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 June 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)
(602) 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 June 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 June 30, 1999 and
December 31, 1998................................................ 3
Consolidated statements of operations for the three and
six months ended June 30, 1999 and 1998.......................... 4
Consolidated statements of cash flows for the six months
ended June 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.............................................. 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 14
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents ...................... $ 645,326 $ 270,295
Accounts receivable, net of allowance of
$60,000 in 1999 and $24,000 in 1998 .......... 2,271,910 1,712,955
Inventories .................................... 507,979 465,038
Other current assets ........................... 363,756 281,994
------------ ------------
Total current assets ......................... 3,788,971 2,730,282
Property and equipment, net ...................... 6,089,082 6,270,374
Intangible assets, net ........................... 3,540,539 3,723,906
Other assets ..................................... 191,269 214,327
------------ ------------
Total assets ................................. $ 13,609,861 $ 12,938,889
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... $ 1,418,233 $ 870,204
Accrued liabilities ............................ 703,110 439,404
Current portion of long-term debt .............. 728,715 652,519
------------ ------------
Total current liabilities .................... 2,850,058 1,962,127
Long-term debt, less current portion ............. 5,640,142 5,720,247
------------ ------------
Total liabilities ............................ 8,490,200 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 ............................ (6,472,878) (6,336,024)
------------ ------------
Total shareholders' equity ................... 5,119,661 5,256,515
------------ ------------
Total liabilities and shareholders' equity ... $ 13,609,861 $ 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>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues ........................................ $ 5,229,562 $3,264,454 $8,920,420 $6,461,219
Cost of revenues .................................... 3,735,123 2,440,401 6,664,064 4,813,287
------------ ---------- ---------- ----------
Gross profit .................................... 1,494,439 824,053 2,256,356 1,647,932
Selling, general and administrative expenses ........ 1,133,093 847,247 2,012,124 1,783,091
------------ ---------- ---------- ----------
Operating income (loss) ......................... 361,346 (23,194) 244,232 (135,159)
Interest income ..................................... 7,174 11,627 12,980 25,122
Interest expense .................................... (163,131) (137,237) (322,435) (274,329)
------------ ---------- ---------- ----------
Income (loss) before cumulative effect of a
change in accounting principle ................. 205,389 (148,804) (65,223) (384,366)
Cumulative effect of a change in accounting
principle........................................... -- -- (71,631) --
------------ ---------- ---------- ----------
Net income (loss) ............................... $ 205,389 $ (148,804) $ (136,854) $ (384,366)
============ ========== ========== ==========
Earnings (loss) per common share:
Basic-
Income (loss) before cumulative effect of a
change in accounting principle ................ $ 0.03 $ (0.02) $ (0.01) $ (0.05)
Cumulative effect of a change in accounting .....
principle ..................................... -- -- (0.01) --
------------ ---------- ---------- ----------
Net income (loss) ............................... $ 0.03 $ (0.02) $ (0.02) $ (0.05)
============ ========== ========== ==========
Diluted-
Income (loss) before cumulative effect of a
change in accounting principle ................. $ 0.03 $ (0.02) $ (0.01) $ (0.05)
Cumulative effect of a change in accounting .....
principle ...................................... -- -- (0.01) --
------------ ---------- ---------- ----------
Net income (loss) ............................... $ 0.03 $ (0.02) $ (0.02) $ (0.05)
============ ========== ========== ==========
Weighted average number of common shares:
Basic ............................................. 7,832,997 7,126,657 7,832,997 7,092,988
============ ========== ========== ==========
Diluted ........................................... 10,143,829 7,126,657 7,832,997 7,092,988
============ ========== ========== ==========
</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
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................... $ (136,854) $ (384,366)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Cumulative effect of a change in accounting
principle .................................... 71,631 --
Depreciation ................................... 298,878 289,864
Amortization ................................... 142,352 104,553
Valuation reserves ............................. 57,000 59,000
Other non-cash charges ......................... 131,963 51,712
Change in operating assets and liabilities:
Accounts receivable ............................ (600,955) 57,150
Inventories .................................... (57,941) (29,293)
Other assets and liabilities ................... (221,283) 13,406
Accounts payable and accrued liabilities ....... 811,735 (99,615)
----------- -----------
Net cash provided by operating activities .. 496,526 62,411
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on disposal of property ................. -- 21,977
Purchase of property and equipment ............... (117,586) (91,910)
----------- -----------
Net cash used in investing activities ...... (117,586) (69,933)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ........... -- 81,116
Payments made on long-term debt .................. (305,891) (298,921)
Net increase (decrease) in working capital
line of credit ................................. 301,982 (230,532)
----------- -----------
Net cash used in financing activities ...... (3,909) (448,337)
----------- -----------
Net increase (decrease) in cash and cash
equivalents ...................................... 375,031 (455,859)
Cash and cash equivalents at beginning of
period ........................................... 270,295 1,622,751
----------- -----------
Cash and cash equivalents at end of period ......... $ 645,326 $ 1,166,892
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the six months for interest ..... $ 222,026 $ 268,447
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 six months ended June 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 six months ended June 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
earning per share for periods in which the Company reports a net profit, but not
for periods in which the Company reports a net loss, as their effect would be
anti-dilutive.
6
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC EPS:
Income (loss) before cumulative
effect of change in accounting
principle ......................... $ 205,389 $ (148,804) $ (65,223) $ (384,366)
=========== ========== ========== ==========
Weighted average number of
common shares ..................... 7,832,997 7,126,657 7,832,997 7,092,988
=========== ========== ========== ==========
Earnings (loss) per common share .... $ 0.03 $ (0.02) $ (0.01) $ (0.05)
=========== ========== ========== ==========
DILUTED EPS:
Income (loss) before cumulative
effect of change in accounting
principle ......................... $ 205,389 $ (148,804) $ (65,223) $ (384,366)
Impact on income of assumed
conversions-
9% convertible debenture
interest ........................ 50,018 -- -- --
----------- ---------- ---------- ----------
Income available to common
shareholders ...................... $ 255,407 $ (148,804) $ (65,223) $ (384,366)
=========== ========== ========== ==========
Weighted average number of
common shares ..................... 7,832,997 7,126,657 7,832,997 7,092,988
Incremental shares from assumed
conversions-
9% convertible debentures ......... 2,229,114 -- -- --
Warrants .......................... 64,786 -- -- --
Stock options ..................... 16,932 -- -- --
----------- ---------- ---------- ----------
Adjusted weighted average
number of common shares ........... 10,143,829 7,126,657 7,832,997 7,092,988
=========== ========== ========== ==========
Earnings (loss) per common share .... $ 0.03 $ (0.02) $ (0.01) $ (0.05)
=========== ========== ========== ==========
</TABLE>
2. LONG-TERM DEBT
At June 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.
7
<PAGE>
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 June 30, 1999, the Company was in
compliance with all of the financial ratio requirements. The holders of the 9%
Convertible Debentures had previously granted the Company a waiver effective
through June 30, 1999 for the interest coverage ratio. 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.
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 includes 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 $1,148,995 and $847,013 at June 30, 1999 and December 31, 1998,
respectively. The Wells Fargo Line of Credit bears interest at an annual rate of
prime plus 1.5% and matures in November 2001 while the Wells Fargo Term Loan
bears interest at an annual rate of prime plus 3% and requires monthly principal
payments of approximately $28,000, plus interest, until maturity on May 1, 2000.
The Wells Fargo Credit Agreement is secured by accounts receivable, inventories,
equipment and general intangibles. The borrowing base under the Wells Fargo Line
of Credit is limited to 85% of eligible receivables and 60% of eligible
inventories. As of July 13, 1999, the Company had a borrowing base of
approximately $1,940,000 under the Wells Fargo Line of Credit. The Wells Fargo
Credit Agreement requires the Company to be in compliance with certain financial
performance criteria, including a minimum debt service coverage ratio, minimum
quarterly and annual operating results and minimum quarterly and annual changes
in book net worth. At June 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 Wells Fargo Credit Agreement prior to the scheduled maturity of the Wells
Fargo Line of Credit or the Wells Fargo Term Loan could have a material adverse
effect upon the Company.
3. 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.
4. 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.
8
<PAGE>
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 JUNE 30, 1999
Revenues from external customers ...... $4,104,310 $1,125,252 $5,229,562
Depreciation and amortization in
segment gross profit ................ 109,121 -- 109,121
Segment gross profit .................. 1,411,487 82,952 1,494,439
THREE MONTHS ENDED JUNE 30, 1998
Revenues from external customers ...... $2,603,070 $ 661,384 $3,264,454
Depreciation and amortization in
segment gross profit ................ 137,473 -- 137,473
Segment gross profit .................. 753,422 70,631 824,053
MANUFACTURED DISTRIBUTED
PRODUCTS PRODUCTS CONSOLIDATED
---------- ---------- ----------
SIX MONTHS ENDED JUNE 30, 1999
Revenues from external customers ...... $6,697,422 $2,222,998 $8,920,420
Depreciation and amortization in
segment gross profit ................ 294,689 -- 294,689
Segment gross profit .................. 2,100,732 155,624 2,256,356
SIX MONTHS ENDED JUNE 30, 1998
Revenues from external customers ...... $5,233,826 $1,227,393 $6,461,219
Depreciation and amortization in
segment gross profit ................ 279,455 -- 279,455
Segment gross profit .................. 1,540,440 107,492 1,647,932
The following table reconciles reportable segment gross profit to the
Company's consolidated loss before income taxes and cumulative effect of a
change in accounting principle.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Consolidated segment gross profit .... $1,494,439 $ 824,053 $2,256,356 $1,647,932
Unallocated amounts:
Selling, general and
administrative expenses .......... 1,133,093 847,247 2,012,124 1,783,091
Interest expense, net .............. 155,957 125,610 309,455 249,207
---------- --------- ---------- ----------
Income (loss) before income taxes
and cumulative effect of a change
in accounting principle ............ $ 205,389 $(148,804) $ (65,223) $ (384,366)
========== ========= ========== ==========
</TABLE>
9
<PAGE>
5. LETTER OF INTENT SIGNED TO ACQUIRE WABASH FOODS, LLC
In April, the Company signed a letter of intent with Pate Foods
Corporation, an Illinois Corporation ("Pate Foods"), and Wabash Foods LLC, a
Delaware limited liability company and a wholly-owned subsidiary of Pate Foods
("Wabash Foods"), to acquire all of the membership interests of Wabash Foods.
Wabash Foods produces and markets various salted snack brands, including
O'Boisies(R), Tato Skins(R), and Pizzarias(R), at a manufacturing facility in
Bluffton, Indiana. It is anticipated that the consideration to be paid by the
Company for Wabash Foods will consist of 4.4 million shares of the Company's
common stock, par value $.01 per share (the "Common Stock"), a warrant to
purchase an additional 400,000 shares of Common Stock for $1.00 per share, and
the effective assumption by the Company of the liabilities of Wabash Foods. In
addition, the Company and Wabash Foods signed a management contract pursuant to
which the Company has been managing the operations of Wabash Foods since April
pending completion of the acquisition. The Company receives a management fee for
such services. See "RESULTS OF OPERATIONS." Completion of the acquisition, which
is expected to take place in the fourth quarter, is subject to successful
completion of negotiations and the signing of the definitive purchase agreement,
and approval of the transaction by the Company's Board of Directors and
shareholders. In the event that the acquisition is not consummated, the
management contract would likely by terminated. If a definitive agreement is
signed, but the transaction is not approved by the Company's shareholders, the
Company is obligated to pay Wabash a breakup fee consisting, in the Company's
sole and absolute discretion, of either $260,000 or 200,000 shares of the
Company's common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1998
Net revenues for the three months ended June 30, 1999 were $5,229,562, up
$1,965,108, or 60%, from $3,264,454 for the three months ended June 30, 1998.
Revenues for the manufactured products segment accounted for 78% and 80% of
total net revenues in 1999 and 1998, respectively, while revenues from
distributed products accounted for 22% and 20% in 1999 and 1998, respectively.
Manufactured products segment revenues increased $1,306,440, or 50%, from sales
of branded and private label products, including $770,571 from the Bob's Texas
Style(TM) brand, acquired by the Company in November 1998 in connection with the
Tejas acquisition, and $194,800, or 8%, 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
$463,867, or 70%. The majority of this increase, $323,005, 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 June 30, 1999, was $1,494,439, or
29% of net revenues, as compared to $824,053, or 25% of net revenues, for the
three months ended June 30, 1998. The $670,386 increase, or 81%, in gross profit
resulted principally from the increased volume in the manufactured products
segment.
Selling, general and administrative expenses increased to $1,133,093, or
22% of net revenues, for the three months ended June 30, 1999 from $847,247, or
26% of net revenues, for the same period in 1998. The increase of $285,846, or
34%, compared to the second quarter of 1998, was primarily due to increased
advertising and promotional spending.
Net interest expense increased to $155,957 for the three months ended June
30, 1999 from a net interest expense of $125,610 for the three months ended June
30, 1998. This increase was due to lower interest income on investments of
$4,453 and increased interest expense of $25,894 on indebtedness related to the
Tejas acquisition.
10
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1998
Net revenues for the six months ended June 30, 1999 were $8,920,420, up
$2,459,201, or 38%, from $6,461,219 for the six months ended June 30, 1998.
Revenues for the manufactured products segment accounted for 75% and 81% of
total net revenues in 1999 and 1998, respectively, while revenues from
distributed products accounted for 25% and 19% in 1999 and 1998, respectively.
Manufactured products segment revenues increased $1,268,795, or 24%, from sales
of branded and private label products, including $1,241,601 from the Bob's Texas
Style(TM) brand, acquired by the Company in November 1998 in connection with the
Tejas acquisition, and $194,800, or 4%, 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
$995,605, or 81%. The majority of this increase, $620,406, 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 six months ended June 30, 1999, was $2,256,356, or 25%
of net revenues, as compared to $1,647,932, or 26% of net revenues, for the six
months ended June 30, 1998. The $608,424 increase, or 37%, in gross profit
resulted principally from the increased volume in the manufactured products
segment.
Selling, general and administrative expenses increased to $2,012,124, or
23% of net revenues, for the six months ended June 30, 1999 from $1,783,091, or
28% of net revenues, for the same period in 1998. The increase of $229,033, or
13%, compared to the six months of 1998, was primarily due to increased
advertising and promotional spending.
Net interest expense increased to $309,455 for the three months ended June
30, 1999 from a net interest expense of $249,207 for the six months ended June
30, 1998. This increase was due to lower interest income on investments of
$12,142 and increased interest expense of $48,106 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 $938,913 (a current ratio of 1.3:1) and $768,155 (a
current ratio of 1.4:1) at June 30, 1999 and December 31, 1998, respectively.
The $170,758 increase in working capital was primarily the result of the
improved operating results of the Company. For the six months ended June 30,
1999, the Company generated cash flow of $496,526 from operating activities,
principally from operating results, and invested $117,586 in new equipment.
At June 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 (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 June 30, 1999, the Company was in
compliance with all of the financial ratio requirements. The holders of the 9%
Convertible Debentures had previously granted the Company a waiver effective
11
<PAGE>
through June 30, 1999 for the interest coverage ratio. 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.
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 includes 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 balance outstanding was $1,148,955 and
$847,013 at June 30, 1999 and December 31, 1998, respectively. The Wells Fargo
Line of Credit bears interest at an annual rate of prime plus 1.5% and matures
in November 2001 while the Wells Fargo Term Loan bears interest at an annual
rate of prime plus 3% and requires monthly principal payments of approximately
$28,000, plus interest, until maturity on May 1, 2000. The Wells Fargo Credit
Agreement is secured by accounts receivable, inventories, equipment and general
intangibles. The borrowing base under the Wells Fargo Line of Credit is limited
to 85% of eligible receivables and 60% of eligible inventories. As of July 13,
1999, the Company had a borrowing base of approximately $1,940,000 under the
Wells Fargo Line of Credit. The Wells Fargo Credit Agreement requires the
Company to be in compliance with certain financial performance criteria,
including a minimum debt service coverage ratio, minimum quarterly and annual
operating results and minimum quarterly and annual changes in book net worth. At
June 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 Wells Fargo
Credit Agreement prior to the scheduled maturity of the Wells Fargo Line of
Credit or the Wells Fargo Term Loan could have a material adverse effect upon
the Company.
In April, the Company signed a letter of intent with Pate Foods
Corporation, an Illinois Corporation ("Pate Foods"), and Wabash Foods LLC, a
Delaware limited liability company and a wholly-owned subsidiary of Pate Foods
("Wabash Foods"), to acquire all of the membership interests of Wabash Foods.
Wabash Foods produces and markets various salted snack brands, including
O'Boisies(R), Tato Skins(R), and Pizzarias(R), at a manufacturing facility in
Bluffton, Indiana. It is anticipated that the consideration to be paid by the
Company for Wabash Foods will consist of 4.4 million shares of the Company's
common stock, par value $.01 per share (the "Common Stock"), a warrant to
purchase an additional 400,000 shares of Common Stock for $1.00 per share, and
the effective assumption by the Company of the liabilities of Wabash Foods. In
addition, the Company and Wabash Foods signed a management contract pursuant to
which the Company has been managing the operations of Wabash Foods since April
pending completion of the acquisition. The Company receives a management fee for
such services. See "RESULTS OF OPERATIONS." Completion of the acquisition, which
is expected to take place in the fourth quarter, is subject to successful
completion of negotiations and the signing of the definitive purchase agreement,
and approval of the transaction by the Company's Board of Directors and
shareholders. In the event that the acquisition is not consummated, the
management contract would likely by terminated. If a definitive agreement is
signed, but the transaction is not approved by the Company's shareholders, the
Company is obligated to pay Wabash a breakup fee consisting, in the Company's
sole and absolute discretion, of either $260,000 or 200,000 shares of the
Company's common stock.
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
<PAGE>
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 and the 1998 Tejas acquisition,
management believes that the Company will generate positive cash flow from
operations in 1999, which along with its existing working capital and borrowing
facilities, should enable the Company to meet its operating cash requirements
through 1999. 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 intends to
implement corrective measures with respect to such database information during
the third quarter 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.
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.
13
<PAGE>
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.1 Management Agreement effective April 1, 1999 by and
between the Company and Wabash Foods, LLC.*
27.1 Financial Data Schedule.*
* Filed herewith.
(b) Current Reports on Form 8-K:
Current Report on Form 8-K, reporting the signing of a letter of
intent by and between the Company and Wabash Foods, LLC to acquire all
the membership interests of Wabash Foods, LLC (filed with the
Commission on May 5, 1999).
14
<PAGE>
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.
Dated: August 10, 1999 By: /s/ Eric J. Kufel
----------------------------------------
Eric J. Kufel
President and Chief Executive Officer
(principal executive officer)
Dated: August 10, 1999 By: /s/ Thomas W. Freeze
---------------------------------------
Thomas W. Freeze
Vice President, Chief Financial Officer,
Treasurer and Secretary
(principal financial and accounting officer)
15
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Management Agreement effective April 1, 1999 by and between the Company
and Wabash Foods, LLC.
27.1 Financial Data Schedule.
EXHIBT 10.1
Mr. Larry R. Polhill, Manager
Wabash Foods, LLC
c/o American Pacific Financial Corporation
225 W. Hospitality Lane, Suite 201
San Bernardino, CA 92408
Dear Mr. Polhill:
The purpose of this letter agreement (the "Agreement") is to outline and
confirm the terms of a management contract between Poore Brothers, Inc. (a
Delaware corporation, hereinafter "Poore Brothers") and Wabash Foods, LLC (a
Delaware limited liability company, hereinafter "Wabash"). This Agreement is a
present binding agreement between the parties. If the terms of this Agreement
are acceptable, please countersign a copy and fax us your countersignature .
1. This Agreement shall be effective April 1, 1999 and continue for four
months through July 31, 1999. The Agreement may be extended by mutual consent of
the parties for up to three additional one-month periods.
2. If the parties do not execute a definitive Purchase and Sale Agreement,
subject to approval by Poore Brothers' shareholders, with respect to the sale of
all membership interests in Wabash to Poore Brothers by 5:00 p.m. (M.S.T.) on
July 1, 1999, or if for any other reason Poore Brothers does not continue the
transactions contemplated by the Purchase Agreement, this Agreement will
terminate.
3. Management of day to day activities will include direction of activities
in the ordinary course of business, including (i) sales and marketing, (ii)
purchasing, (iii) financial matters, (iv) distribution and (v) operations. Poore
Brothers sole obligations hereunder shall be to use reasonable commercial
efforts to fulfill its responsibilities hereunder. Poore Brothers will not be
liable to Wabash for failure of Wabash to generate any specified level of net
income or sales (or any net income at all) and Poore Brothers is no guarantor of
Wabash's ales or income while Poore Brothers is managing its activities
hereunder. In the event of a claimed breach hereof by Poore Brothers, absent
Poore Brothers gross negligence or willful malfeasance, Wabash's sole remedy
shall be to terminate this Agreement and the Purchase Agreement to which
reference is made above. Not withstanding the foregoing, Wabash may terminate
this Agreement upon three days prior written notice to Poore Brothers for any
reason.
4. In exchange for Poore Brothers providing management services to Wabash,
Wabash will remit to Poore Brothers (i) 100% of the first $75,000 of Wabash's
monthly net earnings before taxes, and (ii) 50% of Wabash's monthly net earnings
before taxes which exceed $75,000. Such monthly payments will be made by the
20th day of the following month. In the event no payment is received by the 20th
day of the following month, Poore Brothers may suspend it performance until such
payment is received. Such payments are subject to US Bancorp Republic Commercial
Finance, Inc. approval.
5. So long as Poore Brothers is serving in a management capacity for
Wabash, Wabash shall indemnify, pay, protect, defend and hold Poore Brothers,
its affiliates, and each of their respective directors, officers, employees,
shareholders, agents, advisors and controlling person and assigns harmless from
any loss, damage, liability, claim, obligation, fine, penalty, expenses
(including reasonable fees and expenses of attorneys engaged in defense of any
act or omission), judgments or amounts paid in settlement by such persons by
reason of any act performed by such persons or omitted to be performed by them
in connection with the management of Wabash or in furtherance of Wabash's
interests; provided however, that the foregoing shall not relieve any such
person of liability for such person's gross negligence or willful misconduct.
<PAGE>
6. Each party will pay its own legal, accounting and other expenses
incurred by such party or on its behalf in connection with this Agreement. In
the event an action or suit is brought by any party to enforce the terms of this
Agreement, the prevailing party shall be entitled to the payment of its
reasonable attorney's fees and costs, as determined by the judge of the court.
7. This Agreement shall be governed by the laws of the state of Arizona
(regardless of the laws that might otherwise govern under applicable principles
of conflicts of law of the state of Arizona) as to all matters including, but
not limited to, matters of validity, construction, effect, performance and
remedies.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
date first hereinabove set forth.
POORE BROTHERS, INC., A DELAWARE CORPORATION
By: /s/ Thomas W. Freeze
-----------------------------------------
Its: Vice President and CFO
AGREED TO AND ACCEPTED: WABASH FOODS, LLC, A DELAWARE LIMITED
LIABILITY COMPANY
By: /s/ Larry R. Polhill
-----------------------------------------
Its: Manager
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
FINANCIAL STATEMENT FOR THE SIX MONTHS ENDED JUNE 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 645,326
<SECURITIES> 0
<RECEIVABLES> 2,332,027
<ALLOWANCES> 60,117
<INVENTORY> 507,979
<CURRENT-ASSETS> 3,788,971
<PP&E> 7,571,605
<DEPRECIATION> 1,482,523
<TOTAL-ASSETS> 13,609,861
<CURRENT-LIABILITIES> 2,850,058
<BONDS> 5,640,142
0
0
<COMMON> 78,329
<OTHER-SE> 5,041,332
<TOTAL-LIABILITY-AND-EQUITY> 13,609,861
<SALES> 8,920,420
<TOTAL-REVENUES> 8,920,420
<CGS> 6,664,064
<TOTAL-COSTS> 6,664,064
<OTHER-EXPENSES> 2,012,124
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 309,455
<INCOME-PRETAX> (136,854)
<INCOME-TAX> 0
<INCOME-CONTINUING> (136,854)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (71,631)
<NET-INCOME> (136,854)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
