SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the
[X] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
POORE BROTHERS, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[X] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1) Amount previously paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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POORE BROTHERS, INC.
3500 SOUTH LA COMETA DRIVE
GOODYEAR, ARIZONA 85338
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 6, 1999
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Shareholders (the "Annual
Meeting") of Poore Brothers, Inc., a Delaware corporation (the "Company"), will
be held on October 6, 1999, at 3:00 p.m. local time, at The Wigwam Resort, 300
Wigwam Boulevard, Litchfield, Arizona 85340, for the purpose of considering and
voting upon the following:
(1) A proposal to elect Directors of the Company to serve until the 2000
Annual Meeting of Shareholders or until the election and qualification
of their respective successors.
(2) A proposal to approve an amendment to the Company's Certificate of
Incorporation, as amended, to increase the number of authorized shares
of common stock, $.01 par value (the "Common Stock"), by 35,000,000
shares, from 15,000,000 to 50,000,000 shares.
(3) A proposal to approve the acquisition by the Company 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, $.01 par value, and (ii) a warrant to purchase 400,000
shares of Common Stock.
(4) A proposal 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.
(5) Such other business as may properly come before the Annual Meeting or
any adjournment or postponement thereof.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS OF THE COMPANY VOTE TO APPROVE THE PROPOSALS LISTED ABOVE.
The Board of Directors has fixed August 27, 1999 as the record date (the
"Record Date") for the determination of shareholders entitled to notice of and
to vote at the Annual Meeting or any adjournment or postponement thereof. Only
shareholders of record at the close of business on the Record Date are entitled
to notice of and to vote at the Annual Meeting. The stock transfer books will
not be closed for the Annual Meeting.
By Order of the Board of Directors
Eric J. Kufel
President and Chief Executive Officer
Goodyear, Arizona
September 10, 1999
IMPORTANT
YOU ARE URGED TO READ THE ATTACHED PROXY STATEMENT, WHICH CONTAINS
INFORMATION RELEVANT TO THE ACTIONS TO BE TAKEN AT THE MEETING.
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. HOWEVER, WHETHER OR
NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE URGED TO PROMPTLY
MARK, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED,
SELF-ADDRESSED, STAMPED ENVELOPE SO THAT YOUR SHARES OF STOCK MAY BE REPRESENTED
AND VOTED IN ACCORDANCE WITH YOUR WISHES AND IN ORDER THAT THE PRESENCE OF A
QUORUM MAY BE ASSURED AT THE ANNUAL MEETING. YOUR PROXY WILL BE RETURNED TO YOU
IF YOU SHOULD BE PRESENT AT THE ANNUAL MEETING AND SHOULD REQUEST SUCH RETURN OR
IF YOU SHOULD REQUEST SUCH RETURN IN THE MANNER PROVIDED FOR REVOCATION OF
PROXIES ON THE INITIAL PAGES OF THE ENCLOSED PROXY STATEMENT. PROMPT RESPONSE BY
OUR SHAREHOLDERS WILL REDUCE THE TIME AND EXPENSE OF SOLICITATION.
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TABLE OF CONTENTS
PAGE
ACCOMPANYING DOCUMENTATION.................................................. 3
VOTING AT THE MEETING....................................................... 3
Record Date and Outstanding Shares........................................ 4
Quorum and Vote Required.................................................. 4
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS................... 4
PROPOSAL 1 - ELECTION OF DIRECTORS.......................................... 5
Information Regarding Board of Directors and Committees................... 7
Compensation of Directors................................................. 7
Election of Nominees...................................................... 8
Recommendation of the Board of Directors.................................. 8
EXECUTIVE OFFICERS.......................................................... 8
EXECUTIVE COMPENSATION...................................................... 9
Summary Compensation Table................................................ 9
Stock Option Plan......................................................... 10
Repricing of Stock Options................................................ 10
Employment Agreements..................................................... 11
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ............................ 12
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................. 14
PROPOSAL 2 - APPROVAL OF AMENDMENT OF THE COMPANY'S CERTIFICATE OF
INCORPORATION, AS AMENDED, TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK, $.01 PAR VALUE, BY 35,000,000 SHARES, FROM 15,000,000 TO
50,000,000 SHARES .......................................................... 15
Reasons for the Increase.................................................. 15
Potential Effects of the Proposed Amendment............................... 16
Approval of the Proposed Amendment to the Certificate of Incorporation.... 16
Recommendation of the Board of Directors.................................. 17
PROPOSAL 3 -- APPROVAL OF THE ACQUISITION BY THE COMPANY 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,
$.01 PAR VALUE, AND (II) A WARRANT TO PURCHASE 400,000 SHARES OF
COMMON STOCK................................................................ 17
Introduction.............................................................. 17
Reasons for the Acquisition............................................... 18
Material Contracts Between the Company and Pate Foods/Wabash Foods;
Pre-Acquisition Management Agreement.................................... 19
Terms of the Acquisition.................................................. 19
Regulatory Approval....................................................... 24
Accounting Treatment ..................................................... 24
Federal Income Tax Consequences .......................................... 25
Market Price Data and Dividend Information ............................... 25
Description of Wabash Foods .............................................. 25
Unaudited Pro Forma Combined Condensed And Historical Financial
Information............................................................. 31
Wabash Foods' Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................... 34
Refinancing of Certain Indebtedness of the Company and Wabash Foods....... 36
Risk Factors ............................................................. 37
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Poore Brothers, Inc. Financial Statements................................. 40
Wabash Foods, LLC Financial Statements.................................... 40
Recommendation of the Board of Directors.................................. 40
PROPOSAL 4 - APPROVAL OF AMENDMENT OF 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............................................................ 40
Purpose................................................................... 41
Administration............................................................ 41
Eligibility; Grant of Awards.............................................. 41
Shares Available; Nontransferability of Stock Options..................... 42
Effect of Reorganization, Merger, Etc..................................... 42
Duration, Amendment and Termination of the Stock Option Plan.............. 42
Certain Federal Income Tax Considerations................................. 42
Awards Under the Stock Option Plan........................................ 43
New Plan Benefits......................................................... 43
Stock Options Granted Outside of the Stock Option Plan.................... 44
Approval of the Amendment to the Stock Option Plan........................ 44
Recommendation of the Board of Directors.................................. 44
NO APPRAISAL RIGHTS FOR DISSENTERS ......................................... 44
INDEPENDENT ACCOUNTANTS .................................................... 44
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE .................... 45
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE .......................... 45
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING............................... 45
OTHER BUSINESS ............................................................. 45
EXHIBIT A - FORM OF PROXY
EXHIBIT B - QUARTERLY REPORT ON FORM 10-QSB FOR THE THREE-MONTH PERIOD ENDED
MARCH 31, 1999
EXHIBIT C - QUARTERLY REPORT ON FORM 10-QSB FOR THE THREE-MONTH PERIOD ENDED
JUNE 30, 1999
EXHIBIT D - CERTIFICATE OF AMENDMENT OF THE COMPANY'S CERTIFICATE OF
INCORPORATION PERTAINING TO THE INCREASE OF THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK
EXHIBIT E - AGREEMENT FOR PURCHASE AND SALE OF LIMITED LIABILITY COMPANY
INTERESTS
EXHIBIT F - REGISTRATION RIGHTS AGREEMENT
EXHIBIT G - FORM OF WARRANT
EXHIBIT H - WABASH FOODS, LLC FINANCIAL STATEMENTS
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POORE BROTHERS, INC.
3500 SOUTH LA COMETA DRIVE
GOODYEAR, ARIZONA 85338
PROXY STATEMENT FOR ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON OCTOBER 6, 1999
This Proxy Statement and the accompanying proxy are furnished in connection
with the solicitation by the Board of Directors of Poore Brothers, Inc. (the
"Company") of proxies for the Annual Meeting of Shareholders of the Company (the
"Annual Meeting"), to be held on October 6, 1999, at the time and place and for
the purposes set forth in the accompanying Notice of Annual Meeting of
Shareholders and any adjournment or postponement thereof. This Proxy Statement,
the accompanying proxy and the Company's Annual Report to Shareholders for the
fiscal year ended December 31, 1998, are being first mailed to the Company's
shareholders on or about September 16, 1999.
All expenses of the Company in connection with this solicitation will be
borne by the Company. In addition to the solicitation of proxies by use of the
mail, officers, Directors and employees of the Company may solicit the return of
proxies by personal interview, mail, telephone and/or facsimile. Such persons
will not be additionally compensated, but will be reimbursed for out-of-pocket
expenses. The Company will also request brokerage houses and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of shares held of record by such persons and will reimburse such persons
and the Company's transfer agent for their reasonable out-of-pocket expenses in
forwarding such material.
ACCOMPANYING DOCUMENTATION
A copy of the Company's Annual Report to Shareholders covering the
Company's fiscal year ended December 31, 1998, which includes a copy of the
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998
(including audited financial statements) accompanies this Proxy Statement. In
addition, copies of the Company's Quarterly Reports on Form 10-QSB for the
three-month periods ended March 31, 1999 and June 30, 1999 (each of which
includes unaudited financial statements) are annexed hereto as Exhibits B and C,
respectively. The Company will provide copies of any exhibits to the Form 10-KSB
and the Forms 10-QSB to each shareholder of record as of the Record Date, upon
request of such person and such person's payment of the Company's reasonable
expenses of furnishing such exhibit.
VOTING AT THE MEETING
All shares of the Company's common stock, par value $.01 per share (the
"Common Stock"), represented at the Annual Meeting by properly executed proxies
will be voted in accordance with the instructions indicated thereon unless such
proxies previously have been revoked. IF ANY PROXIES DO NOT CONTAIN VOTING
INSTRUCTIONS, THE SHARES REPRESENTED BY SUCH PROXIES WILL BE VOTED (1) FOR THE
ELECTION OF THE LISTED NOMINEES FOR DIRECTOR, (2) FOR THE AMENDMENT TO THE
COMPANY'S CERTIFICATE OF INCORPORATION, AS AMENDED (THE "CERTIFICATE OF
INCORPORATION"), TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK BY
35,000,000 SHARES FROM 15,000,000 TO 50,000,000 SHARES, (3) FOR THE ACQUISITION
BY THE COMPANY OF WABASH FOODS, LLC, A DELAWARE LIMITED LIABILITY COMPANY
("WABASH FOODS"), 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, (4) FOR THE AMENDMENT TO THE POORE BROTHERS, INC. 1995
STOCK OPTION PLAN (THE "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. It is not anticipated that any matters other than those set
forth in this Proxy Statement will be brought before the Annual Meeting. If any
other matters properly come before the Annual Meeting, the shares represented by
all properly executed proxies will be voted in accordance with the judgment of
the persons named on such proxies.
The Company encourages the personal attendance of its shareholders at the
Annual Meeting, and execution of the accompanying proxy will not affect a
shareholder's right to attend the Annual Meeting and to vote his or her shares
in person. Any shareholder giving a proxy has the right to revoke it by: (1)
delivering written notice of revocation to: Secretary, Poore Brothers, Inc.,
3500 South La Cometa Drive, Goodyear, Arizona 85338, at any time before the
proxy is voted; (2) by executing and delivering a later-dated proxy; or (3) by
attending the Annual Meeting and voting his or her shares in person. No such
notice of revocation or later-dated proxy will be effective, however, until
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received by the Company at or prior to the Annual Meeting. Such revocation will
not affect a vote on any matter taken prior to the receipt of such revocation.
Mere attendance at the Annual Meeting will not by itself revoke the proxy.
RECORD DATE AND OUTSTANDING SHARES
The Board of Directors has fixed August 27, 1999 as the record date (the
"Record Date") for the Annual Meeting. Only holders of record of the outstanding
shares of Common Stock at the close of business on the Record Date are entitled
to notice of and to vote at the Annual Meeting and any adjournment or
postponement thereof. At the close of business on August 27, 1999, 7,832,997
shares of Common Stock were outstanding and entitled to be voted at the Annual
Meeting. The Common Stock is the only class of the Company's securities entitled
to vote at the Annual Meeting. Each share of Common Stock is entitled to one
vote on each matter presented to the shareholders.
QUORUM AND VOTE REQUIRED
The presence, in person or by proxy, of a majority of the shares of Common
Stock entitled to vote at the Annual Meeting will constitute a quorum at the
Annual Meeting. A proxy submitted by a shareholder may indicate that all or a
portion of the shares represented by such proxy are not being voted
("shareholder withholding") with respect to a particular matter. Similarly, a
broker may not be permitted to vote stock ("broker non-vote") held in street
name on a particular matter in the absence of instructions from the beneficial
owner of such stock. The shares subject to a proxy which are not being voted on
a particular matter (because of either shareholder withholding or broker
non-vote) will not be considered shares entitled to vote on such matter. These
shares, however, may be considered present and entitled to vote on any other
matters and will count for purposes of determining the presence of a quorum,
unless the proxy indicates that such shares are not being voted on any matter at
the Annual Meeting, in which case such shares will not be counted for purposes
of determining the presence of a quorum. Assuming the presence of a quorum, the
affirmative vote of the holders of a majority of shares of Common Stock
represented in person or by proxy at the Annual Meeting is required to approve
or ratify the following proposals to be presented at the Annual Meeting: (1) the
proposal to elect Directors of the Company to serve until the 2000 Annual
Meeting of Shareholders or until the election and qualification of their
respective successors; (2) the proposal to approve the acquisition by the
Company of Wabash Foods, LLC 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; and (3) the proposal to approve an amendment to
the Company's 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. Assuming the presence of a quorum, the affirmative vote of the
holders of a majority of the issued and outstanding shares of Common Stock is
required to approve or ratify the proposal to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock by
35,000,000 shares, from 15,000,000 to 50,000,000 shares.
* * * * * * *
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THIS PROXY STATEMENT, INCLUDING ALL DOCUMENTS INCORPORATED BY REFERENCE,
INCLUDES "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 12E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995, AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE "SAFE HARBOR" PROVISIONS
THEREOF. THEREFORE, THE COMPANY IS INCLUDING THIS STATEMENT FOR THE EXPRESS
PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF THE SAFE HARBOR WITH RESPECT TO
ALL OF SUCH FORWARD-LOOKING STATEMENTS. IN THIS PROXY STATEMENT, THE WORDS
"ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "ESTIMATES," "PROJECTS," "WILL
LIKELY RESULT," "WILL CONTINUE," "FUTURE" AND SIMILAR TERMS AND EXPRESSIONS
IDENTIFY FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS IN THIS
PROXY STATEMENT REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE
EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING SPECIFICALLY:
* THE COMPANY'S RELATIVELY BRIEF OPERATING HISTORY AND SIGNIFICANT
OPERATING LOSSES TO DATE.
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* THE PROBABILITY THAT THE COMPANY WILL NEED ADDITIONAL FINANCING DUE TO
CONTINUED OPERATING LOSSES OR IN ORDER TO IMPLEMENT THE COMPANY'S
BUSINESS STRATEGY.
* THE POSSIBLE DIVERSION OF MANAGEMENT RESOURCES FROM THE DAY-TO-DAY
OPERATIONS OF THE COMPANY AS A RESULT OF THE COMPANY'S PURSUIT AND
EXECUTION OF STRATEGIC ACQUISITIONS (INCLUDING THE ACQUISITION BY THE
COMPANY OF WABASH FOODS, LLC DESCRIBED IN THIS PROXY STATEMENT).
* POTENTIAL DIFFICULTIES RESULTING FROM THE INTEGRATION OF ACQUIRED
BUSINESSES WITH THE COMPANY'S BUSINESS (INCLUDING, WITHOUT LIMITATION,
THE INTEGRATION OF WABASH FOODS, LLC WITH THE COMPANY'S BUSINESS).
* OTHER ACQUISITION-RELATED RISKS.
* SIGNIFICANT COMPETITION.
* RISKS RELATED TO THE FOOD PRODUCTS INDUSTRY.
* VOLATILITY OF THE MARKET PRICE OF THE COMPANY'S COMMON STOCK.
* THE POSSIBLE DE-LISTING OF THE COMMON STOCK FROM THE NASDAQ SMALLCAP
MARKET.
* THE OTHER RISKS AND UNCERTAINTIES DISCUSSED HEREIN THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE
ANTICIPATED.
IN LIGHT OF THESE RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE
FORWARD-LOOKING INFORMATION CONTAINED IN THIS PROXY STATEMENT WILL IN FACT
TRANSPIRE OR PROVE TO BE ACCURATE. READERS ARE CAUTIONED TO CONSIDER THE
SPECIFIC RISK FACTORS DESCRIBED HEREIN AND IN "RISK FACTORS" BELOW AND NOT TO
PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH
SPEAK ONLY AS OF THE DATE HEREOF.
* * * * * *
PROPOSAL 1
ELECTION OF DIRECTORS
The By-laws of the Company, as amended, provide that the number of
Directors constituting the Board of Directors shall be determined by resolution
of the Board of Directors at any meeting or by the shareholders at the Annual
Meeting. The Board of Directors of the Company has set the number of Directors
comprising the Board of Directors at seven (7).
The Board of Directors has nominated seven (7) persons for election as
Directors of the Company at the Annual Meeting, each to serve until the 2000
annual meeting of shareholders of the Company or until his successor shall have
been duly elected and qualified. All of the nominees, other than Messrs. Freeze
and Goodspeed, are currently serving as Directors of the Company. Each nominee
has consented to be named in this Proxy Statement and to serve if elected. If,
prior to the meeting, any nominee should become unavailable to serve for any
reason, the shares represented by all properly executed proxies will be voted
for such alternate individual as shall be designated by the Board of Directors,
unless the Board of Directors shall determine to reduce the number of Directors
pursuant to the By-laws of the Company.
The table below sets forth the names and ages of the nominees for Director
and, where applicable, the year each first became a Director of the Company.
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YEAR FIRST BECAME A
NAME AGE DIRECTOR OF THE COMPANY
---- --- -----------------------
Thomas W. Freeze 48 N/A
Richard E. Goodspeed 62 N/A
Mark S. Howells 45 1995
Eric J. Kufel 32 1997
James W. Myers 64 1999
Robert C. Pearson 64 1996
Aaron M. Shenkman 58 1997
Set forth below for each person nominated to be a Director is a description
of all positions held by such person with the Company and the principal
occupations of such person during the last five years.
THOMAS W. FREEZE. Mr. Freeze has served as Vice President, Chief Financial
Officer, Secretary and Treasurer of the Company since April 1997. From April
1994 to April 1997, Mr. Freeze served as Vice President, Finance and
Administration - Retail of New England Business Service, Inc. From October 1989
to April 1994, Mr. Freeze served as Vice President, Treasurer and Secretary of
New England Business Service, Inc.
RICHARD E. GOODSPEED. Mr. Goodspeed currently serves as a management
consultant to several companies, primarily in the food (manufacturing and
retail) industry. Mr. Goodspeed served as President and Chief Operating Officer
of The Vons Companies, Inc. from 1994 to 1998 and as a Director from 1994 to
1997. From 1989 to 1994, he served as President and Chief Operating Officer of
Lucky Stores, Inc., a subsidiary of American Stores Company, and from 1992 to
1994, he also served as Executive Vice President of American Stores Company.
MARK S. HOWELLS. Mr. Howells has served as Chairman of the Board of the
Company since March 1995. For the period from March 1995 to August 1995, Mr.
Howells also served as President and Chief Executive Officer of the Company. He
has served as the Chairman of the Board of Poore Brothers Southeast, Inc., a
subsidiary of the Company, since its inception in May 1993 and served as its
President and Chief Executive Officer from May 1993 to August 1994. Since 1988,
Mr. Howells has devoted a majority of his time to serving as the President and
Chairman of Arizona Securities Group, Inc. d/b/a Puglisi Howells & Co., a
registered securities broker-dealer.
ERIC J. KUFEL. Mr. Kufel has served as President, Chief Executive Officer
and a Director of the Company since February 1997. From November 1995 to January
1997, Mr. Kufel was Senior Brand Manager at The Dial Corporation and was
responsible for the operating results of Purex Laundry Detergent. From June 1995
to November 1995, Mr. Kufel was Senior Brand Manager for The Coca-Cola Company
where he was responsible for the marketing and development of Minute Maid
products. From November 1994 to June 1995 Mr. Kufel was Brand Manager for The
Coca-Cola Company, and from June 1994 to November 1994, Mr. Kufel was Assistant
Brand Manager for The Coca-Cola Company. From January 1993 to June 1994, Mr.
Kufel was employed by The Kellogg Company in various capacities including being
responsible for introducing the Healthy Choice line of cereal and executing the
marketing plan for Kellogg's Frosted Flakes cereal. Mr. Kufel earned a Masters
of International Management from the American Graduate School of International
Management in December 1992.
JAMES W. MYERS. Mr. Myers has served as a Director since January 1999. Mr.
Myers has been President of Myers Management & Capital Group, Inc., a consulting
firm specializing in strategic, organizational and financial advisory services
to CEO's, since January 1996. From December 1989 to December 1995, Mr. Myers
served as President of Myers, Craig, Vallone & Francois, Inc., a management and
corporate finance consulting firm. Previously, Mr. Myers was an executive with a
variety of consumer goods companies. Mr. Myers is currently a Director of ILX
Resorts, Inc., a publicly traded time-share sales and resort property company.
ROBERT C. PEARSON. Mr. Pearson has served as a Director of the Company
since March 1996. Mr. Pearson has been Senior Vice President-Corporate Finance
for Renaissance Capital Group, Inc. since April 1997. Previously, Mr. Pearson
had been an independent financial and management consultant specializing in
investments with emerging growth companies. He has performed services for
Renaissance Capital Partners ("RCP") in connection with the Company and other
RCP investments. RCP is the operating manager of Renaissance Capital Growth &
Income Fund III, Inc. ("Renaissance Capital"), the owner of a 9% Convertible
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Debenture due July 1, 2002 issued by the Company (a "9% Convertible Debenture").
From 1990 to 1994, Mr. Pearson served as Executive Vice President and Chief
Financial Officer of Thomas Group, Inc., a publicly traded consulting firm.
Prior to 1990, Mr. Pearson was Vice President-Finance of Texas Instruments,
Incorporated. Mr. Pearson is currently a Director of Tava Technologies, Inc. (a
publicly traded information technology services company), Dexterity Surgical,
Inc. (a publicly traded surgical instruments manufacturer and distributor), and
Interscience Computer, Inc. (a distributor of consumables for laser printers).
Pursuant to a Convertible Debenture Loan Agreement dated May 31, 1995 (the
"Debenture Loan Agreement") among the Company, Renaissance Capital and Wells
Fargo Small Business Investment Company, Inc. (formerly Wells Fargo Equity
Capital, Inc. and hereinafter referred to as "Wells Fargo"), so long as the 9%
Convertible Debentures have not been fully converted into shares of Common Stock
or redeemed or paid by the Company, Renaissance Capital shall be entitled to
designate a nominee to the Company's Board of Directors subject to election by
the Company's shareholders. Renaissance Capital designated Mr. Pearson as a
nominee to the Board of Directors.
AARON M. SHENKMAN. Mr. Shenkman has served as a Director of the Company
since June 1997. He has served as the General Partner of Managed Funds LLC since
October 1997. He served as the Vice-Chairman of Helen of Troy Corp., a
distributor of personal care products, from March 1997 to October 1997. From
February 1984 to February 1997, Mr. Shenkman was the President of Helen of Troy
Corp. From 1993 to 1996, Mr. Shenkman also served as a Director of Craftmade
International, a distributor of ceiling fans.
INFORMATION REGARDING BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors conducts its business through meetings of the Board
of Directors and through its standing committees. As of the date of this Proxy
Statement, two committees have been established, an Audit Committee and a
Compensation Committee. The Board of Directors does not currently utilize a
Nominating Committee or committee performing similar functions.
The Audit Committee: (i) makes recommendations to the Board of Directors as
to the independent accountants to be appointed by the Board of Directors; (ii)
reviews with the independent accountants the scope of their examinations; (iii)
receives the reports of the independent accountants for the purpose of reviewing
and considering questions relating to their examination and such reports; (iv)
reviews, either directly or indirectly or through independent accountants, the
internal accounting and auditing procedures of the Company; (v) reviews related
party transactions; and (vi) performs such other functions as may be assigned to
it from time to time by the Board of Directors. The Audit Committee is comprised
of three members of the Board of Directors, Messrs. Pearson, Howells and Myers.
The Chairman of the Audit Committee is Mr. Pearson. The Audit Committee was
established on October 22, 1996.
The Compensation Committee reviews and recommends the compensation of
executive officers and key employees. The Compensation Committee is currently
comprised of three members of the Board of Directors, Messrs. Howells, Myers and
Shenkman. The Chairman of the Compensation Committee is currently Mr. Shenkman.
The Compensation Committee was established on June 12, 1997.
During the fiscal year ended December 31, 1998, the Board of Directors met
five times and took actions on five other occasions by unanimous written
consent. There was one meeting of the Audit Committee during 1998 and no
meetings of the Compensation Committee. During 1998, each Director attended,
during the period each was a Director, at least 75% of the Board of Directors
meetings and meetings of any committees on which they served.
COMPENSATION OF DIRECTORS
In May 1998, the Company granted options to purchase 10,000 shares of the
Company's Common Stock to each person who was elected to the Board of Directors
at the 1998 Annual Meeting of Shareholders (other than Mr. Kufel). Such options,
which have an exercise price of $1.3125 per share, will vest on October 6, 1999,
the date of the Annual Meeting, and have a term of five years. In addition, Mr.
Myers, who was newly elected to the Board of Directors on January 12, 1999, was
granted an option to purchase 10,000 shares of Common Stock at an exercise price
of $.59375 per share with a term of five years and exercisable on the date of
grant.
In the future, in order to attract and retain highly competent persons as
Directors and as compensation for Directors' service on the Board, the Company
may, from time to time, grant additional stock options or issue shares of Common
7
<PAGE>
Stock to non-employee Directors. It is anticipated that the Board will grant
options to purchase 10,000 shares of Common Stock to each person who is elected
to the Board at the Annual Meeting (other than persons who are also officers of
the Company).
Directors are reimbursed for out-of-pocket expenses incurred in attending
meetings of the Board of Directors and for other expenses incurred in their
capacity as Directors.
ELECTION OF NOMINEES
Assuming the presence of a quorum, the affirmative vote of the holders of a
majority of the shares of Common Stock represented in person or by proxy at the
Annual Meeting, is required for the election of Directors. Shares will be voted
for the nominees in accordance with the specifications marked on the proxies
applicable thereto, and if no specification is made, will be voted "FOR" the
election of the nominees.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" ALL NOMINEES
FOR DIRECTOR.
EXECUTIVE OFFICERS
The Board of Directors appoints the Company's executive officers. Certain
information concerning the Company's executive officers is set forth below,
except that information concerning Mr. Kufel, the Company's President and Chief
Executive Officer, and Mr. Freeze, the Company's Vice President, Chief Financial
Officer, Secretary and Treasurer, is set forth above under "PROPOSAL 1 --
ELECTION OF DIRECTORS."
THOMAS G. BIGHAM, age 46, has been Vice President of Sales - Texas since
November 1998. From December 1996 to November 1998, Mr. Bigham was President of
Tejas Snacks, L.P. ("Tejas"), whose business and certain assets were acquired by
the Company in November 1998. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS." From 1994 to December 1996, Mr. Bigham was President of Eagle
Brands of Houston, Inc.
GLEN E. FLOOK, age 41, has served as Vice President-Manufacturing since
March 1997. From January 1994 to February 1997, Mr. Flook was employed by The
Dial Corporation as a Plant Manager for a manufacturing operation that generated
$40 million in annual revenues. From January 1983 to January 1994, Mr. Flook
served in various capacities with Frito-Lay, Inc., including Plant Manager and
Production Manager.
WENDELL T. JONES, age 58, has been the Vice President of Sales - Arizona
since August 1998. From February 1997 to August 1998, Mr. Jones served as
Director of Sales -- Arizona. Previously, Mr. Jones was National Sales Manager
of the Company from January 1996 to February 1997. From 1969 to 1996, Mr. Jones
served in various capacities at Frito-Lay, Inc., including Director of Sales,
Operations Manager and Manager-Trade Development.
KEVIN M. KOHL, age 43, has been Vice President, National Sales Manager
since May 1999. From November 1998 to April 1999, Mr. Kohl served as Vice
President of Sales - Texas of the Company. From July 1996 to November 1998, Mr.
Kohl was Executive Vice President of Tejas, whose business and certain assets
were acquired by the Company in November 1998. See "CERTAIN RELATIONSHIP AND
RELATED TRANSACTIONS." From July 1994 to June 1996, Mr. Kohl was President of
Mighty Eagle, Inc. d/b/a Atlanta Eagle. From June 1992 to July 1994, Mr. Kohl
was a Regional Director of Eagle Snacks, Inc.
JAMES M. POORE, age 52, has served as a Vice President of the Company since
June 1995. Mr. Poore co-founded Poore Brothers Foods, Inc. in 1986 and served as
its Vice President, Secretary, Treasurer and Director until May 1995. In
addition, Mr. Poore served as the Secretary and a Director of Poore Brothers
Distributing, Inc., a subsidiary of the Company, from January 1990 to May 1995,
and as Chairman of the Board and a Director of Poore Brothers of Texas, Inc., a
subsidiary of the Company, from May 1991 to May 1995. In 1983, he co-founded
Groff's of Texas, Inc. (a potato chip manufacturer in Brookshire, Texas and a
predecessor business to Tejas, acquired by the Company in November 1998), and
served as its President until January 1986.
8
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years, as applicable, to the
Company's Chief Executive Officer and those other executive officers of the
Company whose salary and bonuses, if any, exceeded $100,000 for the Company's
fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- ------------
NAME AND OTHER ANNUAL STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED COMPENSATION
------------------ ---- ------ ----- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Eric J. Kufel (1) 1998 $119,423 -- $ 6,975(4) 390,000(5) --
President, Chief Executive 1997 $ 99,519 -- $ 7,381(4) 350,000(5) --
Officer and Director 1996 -- -- -- -- --
Glen E. Flook (2) 1998 $ 98,654 $ 15,000 $ 350(4) 130,000(5) --
Vice President- 1997 $ 74,904 $ 30,000 -- 105,000(5) $ 63,143(6)
Manufacturing 1996 -- -- -- -- --
Thomas W. Freeze (3) 1998 $109,038 -- -- 195,000(5) --
Vice President, Chief Financial 1997 $ 71,481 -- -- 155,000(5) --
Officer, Secretary and Treasurer 1996 -- -- -- -- --
</TABLE>
- ----------
(1) Mr. Kufel has served as President, Chief Executive Officer and a Director
of the Company since February 1997.
(2) Mr. Flook has served as Vice President - Manufacturing since March 1997.
(3) Mr. Freeze has served as Vice President, Chief Financial Officer, Secretary
and Treasurer since April 1997.
(4) Represents the value of company automobiles provided to Messrs. Kufel and
Flook for their exclusive use.
(5) Stock options to purchase 300,000, 75,000 and 125,000 shares of Common
Stock were granted to Messrs. Kufel, Flook and Freeze, respectively, in
September 1998 for the purpose of effecting a repricing of stock options
for the same numbers of shares granted to such persons by the Company in
1997. In connection therewith, the 1997 stock options were cancelled. See
"REPRICING OF STOCK OPTIONS."
(6) Represents payments made to, and expenses paid on behalf of, Mr. Flook in
connection with his relocation to Arizona upon obtaining employment with
the Company.
The following table sets forth information concerning stock options granted
during the fiscal year ended December 31, 1998 for the individuals shown in the
Summary Compensation Table. No stock appreciation rights ("SARs") were granted
in connection with any such stock options during the fiscal year ended December
31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENT OF
COMMON STOCK TOTAL OPTIONS EXERCISE
UNDERLYING GRANTED TO EMPLOYEES PRICE
NAME OPTIONS GRANTED(1) IN FISCAL YEAR (5) PER SHARE EXPIRATION DATE
---- ------------------ -------------------- --------- ---------------
<S> <C> <C> <C> <C>
Eric J. Kufel 90,000 11.0% $1.015625 January 28, 2003
300,000(2) 36.8% $1.25(6) September 14, 2003
Glen E. Flook 55,000 6.8% $1.105625 January 28, 2003
75,000(3) 9.2% $1.25(6) September 14, 2003
Thomas W. Freeze 70,000 8.6% $1.015625 January 28, 2003
125,000(4) 15.3% $1.25(6) September 14, 2003
</TABLE>
- ----------
(1) All listed stock options vest over a three-year period from the date of
grant.
(2) Granted to Mr. Kufel for the purpose of effecting a repricing of a stock
option to purchase 300,000 shares of Common Stock granted to him by the
Company in 1997. In connection therewith, the 1997 stock option (with an
exercise price of $3.5625 per share) was cancelled. The new stock option
vests over a period of three years from the date of grant in September
1998. See "REPRICING OF STOCK OPTIONS."
9
<PAGE>
(3) Granted to Mr. Flook for the purpose of effecting a repricing of a stock
option to purchase 75,000 shares of Common Stock granted to him by the
Company in 1997. In connection therewith, the 1997 stock option (with an
exercise price of $3.9375 per share) was cancelled. The new stock option
vests over a period of three years from the date of grant in September
1998. See "REPRICING OF STOCK OPTIONS."
(4) Granted to Mr. Freeze for the purpose of effecting a repricing of a stock
option to purchase 125,000 shares of Common Stock granted to him by the
Company in 1997. In connection therewith, the 1997 stock option (with an
exercise price of $2.8750 per share) was cancelled. The new stock option
vests over a period of three years from the date of grant in September
1998. See "REPRICING OF STOCK OPTIONS."
(5) For purposes of calculating these percentages, stock options to purchase an
aggregate of 40,000 shares of Common Stock granted to non-employee
Directors during fiscal 1998 were excluded from Total Options Granted to
Employees in Fiscal Year.
(6) The average last sale price for the 30 consecutive trading days immediately
prior to the grant date was $0.97 per share.
The following table sets forth information concerning the number and value
of unexercised stock options at December 31, 1998 held by the individuals shown
in the Summary Compensation Table. None of such persons held any SARs at
December 31, 1998 or exercised any SARs during 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF VALUE OF
NUMBER OF AGGREGATE COMMON STOCK UNDERLYING UNEXERCISED IN-THE-
SHARES VALUE UNEXERCISED OPTIONS AT MONEY OPTIONS AT
RECEIVED REALIZED DECEMBER 31, 1998 DECEMBER 31, 1998(1)
UPON UPON -------------------------- --------------------------
NAME EXERCISE EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Eric J. Kufel -- -- 16,667 423,333 -- --
Glen E. Flook -- -- 10,000 150,000 -- --
Thomas W. Freeze -- -- 10,000 215,000 -- --
</TABLE>
- ----------
(1) Value is the difference between the market value of the Company's Common
Stock on December 31, 1998, which was $0.59 per share (based upon the last
sales price of the Common Stock on the Nasdaq SmallCap Market ("Nasdaq")),
and the exercise price.
STOCK OPTION PLAN
See "PROPOSAL 4 - APPROVAL OF AMENDMENT OF 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."
REPRICING OF STOCK OPTIONS
Each of Messrs. Kufel, Freeze and Flook joined the Company in the first
half of 1997. Upon commencement of employment, each person was granted an option
(each, an "Employment Commencement Stock Option") to purchase shares of the
Company's Common Stock under the Stock Option Plan pursuant to the terms of his
employment agreement: Mr. Kufel was granted an option to purchase 300,000 shares
of Common Stock at an exercise price of $3.5625 per share; Mr. Freeze was
granted an option to purchase 125,000 shares of Common Stock at an exercise
price of $2.875 per share; and Mr. Flook was granted an option to purchase
75,000 shares of Common Stock at an exercise price of $3.9375 per share.
In 1997 and 1998, during which the Company implemented and completed a
comprehensive restructuring program and refocused its efforts on expanding the
Company's business, the market value of the Company's Common Stock experienced a
substantial decline. As a result, by the latter part of 1998, all of the
Employment Commencement Stock Options were "out-of-the-money" (i.e., the
exercise prices of the options were higher than the current market price of the
10
<PAGE>
Common Stock), in each case by a large amount. At the same time, due to the
strength of the national and local economies, competition for qualified
management and other key employees intensified.
In light of the contributions of Messrs. Kufel, Freeze and Flook to the
Company in connection with the restructuring and the implementation of the
Company's business plan, and in order to encourage each such person to remain in
the employ of the Company, on September 14, 1998 the Company's Board of
Directors (acting without Mr. Kufel) authorized the Company to offer each such
person the right to cancel his out-of-the-money Employment Commencement Stock
Option in exchange for a replacement stock option to purchase the same number of
shares of Common Stock with an exercise price of $1.25 per share. The average
last sale price of the Common Stock for the 30 consecutive trading days
immediately prior to the grant date was $0.97 per share. In addition, the term
and exercisability of the replacement options were set such that the measurement
periods commenced on the grant date of the replacement options. Otherwise, the
replacement option terms remained the same as the terms of the Employment
Commencement Stock Options.
Each of Messrs. Kufel, Freeze and Flook elected to participate in the
repricing. The total number of shares of Common Stock subject to outstanding
stock options was not impacted by the repricing, since the number of shares of
Common Stock underlying the Employment Commencement Stock Options and the
replacement options was the same.
EMPLOYMENT AGREEMENTS
Mr. Eric J. Kufel was appointed as President and Chief Executive Officer
and elected to the Board of Directors of the Company effective February 3, 1997.
Mr. Kufel is employed under an "at will" employment agreement which provides for
a base salary of $115,000 per year, use of a Company automobile and
participation in Company bonus plans, the terms of which are yet to be
determined. Mr. Kufel's salary is subject to increases at the discretion of the
Company's Board of Directors. Pursuant to his employment agreement, on January
24, 1997 Mr. Kufel was granted a stock option to purchase 300,000 shares of
Common Stock at a price of $3.5625 per share. In September 1998, the stock
option was cancelled and a new stock option for the same number of shares was
issued to Mr. Kufel in order to effect a repricing. The exercise price of the
new stock option is $1.25 per share. The stock option vests over a three-year
period and expires five years from the date of grant. See "REPRICING OF STOCK
OPTIONS." Mr. Kufel's employment agreement contains a non-compete covenant.
Mr. Glen E. Flook has served as Vice President - Manufacturing since March
3, 1997. Mr. Flook is employed under an "at will" employment agreement that
provides for a base salary of $95,000 per year and for participation in Company
bonus plans, the terms of which are yet to be determined. Mr. Flook's salary is
subject to increases at the discretion of the Company's Board of Directors.
Pursuant to his employment agreement, on February 14, 1997 Mr. Flook was granted
a stock option to purchase 75,000 shares of Common Stock at a price of $3.9375
per share. In September 1998, the stock option was cancelled and a new stock
option for the same number of shares was issued to Mr. Flook in order to effect
a repricing. The exercise price of the new stock option is $1.25 per share. The
stock option vests over a three-year period and expires five years from the date
of grant. See "REPRICING OF STOCK OPTIONS." In addition, the Company made
payments to and paid expenses on behalf of Mr. Flook in 1997 in an aggregate
amount of $63,143 for expenses incurred by him in connection with his relocation
to Arizona upon the commencement of his employment with the Company. Mr. Flook's
employment agreement contains a non-compete covenant.
Mr. Thomas W. Freeze has served as Vice President, Chief Financial Officer,
Secretary and Treasurer since April 10, 1997. Mr. Freeze is employed under an
"at will" employment agreement that provides for a base salary of $105,000 per
year and for participation in Company bonus plans, the terms of which are yet to
be determined. Mr. Freeze's salary is subject to increases at the discretion of
the Company's Board of Directors. Pursuant to his employment agreement, on April
10, 1997 Mr. Freeze was granted a stock option to purchase 125,000 shares of
Common Stock at a price of $2.875 per share. In September 1998, the stock option
was cancelled and a new stock option for the same number of shares was issued to
Mr. Freeze in order to effect a repricing. The exercise price of the new stock
option is $1.25 per share. The stock option vests over a three-year period and
expires five years from the date of grant. See "REPRICING OF STOCK OPTIONS."
In addition to Messrs. Kufel, Flook and Freeze, certain other executive
officers of the Company have entered into employment agreements with the
Company.
11
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the Record Date by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each director and nominee for director of the
Company, (iii) each executive officer of the Company listed in the Summary
Compensation Table set forth in "Executive Compensation" above, and (iv) all
executive officers and Directors of the Company as a group, as of the Record
Date. The table also sets forth the anticipated beneficial ownership of the
Common Stock immediately after the consummation of the proposed acquisition by
the Company of Wabash Foods (assuming that the only change in beneficial
ownership of the Common Stock from the Record Date to the date of the closing of
such proposed transaction results from the payment by the Company of the
purchase price for Wabash Foods, consisting of: (i) the issuance by the Company
of 4,400,000 shares of Common Stock; and (ii) a Warrant to purchase 400,000
shares of Common Stock). See "PROPOSAL 3 -- PROPOSAL TO APPROVE THE ACQUISITION
BY THE COMPANY OF WABASH FOODS, LLC AND, IN CONNECTION THEREWITH, THE ISSUANCE
BY THE COMPANY OF (i) 4,400,000 SHARES OF COMMON STOCK, $.01 PAR VALUE, AND (ii)
A WARRANT TO PURCHASE 400,000 SHARES OF COMMON STOCK."
<TABLE>
<CAPTION>
AFTER CONSUMMATION OF ACQUISITION
AS OF THE RECORD DATE --------------------------------------
------------------------------------------ AMOUNT AND NATURE
AMOUNT AND NATURE OF PERCENT OF SHARES OF OF BENEFICIAL PERCENT OF SHARES
NAME AND ADDRESS BENEFICIAL OWNERSHIP COMMON STOCK BENE- OWNERSHIP OF OF COMMON STOCK
OF BENEFICIAL OWNER OF COMMON STOCK (1) FICIALLY OWNED (2) COMMON STOCK BENEFICIALLY OWNED
------------------- -------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Thomas W. Freeze.................... 87,000(3) 1.1% 87,000(3) 0.7%
3500 S. La Cometa Drive
Goodyear, AZ 85338
Richard E. Goodspeed................ 0 0 0 0
350 Meadow Grove Street
La Canada/Flintridge, CA 91011
Mark S. Howells..................... 778,137(4) 9.4 778,137(4) 6.2
2390 E. Camelback Road
Suite 203
Phoenix, AZ 85016
Eric J. Kufel....................... 168,334(5) 2.1 168,334(5) 1.4
3500 S. La Cometa Drive
Goodyear, AZ 85338
James W. Myers...................... 10,000(6) 0.1 10,000(6) 0.1
5050 N. 40th Street
Suite 100
Phoenix, AZ 85018
Robert C. Pearson................... 25,000(7) 0.3 25,000(7) 0.2
8080 North Central Expressway
Suite 210/LB59
Dallas, TX 75206
Aaron M. Shenkman................... 45,000(8) 0.6 45,000(8) 0.4
716 Gary Lane
El Paso, TX 79922
Glen E. Flook....................... 64,333(9) 0.8 64,333(9) 0.5
3500 S. La Cometa Drive
Goodyear, AZ 85338
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
AFTER CONSUMMATION OF ACQUISITION
AS OF THE RECORD DATE --------------------------------------
------------------------------------------ AMOUNT AND NATURE
AMOUNT AND NATURE OF PERCENT OF SHARES OF OF BENEFICIAL PERCENT OF SHARES
NAME AND ADDRESS BENEFICIAL OWNERSHIP COMMON STOCK BENE- OWNERSHIP OF OF COMMON STOCK
OF BENEFICIAL OWNER OF COMMON STOCK (1) FICIALLY OWNED (2) COMMON STOCK BENEFICIALLY OWNED
------------------- -------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Jeffrey J. Puglisi................... 825,001(10) 10.0 825,001(10) 6.5
2390 E. Camelback Road
Suite 203
Phoenix, AZ 85016
Renaissance Capital Growth &
Income Fund III, Inc................. 1,926,357(11) 20.1 1,926,357(11) 13.8
8080 North Central Expressway
Suite 210/LB59
Dallas, TX 75206
Tejas Snacks, L.P. .................. 400,000(12) 5.1 400,000(12) 3.3
Rt. 1, Box 66A
Brookshire, TX 77423
Wells Fargo Small Business
Investment Company, Inc. ............ 518,163(13) 6.2 518,163(13) 4.1
One Montgomery Street
West Tower, Suite 2530
San Francisco, CA 94104
Capital Foods, LLC .................. 0 0 4,800,000(15) 38.0
225 W. Hospitality Lane, Suite 201
San Bernardino, CA 02408
All executive officers and directors
as a group (11 persons) (14)......... 1,639,303(14) 20.4 1,639,303(14) 12.6
</TABLE>
- ----------
(1) Unless otherwise indicated, each of the persons named has sole voting and
investment power with respect to the shares reported.
(2) Shares of Common Stock which an individual or group has a right to acquire
within 60 days pursuant to the exercise of options or warrants are deemed
to be outstanding for the purpose of computing the percentage ownership of
such individual or group, but are not deemed to be outstanding for the
purpose of computing the ownership percentage of any other person shown in
the table. On the Record Date, the date as of which these percentages are
calculated, there were 7,832,997 shares of Common Stock issued and
outstanding.
(3) Includes 85,000 shares of Common Stock issuable upon the exercise of stock
options by Mr. Freeze that are exercisable within 60 days. Excludes 140,000
shares of Common Stock issuable upon the exercise of stock options which
have not yet vested and which are not exercisable within 60 days.
(4) Includes 410,000 shares of Common Stock issuable upon the exercise of stock
options (385,000 of which were granted outside of the Stock Option Plan) by
Mr. Howells that are exercisable within 60 days. Excludes 40,000 shares of
Common Stock held of record by trusts with Jeannie L. Howells, the former
wife of Mr. Howells, for the benefit of Mr. Howells' children.
(5) Includes 163,334 shares of Common Stock issuable upon the exercise of stock
options by Mr. Kufel that are exercisable within 60 days. Excludes 276,666
shares of Common Stock issuable upon the exercise of stock options which
have not yet vested and which are not exercisable within 60 days.
(6) Includes 10,000 shares of Common Stock issuable upon the exercise of stock
options by Mr. Myers that are exercisable within 60 days.
(7) Includes 25,000 shares of Common Stock issuable upon the exercise of stock
options by Mr. Pearson that are exercisable within 60 days.
(8) Includes 35,000 shares of Common Stock issuable upon the exercise of stock
options by Mr. Shenkman that are exercisable within 60 days.
13
<PAGE>
(9) Includes 63,333 shares of Common Stock issuable upon the exercise of stock
options by Mr. Flook that are exercisable within 60 days. Excludes 96,667
shares of Common Stock issuable upon the exercise of stock options which
have not yet vested and which are not exercisable within 60 days.
(10) Includes 400,000 shares of Common Stock issuable upon the exercise of stock
options (385,000 of which were granted outside of the Stock Option Plan) by
Mr. Puglisi that are exercisable within 60 days.
(11) Reflects 1,718,094 shares of Common Stock that would be issued upon the
conversion of the 9% Convertible Debentures, assuming that such conversion
was effected at the conversion price; 25,000 shares of Common Stock that
would be issued upon exercise of a warrant; and 183,263 shares already
issued by the Company in lieu of cash interest for the period November 1,
1998 through October 31, 1999. Russell Cleveland exercises control over the
9% Convertible Debenture owned by Renaissance Capital.
(12) Reflects shares of Common Stock issued by the Company in connection with
the acquisition of the business and certain assets of Tejas in November
1998. Thomas G. Bigham and Kevin M. Kohl (each of which is an executive
officer of the Company) are the beneficial owners of 210,000 and 86,000 of
such shares, respectively.
(13) Reflects 511,020 shares of Common Stock that would be issued upon the
conversion of the 9% Convertible Debentures, assuming that such conversion
was effected at the conversion price, and 7,143 shares of Common Stock that
would be issued upon exercise of a warrant. John P. Whaley is the
designated representative of Wells Fargo and, as such, exercises control
over the 9% Convertible Debenture held by Wells Fargo.
(14) Includes (i) 805,866 shares of Common Stock issuable upon the exercise of
stock options that are exercisable within 60 days (405,866 of which were
granted under the Stock Option Plan and 400,000 of which were granted
outside of the Stock Option Plan). Excludes 522,134 shares of Common Stock
issuable upon the exercise of stock options which have not yet vested and
which are not exercisable within 60 days.
(15) Reflects the issuance by the Company to Pate Foods, the owner of Wabash
Foods, upon the consummation of the Acquisition, of 4,400,000 shares of
Common Stock and a Warrant to purchase an additional 400,000 shares of
Common Stock. Immediately after the consummation of the Acquisition, Pate
Foods will transfer such securities to an affiliated entity, American
Pacific Financial Corporation, a California corporation. American Pacific
will immediately thereafter transfer all of such securities to another
affiliated entity, Capital Foods, LLC, a Delaware limited liability
company. See "Proposal 3 -- Proposal to Approve the Acquisition by the
Company of Wabash Foods, LLC and, in Connection Therewith, the Issuance by
the Company of (i) 4,400,000 Shares of Common Stock, $.01 Par Value, and
(ii) a Warrant to Purchase 400,000 Shares of Common Stock"
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From February 1997 to October 1997, a construction company owned by Matthew
Howells, a brother of Mark S. Howells, provided construction management services
to the Company in connection with the Company's Arizona manufacturing facility.
The Company paid $67,600 for these services.
As of February 1998, the Company issued warrants to Renaissance Capital and
Wells Fargo, the holders of the Company's 9% Convertible Debentures,
representing the right to purchase 25,000 and 7,143 shares, respectively, of the
Company's Common Stock at an exercise price of $1.00 per share. Each warrant
became exercisable upon issuance and expires on July 1, 2002. The warrants were
issued in consideration for the waiver by Renaissance Capital and Wells Fargo,
through June 30, 1999, of a financial covenant that the Company is subject to so
long as the 9% Convertible Debentures remain outstanding. Robert C. Pearson, a
Director of the Company, has been designated by Renaissance Capital as a nominee
for re-election as a Director pursuant to the Debenture Loan Agreement.
In October 1998, Renaissance Capital agreed for the period November 1, 1998
through October 31, 1999, to waive all mandatory principal redemption payments
due under the 9% Convertible Debentures held by Renaissance Capital and to
accept 183,263 unregistered shares of Common Stock in lieu of $154,628 of cash
interest payments. In consideration for these changes, the conversion price of
all outstanding 9% Convertible Debentures was decreased from $1.09 to $1.00 per
share.
On November 4, 1998, the Company acquired the business and certain assets
of Tejas, a Texas-based potato chip manufacturer. The assets, which were
acquired through a newly-formed wholly-owned subsidiary of the Company, Tejas PB
Distributing, Inc., included the Bob's Texas Style(TM) potato chips brand,
inventories and certain capital equipment. In consideration for these assets,
the Company issued 523,077 unregistered shares of Common Stock (400,000 of which
were issued to Tejas) with a fair market value of $450,000 and paid
approximately $1,180,000 in cash. The Company utilized available cash as well as
14
<PAGE>
funds from Norwest Credit, Inc. pursuant to a revolving credit line and term
loan made available to the Company, to satisfy the cash portion of the
consideration. Thomas G. Bigham and Kevin M. Kohl, each a beneficial owner of
Tejas, became executive officers of the Company upon the consummation of the
transaction.
* * * * * * *
PROPOSAL 2
APPROVAL OF AMENDMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION, AS
AMENDED, TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK,
$.01 PAR VALUE, BY 35,000,000 SHARES, FROM 15,000,000 TO 50,000,000 SHARES
The Board of Directors has approved a proposal to amend the Company's
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
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 full text of the proposed
amendment is included as Exhibit D to this Proxy Statement. If approved by the
shareholders, the proposed amendment will become effective upon the filing of an
amendment to the Certificate of Incorporation with the Office of the Secretary
of State of the State of Delaware, which will occur as soon as reasonably
practicable thereafter.
REASONS FOR THE INCREASE
It is proposed to increase the number of shares of Common Stock authorized
for issuance from 15,000,000 shares to a maximum of 50,000,000 shares. The
proposed increase in the number of shares authorized for issuance recognizes the
growth of the Company's operations and the increase in the number of outstanding
shares of the Company's Common Stock as a result of (i) the Company's initial
public offering in 1996; (ii) the issuance of shares of Common Stock in
connection with the November 1998 acquisition by the Company of the business and
certain assets of Tejas, (iii) an increase in the number of shares of Common
Stock underlying stock options granted by the Company to its employees and
directors; and (iv) issuances of warrants to purchase shares of Common Stock in
connection with financing and acquisition matters. As a result of these
issuances, as of the Record Date there were 7,832,997 shares of Common Stock
outstanding. Approximately 5,312,079 additional shares of Common Stock currently
are reserved for issuance upon exercise of outstanding stock options and
warrants and upon conversion of outstanding 9% Convertible Debentures. As a
result, an aggregate of approximately 13,145,076 of the 15,000,000 shares of
Common Stock authorized for issuance pursuant to the Certificate of
Incorporation are currently outstanding or are reserved for issuance upon the
exercise or conversion, as applicable, of stock options, warrants and the 9%
Convertible Debentures. If the amendment is approved by the Company's
shareholders, 50,000,000 shares of Common Stock will be authorized for issuance
and 36,854,924 shares of Common Stock will be available for future issuance or
sale by the Company after the Annual Meeting (upon the filing of the amendment
with the Office of the Secretary of State of the State of Delaware), excluding
shares reserved for issuance as set forth above.
The Board of Directors believes that the proposed increase in the number of
shares of Common Stock authorized for issuance will provide the Company with the
flexibility necessary to enable it to (a) acquire additional assets or
businesses by using shares of Common Stock for a portion or all of the
consideration paid to the sellers (including the proposed acquisition by the
Company of Wabash Foods -- See "PROPOSAL 3 - APPROVAL OF ACQUISITION BY THE
COMPANY OF WABASH FOODS, LLC AND, IN CONNECTION THEREWITH, THE ISSUANCE BY THE
COMPANY OF (I) 4,400,000 SHARES OF COMMON STOCK, $.01 PAR VALUE, AND (II) A
WARRANT TO PURCHASE 400,000 SHARES OF COMMON STOCK"); (b) raise additional
capital through one or more public offerings or private placements of shares of
Common Stock or options, warrants, convertible debt, convertible preferred
stock, or other securities exercisable or convertible into shares of Common
Stock; (c) repay existing indebtedness by issuing shares of Common Stock in lieu
of cash; (d) attract and retain directors, officers, and key employees and
motivate such persons to exert their best efforts on behalf of the Company by
issuing options to acquire shares of Common Stock; or (e) effect stock splits in
the form of a stock dividend or otherwise to make stock dividends to existing
shareholders. The number of shares of Common Stock currently authorized for
issuance is not adequate to provide a sufficient number of shares in order for
the Company to consummate the proposed acquisition by the Company of Wabash
Foods. In addition, the Board of Directors believes that the number of shares of
Common Stock currently authorized for issuance is not adequate to provide a
sufficient number of shares for other transactions such as those described above
as and when they may arise in the future. The Board of Directors believes that
the proposed increase in the number of authorized shares of Common Stock could
be an important factor in the Company's ability to raise capital and to make
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acquisitions in the future. Accordingly, the Board of Directors believes that
the proposed amendment to the Certificate of Incorporation is appropriate and in
the best interests of the Company and its shareholders generally.
Upon approval of the proposed amendment to the Certificate of Incorporation
and the filing of the amendment with the Office of the Secretary of State of the
State of Delaware, the newly authorized shares of Common Stock will be available
for issuance by action of the Board of Directors for any of the reasons
described above or for any other corporate purpose. Upon any issuance thereof,
such shares will have the same rights as the outstanding shares of Common Stock.
Holders of Common Stock have no preemptive rights. The authorized shares of
Common Stock in excess of those issued will be available for issuance at such
times and for such corporate purposes as the Board of Directors may deem
advisable, without further action by the Company's shareholders, except as may
be required by applicable law or by the rules of The Nasdaq Stock Market, Inc.
or any other stock exchange or national securities association trading system on
which the Common Stock may be listed or traded. At present, for example, the
Company is subject to Rule 4310 of the Nasdaq Rules which requires that in order
for the Company to continue the listing of its Common Stock on Nasdaq, the
Company must either receive the approval of its shareholders at a shareholders'
meeting, or receive a waiver of such requirement from Nasdaq, in order to issue
a number of shares of Common Stock equal to or greater than twenty percent (20%)
of the number of its theretofore issued and outstanding shares of Common Stock.
It should be noted that strategic acquisitions constitute a primary
component of the Company's business strategy. As such, the Company is actively
exploring possible acquisitions in addition to the proposed Wabash Foods
transaction. In connection with any such transactions, the Company would likely
utilize some or all of the additional authorized shares of Common Stock as all
or a portion of the consideration to be paid by the Company. In such an event,
the Company's shareholders would not need to be solicited for any specific
acquisitions if they approve the current proposal to increase the Company's
authorized Common Stock, except as indicated in the preceding paragraph.
Accordingly, the Company's shareholders' only opportunity to specifically vote
on and approve any such acquisitions may be the vote on the current proposal to
increase the Company's authorized Common Stock. Apart from the Wabash Foods
transaction, the Company has no immediate specific plans for the issuance any of
the additional authorized shares of Common Stock.
The Board of Directors does not intend to issue any Common Stock except on
terms that the Directors deem to be in the best interests of the Company and its
then-existing shareholders. Any future issuances of Common Stock will be subject
to the rights and preferences of holders of outstanding shares of any preferred
stock that the Company may issue in the future.
POTENTIAL EFFECTS OF THE PROPOSED AMENDMENT
In deciding whether to issue additional shares of Common Stock, the Board
of Directors will carefully consider the effect of the issuance on the operating
results of the Company and its then-existing shareholders. With the exception of
stock dividends, including stock splits effected as stock dividends, issuances
of Common Stock may result in dilution to the investments of existing
shareholders. In addition, issuances of Common Stock could be used to discourage
or make more difficult a business combination or an attempt to obtain control of
the Company that is not approved by the Company's Board of Directors, even when
those attempts may be in the best interests of some or all of the Company's
shareholders. It should be noted that in addition to Common Stock, the
Certificate of Incorporation authorizes the issuance of up to 50,000 shares of
"blank check" preferred stock, par value $100 per share, with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors of the Company. Such preferred stock could also be used to discourage
or make more difficult a business combination or an attempt to obtain control of
the Company that is not approved by the Board of Directors. The Company may
issue such shares of preferred stock in the future without shareholder approval.
Notwithstanding the foregoing, the Board of Directors did not propose this
amendment for the purpose of discouraging business combinations or attempts to
obtain control of the Company that are not approved by the Board of Directors,
and the Company is not aware of any specific effort to accumulate its Common
Stock for any such purpose.
APPROVAL OF THE PROPOSED AMENDMENT TO THE CERTIFICATE OF INCORPORATION
Approval of the proposed amendment to the Certificate of Incorporation will
require the affirmative vote of the holders of a majority of the total number of
issued and outstanding shares of the Company's Common Stock. Upon approval by
the Company's shareholders the proposed amendment will become effective upon
filing of the amendment with the Office of the Secretary of State of the State
of Delaware, which will occur as soon as practicable following the meeting. In
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the event that the proposed amendment is not approved by the Company's
shareholders at the meeting, the current Certificate of Incorporation will
remain in effect and the acquisition by the Company of Wabash Foods, which will
involve the issuance of a significant number of shares of Common Stock, will not
be consummated. See "PROPOSAL 3 - APPROVAL OF THE ACQUISITION BY THE COMPANY OF
WABASH FOODS, LLC AND, IN CONNECTION THEREWITH, THE ISSUANCE BY THE COMPANY OF
(i) 4,400,000 SHARES OF COMMON STOCK, $.01 PAR VALUE, AND (ii) A WARRANT TO
PURCHASE 400,000 SHARES OF COMMON STOCK." Shares will be voted for or against
such approval in accordance with the specifications marked on the proxies
applicable thereto, and if no specification is made, will be voted "FOR"
approval of the proposal to the Certificate of Incorporation.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE AMENDMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION, AS AMENDED, TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK, $.01 PAR VALUE, BY
35,000,000 SHARES, FROM 15,000,000 TO 50,000,000 SHARES.
* * * * * * *
PROPOSAL 3
APPROVAL OF THE ACQUISITION BY THE COMPANY 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, $.01 PAR VALUE, AND (ii) A
WARRANT TO PURCHASE 400,000 SHARES OF COMMON STOCK
INTRODUCTION
As of August 16, 1999, the Company and Pate Foods Corporation, an Illinois
corporation ("Pate Foods"), entered into an Agreement for Purchase and Sale of
Limited Liability Company Membership Interests (the "Purchase and Sale
Agreement"), pursuant to which the Company has agreed to acquire all of the
membership interests of Wabash Foods, LLC, a Delaware limited liability company
that is wholly-owned by Pate Foods. As more fully described below, the purchase
price to be paid by the Company for Wabash Foods is (i) 4,400,000 unregistered
shares of Common Stock (the "Closing Shares"), and (ii) a warrant (the
"Warrant") to purchase 400,000 unregistered shares of Common Stock at an
exercise price of $1.00 per share (such shares of Common Stock underlying the
Warrant being hereinafter referred to as the "Warrant Shares"). The Warrant
shall have a five-year term and shall become exercisable on the date of issuance
thereof. The acquisition by the Company of Wabash Foods is sometimes hereinafter
referred to as the "Acquisition."
Wabash Foods is engaged in the production and marketing of salted snack
food products sold throughout the United States. Wabash Foods currently
manufactures and sells products under the Tato Skins(R), Pizzarias(R),
O'Boisies(R), Braids(R) and Knots(R) brand names and manufactures private label
pretzels and tortiLLA chips for snack food manufacturers. Wabash Foods commenced
operations in April 1998 after purchasing the assets of the O'Boisie
Corporation. From the commencement of operations in April 1998 through December
31, 1998, Wabash Foods' revenues totaled $6,300,570. Wabash Foods generally
sells its products to vending distributors and retailers through independent
distributors.
Wabash Foods produces Tato Skins(R) brand potato crisps, Pizzarias(R) brand
pizza chips, and O'Boisies(R) brand potato crisps utilizing a sheeting and
frying process that includes patented technology. Wabash Foods licenses the
technology from a third party and has an exclusive right to use the technology
within North America until the patents expire between 2004 and 2006. Tato
Skins(R) brand potato crisps are offered in three flavors: Baked Potato, Cheese
n' Bacon and Sour Cream n' Onion flavors. Pizzarias(R) brand pizza chips are
offered in three flavors: Supreme, Pepperoni and Cheese flavors. O'Boisies(R)
brand potato crisps are offered in three flavors: Original, Sour Cream and Onion
and Cheddar flavors. Braids(R) and Knots(R) brand pretzels are offered in
numerous braid and knot pretzel varieties. Wabash Foods also produces pretzels
on a private label basis for a snack food manufacturer.
Although the Delaware General Corporation Law, as amended, does not require
that the shareholders of the Company approve the Acquisition, Rule 4310 of the
Nasdaq Marketplace Rules (the "Nasdaq Rules") requires that in order for the
Company to continue the listing of its Common Stock on Nasdaq, the Company must
either receive the approval of its shareholders at a shareholders' meeting, or
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receive a waiver of such requirement from Nasdaq, in order to issue a number of
shares of Common Stock equal to or greater than twenty percent (20%) of the
number of its theretofore issued and outstanding shares of Common Stock. The
number of shares of Common Stock comprising the Closing Shares (4,400,000) is in
excess of 20% of the currently issued and outstanding shares of Common Stock
(7,832,997). As a result, the Company is submitting for the approval of
shareholders this proposal to approve the Acquisition and the issuances of the
Closing Shares and the Warrant in connection therewith in order to comply with
the Nasdaq Rules.
It should be noted that Nasdaq recently implemented rules changes
increasing its quantitative listing standards that make it more difficult for
companies to maintain compliance with the listing requirements for Nasdaq. One
of such requirements is that the bid price of listed securities be equal to or
greater than $1.00 per share. As of November 9, 1998, the closing bid price of
the Company's Common Stock had remained below $1.00 per share for 30 consecutive
trading days. As a result, the Company received a notice from The Nasdaq Stock
Market, Inc. that the Company was not in compliance with the closing bid price
requirements for continued listing of the Common Stock on Nasdaq and that the
Common Stock would be delisted after February 15, 1999 if the closing bid price
was not equal to or greater than $1.00 per share for a period of at least ten
consecutive trading days during the 90-day period ending February 15, 1999. On
February 9, 1999, the Company submitted to Nasdaq a request for a hearing to
discuss the possibility of obtaining an extension of such 90-day period. The
Company's hearing request was granted by Nasdaq and took place on April 16,
1999, at which time management made a request to the Nasdaq Listing
Qualifications Panel for an extension of the period of time for the Company to
achieve compliance with the minimum bid price requirement. As of the date
hereof, Nasdaq has not informed the Company of a final determination. There can
be no assurance as to the final determination of the Nasdaq Listing
Qualifications Panel or as to the continued listing of the Common Stock on
Nasdaq.
REASONS FOR THE ACQUISITION
The Board of Directors of the Company approved the Acquisition and the
issuance of the Closing Shares and the Warrant in connection therewith, by
unanimous written consent on September 2, 1999. In making its determination with
respect to the Acquisition and the issuances of the Closing Shares and the
Warrant in connection therewith, the Board of Directors considered the following
factors which it deemed to be favorable:
COMPLEMENTARY PRODUCT LINES. The Company's strategy includes the
acquisition of snack food brands that provide strategic fit and possess strong
brand equity. Wabash Foods' Tato Skins(R), O'Boisies(R) and Pizzarias(R) brands
were produced and marketed extensively until 1995 by Keebler Company and
obtained national distribution and brand recognition. In addition, Wabash Foods'
brands appeal to a complementary consumer demographic as compared to the
Company. By combining the two companies' complementary product lines, the
Company's Board of Directors believes that the Acquisition will allow the
Company to offer a broader range of unique products to customers and thus create
stronger business prospects and greater diversification than either company
could accomplish alone.
UNIQUE MANUFACTURING CAPABILITIES. Wabash Foods has certain unique
manufacturing capabilities as a result of its exclusive right to use various
third party patents in North America regarding certain snack food production
processes. The Company's Board of Directors believes that the Company can
leverage those capabilities to create innovative and unique new snack food
products to distribute through a variety of distribution channels.
COMPLEMENTARY CUSTOMERS AND DISTRIBUTION CHANNELS. Wabash Foods' products
have achieved significant market presence in the vending distribution channel
and is experiencing growth in the eastern retail grocery distribution channel.
The Company's products are sold primarily through the western retail grocery
distribution channel. Accordingly, the Company's Board of Directors believes
that there are significant opportunities to cross-sell each company's products
to the other's customer base as well as to pursue new sales opportunities
jointly.
POTENTIAL EFFECT ON FINANCIAL RESULTS AND RESOURCES. Wabash Foods is
currently generating approximately $12 million in annualized net sales and is
profitable. The pro forma combined results of operations of the Company and
Wabash Foods for the six months ended June 30, 1999 reflect a profit as well,
even though the Company had a "Loss before cumulative effect of a change in
accounting principle" of $65,223. The Board of Directors believes that the
Acquisition represents an opportunity for revenue growth for the Company and
that such growth will have a positive impact on the Company's operating results.
In addition, the Board believes that the increased revenue base of the Company
will enhance the Company's ability to raise capital to finance future growth.
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This discussion of the information and factors considered by the Company's
Board of Directors in reaching its decision to approve the Acquisition and the
issuances of the Closing Shares and the Warrant in connection therewith is not
intended to be exhaustive. In view of the variety of material factors considered
in connection with its evaluation of the Acquisition, the Board of Directors did
not find it practicable to, and did not, quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination. In
addition, individual members of the Board of Directors may have given different
weight to different factors.
MATERIAL CONTRACTS BETWEEN THE COMPANY AND PATE FOODS/WABASH FOODS;
PRE-ACQUISITION MANAGEMENT AGREEMENT
Effective April 1, 1999, in anticipation of the Acquisition, the Company
and Wabash Foods entered into an agreement (the "Management Agreement") pursuant
to which the Company agreed to provide management services to Wabash Foods in
connection with its day-to-day operations. In consideration therefor, Wabash
Foods agreed to pay to the Company a monthly fee calculated based upon the net
earnings of Wabash Foods during the term of the Agreement. Since such effective
date, the Company has effectively managed the day-to-day operations of Wabash
Foods. As of June 30, 1999, the fees earned by the Company pursuant to the
Management Agreement totaled $194,800. Upon the consummation of the Acquisition,
Wabash Foods will be wholly-owned by the Company and the Management Agreement
will terminate.
Other than the Management Agreement and the Purchase and Sale Agreement,
the Company is not aware of any past, present, or proposed material contracts,
arrangements, understandings, relationships, negotiations or transactions
between the Company and Pate Foods or Wabash Foods or any of their affiliates.
TERMS OF THE ACQUISITION
The following is a brief summary of the Purchase and Sale Agreement, a copy
of which (without exhibits or schedules) is attached to this Proxy Statement and
is incorporated herein by reference. Although the material provisions of the
Purchase and Sale Agreement have been summarized accurately, the statements made
herein concerning such document are not necessarily complete, and reference is
made to the full text of the Purchase and Sale Agreement. Each such statement is
qualified in its entirety by such reference.
GENERAL; PURCHASE PRICE
THE PURCHASE AND SALE AGREEMENT PROVIDES, THAT, SUBJECT TO THE SATISFACTION
OR WAIVER OF CERTAIN CONDITIONS SET FORTH THEREIN, ON THE CLOSING DATE (AS
DEFINED HEREIN), THE COMPANY WILL ACQUIRE ALL OF THE LIMITED LIABILITY COMPANY
MEMBERSHIP INTERESTS OF WABASH FOODS AND WABASH FOODS WILL BECOME WHOLLY-OWNED
BY THE COMPANY. A COPY OF THE PURCHASE AND SALE AGREEMENT IS ANNEXED HERETO AS
EXHIBIT E.
On the Closing Date, all of the limited liability company membership
interests of Wabash Foods will be sold, delivered and assigned by Pate Foods, an
Illinois corporation and the sole beneficial holder of Wabash Foods' membership
interests, to the Company, in consideration for the payment by the Company to
Pate Foods of (i) 4,400,000 shares of Common Stock (the "Closing Shares"), and
(ii) a warrant (the "Warrant") to purchase 400,000 shares of Common Stock (the
"Warrant Shares") at a price of $1.00 per share. 3,900,000 of the Closing Shares
will be issued directly to Pate Foods at the closing and 500,000 of such shares
(the "Escrowed Shares") will be deposited in an escrow account established with
a bank or other financial institution. Pursuant to an escrow agreement to be
entered into by the Company and Pate Foods, the Escrowed Shares will remain in
the escrow account for a period of one year from the date of the Closing. Until
released from the escrow account, the Escrowed Shares will be subject to certain
claims for indemnification against Pate Foods pursuant to the Purchase and Sale
Agreement. See "INDEMNIFICATION."
Immediately after the Closing, Pate Foods will transfer all of the Closing
Shares and the Warrant to an affiliated entity, American Pacific Financial
Corporation, a California corporation ("American Pacific"). American Pacific
will immediately thereafter transfer all of the Closing Shares and the Warrant
to Capital Foods, LLC, a Delaware limited liability company ("Capital Foods").
The beneficial owners (as well as the percentage of ownership of each such
person) of the capital stock of Pate Foods are the same as the beneficial owners
of the limited liability company interests of Capital Foods. As a result of such
transfers, Capital Foods will become the holder of record of the Closing Shares
and the Warrant Shares. Upon consummation of the Acquisition, Capital Foods will
be the beneficial owner of 36% of the issued and outstanding shares of Common
Stock (assuming no exercise of the Warrant) and 27% of the Common Stock on a
fully diluted basis (inclusive of the Warrant Shares). See "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS."
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The purchase price to be paid by the Company in connection with the
Acquisition does not include the following additional costs and expenses which
will be borne by the Company: (i) fees and expenses of the Company's advisors
(including, without limitation, the Company's legal counsel, accountants and
financial advisors) incurred in connection with the Acquisition; (ii) other
out-of-pocket expenses incurred by the Company in connection with the
Acquisition; and (iii) the costs associated with the preparation of this Proxy
Statement. In addition, the first $25,000 of Acquisition-related expenses
incurred by Pate Foods and Wabash Foods may be paid for by Wabash Foods. As
Wabash Foods will become a subsidiary of the Company upon consummation of the
Acquisition, and the payment of such expenses would reduce the assets of Wabash
Foods, such expenses may be deemed to be indirectly paid by the Company. See
"OTHER AGREEMENTS - BROKER/FINDER Fees."
The indebtedness of Wabash Foods outstanding upon consummation of the
Acquisition will thereafter be reflected as a liability of the Company, on a
consolidated basis. In connection therewith, the Purchase and Sale Agreement
provides that as of the date of the Closing, the total indebtedness of Wabash
Foods shall not exceed $7,392,194. See "TERMS OF THE ACQUISITION -- CONDITIONS
TO THE OBLIGATIONS OF THE COMPANY."
Pate Foods will be responsible for the payment of any transaction privilege
tax, use tax, excise tax or other transfer fee or tax which may be imposed by
any governmental agency with respect to the sale, transfer, conveyance and
assignment of the Wabash Foods membership interests in connection with the
Acquisition. With respect to the legal, accounting and other expenses of Pate
Foods and Wabash Foods in connection with the Acquisition, the first $25,000 of
such expenses shall be paid for by Wabash Foods and all expenses in excess
thereof shall be paid for by Pate Foods.
WARRANT
The Warrant to be issued by the Company to Pate Foods will have a term of
five years commencing on or about the date of the Closing. The purchase price
payable by Pate Foods upon any exercise of the Warrant may be paid for either in
cash or pursuant to a "cashless exercise" provision. Pursuant to such provision,
Pate Foods will have the option of paying the purchase price for the exercise of
the Warrant by instructing the Company to withhold from issuance to Pate Foods a
portion of the Warrant Shares (valued, in general, according to the market price
of the Common Stock at the time of exercise) as consideration for the exercise
in lieu of a cash payment. If the cashless exercise provision of the Warrant is
utilized by Pate Foods, the Company will not receive any cash consideration in
connection with such exercise and Pate Foods will receive a reduced number of
Warrant Shares. SEE THE "FORM OF WARRANT" ANNEXED HERETO AS EXHIBIT G.
REGISTRATION RIGHTS AGREEMENT
Upon issuance of the Closing Shares and the Warrant, neither the Closing
Shares nor the Warrant Shares underlying the Warrant will be registered under
the Securities Act of 1933, as amended, and, as a result, such shares will be
subject to certain transfer restrictions. However, pursuant to the Purchase and
Sale Agreement, the Company and Pate Foods will enter into a Registration Rights
Agreement (the "Registration Rights Agreement") that will provide "piggyback"
registration rights to Pate Foods with respect to such shares. Such piggyback
registration rights will not be exercisable until the first anniversary of the
Closing of the Acquisition. As a result of the Registration Rights Agreement,
the Company may in the future, at primarily its expense, be required to register
the Closing Shares and the Warrant Shares in connection with a registration of
securities on behalf of the Company or one or more of its security holders. SEE
THE COPY OF THE "REGISTRATION RIGHTS AGREEMENT" ANNEXED HERETO AS EXHIBIT F.
COMMON STOCK OWNERSHIP FOLLOWING THE ACQUISITION; MARKET VALUE OF CLOSING SHARES
Upon consummation of the Acquisition, Pate Foods will own 4,400,000 shares
of Common Stock, which shall represent approximately 36% of the total number of
issued and outstanding shares of Common Stock after the Closing (assuming (i) no
change in the number of issued and outstanding shares of Common Stock prior to
the Closing, and (ii) the Warrant is not exercised). Based upon the closing sale
price of the Common Stock of $1.1875 per share, as reported on the Nasdaq
SmallCap Market on August 27, 1999, the Closing Shares will have a market value
of approximately $5,225,000.
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CLOSING DATE OF THE ACQUISITION
It is the intention of the Company and Wabash to close the Acquisition as
soon as reasonably practicable following (i) approval by the Company's
shareholders of the Acquisition and the issuance by the Company of the Closing
Shares and the Warrant in connection therewith and (ii) the satisfaction of all
other conditions (or, to the extent permitted, the waiver thereof) to the
parties' respective obligations to consummate the Acquisition. See "TERMS OF THE
ACQUISITION -- TERMINATION OF THE PURCHASE AND SALE AGREEMENT; CERTAIN
REMEDIES."
REPRESENTATIONS AND WARRANTIES
The Purchase and Sale Agreement contains certain representations and
warranties of Pate Foods and Wabash Foods relating to, among other things: (i)
due organization and qualification; (ii) beneficial ownership; (iii) valid
issuance of securities; (iv) corporate power and authority to enter into the
Acquisition; (v) absence of breaches or violations of organization
documentation, laws and material agreements and other documents as a result of
Acquisition; (vi) absence of required governmental consents or approvals in
connection with Acquisition; (vii) absence of defaults or alleged defaults with
respect to material contracts as a result of Acquisition; (viii) properties of
Wabash Foods; (ix) absence of pending or threatened material litigation; (x)
absence of judgments, injunctions or orders of courts or governmental agencies;
and (xi) compliance with applicable laws.
The Purchase and Sale Agreement also contains certain representations and
warranties of the Company relating to, among other things: (i) due organization
and qualification; (ii) authorized capital stock of the Company; (iii) corporate
power and authority of the Company to enter into the Acquisition; (iv) absence
of breaches or violations of organization documents as a result of Acquisition;
and (v) absence of required governmental consents or approvals in connection
with Acquisition.
COVENANTS
Pursuant to the Purchase and Sale Agreement, Pate Foods and Wabash Foods
have covenanted and agreed, for the period prior to the Closing, among other
things: (i) that Wabash Foods will operate its business in the ordinary course,
diligently and in good faith, consistent with past management and operating
practices; (ii) that Wabash Foods will maintain substantially all of its
properties in customary repair, order and condition, reasonable wear and tear
excepted; (iii) that Wabash Foods will maintain all leases and contracts in
effect without change; (iv) that Wabash Foods will comply with all applicable
laws and regulations; (v) that Wabash Foods will not knowingly cancel, release,
waive or compromise any debt, claim or right in its favor having a value in
excess of $1,000, with certain exceptions; (vi) that Wabash Foods will maintain
its insurance coverage; (vii) that no change or amendment will be made to Wabash
Foods' organization documents; (viii) that Wabash Foods will not merge into or
consolidate with any other entity or change the character of its business; (ix)
that Pate Foods will not, directly or indirectly, exchange, transfer, assign,
pledge or encumber, nor grant any right to acquire, dispose of, vote or
otherwise control in any manner the Wabash Foods membership interests other than
to the Company at Closing, nor to make any offer to do so to a third party; (x)
that Wabash Foods will not pay, set aside, accrue or agree to any bonus to Pate
Foods or to any employee, manager or officer of Wabash Foods; (xi) that Wabash
Foods will not make certain capital expenditures or commitments with respect
thereto; (xii) that Wabash Foods will not incur, assume or guarantee any
indebtedness or capital leases or create or permit to become effective any
mortgage, pledge, lien, encumbrance or charge of any kind upon its assets other
than in the ordinary course of business; (xiii) that Wabash Foods will not enter
into any transaction or make any commitment or incur any obligations except in
the ordinary course of business consistent with past practice which individually
exceed the sum of $5,000 or, in the event or a related series of transactions,
in the aggregate exceed the sum of $10,000 without the prior consent of the
Company; (xiv) to supply the Company with certain financial information
pertaining to Wabash Foods; (xv) to provide the Company and its representatives
access to Wabash Foods' plants, properties, books and records in connection with
the Company's investigation of the affairs of Wabash Foods and to cause its
officers, members, managers and employees to furnish such additional information
to the Company as it may reasonably request; (xvi) to exert reasonable efforts
to obtain all consents necessary for the consummation of the Acquisition. If
Pate Foods shall breach its obligation described in (ix) above to refrain from
offering any interest in the Wabash Foods membership interests to a third party,
Pate Foods shall be liable to the Company for liquidated damages in the amount
of $250,000. See "TERMS OF THE ACQUISITION -- TERMINATION OF THE PURCHASE AND
SALE AGREEMENT; CERTAIN REMEDIES."
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Pursuant to the Purchase and Sale Agreement, the Company and Wabash Foods
have covenanted and agreed, for the period commencing on the effective date of
the Purchase and Sale Agreement and continuing after the Closing, among other
things: (i) to treat certain information regarding Pate Foods and Wabash Foods
in confidence; and (ii) to preserve and keep the books and records of Wabash
Foods for at least three years after the effective date of the Purchase and Sale
Agreement and to make such books and records available to Pate Foods for any
reasonable purpose.
RELATED AGREEMENTS
BROKER/FINDER FEES. Pursuant to the Purchase and Sale Agreement, each of
Pate Foods and the Company has represented and warranted to the other party that
it has not retained any consultant, broker or finder in connection with the
Acquisition, other than the retention by the Company of Stifel, Nicolaus &
Company, Incorporated ("SN&C") as its financial adviser. SN&C has recently
replaced Everen Securities, Inc. as the Company's financial advisor. Upon the
consummation of the Acquisition, the Company will become obligated to make a
payment to SN&C in the amount of approximately $400,000. Each of Pate Foods and
the Company has agreed to indemnify the other party in connection with any and
all claims, liabilities or expenses for any brokerage or finder fees or
commissions due to any consultant, broker or finder alleged to have been
retained by the indemnifying party.
NONCOMPETITION AGREEMENT. Pursuant to the Purchase and Sale Agreement, the
Company and Larry R. Polhill, a principal of Pate Foods, are required to enter
into a Noncompetition Agreement. Mr. Polhill has an ownership interest in, or is
involved in a management or other capacity with, several other businesses in the
snack food industry, some of which may be, presently or in the future, in
competition with the Company. See "WABASH FOODS MANAGEMENT - LARRY R. POLHILL."
Pursuant to the Noncompetition Agreement, Mr. Polhill and certain of his
affiliates will agree to be restricted from engaging in certain activities that
are competitive with the business of the Company and Wabash Foods for so long as
Mr. Polhill, or any of his affiliates, directly or indirectly, own more than
five percent (5%) of the issued and outstanding shares of the Company's Common
Stock. Subject to the restrictions contained in the Noncompetition Agreement,
Mr. Polhill will, after the consummation of the Acquisition, be permitted to be
actively involved in the snack food industry. Any such permitted activities, to
the extent that they are competitive with the business of the Company, could
have a material adverse effect on the Company.
In addition to the above-described restrictions, the Noncompetition
Agreement requires Mr. Polhill to give the Company a right of first refusal with
respect to certain business opportunities that Mr. Polhill or his affiliates may
have an opportunity to engage in, if such business opportunities pertain to the
manufacture of pretzels, pretzel products, potato chips or potato chip products.
If the Company declines any such opportunity or otherwise fails to exercise its
right of first refusal with respect thereto, then Mr. Polhill or his affiliates
will be permitted to enter into the opportunity on materially the same terms as
those offered to the Company. If any opportunity presented by Mr. Polhill to the
Company pursuant to the right of first refusal provision involves a business
which sells, on an annual basis, more than $5,000,000 in tortilla chips which
are produced for such business by a third party, and the Company exercises its
right of first refusal with respect to such opportunity, the Company must also
enter into negotiations with Pate Foods to purchase Pate Foods. If such
negotiations are unsuccessful, then Pate Foods may pursue the opportunity.
Furthermore, if any opportunity presented by Mr. Polhill to the Company pursuant
to the right of first refusal provision involves a business which sells, on an
annual basis, less than $5,000,000 in tortilla chips which are produced for such
business by a third party, and the Company exercises its right of first refusal
with respect to such opportunity, then the Company must offer a right of first
refusal to Mr. Polhill to supply all of the tortilla chip requirements of such
business.
EMPLOYMENT AGREEMENTS. Pursuant to the Purchase and Sale Agreement, Pate
Foods and Wabash Foods are obligated to exert their reasonable best efforts to
cause two employees of Wabash Foods, Gary Folk and Don Addington, to enter into
employment agreements with the Company. Mr. Folk is the Plant Director of Wabash
Foods' manufacturing facility in Bluffton, Indiana. Mr. Addington is the Plant
Manager at such facility. There can be no assurance that such persons will enter
into the proposed agreements upon consummation of the Acquisition.
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CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
Pursuant to the Purchase and Sale Agreement, the obligation of the Company
to consummate the Acquisition shall be subject to the material satisfaction, on
or before the date of the Closing, of the following conditions (unless waived by
the Company), among others: (i) the representations and warranties made by Pate
Foods in the Purchase and Sale Agreement shall be true and correct; (ii) Pate
Foods shall have performed and complied in all material respects with all
material agreements, covenants and conditions contained in the Purchase and Sale
Agreement to be performed or complied with prior to the date of the Closing;
(iii) Pate Foods shall have obtained or delivered, or caused to be delivered, to
the Company, as applicable, certain specified closing documents; (iv) there
shall have been no material adverse change in the business, prospects or
financial condition of Wabash Foods; (v) no legal proceeding shall have been
commenced seeking to prevent the Acquisition or questioning its validity or
legality; (vi) the Company shall be satisfied with the results of its due
diligence review of Wabash Foods; (vii) the total indebtedness of Wabash Foods
as of the date of the Closing shall not exceed $7,392,194; and (viii) the
Company shall have obtained consents to the Acquisition from certain of the
Company's lenders and other third parties.
If Pate Foods is unable to satisfy any of the above-referenced conditions
or the other conditions set forth in the Purchase and Sale Agreement, the
Company shall have the right to either waive such conditions or cancel the
Purchase and Sale Agreement. See "TERMINATION OF THE PURCHASE AND SALE
AGREEMENT; CERTAIN REMEDIES."
CONDITIONS TO THE OBLIGATIONS OF PATE FOODS
Pursuant to the Purchase and Sale Agreement, the obligation of Pate Foods
to consummate the Acquisition shall be subject to the material satisfaction, on
or before the date of the Closing, of the following conditions (unless waived by
Pate Foods), among others: (i) the representations and warranties made by the
Company in the Purchase and Sale Agreement shall be true and correct; (ii) the
Company shall have performed and complied in all material respects with all
material agreements, covenants and conditions contained in the Purchase and Sale
Agreement to be performed or complied with prior to the date of the Closing;
(iii) no legal proceeding shall have been commenced seeking to prevent the
Acquisition or questioning its validity or legality; and (iv) the Company shall
have delivered payment of the purchase price for Wabash Foods in accordance with
the terms of the Purchase and Sale Agreement. See "GENERAL; PURCHASE PRICE.".
If the Company is unable to satisfy any of the above-referenced conditions
or the other conditions set forth in the Purchase and Sale Agreement, Pate Foods
shall have the right to either waive such conditions or cancel the Purchase and
Sale Agreement. See "TERMINATION OF THE PURCHASE AND SALE AGREEMENT; CERTAIN
REMEDIES."
TERMINATION OF THE PURCHASE AND SALE AGREEMENT; CERTAIN REMEDIES
In the event of any material breach or default of any warranty, covenant,
agreement or obligation of Pate Foods under the Purchase and Sale Agreement
prior to the Closing, the Company may at its option terminate the Purchase and
Sale Agreement or, at its option, sue for specific performance. In addition, if
Pate Foods breaches its undertaking not to exchange, transfer, assign, pledge or
encumber, or grant any right to acquire, dispose of, vote or otherwise control
in any manner the Wabash Foods membership interests other than to the Company at
Closing, nor to make any offer to a third party to do so, then Pate Foods shall
be obligated to make a cash payment to the Company in the amount of $250,000 as
liquidated damages.
In the event of any breach or default of any warranty, covenant, agreement
or obligation of the Company under the Purchase and Sale Agreement prior to the
Closing, Pate Foods may at its option terminate the Purchase and Sale Agreement.
If the Company's Board of Directors approves the Purchase and Sale
Agreement and, thereafter, either this Proposal to approve the Acquisition or
the Proposal to increase the number of authorized shares of Common Stock (see
"PROPOSAL 2 - APPROVAL OF AMENDMENT OF THE COMPANY'S CERTIFICATE OF
INCORPORATION, AS AMENDED, TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON
STOCK, $.01 PAR VALUE, BY 35,000,000 SHARES, FROM 15,000,000 TO 50,000,000) is
not approved by the Company's shareholders or is not consented to by applicable
third parties on or before October 22, 1999, the Company will be required to pay
to Pate Foods a "break-up fee" as compensation for Pate Foods' expenditures in
connection with the Acquisition and not as a penalty or damages. The "break-up
fee" shall, at the Company's discretion, consist of either (i) a cash payment of
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$260,000 or (ii) the issuance by the Company to Pate Foods of 200,000 shares of
Common Stock that have not been registered under the Securities Act of 1933, as
amended. However, if the failure to obtain the required shareholder approvals is
due to regulatory actions or events beyond the Company's reasonable control such
as, without limitation, actions taken by the Securities and Exchange Commission,
the National Association of Securities Dealers, Inc., or any other regulatory
authorities, said October 22, 1999 deadline date shall be extended for a
reasonable period of time not to exceed 60 days to permit the Company to
endeavor to obtain all such necessary regulatory consents or authorizations and
thereafter to obtain approval of the Company's shareholders.
In addition to the termination rights described above, the Purchase and
Sale Agreement may be terminated at any time prior to the Closing by mutual
consent of the Company and Pate Foods.
INDEMNIFICATION
Pate Foods has agreed to indemnify the Company and each of its
shareholders, officers and directors against any loss, damage or expense
incurred by the Company or any of such persons as a result of: (i) any material
breach of any covenant or agreement contained in the Purchase and Sale
Agreement, (ii) any material inaccuracy in the representations or warranties
made by Pate Foods in the Purchase and Sale Agreement to the extent that such
inaccuracy is attributable to events, actions, occurrences, conditions or
omissions existing prior to the date of the Closing, or (iii) any material
inaccuracy or misrepresentation in any certificate or other documents or
instrument delivered by Pate Foods or Wabash Foods to the Company pursuant to
the terms of the Purchase and Sale Agreement. Any claim arising pursuant to
clause (ii) or clause (iii) above is hereinafter referred to as a "Damage
Claim." As a result of a Damage Claim, the Company's exclusive remedy shall be a
reduction in the purchase price payable by the Company to Pate Foods in
connection with the Acquisition, such adjustment to be made solely from (and to
be limited to) the 500,000 Escrowed Shares placed in an escrow account at the
Closing. See "GENERAL; PURCHASE PRICE." Pate Foods shall have no other liability
to the Company in respect of a Damage Claim. After a period of one year from the
date of the Closing, the Escrowed Shares (less any Escrowed Shares previously
paid to the Company in connection with Damage Claims and any Escrowed Shares
subject to pending Damage Claims) will be released from the escrow account to
Pate Foods and will no longer be subject to such indemnification obligations. A
claim for indemnification may not be made if the loss is recovered by the
Company from an insurer or other third party or if the Company is otherwise
compensated for such loss at no cost to the Company.
Notwithstanding the foregoing, Pate Foods shall be fully and personally
liable to, and shall pay, protect, defend and indemnify, the Company and each of
its shareholders, officers and directors for any cost, claim, damage or
liability to which they may be exposed or which they may suffer which have been
determined by a court or arbitrator to have arisen from Pate Foods' willful and
intentional breach of the Purchase and Sale Agreement or from fraud.
REGULATORY APPROVAL
The Company must comply with applicable federal and state securities laws
regarding the issuance of the Closing Shares, the Warrant and the Warrant Shares
to Pate Foods.
ACCOUNTING TREATMENT
The Acquisition will be accounted for as a "purchase" under generally
accepted accounting principles. Accordingly, the Wabash Foods results of
operations will be included in the Company's consolidated results of operations
from and after the Closing Date. For purposes of preparing the Company's
consolidated financial statements, the Company will establish a new accounting
basis for Wabash Foods' assets and liabilities based upon the estimated fair
values thereof and the Company's purchase price, including the costs of
Acquisition. A final determination of required purchase accounting adjustments
and of the fair value of the assets and liabilities of Wabash Foods has not yet
been made. As a result, the purchase accounting adjustments made in connection
with the development of the pro forma combined condensed financial information
appearing elsewhere in this Proxy Statement are preliminary and have been made
solely for purposes of developing such pro forma combined condensed financial
information to comply with disclosure requirements of the Securities and
Exchange Commission. Accordingly, such adjustments may materially differ from
the amounts that would have been determined if the final allocation had been
known.
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FEDERAL INCOME TAX CONSEQUENCES
The Acquisition and the issuances of the Closing Shares and the Warrant are
not expected to have any federal income tax consequences on the current
shareholders of the Company.
MARKET PRICE DATA AND DIVIDEND INFORMATION
Shares of the Company's Common Stock are listed on the Nasdaq SmallCap
Market. See "INTRODUCTION." The following table sets forth the high and low
sales prices per share of Common Stock on (i) April 30, 1999, the last full
trading day before the public announcement of the Acquisition and (ii) September
8, 1999, the last day for which such information could be calculated before the
date of this Proxy Statement.
HIGH LOW
---- ---
April 30,1999..................... $ 0.875 $ 0.813
September 8, 1999................. 1.1875 1.0625
BECAUSE THE MARKET PRICE FOR SHARES OF THE COMMON STOCK IS SUBJECT TO
FLUCTUATION, SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR SUCH
SHARES.
The Company has never paid cash dividends to its shareholders and does not
anticipate paying any such dividends in the foreseeable future.
DESCRIPTION OF WABASH FOODS
OVERVIEW
Wabash Foods is engaged in the production and marketing of salted snack
food products (including potato crisps, pizza chips and pretzels) sold across
the United States. Wabash Foods currently manufactures and sells products under
the Tato Skins(R), Pizzarias(R), O'Boisies(R), Braids(R) and Knots(R) brand
nameS AND manufactures private label pretzels and tortilla chips for snack food
manufacturers. Wabash Foods commenced operations in April 1998 after purchasing
the assets of the O'Boisie Corporation. For the period from commencement of
operations in April 1998 through December 31, 1998, Wabash Foods' revenues
totaled $6,300,570. Wabash Foods generally sells its products to vending
distributors and retailers through independent distributors.
Wabash Foods produces Tato Skins(R) brand potato crisps, Pizzarias(R) brand
pizza chips, and O'Boisies(R) brand potato crisps utilizing a sheeting and
frying process that includes patented technology. Wabash Foods licenses the
patented technology from a third party and has an exclusive right to use the
technology within North America until the patents expire between 2004 and 2006.
Tato Skins(R) brand potato crisps are offered in three flavors: Baked Potato,
Cheese n' Bacon and Sour Cream n' Onion flavors. Pizzarias(R) brand pizza chips
are offered in three flavors: Supreme, Pepperoni and Cheese flavors.
O'Boisies(R) brand potato crisps are offered in three flavors: Original, Sour
Cream and Onion and Cheddar flavors. Braids(R) and Knots(R) brand pretzels are
offered in numerous braid and knot pretzel varieties. Wabash Foods also produces
pretzels and tortilla chips on a private label basis for snack food
manufacturers. See "PRODUCTS".
Wabash Foods' business objective is to regain distribution and build market
share for its Tato Skins(R), Pizzarias(R), O'Boisies(R), Braids(R) and Knots(R)
brands. Collectively, these brands achieved annual SALES in excess of
$150,000,000 when they were owned by the Keebler Company in the 1980's. Although
management does not believe that such revenue levels will be attained in the
future, it does believe that significant growth opportunities exist for such
brands. The Keebler Company developed and marketed the brands from the
mid-1980's until 1995, when United Biscuit, Keebler's parent company, divested
all North American Keebler operations.
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COMPANY HISTORY
Wabash Foods, a Delaware limited liability company, was organized in
February, 1998 and is a wholly-owned subsidiary of Pate Foods, an Illinois
corporation. Pate Foods is affiliated with Capital Foods, a Delaware limited
liability company, which owns a number of food manufacturing interests,
primarily in the snack and bakery categories, including products such as
cookies, crackers, rice cakes and salted snacks. Larry R. Polhill and Bradley I.
Crandall each beneficially own approximately 40% of Pate Foods and Capital
Foods.
On March 31, 1998, Wabash Foods purchased certain assets of the former
O'Boisie Corporation from U.S. Bancorp Republic Commercial Finance, Inc., a
Minnesota corporation ("U.S. Bancorp"). The acquired assets included the Tato
Skins(R), Pizzarias(R), O'Boisies(R), Braids(R) and Knots(R) brand names and all
manufactURING equipment existing at Wabash Foods' leased Bluffton, Indiana
manufacturing facility. The manufacturing facility's land and building were also
sold in a separate transaction and Wabash Foods holds a 20-year lease that
expires in 2018 with two five-year renewal options. The aggregate purchase price
paid by Wabash Foods for the acquired assets was $6,450,000, payable pursuant to
a $5,800,000 seven-year note payable to U.S. Bancorp and a $650,000 note payable
to U.S. Bancorp due in quarterly installments beginning in June 1999 through
December 31, 1999. The $650,000 note was negotiated down from an original $2.5
million note payable to US Bancorp in exchange for accelerated payments
requiring the $650,000 note payable to be paid in full by December 31, 1999. See
"REFINANCING OF CERTAIN INDEBTEDNESS OF THE COMPANY AND WABASH FOODS."
Wabash Foods' products were originally developed, manufactured and marketed
by the Keebler Company between 1980 and 1995. In 1995, the North American
operations of the Keebler Company were divested and, in connection therewith,
O'Boisie Corporation acquired the Keebler Company's salted snack business. In
January 1998, an involuntary bankruptcy proceeding was instituted with respect
to O'Boisie Corporation and, as a result, O'Boisie Corporation's assets were
transferred to U.S. Bancorp.
BUSINESS STRATEGY
Wabash Foods' business objective is to regain distribution and build market
share for Wabash Foods' branded products by providing high quality products at
competitive prices that are superior in taste to comparable products. Wabash
Foods plans to achieve growth through increased distribution and sales volume in
new and existing markets, as well as through development of new products. The
primary elements of Wabash Foods' business strategy are as follows:
INCREASE DISTRIBUTION AND MARKET SHARE OF TATO SKINS(R), PIZZARIAS(R),
O'BOISIES(R), BRAIDS(R) AND KNOTS(R) BRAND PRODUCTS. Wabash Foods' products
have achieved significant market presence in the vending distribution
channel across the United States and in selected retailers, primarily in
the Midwest. Wabash Foods attributes the success of its products in these
markets to the taste resulting from patented technology that it utilizes
(pursuant to a license agreement) and to the variety of flavors, sizes and
types of products offered by Wabash Foods. To increase awareness and
acceptance of its products, Wabash Foods is focusing its trade advertising
and promotion activity in certain core regional markets that represented
the largest markets for Wabash Foods' brands when they were owned by the
Keebler Company and enjoyed significantly greater annual sales than at
present. These efforts include, among other things, joint advertising with
supermarkets and other manufacturers, product sampling, and in-store
advertisements and displays.
DEVELOP A PRIVATE LABEL BUSINESS. Wabash Foods has arrangements with snack
food manufacturers for the manufacture by Wabash Foods of their branded
pretzels and tortilla chips. Wabash Foods manufactures these products in
various types and flavors as specified by them. Wabash Foods believes that
opportunities exist for it to expand this segment of its business and to
thereby improve the capacity utilization of its manufacturing equipment.
Wabash Foods intends to seek additional private label customers throughout
the United States who demand exceptional product quality at a reasonable
price.
DEVELOP INNOVATIVE NEW PRODUCTS UTILIZING WABASH FOODS' UNIQUE
MANUFACTURING CAPABILITIES. Wabash Foods intends to seek opportunities to
develop new products that leverage its expertise in manufacturing,
marketing and distributing snack food products. Wabash Foods believes it
can develop other new snack food products that consumers perceive to be
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superior in taste, texture, appearance and brand personality, resulting in
increased consumer demand and shelf space for Wabash Foods' products.
INCREASE OPERATING EFFICIENCIES BY IMPROVING CAPACITY UTILIZATION. Since
Wabash Foods' inception, its management team has focused its efforts on
reducing costs and improving product quality. Negotiated reductions in raw
material costs, and Wabash Foods' investments in updating machinery and
manufacturing processes have resulted in significantly increased
manufacturing efficiencies. Continued improvement in operating efficiencies
in 1999 should result as increased sales volume positively impacts
manufacturing capacity utilization and production costs.
PRODUCTS
Wabash Foods produces Tato Skins(R) brand potato crisps, Pizzarias(R) brand
pizza chips, and O'Boisies(R) brand potato crisps utilizing a sheeting and
frying process that includes patented technology that utilized by Wabash Foods.
Wabash Foods licenses the technology from a third party and has an exclusive
right to use the technology within North America until the patents expire
between 2004 and 2006. See "PATENTS AND TRADEMARKS." Tato Skins(R) brand potato
crisps are offered in three flavors: Baked Potato, Cheese n' Bacon and Sour
Cream n' Onion flavors. Pizzarias(R) brand pizza chips are offered in three
flavors: Supreme, Pepperoni and Cheese flavors. O'Boisies(R) brand potato crisps
are offered in three flavors: Original, Sour Cream and Onion and Cheddar
flavors. Braids(R) and Knots(R) brand pretzels are offered in numerous braid and
knot pretzel varieties. Wabash Foods also produces pretzels and tortilla chips
on a private label basis for snack food manufacturers.
MANUFACTURING
Wabash Foods believes that a key element of its success to date has been
its use of manufacturing techniques and key ingredients in the manufacturing
process to produce snacks with unique shapes, texture and flavor. These
techniques currently involve two elements: Wabash Foods' use of sheeting and
frying and Wabash Foods' use of distinctive seasonings to produce snack chips in
a variety of flavors.
In April 1998, Wabash Foods began operations utilizing the facility and
equipment formerly owned and operated by the O'Boisie Corporation in Bluffton,
Indiana. In connection therewith, Wabash Foods negotiated a 20-year lease on the
manufacturing facility that was utilized by O'Boisie Corporation. The Bluffton,
Indiana facility has the capacity to produce over 11,000 pounds of product per
hour. Such capacity includes three fryer lines that can produce an aggregate of
approximately 7,800 pounds per hour of Tato-Skins(R), O'Boisies(R) and
Pizzarias(R), and four pretzel ovens that can produce an aggregate of
approximately 3,520 pounds of pretzels per hour. Currently, the Wabash Foods
facility is operating at approximately 15% of capacity.
MARKETING AND DISTRIBUTION
Wabash Foods sells its Tato-Skins(R), O'Boisies(R), Pizzarias(R), Braids(R)
and Knots(R) brand proDUCTS primarily through a select group of vending
distributors and independent retail distributors.
Wabash Foods selects distributors to distribute branded products primarily
on the basis of quality of service, call frequency on customers, financial
capability and relationships they have with supermarkets, including access to
shelf space in the stores' snack aisles. As of December 31, 1998, Wabash Foods
had arrangements with over 17 vending brokers and 15 retail distributors in a
number of major cities across the United States.
Successful marketing of Wabash Foods' products depends, in part, upon
obtaining adequate retail and vend slotting space for such products. Frequently,
Wabash Foods incurs additional marketing costs in order to obtain new
distributor authorization. Whether or not Wabash Foods will continue to incur
such costs in the future will depend upon a number of factors, including
existing demand for its products, relative availability of new distributors and
general competitive conditions. Wabash Foods may incur significant distributor
marketing program or other promotional costs as a necessary condition of
entering into competition in particular markets or stores. Any such costs may
materially affect Wabash Foods' financial performance.
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SUPPLIERS
The principal raw materials used by Wabash Foods are potato flakes, wheat
flour, corn, a variety of oils and packaging materials. Wabash Foods believes
that the raw materials it needs to produce its products are readily available
from numerous suppliers on commercially reasonable terms. Potato flakes, wheat
flour, corn and oils are widely available year-round. Wabash Foods also uses
seasonings in its manufacturing process.
Wabash Foods chooses its suppliers based primarily on price, availability
and quality and does not have any long-term arrangements with any supplier.
Although Wabash Foods believes that its required products and ingredients are
readily available, and that its business success is not dependent on any single
supplier, the failure of certain suppliers to meet Wabash Foods' performance
specifications, quality standards or delivery schedules could have a material
adverse effect on Wabash Foods' operations. In particular, a sudden scarcity, a
substantial price increase, or an unavailability of product ingredients could
materially adversely affect Wabash Foods' operations. There can be no assurance
that alternative ingredients would be available when needed and on commercially
attractive terms, if at all.
CUSTOMERS
One customer of Wabash Foods, VSA, Inc., accounted for 29% and 32% of
Wabash Foods' net sales in fiscal 1998 and for the six-month period ended June
30, 1999, respectively. The remainder of Wabash Foods' revenues were derived
from sales to a limited number of additional customers, either vending
distributors, grocery chains or regional distributors, none of which
individually accounted for more than 10% of Wabash Foods' sales in 1998 or for
such six-month period in 1999. A decision by any of Wabash Foods' major
customers to cease or substantially reduce its purchases could have a material
adverse effect on Wabash Foods' business.
MARKET OVERVIEW AND COMPETITION
According to the Snack Food Association ("SFA"), the U.S. market for salty
snack foods reached $18.2 billion at retail in 1998 with potato chips, tortilla
chips and pretzels accounting for approximately 52% of the market, and popcorn,
nuts, meat snacks and other products accounting for the balance. Total salted
snack sales, in dollar terms, has increased every year during the past nine
years, ranging from an increase of 8.5% (in 1997) to 0.3% (in 1995), with a 1998
increase of 7.3%. Potato chip, tortilla chips and pretzel combined sales have
similarly increased, with 1998 retail sales of $9.4 billion, an 8.1% increase
over 1997 sales of $8.7 billion.
Wabash Foods' products compete generally against other salty snack foods,
including potato chips, tortilla chips and pretzels. The salty snack food
industry is large and highly competitive and is dominated primarily by
Frito-Lay, Inc., a subsidiary of PepsiCo, Inc. Frito-Lay, Inc. possesses
substantially greater financial, production, marketing, distribution and other
resources than Wabash Foods and brands that are more widely recognized than
Wabash Foods' products. Numerous other companies that are actual or potential
competitors of Wabash Foods, many with greater financial and other resources
(including more employees and more extensive facilities) than Wabash Foods,
offer products similar to those of Wabash Foods. In addition, many of such
competitors offer a wider range of products than offered by Wabash Foods. Local
or regional markets often have significant smaller competitors, many of whom
offer batch fried or low-fat products similar to those of Wabash Foods.
Expansion of Wabash Foods' operations into new markets has and will continue to
encounter significant competition from national, regional and local competitors
that may be greater than that encountered by Wabash Foods in its existing
markets. In addition, such competitors may challenge Wabash Foods' position in
its existing markets. While Wabash Foods believes that its specialized products
and methods of operation will enable it to compete successfully, there can be no
assurance of its ability to do so.
The principal competitive factors affecting the market for Wabash Foods'
products include product quality and taste, brand awareness among consumers,
access to supermarket shelf space, price, advertising and promotion, variety of
snacks offered, nutritional content, product packaging and package design.
Wabash Foods competes in the market principally on the basis of product quality
and taste.
GOVERNMENT REGULATION
The manufacture, labeling and distribution of Wabash Foods' products are
subject to the rules and regulations of various federal, state and local health
agencies, including the FDA. In May 1994, regulations under the NLEA concerning
28
<PAGE>
labeling of food products, including permissible use of nutritional claims such
as "fat-free" and "low-fat," became effective. Wabash Foods believes that it is
in compliance with the NLEA regulations and closely monitors the fat content of
its products through various testing and quality control procedures. Wabash
Foods believes that compliance with the NLEA regulations does not materially
increase Wabash Foods' manufacturing costs. There can be no assurance that new
laws or regulations will not be passed that could require Wabash Foods to alter
the taste or composition of its products. Such changes could affect sales of
Wabash Foods products and have a material adverse effect on Wabash Foods.
In addition to laws relating to food products, Wabash Foods' operations are
governed by laws relating to environmental matters, workplace safety and worker
health, principally the Occupational Safety and Health Act. Wabash Foods
believes that it presently complies in all material respects with such laws and
regulations.
EMPLOYEES
As of August 27, 1999, Wabash Foods had 100 full-time employees, including
93 in manufacturing and distribution, one in sales and marketing and six in
administration and finance. Wabash Foods' employees are not represented by any
collective bargaining organization and Wabash Foods has never experienced a work
stoppage. Wabash Foods believes that its relations with its employees are good.
PATENTS AND TRADEMARKS
Wabash Foods produces Tato Skins(R) brand potato crisps, Pizzarias(R) brand
pizza chips, and O'Boisies(R) brand potato crisps utilizing a sheeting and
frying process that includes patented technology that Wabash Foods licenses from
Miles Willard Technologies, LLC, an Idaho limited liability company ("Miles
Willard"). Pursuant to the license agreement between Wabash Foods and Miles
Willard, Wabash Foods has an exclusive right to use the patented technology
within North America until the patents expire between 2004 and 2006. In
consideration for the use of the patents, Wabash Foods is required to make
royalty payments to Miles Willard on sales of products manufactured utilizing
the patented technology.
Wabash Foods owns the following trademarks, which are registered in the
United States: Tato-Skins(R), O'Boisies(R), Pizzarias(R), Braids(R) and
Knots(R). Wabash Foods considers its trademarks to be of significANT importance
to Wabash Foods' business. Wabash Foods is not aware of any circumstances that
would have a material adverse effect on Wabash Foods' ability to use its
trademarks.
DESCRIPTION OF PROPERTY
Wabash Foods leases a 140,000 square foot facility located in Bluffton,
Indiana, approximately 20 miles south of Ft. Wayne, Indiana. Prior to the
Keebler Company's acquisition of the facility in 1980, the Bluffton plant
contained three pretzel lines with 40,000 square feet of processing space and
40,000 square feet of warehousing space. In 1985, the Keebler Company completed
a 60,000 square foot fryer room addition and installed the three fryer lines
that still operate in the facility. Wabash Foods has entered into a 20-year
lease expiring in April 2018 with respect to the facility with two five-year
renewal options. Monthly lease payments through April 2000 are $17,500 and then
increase to $20,000 per month for the remainder of the lease term with an annual
CPI adjustment. Wabash Foods is responsible for all insurance costs, utilities
and real estate taxes.
Wabash Foods believes that its facilities are adequately covered by
insurance.
LEGAL PROCEEDINGS
Wabash Foods is not presently a party to any lawsuit.
WABASH FOODS MANAGEMENT
The executive officers and key personnel of Wabash Foods, and their ages,
are as follows:
NAME AGE POSITION
---- --- --------
Larry R. Polhill 48 President
Gary W. Folk 48 Plant Director
Donald R. Addington 61 Plant Manager
29
<PAGE>
LARRY R. POLHILL. Mr. Polhill has been President and Managing Member of
Wabash Foods since February 1998. In addition, Mr. Polhill holds or has recently
held the following positions for the periods indicated: President, Chief
Executive Officer and Chairman of the Board of American Pacific from 1978 to
present; President, Chief Executive Officer and Chairman of the Board of Pate
Foods from 1993 to present; President, Chief Executive Officer and Chairman of
the Board of Eclipse Space Lines, Inc. from 1997 to present; Vice President and
Director of Realty Information Systems, Inc. from 1997 to present; Vice
President and Director of G, B & L Corporation from 1995 to present; Vice
President and Director of The Point Athletic Club, Inc. from 1991 to present;
President, Chief Executive Officer and Chairman of the Board of American Pacific
Inc. from 1990 to present; and President, Chief Executive Officer and Chairman
of Midwest Business Credit from 1997 to present. Mr. Polhill also serves as a
Director or in a similar capacity with respect to several privately-held
corporations and other business entities.
GARY W. FOLK. Mr. Folk has served as Plant Director for Wabash Foods since
February 1998. From 1996 to January 1998, Mr. Folk served as Production Manager,
first for the Keebler Company and then for O'Boisie Corporation. From 1992 to
1995 he was Shift Manager with the Keebler Company.
DONALD R. ADDINGTON. Mr. Addington has served as Plant Manager for Wabash
Foods since February 1999. From February 1998 to February 1999, Mr. Addington
was Production Superintendent of Wabash Foods. From 1995 to 1998, Mr. Addington
served as Production Manager at O'Boisie Corporation. During 1995, Mr. Addington
served as a consultant for McCleary Snacks and from 1978 to 1995, he was Shift
Manager at the Keebler Company.
Pursuant to the Purchase and Sale Agreement, Pate Foods and Wabash Foods
are obligated to exert their reasonable best efforts to cause Messrs. Folk and
Addington to enter into employment agreements with the Company upon consummation
of the Acquisition. Upon the consummation of the Acquisition, Mr. Polhill will
resign as President of Wabash Foods and is not expected to be involved in the
day-to-day operations of the Company or Wabash Foods.
BENEFICIAL OWNERSHIP OF WABASH FOODS
All of the outstanding equity interests of Wabash Foods (consisting of
member interests) are owned directly of record and beneficially by Pate Foods.
As of the date hereof, the following persons owned beneficially the percentages
of outstanding capital stock of Pate Foods (consisting of shares of common
stock) respectively indicated below, and thereby may be deemed to own
beneficially indirectly comparable percentage equity interests in Wabash Foods.
Such persons also own beneficially the identical respective percentage equity
interests in Capital Foods, which will be the holder of the Closing Shares and
the Warrant after certain transfers immediately following consummation of the
Acquisition.
OWNERSHIP
NAME OF HOLDER PERCENTAGE
-------------- ----------
Dakota Farms, LLC(1) 29.66%
Stillwater Capital, LLC(2) 29.66%
American Pacific Financial Corporation(3) 22.85%
Wall Family Trust(4) 10.38%
American Pacific Fitness Partners IRAs(5) 2.11%
Marilyn R. Donegan 1.08%
Dennis Polhill 0.68%
Byron L. Reeser 0.51%
Thomas L. Davis Pension Plan 0.44%
Allene Shore and Elinor Neafsey, as joint tenants 0.38%
James E. Johnson IRA 0.34%
Robert D. Long 0.34%
Dean Polhill 0.34%
Gary and Sharon Washburn 0.34%
Halo Investments I., L.P.(6) 0.32%
30
<PAGE>
- ------------
(1) A private investment entity for the benefit of family members of Bradley J.
Crandall, a director of Pate Foods, and controlled by Mr. Crandall. Such
interests may be deemed beneficially owned indirectly by Mr. Crandall.
(2) A private investment entity for the benefit of family members of Larry R.
Polhill, President and a director of Pate Foods, and controlled by Mr.
Polhill. Such interests may be deemed beneficially owned indirectly by Mr.
Polhill.
(3) A privately held corporation controlled in equal shares by Messrs. Crandall
and Polhill. Such interests may be deemed beneficially owned indirectly by
Messrs. Crandall and Polhill.
(4) The sole trustee of said trust is Mr. Jerome Wall, who may be deemed to
beneficially own indirectly such interests.
(5) Consists of IRAs for the benefit of Messrs. Douglas Bruneau, Allen W. Mohr,
Robert T. Riehl and Jeffrey Mersch, who may be deemed to beneficially own
indirectly such interests.
(6) A private investment partnership of which Mr. James Saint is the sole
managing member of the general partner. Such interests may be deemed
beneficially owned indirectly by Mr. Saint.
UNAUDITED PRO FORMA COMBINED CONDENSED AND HISTORICAL FINANCIAL INFORMATION
The following tables set forth certain unaudited pro forma combined
condensed and historical financial information for the Company and Wabash Foods.
The following data gives effect to the Acquisition, accounted for using the
purchase method of accounting in accordance with APB Opinion No. 16, as if the
Acquisition had occurred as of June 30, 1999 with respect to the balance sheet
data and as of January 1, 1998 with respect to the statement of operations data
for the fiscal year ended December 31, 1998 and the six months ended June 30,
1999. The following data should be read in conjunction with the consolidated
financial statements of the Company, the financial statements of Wabash and the
pro forma financial information regarding the Acquisition and all notes relating
thereto, all appearing elsewhere in this Proxy Statement or incorporated by
reference herein.
The unaudited pro forma combined condensed information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that could have occurred if the Acquisition had
been consummated as of such dates, nor is it necessarily indicative of future
operating results or financial position.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
----------------------------------------------------------
POORE WABASH PRO FORMA PRO FORMA
BROTHERS, INC. FOODS, LLC ADJUSTMENTS COMBINED
-------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $8,920,420 $5,998,112 $ 71,886 (1) $14,990,418
Gross profit 2,256,356 1,058,766 91,906 (2) 3,407,028
Operating income (loss) 244,232 612,463 (281,329)(3) 575,366
Income (loss) before cumulative
effect of a change in accounting
principle $ (65,223) $ 184,268 $ (86,529)(4) $ 32,516
========== ========== ========= ===========
Income (loss) per common share
before cumulative effect of a
change in accounting principle $ (0.01) $ 0.00
========== ===========
Weighted average number of
common shares 7,832,997 4,415,186(5) 12,248,183
========== ========= ===========
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
----------------------------------------------------------
POORE WABASH PRO FORMA PRO FORMA
BROTHERS, INC. FOODS, LLC ADJUSTMENTS COMBINED
-------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $13,167,993 $6,300,570 $ 260,549 (6) $ 19,729,112
Gross profit 3,244,103 888,001 288,349 (7) 4,420,453
Operating income (loss) (359,053) 239,994 (138,957)(8) (258,016)
Net loss $ (874,091) $ (207,005) $ 45,929 (9) $ (1,035,167)
=========== ========== ========= ============
Net loss per common share $ (0.12) $ (0.09)
=========== ============
Weighted average number of
common shares 7,210,810 4,400,000(10) 11,610,810
=========== ========= ============
AS OF JUNE 30, 1999 (UNAUDITED)
--------------------------------------------------------
POORE WABASH PRO FORMA PRO FORMA
BROTHERS, INC. FOODS, LLC ADJUSTMENTS COMBINED
-------------- ---------- ----------- --------
BALANCE SHEET DATA:
Working capital $ 938,913 $ (138,001) $ 187,599(11) $ 988,511
Total assets 13,609,861 8,106,614 5,096,702(12) 26,813,177
Long-term debt 5,640,142 5,705,557 643,072(13) 11,988,771
Total shareholders' equity 5,119,661 (22,736) 4,641,229(14) 9,738,154
</TABLE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(1) Reflects the reclassification of $266,686 in Wabash Foods broker
commissions to Selling, general and administrative expenses consistent with
the Company's accounting policies, offset by the elimination of $194,800 in
management fees reflected in Net sales by the Company.
(2) In addition to the items discussed above, reflects a $20,020 reduction in
manufacturing equipment depreciation after allocation of $7.8 million of
the Acquisition purchase price to Equipment and to conform their
depreciation lives to those of the Company which average 15 years.
(3) In addition to the items discussed above, reflects $106,549 of amortization
on $3.1 million of intangibles over lives ranging from 7-20 years.
(4) In addition to the items discussed above, reflects the elimination of the
management fee discussed in Note (1).
(5) Reflects the issuance of 4,400,000 shares of common stock for the
Acquisition and inclusion of 15,186 shares for common stock equivalents.
(6) Reflects the reclassification of $260,549 in Wabash Foods broker
commissions to Selling, general and administrative expenses consistent with
the Company's accounting policies.
(7) In addition to the item discussed in Note (6) above, reflects a $27,800
reduction in manufacturing equipment depreciation after allocation of $7.8
million of the Acquisition purchase price to Equipment and to conform their
depreciation lives to those of the Company which average 15 years.
(8) In addition to the items discussed in Notes (6) and (7) above, reflects
$166,757 of amortization on $3.1 million of intangibles over lives ranging
from 7-20 years.
(9) In addition to the items discussed in Notes (6) through (8) above, reflects
the capitalization of a $184,886 purchased receivables write-off as a
purchase price allocation adjustment.
(10) Reflects the issuance of 4,400,000 shares of common stock for the
Acquisition.
(11) Includes an accrual of $455,473 for estimated Acquisition and related
refinancing costs offset by a reduction of $643,072 in Current maturities
of long-term debt reflecting the new financing structure provided by US
Bancorp.
(12) Reflects the Acquisition purchase price allocation, including a $3.1
million write-up in capital equipment and a $2.0 million write-up of
intangible assets, principally trademarks.
(13) Reflects an increase in long-term debt reflecting the proposed financing
structure provided by US Bancorp.
32
<PAGE>
(14) Reflects the value of the securities issued in connection with the
Acquisition, including the 4,400,000 shares of common stock and the warrant
to purchase 400,000 shares of common stock.
SELECTED CONDENSED HISTORICAL FINANCIAL INFORMATION OF THE COMPANY
Certain of the selected financial data presented below for the year ended
December 31, 1998 has been derived from the Company's consolidated financial
statements which were audited by Arthur Andersen LLP, independent public
accountants. Certain of the selected financial data presented below for the six
months ended June 30, 1998 and 1999 has been derived from the Company's
unaudited consolidated financial statements which were prepared on the same
basis as the audited consolidated financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of these periods. The results of operations for
the interim periods should not be taken as indicative of results for a full
fiscal year. This data should be read in conjunction with the Company's
consolidated financial statements, related notes thereto and other financial
information included elsewhere in this Proxy Statement or incorporated by
reference herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------
1998 1999 1997 1998
----------- ----------- ------------ ------------
(UNAUDITED) UNAUDITED)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 6,461,219 $ 8,920,420 $ 15,731,796 $ 13,167,993
Cost of sales 4,813,287 6,664,064 13,709,979 9,923,890
----------- ----------- ------------ ------------
Gross profit 1,647,932 2,256,356 2,021,817 3,244,103
Selling, general and administrative expenses 1,783,091 2,012,124 3,982,428 3,603,156
Restructuring costs -- -- 745,875 --
----------- ----------- ------------ ------------
Operating income (loss) (135,159) 244,232 (2,706,486) (359,053)
Interest expense, net (249,207) (309,455) (327,611) (515,038)
----------- ----------- ------------ ------------
Loss before cumulative effect of a change
in accounting principle $ (384,366) $ (65,223) $ (3,034,097) $ (874,091)
=========== =========== ============ ============
Loss per common share before cumulative effect
of a change in accounting principle $ (0.05) $ (0.01) $ (0.43) $ (0.12)
=========== =========== ============ ============
</TABLE>
AS OF AS OF
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital $ 938,913 $ 768,155
Total assets 13,609,861 12,938,889
Long-term debt 5,640,142 5,720,247
Total shareholders' equity 5,119,661 5,256,515
SELECTED CONDENSED HISTORICAL FINANCIAL INFORMATION OF WABASH FOODS
Certain of the selected financial data presented below for the period
from commencement of operations in April 1998 through December 31, 1998 has been
derived from Wabash's financial statements which were audited by Clifton,
Gunderson P.L.C., independent public accountants. Certain of the selected
financial data presented below for the six months ended June 30, 1998 and 1999
has been derived from Wabash's unaudited financial statements which were
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of these periods. The results of operations for
the interim periods should not be taken as indicative of results for a full
fiscal year. This data should be read in conjunction with Wabash's financial
statements, related notes thereto and other financial information included
elsewhere in this Proxy Statement or incorporated by reference herein.
33
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE PERIOD FROM FROM INCEPTION
INCEPTION (APRIL SIX MONTHS (APRIL 1998)
1998) THROUGH ENDED THROUGH
JUNE 30, 1998 JUNE 30, 1999 DECEMBER 31, 1998
------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 1,448,937 $ 5,998,112 $ 6,300,570
Cost of sales 1,230,490 4,939,346 5,412,569
----------- ----------- -----------
Gross profit 218,447 1,058,766 888,001
Selling, general and administrative
expenses 143,429 446,303 648,007
----------- ----------- -----------
Operating income 75,018 612,463 239,994
Other income (expense) (11,226) (428,195) (446,999)
----------- ----------- -----------
Net income (loss) $ 63,792 $ 184,268 $ (207,005)
=========== =========== ===========
</TABLE>
AS OF AS OF
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital $ (138,001) $ 817,710
Total assets 8,106,614 6,901,849
Long-term debt 5,705,557 6,171,561
Total shareholders' equity (22,736) (207,005)
WABASH FOODS' MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Wabash Foods financial statements and the notes thereto, which are annexed
hereto as Exhibit H.
RESULTS OF OPERATIONS
Six months ended June 30, 1999 compared to the period from inception (April
1998) through June 30, 1998
Net sales for the six months ended June 30, 1999 were $5,998,112, up
$4,549,175, or 314%, from $1,448,937 for the period ended June 30, 1998. Since
Wabash Foods only started up operations in April 1998, the increase in net sales
is due to both the longer period of operations (six months versus three months),
but also due to the growth in sales to new and existing customers. Sales of all
branded and private label product lines manufactured by Wabash Foods increased.
Gross profit for the six months ended June 30, 1999, was $1,058,766, or 18%
of net sales, as compared to $218,447, or 15% of net sales, for the period ended
June 30, 1998. The $840,319 increase, or 385%, in gross profit resulted
principally from the increased volume of manufactured products and the related
improved manufacturing efficiencies, and also due to the longer period of
operations referred to above.
Selling, general and administrative expenses increased to $446,303, or 7%
of net sales, for the six months ended June 30, 1999 from $143,429, or 10% of
net sales in 1998. The increase of $302,874, or 211%, compared to 1998, was due
to increased sales and marketing activities as well as to the longer period of
operations referred to above.
Net other expense increased to $428,195 for the six months ended June 30,
1999 from $11,226 for the period ended June 30, 1998. Part of this increase was
due to $248,418 of increased interest expense relating to Wabash Foods' $5.8
million equipment loans, which expense did not commence until July 1998. In
addition, the 1999 results include $194,800 of management fees paid to Poore
Brothers pursuant to the Management Agreement. See "MATERIAL CONTRACTS BETWEEN
THE COMPANY AND PATE FOODS/WABASH FOODS; PRE-ACQUISITION MANAGEMENT AGREEMENT."
34
<PAGE>
YEAR ENDED DECEMBER 31, 1998
Net sales for the year ended December 31, 1998 were $6,300,570. Wabash
Foods commenced operations in April 1998. Sales consisted of all branded and
private label product lines manufactured by Wabash Foods.
Gross profit for the year ended December 31, 1998, was $888,001, or 14% of
net sales. Cost of sales includes raw materials, labor and manufacturing
overhead.
Selling, general and administrative expenses were $648,007, or 10% of net
sales, for the year ended December 31, 1998. Expenses consisted principally of
advertising and promotion, outside services, samples, payroll and travel and
entertainment spending
Net other expense amounted to $446,999 for the year ended December 31, 1998
and consisted primarily of $277,030 of interest expense on indebtedness related
to equipment loans and a working capital line of credit, and $184,886 of
uncollectible purchased receivables.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was a negative $138,001 (a current ratio of .9:1) and
$817,710 (a current ratio of 1.9:1) at June 30, 1999 and December 31, 1998,
respectively. The $955,711 decrease in working capital reflects $1,129,300 of
increased current maturities of long-term debt that is payable during 1999 by
Wabash Foods. If the Acquisition is completed, all of those maturities would be
deferred and payments would not commence until next year. SEE "REFINANCING OF
CERTAIN INDEBTEDNESS OF THE COMPANY AND WABASH FOODS." Offsetting the increased
current maturities was an increase in other net current assets as a result of
improved operating results.
At June 30, 1999, Wabash Foods had outstanding a promissory note (the
"Equipment Note") to US Bancorp Republic Commercial Finance, Inc. ("US Bancorp")
in the principal amount of $5,800,000. The Equipment Note is due over seven
years in monthly principal installments of $69,050 commencing July 1, 1999. The
Equipment Note is secured by all equipment and interest on the Equipment Note is
paid on a monthly basis by Wabash Foods at US Bancorp's reference rate (8.0% at
June 30, 1999). Principal payments on the Equipment Note have been temporarily
deferred by US Bancorp pending completion of the Acquisition. There are no
significant restrictive financial covenants in the related Financing Agreement
that also covers the Line of Credit discussed below.
Wabash Foods also has an agreement with US Bancorp for a $1.5 million
working capital line of credit (the "Line of Credit"). The balance outstanding
was $734,157 and $785,861 at June 30, 1999 and December 31, 1998, respectively.
The Line of Credit bears interest at US Bancorp's reference rate (8% at June 30,
1999) and, while due on demand, has no maturity date. The Line of Credit is
secured by accounts receivable, inventories, and equipment. The borrowing base
under the Line of Credit is limited to 80% of eligible receivables and 50% of
eligible inventories. As of August 27, 1999, Wabash Foods had a borrowing base
of approximately $860,384 under the Line of Credit.
Pursuant to an Agreement for Sale of Collateral with US Bancorp in March
1998, Wabash Foods issued to US Bancorp a $2.5 million Promissory Note (the
"Promissory Note"), with principal payments commencing December 31, 1999. The
Promissory Note bears no interest. The Promissory Note was subsequently amended
to reduce the principal amount to $650,000 with the following required principal
installments: $200,000 due June 30, 1999; $200,000 due September 30, 1999; and
$250,000 due December 31, 1999. Principal payments on the Promissory Note have
been temporarily deferred by US Bancorp pending completion of the Acquisition.
Wabash Foods' management believes that the achievement of its plans and
objectives will enable Wabash Foods to attain a sufficient level of operating
cash flow, or be able to negotiate successfully a further deferral of principal
payments, to meet its debt repayment obligations. There can be no assurance,
however, that Wabash Foods will achieve a sufficient level of operating cash
flow to meet its debt repayment obligations. Any acceleration under the
Equipment Note, the Line of Credit, and or the Promissory Note could have a
material adverse effect upon Wabash Foods.
35
<PAGE>
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.
Wabash Foods processes much of its data using licensed computer programs
from third parties, including its accounting software. Such third parties have
advised Wabash Foods that they have made all necessary programming changes to
such computer programs to address the Year 2000 issue. Wabash Foods believes
that 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 Wabash
Foods' computerized information systems.
Wabash Foods 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 Wabash Foods' results of operations will not be adversely affected by the
failure of systems operated by third parties to properly operate in the year
2000.
Wabash Foods 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. Wabash Foods expects to complete
development of its contingency plans and begin implementation, if required, by
November 30, 1999.
REFINANCING OF CERTAIN INDEBTEDNESS OF THE COMPANY AND WABASH FOODS
As of June 30, 1999, the Company's outstanding indebtedness consisted of:
(i) $2,229,114 principal amount of 9% Convertible Debentures due July 1, 2002;
(ii) $305,556 principal amount of a term loan from Wells Fargo Business Credit,
Inc. ("Wells Fargo") which accrues interest at prime plus 3% with principal due
in monthly installments through May 1, 2000; (iii) $1,148,995 principal amount
of a working capital line from Wells Fargo which accrues interest at prime plus
1.5% and which is due on November 4, 2001; (iv) a mortgage loan on the Company's
Goodyear, Arizona facility in the principal amount of $1,953,501 which accrues
interest at 9.03% and is due in monthly installments through July 2012; and (v)
equipment lease obligations in the aggregate principal amount of $731,691 which
accrue interest at rates ranging from 8.19% to 11.3% and which are due in
monthly installments through 2002.
As a result of the Acquisition, Wabash Foods will be wholly-owned by the
Company and, consequently, the indebtedness of Wabash Foods will, effectively,
become part of the consolidated indebtedness of the Company. At June 30, 1999,
Wabash Foods had outstanding the following long-term indebtedness: (i)
$5,800,000 principal amount of an equipment note (the "Equipment Note") to US
Bancorp which is secured by Wabash Foods' equipment; (ii) $734,157 principal
amount of a $1.5 million working capital Line of Credit; and (iii) $650,000
principal amount of an additional Promissory Note. The terms of the Equipment
Note, the Line of Credit and the Promissory Note are summarized in "WABASH
FOODS' MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES."
In connection with the Acquisition, the Company has entered into a letter
of intent with US Bancorp in connection with the refinancing of certain
indebtedness of Wabash Foods and the Company. As contemplated by the letter of
intent, the existing $5,800,000 Equipment Note will be replaced with a new term
loan to the Company in the same aggregate principal amount which will accrue
interest at the US Bancorp reference rate (on a floating rate basis) and which
will mature in 2006, and the $650,000 Promissory Note will be replaced with a
term loan from US Bancorp to the Company in the principal amount of $715,000
bearing no interest and which will mature in 2000. In addition, it is expected
that the Company's term loan and working capital line from Wells Fargo will be
paid off and replaced with (i) a $350,000 term loan from US Bancorp which will
accrue interest at the US Bancorp reference rate plus 2.5% and (ii) a $3,000,000
working capital line from US Bancorp which will accrue interest at the US
Bancorp reference rate plus 1%. It is expected that upon completion of the
transaction with US Bancorp, approximately $500,000 principal amount of the
working capital line of credit will be available to the Company. No other
indebtedness of the Company is expected to be refinanced or modified in
connection with the Acquisition or the US Bancorp refinancing. The Company will
become subject to several financial covenants and restrictive covenants as a
result of the refinancing. Such refinancing is subject to various conditions.
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In consideration for the above-described loans, the Company will be
required to pay facility fees to US Bancorp totaling approximately $50,000 and
to issue to US Bancorp a warrant for 50,000 shares of unregistered Common Stock
with an exercise price equal to $1.00 per share. In addition, the Company will
be obligated to reimburse US Bancorp for all reasonable expenses (including
legal fees and expenses, collateral audit fees and appraisal fees) incurred by
US Bancorp in connection with the refinancing.
RISK FACTORS
In addition to other information in this Proxy Statement and the Exhibits
hereto, Company shareholders should carefully consider the following risk
factors in evaluating the Acquisition.
DIVERSION OF THE COMPANY'S MANAGEMENT; INTEGRATION OF THE WABASH FOODS
OPERATION INTO THE COMPANY; OTHER ACQUISITION-RELATED RISKS. The Acquisition
could divert the attention of the Company's management from the daily operations
of the Company, and otherwise require additional management, operational and
financial resources. Moreover, there is no assurance that the Company will
successfully integrate Wabash Foods or its key personnel into the Company's
operating structure, retain key personnel of Wabash Foods on a long-term basis,
or operate the Wabash Foods operations profitably. The Acquisition may also
involve a number of other risks, including adverse short-term effects on the
Company's operating results, dependence on retaining key personnel and
customers, amortization of acquired intangible assets, and risks associated with
unanticipated liabilities.
BRIEF OPERATING HISTORY. Wabash Foods has a brief operating history upon
which an evaluation of the prospects of its business can be made. Such prospects
are subject to the substantial risks, expenses and difficulties frequently
encountered in the establishment and growth of a business in the snack food
industry, which is characterized by a significant number of market entrants and
intense competition. Wabash Foods has incurred cumulative operating losses to
date associated primarily with its start-up costs, incurring a net loss of
$207,005 for the fiscal year ended December 31, 1998 and net income of $184,268
for the six months ended June 30, 1999.
Even if Wabash Foods is successful in expanding the production and
distribution of its products or in increasing its net sales, Wabash Foods may be
expected to incur substantial additional expenses in the future, including
advertising and promotional costs, and "slotting" expenses (i.e., the cost of
obtaining shelf space in certain grocery stores) pertaining to Wabash Foods'
products. Accordingly, Wabash Foods may generate additional losses in the future
as a result of the implementation of its business strategy, even if net sales
increase significantly. There can be no assurance that Wabash Foods' business
strategy will prove successful or that Wabash Foods will remain profitable.
NEED FOR ADDITIONAL FINANCING. The Company may, in the future, require
third party financing (debt or equity) in connection with the costs of
implementing Wabash Foods' business strategy. There can be no assurance that a
required financing will be available or, if available, on terms attractive to
Wabash Foods or the Company.
COMPETITION. The market for salty snack foods, such as those sold by Wabash
Foods (as well as the Company), including potato chips and crisps, tortilla
chips and pretzels, is large and intensely competitive. Competitive factors in
the salty snack food industry include product quality and taste, brand awareness
among consumers, access to supermarket shelf space, price, advertising and
promotion, variety of snacks offered, nutritional content, product packaging and
package design. Wabash Foods competes in that market principally on the basis of
product quality and taste.
The snack food industry is primarily dominated by Frito-Lay, Inc., which
has substantially greater financial and other resources than the Company will
have after the completion of the Acquisition and sells brands that are more
widely recognized than are the Company's and Wabash Foods' brands. Numerous
other companies that are actual or potential competitors of Wabash Foods, many
with greater financial and other resources (including more employees and more
extensive facilities) than the Company will have after the completion of the
Acquisition, offer products similar to those of Wabash Foods. In addition, many
of such competitors offer a wider range of products than that offered by Wabash
Foods. Local or regional markets often have significant smaller competitors,
many of whom offer products similar to those of Wabash Foods. Expansion of
Wabash Foods' operations into new markets has and will continue to encounter
significant competition from national, regional and local competitors that may
be greater than that encountered by Wabash Foods in its existing markets. In
addition, such competitors may challenge Wabash Foods' position in its existing
markets. While the Company believes that Wabash Foods' products and methods of
operation will enable it to compete successfully, there can be no assurance of
its ability to do so.
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Wabash Foods licenses patented technology from a third party in connection
with the manufacture of its Tato Skins(R), Pizzarias(R) and O'Boisies(R) brand
products, and has an exclusive right to use such technology within North America
until the patents expire between 2004 and 2006. Upon the expiration of the
patents, competitors of Wabash Foods and the Company, certain of which may have
significantly greater resources than Wabash Foods and the Company, may utilize
the patented technology in the manufacture of products that are similar to those
currently manufactured by Wabash Foods. The entry of any such products into the
marketplace could have a material adverse effect on sales of Wabash Foods'
products.
PROMOTIONAL AND SHELF SPACE COSTS. Successful marketing of food products
generally depends upon obtaining adequate retail shelf space for product
display, particularly in supermarkets. Frequently, food manufacturers and
distributors, such as Wabash Foods, incur additional costs in order to obtain
additional shelf space. Whether or not Wabash Foods incurs such costs in a
particular market is dependent upon a number of factors, including existing
demand for Wabash Foods' products, relative availability of shelf space and
general competitive conditions. After the completion of the Acquisition, the
Company may incur significant shelf space or other promotional costs in
connection with the Wabash Foods products as a necessary condition of entering
into competition in particular markets or stores. If incurred, such costs may
materially affect the Company's financial performance.
NO ASSURANCE OF CONSUMER ACCEPTANCE OF WABASH FOODS' EXISTING AND FUTURE
PRODUCTS. Consumer preferences for snack foods are continually changing and are
extremely difficult to predict. The ability of the Company to develop successful
operations with respect to the Wabash Foods products in new markets will depend
upon customer acceptance of, and the Company's ability to manufacture the Wabash
Foods products. There can be no assurance that Wabash Foods' products will
achieve a significant degree of market acceptance, that acceptance, if achieved,
will be sustained for any significant period or that product life cycles will be
sufficient to permit Wabash Foods to recover start-up and other associated
costs. In addition, there can be no assurance that the Company will succeed in
the development of any new Wabash Foods products or that any new products
developed by Wabash Foods will achieve market acceptance or generate meaningful
revenue for the Company after the completion of the Acquisition.
UNCERTAINTIES AND RISKS OF FOOD PRODUCT INDUSTRY. The food product industry
in which the Company and Wabash Foods are engaged is subject to numerous
uncertainties and risks outside of their control. Profitability in the food
product industry is subject to adverse changes in general business and economic
conditions, oversupply of certain food products at the wholesale and retail
levels, seasonality, the risk that a food product may be banned or its use
limited or declared unhealthful, the risk that product tampering may occur that
may require a recall of one or more of Wabash Foods' products, and the risk that
sales of a food product may decline due to perceived health concerns, changes in
consumer tastes or other reasons beyond the control of Wabash Foods.
FLUCTUATIONS IN PRICES OF SUPPLIES; DEPENDENCE UPON AVAILABILITY OF
SUPPLIES AND PERFORMANCE OF SUPPLIERS. Wabash Foods' manufacturing costs are
subject to fluctuations in the prices of potatoes, wheat, corn and oil, the four
major ingredients used in the manufacture of Wabash Foods' products. Potatoes,
wheat and corn are widely available year-round and the Company believes that a
variety of oils acceptable in the manufacturing of Wabash Foods' products are
also widely available year-round. Wabash Foods is dependent on its suppliers to
provide products and ingredients in adequate supply and on a timely basis.
Although the Company believes that Wabash Foods' requirements for products and
ingredients are readily available, and that its business success is not
dependent on any single supplier, the failure of certain suppliers to meet
Wabash Foods' performance specifications, quality standards or delivery
schedules could have a material adverse effect on the operations of Wabash
Foods. In particular, a sudden scarcity, a substantial price increase, or an
unavailability of product ingredients could materially adversely affect Wabash
Foods' operations. There can be no assurance that alternative ingredients would
be available when needed and on commercially attractive terms, if at all.
DEPENDENCE UPON MAJOR CUSTOMERS. One customer of Wabash Foods, VSA, Inc.,
accounted for 29% and 32% of Wabash Foods' net sales in fiscal 1998 and for the
six months ended June 30, 1999, respectively. The remainder of Wabash Foods'
revenues were derived from sales to a limited number of additional customers,
either vending distributors, grocery chains or regional distributors, none of
which individually accounted for more than 10% of Wabash Foods' sales in 1998 or
for the six-month period in 1999. A decision by any of Wabash Foods' major
customers to cease or substantially reduce their purchases could have a material
adverse effect on Wabash Foods' business.
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RELIANCE ON KEY EMPLOYEES. Wabash Foods' success is dependent in large part
upon the abilities of its key employees. The inability of the key employees to
perform their duties or the inability of Wabash Foods to attract and retain
other highly qualified personnel could have a material adverse effect upon
Wabash Foods' business and prospects. Wabash Foods does not maintain, and the
Company does not currently contemplate obtaining, "key man" life insurance with
respect to such employees.
GOVERNMENTAL REGULATION. The packaged food industry is subject to numerous
federal, state and local governmental regulations, including those relating to
the preparation, labeling and marketing of food products. Wabash Foods is
particularly affected by the Nutrition Labeling and Education Act of 1990
("NLEA"), which requires specified nutritional information to be disclosed on
all packaged foods. The Company believes that the labeling on Wabash Foods'
products currently meets these requirements. Wabash Foods does not believe that
complying with the NLEA regulations materially increases Wabash Foods'
manufacturing costs. There can be no assurance, however, that new laws or
regulations will not be passed that could require Wabash Foods to alter the
taste or composition of its products. Such changes could affect sales of Wabash
Foods' products and have a material adverse effect on the Company after the
Acquisition.
PRODUCT LIABILITY CLAIMS. As a manufacturer and marketer of food products,
Wabash Foods may be subjected to various product liability claims. There can be
no assurance that the product liability insurance maintained by Wabash Foods
will be adequate to cover any loss or exposure for product liability, or that
such insurance will continue to be available on terms acceptable to the Company
after the completion of the Acquisition. Any product liability claim not fully
covered by insurance, as well as any adverse publicity from a product liability
claim, could have a material adverse effect on the financial condition or
results of operations of Wabash Foods.
DETERMINATION OF PURCHASE PRICE. The purchase price for Wabash Foods in the
Acquisition was determined solely by negotiation by management and was approved
by the Company's Board of Directors. No opinion, appraisal or other formal
evaluation of Wabash Foods or its assets or business was sought or obtained from
any investment banking firm or other third party.
POSSIBLE CHANGES IN TERMS OR CONDITIONS. Under the terms of the Purchase
and Sale Agreement, the Company has the right to waive one or more conditions to
the Company's obligation to consummate the Acquisition, as well as to amend the
terms of such Agreement by mutual consent. Although no waivers or material
amendments to the Purchase and Sale Agreement are contemplated at the date
hereof, such actions could be effected by the Company's Board of Directors or
management, as the case may be, at or prior to the closing, without prior notice
to or further action by the Company's shareholders.
MAJOR SHAREHOLDER; POSSIBLE CHANGE IN CONTROL. Following consummation of
the Acquisition (and certain related party transfers immediately thereafter)
Capital Foods will become the single largest shareholder of the Company, with
the Closing Shares to be acquired by it constituting approximately 36% of the
outstanding shares of Common Stock (without giving effect to the possible
exercise of the Warrant and assuming that no additional shares of Common Stock
are issued subsequent to the date hereof). Accordingly, Capital Foods will be in
a position to exercise a substantial influence on the business and affairs of
the Company and may be deemed (either alone or together with Company management)
to control the Company. Although the Company is not aware of any plans or
proposals on the part of Capital Foods to recommend or undertake any material
change in the management or business of the Company, there is no assurance that
Capital Foods will not adopt or support any such plans or proposals in the
future.
Apart from transfer restrictions arising under applicable provisions of the
securities laws, there will be no restriction on the ability of Capital Foods to
transfer any or all of the Closing Shares and/or the Warrant at any time
following consummation of the Acquisition. One or more of such transfers could
have the effect of transferring control of the Company to one or more parties
not currently known to the Company.
EFFECT OF POSSIBLE SHARE RESALES. Following expiration of the required
holding period (one year, in the case of reliance upon the exemption provided by
Rule 144 under the Securities Act of 1933, as amended) for the Closing Shares,
Capital Foods (or other holder(s) of such shares) will be generally free to
resell any or all of the Closing Shares without registration under that Act.
Such sales will be subject to volume limitations under Rule 144 only if Capital
Foods or such other holder is deemed an "affiliate" of the Company at or about
the time of resale or resells shares prior to completion of a two-year holding
period. In addition, Capital Foods or its transferees will have certain
"piggyback" registration rights which will permit such resales pursuant to an
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effective registration statement under the Securities Act. Depending upon their
timing, magnitude and other factors, such resales, or the possibility thereof,
could adversely affect the market price of the Common Stock.
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.
Wabash Foods processes much of its data using licensed computer programs
from third parties, including its accounting software. Such third parties have
advised Wabash Foods that they have made all necessary programming changes to
such computer programs to address the Year 2000 issue. Wabash Foods believes
that 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 Wabash
Foods' computerized information systems.
Wabash Foods 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 Wabash Foods' results of operations will not be adversely affected by the
failure of systems operated by third parties to properly operate in the year
2000.
Wabash Foods 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. Wabash Foods expects to complete
development of its contingency plans and begin implementation, if required, by
November 30, 1999.
POORE BROTHERS, INC. FINANCIAL STATEMENTS
Historical audited financial information of the Company for the fiscal year
ended December 31, 1998 is incorporated herein by reference to the Company's
Annual Report to Shareholders, which accompanies this Proxy Statement.
Historical unaudited financial information of the Company for the three-month
periods ended March 31, 1999 and June 30, 1999 is annexed hereto as Exhibits B
and C, respectively.
WABASH FOODS, LLC FINANCIAL STATEMENTS
Historical audited financial information of Wabash Foods for the fiscal
year ended December 31, 1998 and historical unaudited financial information of
Wabash Foods for the six-month period ended June 30, 1999 are annexed hereto as
Exhibit H.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF
THE ACQUISITION BY THE COMPANY 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, $.01 PAR VALUE, AND (ii) THE WARRANT TO
PURCHASE 400,000 SHARES OF COMMON STOCK.
* * * * * *
PROPOSAL 4
APPROVAL OF AMENDMENT OF 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
In May 1995, the Board of Directors of the Company adopted the Poore
Brothers, Inc. 1995 Stock Option Plan (the "Stock Option Plan"), which was
subsequently approved by the Company's shareholders. The Stock Option Plan
permits the grant of "incentive stock options" within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), as well as
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non-qualified stock options. The Stock Option Plan originally provided for the
issuance of options to purchase up to 300,000 shares of Common Stock. The Stock
Option Plan was amended, effective August 30, 1996, pursuant to which the number
of shares of Common Stock reserved for issuance thereunder was increased to
1,000,000 shares, and then amended again effective March 24, 1997, pursuant to
which the number of shares of Common Stock reserved for issuance thereunder was
increased to 1,500,000 shares. As of August 31, 1999, options to purchase an
aggregate of 1,147,350 shares of Common Stock were granted and outstanding under
the Stock Option Plan and a total of 212,317 shares of Common Stock remained
available for future grants under the Stock Option Plan. In order to provide for
sufficient shares of Common Stock for future grants, the Board of Directors has
amended the Stock Option Plan, subject to shareholder approval, to provide that
the number of shares of Common Stock reserved for issuance under the Stock
Option Plan be increased by 500,000 shares, from 1,500,000 to 2,000,000 shares.
The Stock Option Plan, as so amended, is hereby submitted to shareholders of the
Company for approval.
A general description of the basic features of the Stock Option Plan is set
forth below. Such description is qualified in its entirety by reference to the
full text of the Stock Option Plan, a copy of which may be obtained without
charge upon written request to: Secretary, Poore Brothers, Inc., 3500 South La
Cometa Drive, Goodyear, Arizona 85338.
PURPOSE
The purpose of the Stock Option Plan is to provide incentives that will
attract and retain highly competent persons as Directors, officers and key
employees of the Company and its subsidiaries by providing them with
opportunities to acquire shares of Common Stock.
ADMINISTRATION
The Stock Option Plan is administered by the Board of Directors or a
committee appointed by the Board of Directors (a "Stock Option Committee"),
which determines the persons to whom options are granted, and the number and
terms of the options, including the exercise price. The Stock Option Plan is
currently being administered by the Board of Directors and no Stock Option
Committee has been appointed to date.
ELIGIBILITY; GRANT OF AWARDS
Pursuant to the Stock Option Plan, directors, officers and key employees of
the Company or its subsidiaries who have been selected by the Board of Directors
or the Stock Option Committee as participants are eligible to receive grants of
stock options under the Stock Option Plan. The Company and its subsidiaries
currently have approximately 100 persons who are so eligible (comprising all
employees and directors).
All options granted under the Stock Option Plan are evidenced by written
option agreements between the option holders and the Company. Option holders
have no voting, dividend, or other rights of shareholders with respect to shares
of Common Stock covered by their options prior to exercising such options and
becoming the holders of record of shares of Common Stock. No options may be
exercisable earlier than six months after the date of grant and no options may
have a term longer than ten years. An option holder's options are subject to
early termination in the event that the holder ceases to be an employee or
director of the Company, as the case may be, or in the event of the holder's
death. Certain outstanding options provide for full vesting upon a change of
control of the Company. With respect to future option grants, the Board of
Directors and the Stock Option Committee retain the right to provide for full
vesting upon a change of control of the Company.
The Stock Option Plan authorizes the grant of both incentive stock options
("ISOs") within the meaning of Section 422 of the Code and non-qualified stock
options ("NQSOs"); provided, however, that ISOs may only be granted to
participants who are employees of the Company on the date of grant. The exercise
price of the stock options will be determined by the Board of Directors or the
Stock Option Committee when the stock options are granted, subject to a minimum
price (i) in the case of ISOs of 100% of the fair market value of the Common
Stock at the time of the grant and (ii) in the case of NQSOs of 85% of the fair
market value of the Common Stock at the time of the grant, each as determined in
accordance with the Stock Option Plan. Payment for shares of Common Stock
acquired pursuant to a stock option granted under the Stock Option Plan is to be
made in cash. Payment may also be made by any other method established by the
Board of Directors or the Stock Option Committee including, without limitation,
the tendering of previously owned shares of Common Stock.
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SHARES AVAILABLE; NONTRANSFERABILITY OF STOCK OPTIONS
A total of 1,500,000 shares of Common Stock are currently reserved for
issuance under the Stock Option Plan. If the amendment to increase the number of
shares reserved for issuance under the Stock Option Plan is approved by the
shareholders, the number of shares of Common Stock reserved for issuance under
the Stock Option Plan will be increased by 500,000 shares to 2,000,000 shares.
Any shares subject to an award which expires or is terminated unexercised will
again be available for issuance under the Stock Option Plan. Generally, no award
or any right or interest therein is assignable or transferable.
EFFECT OF REORGANIZATION, MERGER, ETC.
Shares as to which awards may be granted under the Stock Option Plan, and
shares then subject to awards, will be adjusted by the Board of Directors or the
Stock Option Committee in the event of a change in the number of issued and
outstanding shares of Common Stock without new consideration to the Company
(such as by stock dividend, stock split, recapitalization, reorganization,
exchange of shares, liquidation, combination or other changes in corporate
structure affecting the Common Stock). In any such event, the exercise price of
such options shall be adjusted so that the net value of the options, as
adjusted, shall not be changed.
In the case of any sale of assets, merger, consolidation, combination or
other corporate reorganization or restructuring of the Company with or into
another corporation that results in the outstanding Common Stock being converted
into or exchanged for different securities, cash or other property, or any
combination thereof, any participant to whom a stock option has been granted
will have the right upon exercise of the option in whole or in part, to receive
the Acquisition Consideration (as defined below) receivable upon consummation of
the transaction by a holder of the number of shares of Common Stock which might
have been obtained upon exercise of the stock option or portion thereof, as the
case may be, immediately prior to the Acquisition. The term "Acquisition
Consideration" means the kind and amount of securities, cash or other property
or any combination thereof receivable in respect of one share of Common Stock
upon consummation of the transaction. In the case of any other merger,
consolidation, sale of assets, acquisition of property or stock,
recapitalization or similar occurrence resulting in changes in the Common Stock,
the Board of Directors or the Stock Option Committee may authorize the issuance,
continuation or assumption or stock options or provide for other equitable
adjustments as it shall deem equitable and appropriate.
DURATION, AMENDMENT AND TERMINATION OF THE STOCK OPTION PLAN
No stock option may be granted by the Company under the Stock Option Plan
more than ten (10) years after the date of its approval by the Company's
shareholders. The Board of Directors may amend or terminate the Stock Option
Plan at any time. However, no such action shall reduce the amount of any
existing stock option or change the terms and conditions thereof, without the
holder's consent. In addition, no amendment of the Stock Option Plan shall,
without the approval of the shareholders, (i) materially increase the total
number of shares of Common Stock which may be issued under the Stock Option
Plan; (ii) materially increase the amount or type of stock options that may be
granted under the Stock Option Plan; (iii) materially modify the requirements as
to eligibility for stock options under the Stock Option Plan; (iv) result in any
member of the Stock Option Committee, if applicable, losing his status as a
disinterested person under Securities and Exchange Commission Rule 16b-3 under
the Securities Exchange Act of 1934, as amended; or (v) extend the term of the
Stock Option Plan.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is intended only as a general guide as to certain federal
income tax consequences under current law for participants in the Stock Option
Plan and does not attempt to describe all potential tax consequences.
Furthermore, tax consequences are subject to change and a taxpayer's particular
situation may be such that some variation of the described rules is applicable.
Accordingly, each participant has been advised to consult his or her own tax
advisor with respect to the tax consequences of participating in the Stock
Option Plan.
No tax obligation will arise for the optionee or the Company upon the
granting of either ISOs or NQSOs under the Stock Option Plan. Upon exercise of a
NQSO, an optionee will recognize ordinary income in an amount equal to the
excess, if any, of the fair market value on the date of exercise of the Common
Stock acquired over the exercise price of the stock option. The Company will be
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entitled to a tax deduction in an amount equal to the ordinary income recognized
by the optionee. Any additional gain or loss realized by an optionee on
disposition of the Common Stock generally will be capital gain or loss to the
optionee and will not result in any additional tax deduction to the Company.
Because a NQSO cannot be exercised prior to six months from the date of grant,
the taxable event arising from exercise of NQSOs by officers of the Company
subject to Section 16(b) of the Exchange Act occurs on the date the stock option
is exercised. The income recognized at the end of any deferred period will
include any appreciation in the value of the Common Stock during that period,
and the capital gain holding period of the Common Stock for purposes of
obtaining long-term capital gain treatment will not begin until the completion
of such period.
Upon the exercise of an ISO, an optionee recognizes no immediate taxable
income. The tax cost is deferred until the optionee ultimately sells the
underlying shares of Common Stock. If the optionee does not dispose of the
option shares within two years from the date the stock option was granted and
within one year after the exercise of the stock option ("holding periods"), and
the option is exercised no later than three months after the termination of the
optionee's employment, the gain on the sale will be treated as a long-term
capital gain. Subject to the limitations in the Stock Option Plan, certain of
these holding periods and employment requirements are liberalized in the event
of the optionee's death or disability while employed with the Company. The
Company is not entitled to any tax deduction, except that if the stock is
disposed of prior to satisfying the holding periods described above, the gain on
the sale of such Common Stock equal to the lesser of (i) the fair market value
of the Common Stock on the date of exercise minus the option price or (ii) the
amount realized on disposition minus the option price will be taxed to the
optionee as ordinary income and the Company will be entitled to a deduction in
the same amount. Any additional gain or loss recognized by an optionee upon
disposition of shares prior to the expiration of the holding period outlined
above generally will be capital gain or loss to the optionee and will not result
in any additional tax deduction to the Company. The "spread" between the fair
market value of the option stock and option price upon exercise of an ISO is an
item of adjustment used in the computation of the "alternative minimum tax" of
the optionee under the Code. The tax benefits which might otherwise accrue to an
optionee may be affected by the imposition of such tax if applicable in the
optionee's individual circumstances.
AWARDS UNDER THE STOCK OPTION PLAN
The following table presents information with respect to the dollar value
and the number of awards outstanding as of August 27, 1999 under the Stock
Option Plan:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF COMMON STOCK
VALUE OF STOCK UNDERLYING STOCK
PARTICIPANT OPTIONS (1) OPTIONS GRANTED
----------- ----------- ---------------
<S> <C> <C>
Eric J. Kufel................................... $15,469 440,000
Glen E. Flook................................... 9,453 160,000
Thomas W. Freeze................................ 12,031 225,000
All current executive officers, as a group...... 36,953 848,000
All current directors who are not executive
officers, as a group............................ 5,938 95,000 (2)
All employees, including all current officers
who are not executive officers, as a group...... 2,306 59,350
</TABLE>
- ----------
(1) The difference between the aggregate option exercise price and the market
value of the underlying shares at August 27, 1999 ($1.1875 per share,
representing the last sale price on such date).
(2) In addition to the grants of stock options under the Stock Option Plan,
Mark S. Howells, a Director of the Company, has been granted Non-Plan
Options (as defined below) to purchase (i) 275,000 shares of Common Stock
at an exercise price of $1.082 per share, (ii) 100,000 shares of Common
Stock at an exercise price of $1.25 per share and (iii) 10,000 shares of
Common Stock at an exercise price of $3.50 per share.
NEW PLAN BENEFITS
Because the Stock Option Plan is a discretionary plan, it is not possible
to determine what awards the Board of Directors or the Stock Option Committee
will grant under the Stock Option Plan in the future.
43
<PAGE>
STOCK OPTIONS GRANTED OUTSIDE OF THE STOCK OPTION PLAN
In addition to stock options granted under the Stock Option Plan, the
Company has granted stock options to Mr. Howells and certain former Directors
which do not fall under the Stock Option Plan ("Non-Plan Options"). As of August
27, 1999, Non-Plan Options to purchase 820,000 shares of Common Stock were
outstanding, with an average exercise price of $1.18 per share. The Non-Plan
Options vested on their respective dates of grant, expire ten years from the
date of grant and do not terminate if such persons cease to be Directors of the
Company.
APPROVAL OF THE AMENDMENT TO THE STOCK OPTION PLAN
Assuming the presence of a quorum, the proposal to approve the
above-described amendment to the Stock Option Plan requires the affirmative vote
of a majority of the shares of Common Stock represented in person or by proxy at
the Annual Meeting. Shares will be voted for or against such approval in
accordance with the specifications marked on the proxies applicable thereto, and
if no specification is made, will be voted "FOR" approval of the amendment to
the Stock Option Plan.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF
THE AMENDMENT TO THE 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.
* * * * * * *
NO APPRAISAL RIGHTS FOR DISSENTERS
Under Delaware law, holders of the Company's Common Stock will not be
entitled to appraisal rights in connection with any of the proposals discussed
in this Proxy Statement.
INDEPENDENT ACCOUNTANTS
Representatives of Arthur Andersen LLP, the Company's independent auditors,
are expected to be present at the Annual Meeting and will have the opportunity
to make a statement, if they so desire. In addition, such representatives are
expected to be available to respond to appropriate questions from those
attending the Annual Meeting.
On December 30, 1997, the Audit Committee of the Company's Board of
Directors voted unanimously to elect Arthur Andersen LLP as the Company's
independent auditors and to dismiss Coopers & Lybrand L.L.P., which appointment
and dismissal were effective December 30, 1997. During the interim period from
January 1, 1997 through December 30, 1997, there were no disagreements between
the Company and Coopers & Lybrand L.L.P. on any matters of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to the satisfaction of Coopers & Lybrand L.L.P. would
have caused it to make a reference to the subject matter of the disagreement in
connection with its report. In November 1997, Coopers & Lybrand L.L.P. advised
the Company of the need to expand the scope of its upcoming audit, as required
by professional standards, to address the ability of the Company to continue as
a going concern. Due to the dismissal, no such procedures were performed, nor
did Coopers & Lybrand L.L.P make any determination.
During the interim period from January 1, 1997 through December 30, 1997,
the Company did not consult with Arthur Andersen LLP regarding the application
of accounting principles to a specific completed or contemplated transaction nor
the type of audit opinion that might be rendered on the Company's financial
statements.
44
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires that the Company's directors,
executive officers and persons who own more than 10% of the Company's Common
Stock file with the Securities and Exchange Commission (the "Commission")
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
10% shareholders are required by Commission regulations to furnish the Company
with copies of all Section 16(a) reports they file. To the Company's knowledge,
based solely on review of the copies of such reports furnished to the Company
and written representations, during the fiscal year ended December 31, 1998, all
Section 16(a) filing requirements applicable to the Company's officers,
directors and greater than 10% beneficial owners were complied with, except that
Renaissance Capital did not file in a timely manner a report pertaining to its
receipt as of February 1998 of a warrant to purchase 25,000 shares of Common
Stock. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents previously filed by the Company with the Commission
(Commission File Number 1-14556) under the Exchange Act are incorporated herein
by reference in this Proxy Statement: Annual Report on Form 10-KSB for the year
ended December 31, 1998 (a copy of which is being mailed to shareholders with
this Proxy Statement).
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Shareholders may submit proposals on matters appropriate for shareholder
action at the Company's annual meetings, consistent with regulations adopted by
the Commission. Proposals of shareholders intended to be presented at the 2000
Annual Meeting of Shareholders should be submitted by certified mail, return
receipt requested, and must be received by the Company at its principal
executive offices on or before December 31, 1999, to be eligible for inclusion
in the Company's proxy statement relating to that meeting. Proposals should be
directed to the attention of Thomas W. Freeze, Poore Brothers, Inc., 3500 South
La Cometa Drive, Goodyear, Arizona 85338.
OTHER BUSINESS
The Board of Directors does not know of any business to be brought before
the Annual Meeting other than the matters described in the Notice of Annual
Meeting. However, if any other matters are properly presented for action, it is
the intention of each person named in the accompanying proxy to vote said proxy
in accordance with his judgment on such matters.
The Company's principal executive offices are located at 3500 South La
Cometa Drive, Goodyear, Arizona 85338, and the Company's telephone number is
(623) 932-6200.
By Order of the Board of Directors
Eric J. Kufel
President and Chief Executive Officer
Goodyear, Arizona
September 10, 1999
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND THE ANNUAL MEETING AND DESIRE THEIR STOCK TO BE VOTED ARE URGED
TO DATE, SIGN AND RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED SELF-ADDRESSED
ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
45
<PAGE>
INDEX TO EXHIBITS
A. Form of Proxy
B. Quarterly Report on Form 10-QSB for the three-month period ended March 31,
1999
C. Quarterly Report on Form 10-QSB for the three-month period ended June 30,
1999
D. Certificate of Amendment of the Company's Certificate of Incorporation
Pertaining to the Increase of the Number of Authorized Shares of Common
Stock
E. Agreement for Purchase and Sale of Limited Liability Company Interests
F. Registration Rights Agreement
G. Form of Warrant
H. Wabash Foods, LLC Financial Statements
46
<PAGE>
EXHIBIT A
FORM OF PROXY
POORE BROTHERS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
-----------------------------------------------------------
The undersigned hereby appoints Eric J. Kufel and Thomas W. Freeze, and each of
them, with full power of substitution, as proxies of the undersigned to vote all
shares of common stock, par value $.01 per share, of Poore Brothers, Inc. (the
"Company") held of record by the undersigned on August 27, 1999, at an Annual
Meeting of Shareholders of the Company to be held on October 6, 1999 or any
adjournments or postponements thereof (the "Annual Meeting"), on the matters set
forth on the reverse side of this Proxy, and, in their discretion, upon all
matters incident to the conduct of the Annual Meeting and upon such other
matters as may properly be brought before the Annual Meeting. This proxy revokes
all prior proxies given by the undersigned.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR APPROVAL OF PROPOSALS 1,
2, 3 AND 4.
(CONTINUED ON REVERSE SIDE)
1
<PAGE>
PLEASE DATE, SIGN AND MAIL YOUR PROXY
CARD BACK AS SOON AS POSSIBLE!
ANNUAL MEETING OF SHAREHOLDERS
POORE BROTHERS, INC.
OCTOBER 6, 1999
---------------
1. Election of Directors
FOR all nominees listed below:
WITHHELD all nominees listed below:
Nominees: Thomas W. Freeze, Richard E. Goodspeed, Mark S. Howells, Eric J.
Kufel, James W. Myers, Robert C. Pearson, Aaron M. Shenkman
FOR, except vote withheld from the following nominee(s).
----------------------------------------------
2. Proposal to approve an amendment to the Certificate of Incorporation, as
amended, of Poore Brothers, Inc. (the "Company") to increase the number of
authorized shares of Common Stock, par value $.01 per share, by 35,000,000
shares, from 15,000,000 to 50,000,000.
FOR AGAINST ABSTAIN
3. Proposal to approve the acquisition by the Company 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, par value
$.01 per share, and (ii) a warrant to purchase 400,000 shares of Common
Stock.
FOR AGAINST ABSTAIN
4. Proposal to approve an amendment to the Poore Brothers, Inc. 1995 Stock
Option Plan to increase the number of shares of Common Stock, par value
$.01 per share, reserved for issuance thereunder by 500,000 shares from
1,500,000 to 2,000,000 shares.
FOR AGAINST ABSTAIN
5. TO CONSIDER AND ACT UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE
THE ANNUAL MEETING OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2, 3 AND 4.
PLEASE MARK BOXES IN BLUE OR BLACK INK.
YOUR VOTE IS IMPORTANT. PLEASE MARK, SIGN, DATE AND MAIL THIS PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
________________ ___________________ (By) ______________________ (Date)_____________, 1999
Name (please print) Name of Corporation Signature
(if applicable)
</TABLE>
NOTE: Please sign exactly as name appears on stock certificate. When shares are
held by joint tenants, both should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title as
such. If a corporation, please sign in full corporate name by President
or other authorized officer. If a partner, please sign in partnership
name by authorized person.
2
<PAGE>
EXHIBIT B
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 March 31, 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 (I.R.S. Employer
incorporation or 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 March 31, 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]
1
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated balance sheets as of March 31, 1999 and
December 31, 1998................................................... 3
Consolidated statements of operations for the three
months ended March 31, 1999 and 1998................................ 4
Consolidated statements of cash flows for the three
months ended March 31, 1999 and 1998 ............................... 5
Notes to consolidated financial statements............................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION................................................... 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................... 11
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................... 11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 11
ITEM 5. OTHER INFORMATION................................................... 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................... 12
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1999 1998
------------ -------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 154,843 $ 270,295
Accounts receivable, net of allowance of
$34,000 in 1999 and $24,000 in 1998 1,580,126 1,712,955
Inventories 426,923 465,038
Other current assets 234,456 281,994
------------ ------------
Total current assets 2,396,348 2,730,282
Property and equipment, net 6,195,073 6,270,374
Intangible assets, net 3,593,276 3,723,906
Other assets 203,695 214,327
------------ ------------
Total assets $ 12,388,392 $ 12,938,889
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 660,250 $ 870,204
Accrued liabilities 426,000 439,404
Current portion of long-term debt 703,933 652,519
------------ ------------
Total current liabilities 1,790,183 1,962,127
Long-term debt, less current portion 5,683,937 5,720,247
------------ ------------
Total liabilities 7,474,120 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 (6,678,267) (6,336,024)
------------ ------------
Total shareholders' equity 4,914,272 5,256,515
------------ ------------
Total liabilities and shareholders' equity $ 12,388,392 $ 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
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- ------------
(unaudited) (unaudited)
Net sales .......................................... $ 3,690,858 $ 3,196,764
Cost of sales ...................................... 2,928,941 2,372,885
----------- -----------
Gross profit ..................................... 761,917 823,879
Selling, general and administrative expenses ....... 879,031 935,844
----------- -----------
Operating loss ................................... (117,114) (111,965)
----------- -----------
Interest income .................................... 5,806 13,495
Interest expense ................................... (159,304) (137,092)
----------- -----------
(153,498) (123,597)
----------- -----------
Loss before cumulative effect of a change in
accounting principle ........................... (270,612) (235,562)
Cumulative effect of a change in accounting
principle ........................................ (71,631) --
----------- -----------
Net loss ......................................... $ (342,243) $ (235,562)
=========== ===========
Loss per common share:
Basic-
Loss before cumulative effect of a change
in accounting principle ...................... $ (0.03) $ (0.03)
Cumulative effect of a change in accounting
principle .................................... (0.01) --
----------- -----------
Net loss ................................... $ (0.04) $ (0.03)
=========== ===========
Diluted-
Loss before cumulative effect of a change in
accounting principle ....................... $ (0.03) $ (0.03)
Cumulative effect of a change in accounting
principle .................................. (0.01) --
----------- -----------
Net loss ..................................... $ (0.04) $ (0.03)
=========== ===========
Weighted average number of common shares:
Basic .......................................... 7,832,997 7,058,946
=========== ===========
Diluted ........................................ 7,832,997 7,058,946
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................... $(342,243) $ (235,562)
Adjustments to reconcile net loss to net cash
used in operating activities:
Cumulative effect of a change in accounting
principle .................................... 71,631 --
Depreciation ................................... 147,737 142,052
Amortization ................................... 111,530 57,991
Bad debt expense ............................... 12,000 50,000
Change in operating assets and liabilities:
Accounts receivable ............................ 120,828 (157,014)
Inventories .................................... 38,116 38,196
Other assets and liabilities ................... 8,139 16,463
Accounts payable and accrued liabilities ....... (223,357) (236,426)
--------- -----------
Net cash used in operating activities ........... (55,619) (324,300)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............... (72,437) (31,142)
--------- -----------
Net cash used in investing activities .......... (72,437) (31,142)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ........... -- 81,116
Payments made on long-term debt .................. (154,646) (232,585)
Net increase in working capital line of credit ... 167,250 17,955
--------- -----------
Net cash (used in) provided by financing
activities ................................... 12,604 (133,514)
--------- -----------
Net (decrease) in cash and cash equivalents ........ (115,452) (488,956)
Cash and cash equivalents at beginning of period ... 270,295 1,622,751
--------- -----------
Cash and cash equivalents at end of period ......... $ 154,843 $ 1,133,795
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the three months for interest ... $ 112,780 $ 133,710
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 StyleTM 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 StyleTM 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 three months ended March 31, 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 three months ended March 31, 1999 as the
"Cumulative effect on prior years (to December 31, 1998) of expensing
organization costs" in accordance with APB No. 20.
LOSS 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 were not assumed to be exercised for purposes of
calculating diluted earning per share for the three months ended March 31, 1999
and 1998, as their effect was anti-dilutive.
6
<PAGE>
2. LONG-TERM DEBT
At March 31, 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
of $4,500,000 shareholders' equity. At March 31, 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 $1,014,263 and $847,013 at March 31, 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 April 16, 1999, the Company had a borrowing base of
approximately $1,340,000 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 minimum debt service coverage ratio, minimum
quarterly and annual operating results and minimum quarterly and annual changes
in book net worth. At March 31, 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.
7
<PAGE>
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.
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
-------- -------- ------------
1999
Revenues from external customers .. $2,593,113 $1,097,745 $3,690,858
Depreciation and amortization in
segment gross profit ............ 185,568 -- 185,568
Segment gross profit .............. 689,246 72,671 761,917
1998
Revenues from external customers .. $2,630,756 $ 566,008 $3,196,764
Depreciation and amortization in
segment gross profit ............ 141,982 -- 141,982
Segment gross profit .............. 787,019 36,860 823,879
The following table reconciles reportable segment profit to the Company's
consolidated loss before income taxes and cumulative effect of change in
accounting principle.
1999 1998
--------- ---------
Consolidated segment gross profit .................. $ 761,917 $ 823,879
Unallocated amounts:
Selling, general and administrative expenses ..... 879,031 935,844
Interest expense, net ............................ 153,498 123,597
--------- ---------
Loss before income taxes and cumulative effect of
change in accounting principle ................... $(270,612) $(235,562)
========= =========
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1998
Net sales for the three months ended March 31, 1999 were $3,690,858, up
$494,094, or 15%, from $3,196,764 for the three months ended March 31, 1998.
Sales of products manufactured by the Company accounted for 70% and 82% of total
net sales in 1999 and 1998, respectively, while revenues from distributed
products accounted for 30% and 18% in 1999 and 1998, respectively. Sales of
branded and private label manufactured products were generally flat, while
revenues from the distribution and merchandising of products manufactured by
others increased $531,737, or 94%. The majority of this increase, $297,401, 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 March 31, 1999, was $761,917, or
21% of net sales, as compared to $823,879, or 26% of net sales, for the three
months ended March 31, 1998. The decrease in gross profit of manufactured
products from $787,019, or 30% of net sales, to $689,246, or 27% of net sales,
was primarily the result of higher potato and oil costs versus a year ago. The
gross profit of distributed products increased from $36,860 to $72,671
reflecting the impact of higher revenues.
Selling, general and administrative expenses decreased to $879,031 for the
three months ended March 31, 1999 from $935,844 for the same period in 1998. The
decrease of $56,813, or 6%, compared to the first quarter of 1998, was
principally due to lower bad debt expense and promotional spending.
Net interest expense increased to $153,498 for the three months ended March
31, 1999 from $123,597 for the three months ended March 31, 1998. This increase
was due to lower interest income on investments of $7,689 and increased interest
expense of $22,212 on indebtedness related to the Tejas acquisition.
The cumulative effect of a change in accounting principle resulted in a
$71,631 charge and was related to the Company's expensing of previously
capitalized organization costs in accordance with Statement of Position 98-5,
REPORTING ON THE COSTS OF START-UP ACTIVITIES."
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $606,165 (a current ratio of 1.3:1) and $768,155 (a
current ratio of 1.4:1) at March 31, 1999 and December 31, 1998, respectively.
The $161,990 decrease in working capital was primarily attributable to the
Company's use of cash for operating and investing activities. For the three
months ended March 31, 1999, the Company used $55,619 for operating activities,
principally to reduce payables, and invested $72,437 in new equipment.
At March 31, 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
9
<PAGE>
of $4,500,000 shareholders' equity. At March 31, 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 balance outstanding was $1,014,263 and
$847,013 at March 31, 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 April 16,
1999, the Company had a borrowing base of approximately $1,340,000 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 minimum debt service coverage ratio, minimum quarterly and annual
operating results and minimum quarterly and annual changes in book net worth. At
March 31, 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 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
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.
10
<PAGE>
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On May 3, 1999, the Company announced that it had signed a letter of intent
to acquire Wabash Foods, LLC for 4.0 million shares of common stock and
assumption of debt. The Company simultaneously signed a management contract
pursuant to which the Company will manage the operations of Wabash Foods pending
completion of the acquisition. The Company will receive a management fee for
such services. Completion of the acquisition is subject to the signing of a
definitive purchase agreement, approval by the Company's Board of Directors and
approval by the Company's shareholders. The acquisition is expected to close in
the third quarter. In the event that 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 $130,000 or 100,000 shares of the Company's
common stock.
11
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
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.
Dated: May 7, 1999 By: /s/ Eric J. Kufel
-------------------------------------
Eric J. Kufel
President and Chief Executive Officer
(principal executive officer)
Dated: May 7, 1999 By: /s/ Thomas W. Freeze
-------------------------------------
Thomas W. Freeze
Vice President, Chief Financial
Officer, Treasurer and Secretary
(principal financial and accounting
officer)
12
<PAGE>
EXHIBIT C
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 D
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
POORE BROTHERS, INC.
Poore Brothers, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
FIRST: The Certificate of Incorporation of the Corporation was filed with
the Secretary of State of the State of Delaware on February 23, 1995. SECOND: A
Certificate of Amendment to the Certificate of Incorporation of the Corporation
was filed with the Secretary of State of the State of Delaware on March 2, 1995.
THIRD: The Board of Directors of the Corporation has duly and unanimously
adopted the following resolution setting forth a proposed amendment to the
Certificate of Incorporation of the Corporation, as amended:
RESOLVED, that the Certificate of Incorporation of the Corporation, as
amended, be, and it hereby is, amended pursuant to Section 242 of the
Delaware General Corporation Law by striking Article FOURTH (relating to
the authorized capital stock of the Corporation) in its entirety, and
replacing therefor a new Article FOURTH as follows:
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Fifty Million Fifty
Thousand (50,050,000) shares, consisting of:
(a) Fifty Thousand (50,000) shares of preferred stock, par value $100
per share (the "Preferred Stock"); and
(b) Fifty Million (50,000,000) shares of common stock, par value
$0.01 per share (the "Common Stock").
FIFTH: That at a meeting of the stockholders of the Corporation held on
_________, 1999, the holders of a majority of the issued and outstanding shares
of Common Stock of the Corporation approved the amendment to the Certificate of
Incorporation, as amended, set forth in this Certificate of Amendment.
SIXTH: That this Amendment to the Certificate of Incorporation, as amended,
has been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said Corporation has caused this Certificate of
Amendment of the Certificate of Incorporation, as amended, to be signed by its
President and attested by its Secretary as of this ____ day of ___________,
1999.
POORE BROTHERS, INC.
By:
--------------------------------
Eric J. Kufel
President
ATTEST:
By:
-------------------------
Thomas W. Freeze
Secretary
<PAGE>
EXHIBIT E
AGREEMENT FOR PURCHASE AND SALE OF
LIMITED LIABILITY COMPANY MEMBERSHIP INTERESTS
OF
WABASH FOODS, LLC
A DELAWARE LIMITED LIABILITY COMPANY
BETWEEN
PATE FOODS CORPORATION
AN ILLINOIS CORPORATION
AND
POORE BROTHERS, INC.
A DELAWARE CORPORATION
AS OF AUGUST 16, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
----
RECITALS 1
ARTICLE 1: PURCHASE AND SALE PRICE 1
1.1 Purchase and Sale of the Membership Interests 1
1.2 Purchase Price. 1
1.3 Closing Financial Information. 1
1.4 [RESERVED] 2
1.5 Use of Cash and Working Capital. 2
1.6 Accounts and Notes Receivable. 2
1.7 Required Shareholder Approval. 2
1.8 Payment of Taxes and Other Charges. 2
ARTICLE 2: REPRESENTATIONS AND WARRANTIES OF OF SELLER AND COMPANY 2
2.1 Due Organization of Company, etc.. 3
2.2 Sole Member, Identity of Manager 3
2.3 Due Organization of Seller, etc. 3
2.4 Subsidiaries 3
2.5 Authorization, etc. 3
2.6 No Violation 3
2.7 Governmental Authorities 3
2.8 Assets and Net Sales. 4
2.9 Financial Statements. 4
2.10 No Material Undisclosed Liabilities, Claims, etc. 4
2.11 Absence of Certain Changes 4
2.12 Contracts 5
2.13 True and Complete Copies 5
2.14 Title and Related Matters 5
2.15 Real Property 5
2.16 Premises 5
2.17 Personal Property 6
2.18 No Disposition of Assets 6
2.19 Litigation 6
2.20 No Partnerships or Joint Ventures. 6
2.21 Tax Returns and Audits 6
2.22 Government Contracts 6
2.23 Compliance with Law 6
2.24 Absence of Certain Business Practices 7
2.25 ERISA and Related Employee Benefit Matters 7
i
<PAGE>
2.26 Intellectual Property 8
2.27 Warranties 9
2.28 Labor Relations 9
2.29 Insurance 9
2.30 Liability for Products 9
2.31 Environmental Matters 9
2.32 Capital Expenditures 10
2.33 Suppliers 10
2.34 Dealings with Affiliates 11
2.35 Business Generally 11
2.36 Bank Accounts 11
2.37 Compensation 11
2.38 Disclosure of Changes 11
2.39 Knowledge 11
2.40 Materiality 11
2.41 Joint and Several Representations 12
ARTICLE 3: REPRESENTATIONS AND WARRANTIES OF PURCHASER 12
3.1 Corporate Organization, etc. 12
3.2 Capitalization. 12
3.3 Authorization, etc. 12
3.4 No Violation. 12
3.5 Governmental Authorities. 12
ARTICLE 4: COVENANTS OF SELLER AND COMPANY 13
4.1 Regular Course of Business. 13
4.2 Amendments. 13
4.3 No Transfer of Membership Interests. 13
4.4 Bonuses. 13
4.5 Capital and Other Expenditures. 13
4.6 Borrowing. 14
4.7 Other Commitments. 14
4.8 Interim Financial Information. 14
4.9 Full Access and Disclosure. 14
4.10 Consents. 14
4.11 Further Assurances. 14
4.12 Fulfillment of Conditions. 14
ARTICLE 5: COVENANTS OF PURCHASER AND COMPANY 15
5.1 Confidentiality. 15
5.2 Books and Records. 15
5.3 Fulfillment of Conditions. 15
5.4 Approval of Board of Directors. 15
5.5 Third Party Consents and Approvals. 16
ii
<PAGE>
ARTICLE 6: OTHER AGREEMENTS 16
6.1 Consultants, Brokers and Finders. 16
6.2 Noncompetition Agreements. 16
6.3 Taxes. 16
6.4 Escrow Agreement. 18
6.5 Employment Agreements, Resignations. 18
6.6 Confidentiality. 18
ARTICLE 7: CONDITIONS TO THE OBLIGATIONS OF PURCHASER 19
7.1 Representations and Warranties, Performance. 19
7.2 Consents and Approvals. 19
7.3 Opinion of Seller's Counsel. 19
7.4 Opinion of Company's Counsel. 20
7.5 No Adverse Change. 21
7.6 No Proceeding or Litigation. 21
7.7 Review. 21
7.8 Other Documents. 21
7.9 Identified Debt Limit. 21
7.10 Other Agreements. 21
7.11 Withholding Certificate. 21
7.12 Approval of Purchaser's Board of Directors. 21
7.13 Required Shareholder Approvals. 21
7.14 Approval of Third Parties and Board. 21
7.15 Intellectual Property Rights. 22
7.16 Failure of Conditions. 22
7.17 Escrow. 22
ARTICLE 8: CONDITIONS TO THE OBLIGATIONS OF SELLER 23
8.1 Representations and Warranties, Performance. 23
8.2 No Proceeding or Litigation. 23
8.3 Opinion of Counsel. 23
8.4 Payment/Issuance. 24
8.5 Other Documents. 24
8.6 Other Agreements. 24
8.7 Failure of Conditions. 24
ARTICLE 9: CLOSING 24
9.1 Closing. 24
9.2 Deliveries at Closing. 25
9.3 Legal Actions. 25
9.4 Remedies of Purchaser Prior to or on Closing. 25
9.5 Remedies of Seller Prior to or on Closing. 26
9.6 Termination. 26
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ARTICLE 10: TERMINATION AND ABANDONMENT 26
10.1 Methods of Termination. 26
10.2 Procedure Upon Termination. 27
ARTICLE 11: INDEMNIFICATION 27
11.1 Indemnification by Seller 27
11.2 Tender of Defense for Damages 27
11.3 [RESERVED] 28
11.4 Fraud Claims. 28
ARTICLE 12: MISCELLANEOUS PROVISIONS 28
12.1 Amendment and Modification. 28
12.2 Waiver of Compliance; Consents. 28
12.3 Expenses. 28
12.4 Investigations, Survival of Warranties. 28
12.5 Notices. 29
12.6 Governing Law, Dispute Resolution. 30
12.7 Neutral Interpretation. 30
12.8 Securities Issues. 30
12.9 Nondisclosure. 32
12.10 Publicity. 33
12.11 Entire Agreement: Modification. 33
12.12 Exhibits and Recitals. 33
12.13 Counterparts, Facsimile Signatures. 33
12.14 Attorneys Fees. 33
12.15 Parties in Interest. 33
12.16 Severability. 33
12.17 Risk of Loss. 33
12.18 Further Documentation. 34
12.19 RESERVED. 34
12.20 Completion of Exhibits. 34
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AGREEMENT FOR PURCHASE SALE OF MEMBERSHIP INTERESTS
THIS AGREEMENT ("Agreement"), dated as of the 16th day of August, 1999
("Effective Date"), is made by and between PATE FOODS CORPORATION, an Illinois
corporation ("Seller"), and WABASH FOODS, LLC, a Delaware limited liability
company ("Company"), and POORE BROTHERS, INC., a Delaware corporation
("Purchaser" or "Poore Brothers"), with respect to the following:
RECITALS
WHEREAS, Seller is the holder of all of the outstanding membership
interests in Company (the "Membership Interests"); and
WHEREAS, Purchaser desires to purchase, and Seller desires to sell and
transfer to Purchaser, the Membership Interests on the terms and conditions
hereafter set forth; and
WHEREAS, Company desires to cooperate with Purchaser and Seller and provide
all necessary and appropriate assistance to the parties to effect the purchase
and sale transaction contemplated by this Agreement.
NOW, THEREFORE, in consideration of the terms, covenants and conditions
hereinafter set forth, the parties hereto agree as follows:
ARTICLE 1: PURCHASE AND SALE PRICE
1.1 Purchase and Sale of the Membership Interests. At the Closing (defined
herein) and in the manner herein provided, Seller shall sell, deliver and assign
to Purchaser the Membership Interests free and clear of any and all liens and/or
encumbrances, and Purchaser shall purchase the Membership Interests from Seller
on the terms and conditions set forth herein.
1.2 Purchase Price. Subject to the terms and conditions of this Agreement
and in reliance on the representations and warranties of Seller contained
herein, and in consideration of the sale, conveyance, transfer and delivery of
the Membership Interests provided for in this Agreement, Purchaser agrees to pay
to Seller at the Closing an aggregate purchase price ("Purchase Price"), set
forth below and payable as follows:
(1) Issuance to Seller of Four Million Four Hundred Thousand (4,400,000)
common shares of Poore Brothers, Inc., $0.01 par value, that have not been
registered under the Securities Act of 1933 (the "1933 Act"), as amended
("Closing Shares"), which shall carry piggyback registration rights as provided
in the Registration Rights Agreement attached hereto as Exhibit 1.2.1. Purchaser
shall deliver 3,900,000 of the Closing Shares to Seller at Closing and deposit
the remaining 500,000 Closing Shares with the Escrow Agent pursuant to Section
7.18 herein.
(2) Issuance to Seller of a Warrant to purchase Four Hundred Thousand
(400,000) common shares of Poore Brothers, Inc., that have not been registered
under the 1933 Act, at an exercise price of $1.00 per share ("Warrant for
Additional Shares"), subject to the terms set forth herein and in the Warrant
Agreement attached as Exhibit 1.2.2.
1.3 Closing Financial Information.
With the full and good faith cooperation of Purchaser in accessing
relevant information, within a reasonable time prior to the Closing Date, Seller
and Company shall cause to be prepared and delivered to the parties a Statement
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of Liabilities of Company as of the Closing Date ("Closing Liability
Statement"). Reasonably contemporaneous with the Closing, and with the full and
good faith cooperation of Purchaser in assessing relevant information, Seller
and Company shall cause to be prepared a Statement of Assets of Company as of
the Closing Date (the "Closing Statement of Assets"; collectively, with the
Closing Liability Statement, the "Statements"). Each entry in the Statements,
shall be calculated and stated in accordance with generally accepted accounting
principles ("GAAP") applied in a manner consistent with the preparation of
Company's audited balance sheet as of December 31, 1998 (the "Balance Sheet").
1.4 [RESERVED]
1.5 Use of Cash and Working Capital. Purchaser acknowledges that,
notwithstanding any other provision in this Agreement, Company shall be entitled
to utilize any and all working capital and cash available to Company prior to
the Closing for valid business reasons in accordance with Section 4.1 of this
Agreement.
1.6 Accounts and Notes Receivable. Company will deliver to Purchaser a
schedule of all accounts and notes receivable (and the face amounts thereof) of
Company which are reflected on the Closing Statement of Assets within thirty
(30) days following Purchaser's receipt of the Closing Statement of Assets.
1.7 Required Shareholder Approval. Seller understands and acknowledges that
the number of shares of Purchaser's common stock, par value $.01 per share (the
"Common Stock"), presently authorized for issuance pursuant to its Certificate
of Incorporation, as amended (the "Certificate of Incorporation"), is not
sufficient to satisfy Purchaser's obligations to issue the Closing Shares and
the Warrant Shares. Consequently, an amendment to the Certificate of
Incorporation, which requires the approval of Purchaser's shareholders in
accordance with the terms of the Certificate of Incorporation and the Delaware
General Corporation Law, is required to increase the number of authorized shares
of Common Stock to an amount that will be sufficient to satisfy such
obligations. Seller further understands and acknowledges that, pursuant to the
rules and regulations of The Nasdaq Stock Market, Inc. (the "NASDAQ Rules"),
Purchaser is required to obtain, prior to the consummation of the transactions
contemplated by this Agreement, the approval of its shareholders with respect to
(i) the issuances of Common Stock required to be made by Purchaser pursuant to
this Agreement and the Warrant; and (ii) the consummation of the transactions
contemplated by this Agreement. The required approvals of Purchaser's
shareholders referred to in this Section are hereinafter sometimes referred to
collectively as, the "Required Shareholder Approvals". Seller understands and
acknowledges that there can be no assurance from Purchaser or otherwise that any
of the above-mentioned Required Shareholder Approvals will be obtained. In the
event any of the Required Shareholder Approvals are not obtained on or before
October 22, 1999 (as the same is subject to extension under subsection 9.5(b)
below) and, as a result, Purchaser is unable to consummate the transactions
contemplated by this Agreement, Seller's sole remedy will be the payment by
Purchaser of the break-up fee referred to in Article 9 hereof.
1.8 Payment of Taxes and Other Charges. Seller shall pay any
transaction privilege tax, use tax, excise tax or other transfer fee or tax
which may be imposed by any governmental agency with respect to the sale,
transfer, conveyance and assignment of the Membership Interests pursuant to this
Agreement.
ARTICLE 2: REPRESENTATIONS AND WARRANTIES OF
OF SELLER AND COMPANY
The following representations are made to Purchaser:
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2.1 Due Organization of Company, etc.. Seller and Company represent and
warrant that: (a) Company is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Delaware, with all
requisite company power and authority to carry on its business as it is now
being conducted and to own, operate and lease its properties and assets; (b)
Exhibit 2.1.1 lists each of the states where Company is qualified as a foreign
limited liability company; and (c) Exhibit 2.1.2 contains complete and correct
copies of Company's: (i) articles of organization; (ii) operating agreement; and
(iii) good standing certificates from the secretary of state of the State of
Delaware and each of the states listed on Exhibit 2.1.1; and (iv) certificates
of authority for the states listed in Exhibit 2.1.1, each as amended to date.
2.2 Sole Member, Identity of Manager. Seller and Company represent and
warrant that: (a) Seller is the sole Member of Company and the Membership
Interests represent 100% of the issued and outstanding membership interests of
Company; (b) the Membership Interests are validly issued, fully paid and
nonassessable and are owned by Seller, free and clear of all encumbrances or
claims; (c) there are no issued and outstanding options, warrants, rights,
security, contracts, commitments, understanding or arrangements by which Company
is bound to issue any additional membership interest or options to purchase a
membership interest; and (d) Larry Polhill is the sole manager of Company.
2.3 Due Organization of Seller, etc. Seller represents and warrants Seller
is a corporation duly organized, validly existing and in good standing under the
laws of the state of Illinois and is therefore qualified to do business in
Illinois.
2.4 Subsidiaries. Seller and Company represent and warrant Company has no
subsidiaries or investments in any other entity or business operation other than
the business operations which are referred to in this Agreement. Neither Company
nor Seller owns or holds, directly or indirectly or in any beneficial manner,
any interest in Purchaser or any "Affiliate" of Purchaser except as set forth in
Exhibit 2.4 hereto. The term "Affiliate" (including correlative meanings thereof
such as "Affiliated") includes any corporation, partnership or other entity in
which Purchaser, or any subsidiary of Purchaser, holds, directly or indirectly
or in any beneficial manner, any financial interest or, inclusive of natural
persons, is a "controlling person", as that term is used in connection with the
federal securities laws.
2.5 Authorization, etc. Seller represents and warrants Seller has full
corporate power and authority to enter into this Agreement and to carry out the
transactions contemplated hereby.
2.6 No Violation. Seller and Company represent and warrant Company is not
subject to or obligated under any article, certificate of organization or
operating agreement which would be breached or violated by Seller's execution,
delivery and performance of this Agreement. To the knowledge of Seller and
Company, except as set forth on Exhibit 2.6 hereto, Company is not subject to or
obligated under any Law (as herein defined), or material agreement, instrument,
license, franchise or permit which would be breached or violated by Seller's
execution, delivery and performance of this Agreement. Seller will comply with
all applicable Laws in connection with Seller's execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby. When used herein, the term "Law(s)" shall mean, without
limitation, all foreign, federal, state and local laws, statutes, rules,
regulations, codes, ordinances, plans, orders, judicial decrees, writs,
injunctions, notices, decisions or demand letters issued, entered or promulgated
pursuant to any foreign, federal, state or local law.
2.7 Governmental Authorities. Seller represents and warrants that, to the
knowledge of Seller, except as set forth on Exhibit 2.7 hereto, Seller is not
required to submit any notice, report or other filing with, and no consent,
approval or authorization is required by, any governmental or regulatory
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authority in connection with Seller's execution and delivery of this Agreement
and the transfer and conveyance of the Membership Interests to Purchaser as
contemplated hereby.
2.8 Assets and Net Sales. Seller and Company represent and warrant neither
Company nor any "Ultimate Parent Entity" (as defined in 16 C.F.R. 801.1(a)
(1988)) of Company immediately prior to the purchase and sale transaction
contemplated hereunder is a person that has total assets or annual net sales of
$10,000,000 or more within the meaning of 15 U.S.C. Section 18a.
2.9 Financial Statements. Seller and Company represent and warrant that
Seller and Company have heretofore delivered to Purchaser true and complete
copies of Company's balance sheets as of the end of each calendar quarter,
beginning with the calendar quarter ending June 30, 1998; and continuing with
the calendar quarter ending March 31, 1999, and statements of income for the
quarters then ended, each such balance sheet and statement of income (except for
the 1998 year-end balance sheet (the "Balance Sheet") and the 1998 income
statement (the "Income Statement"), which were prepared by Clifton Gunderson,
PLC) being internally prepared. All such financial information fairly presents
the financial position (unaudited, where internally prepared, but subject only
to general ordinary and recurring year-end adjustments) of Company as of the
respective dates thereof, and such statements of income fairly present the
results of operations for the period therein referred to, all in accordance with
generally accepted accounting principles consistently applied throughout the
periods indicated (except as stated therein or in the notes thereto). December
31, 1998 shall hereinafter be referred to as the "Financial Statement Date."
2.10 No Material Undisclosed Liabilities, Claims, etc. Seller and Company
represent and warrant that, to the knowledge of Seller and Company, except for:
(a) liabilities reflected or reserved against in the Balance Sheet; and (b)
regular and usual liabilities and obligations incurred in the ordinary course of
business consistent with past practices; and (c) those liabilities, obligations
and claims described on Exhibit 2.10 hereto, Company does not have any material
liabilities or obligations nor is it subject to any material claims, except
liabilities, obligations or claims that may be contingent or unmatured; however,
Seller and Company represent and warrant they have no knowledge of any specific
incident, occurrence or event giving rise to any such contingent or unmatured
liability, obligation or claim.
2.11 Absence of Certain Changes. Seller and Company represent and warrant
that, to the knowledge of Seller and Company, except as set forth on Exhibit
2.11.1 hereto, since the Financial Statement Date, there has not been: (a) any
material adverse change in the business, prospects, financial condition,
earnings or operations of Company or any material loss or curtailment of any
material customer accounts of Company; (b) any damage, destruction or loss, not
adequately covered and indemnified by insurance, materially adversely affecting
Company's properties and business; (c) any redemption or other acquisition of
membership interests of Company; (d) any material increase in the compensation
payable by Company to its members, managers, officers or those employees listed
on Exhibit 2.11.2, or any adoption of or material increase in any bonus,
insurance, pension or other employee benefit plan, payment or arrangement made
to, for or with any such party; (e) any entry by Company into any commitment or
transaction for the purchase, lease or other acquisition of capital equipment or
other capital items with an individual purchase or lease value of more than
$5,000, including, without limitation, any related borrowing, other than the
capital expenditures identified on Exhibit 2.32; (f) any change by Company in
accounting methods, practices or principles adopted by Company since the
Financial Statement Date; (g) any adoption of any statute, rule, regulation or
order which would materially and adversely affect the operations of Company; (h)
any termination or waiver of any material rights of value to the business of
Company; (i) any other transaction or event that would materially and adversely
affect the operations of Company other than in the ordinary course of business
of Company; (j) any material transaction or conduct by Company inconsistent with
past business practices; (k) any adoption or material amendment of any
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collective bargaining, bonus, profit sharing, compensation, pension, retirement,
deferred compensation or other plan, agreement, trust, fund or arrangement for
the benefit of employees; or (l) any agreement or understanding made or entered
into by Company to do any of the foregoing.
2.12 Contracts. Seller and Company represent and warrant that, to the
knowledge of Seller and Company, except as set forth on Exhibit 2.12 hereto,
Company is not in default or alleged to be in default under any material
contract or agreement nor does Seller have knowledge of any default by any other
party to any material contract or agreement entered into with Company and
neither Seller nor Company has knowledge of any event, condition or occurrence
which, after notice or lapse of time, or both, would constitute a material
default under any such material contract or agreement.
2.13 True and Complete Copies. To the knowledge of Seller and Company,
copies of all agreements, contracts and documents delivered and to be delivered
hereunder by Seller or Company are, and will be, true, correct and complete
copies of such agreements, contracts and documents. All written summaries of
oral agreements, if any, are, and will be, to the knowledge of Seller and
Company, true and complete.
2.14 Title and Related Matters. Seller and Company represent and warrant
that, to the knowledge of Seller and Company, Company has good and marketable
title to the fixed assets and personal property reflected in the Balance Sheet
or acquired after the date thereof, and all Company intangibles (except
inventories disposed of in the ordinary course of business and consistent with
past practices) free and clear of all mortgages, security interest liens,
pledges, claims, escrows, options, rights of first refusal, indentures,
easements, licenses, security agreements or other agreements, arrangements,
contracts, commitments, understandings, obligations, charges or encumbrances of
any kind or character, except as reflected on the schedule of liens and
encumbrances attached hereto as Exhibit 2.14. To the knowledge of Company and
Seller, Company: (a) owns or leases, directly and indirectly, all of the
material assets and properties; and (b) is a party to all licenses and other
agreements, presently used or necessary to carry on the business of Company as
presently conducted.
2.15 Real Property. Seller and Company represent and warrant that Company
owns no real property and is not a tenant under any lease of real property used
by Company except as described on Exhibit 2.15. Seller and Company represent and
warrant, except as set forth on Exhibit 2.15 hereto: (a) to the knowledge of
Seller and Company, neither Company nor the lessor(s) under any such lease is in
default or alleged to be in default under any real property lease; (b) neither
Company nor Seller has knowledge of any event or occurrence which, with or
without notice or lapse of time, would constitute a material default thereunder
entitling either party to terminate the lease; and (c) except for a requirement
to obtain the lessor's and any prior lienholder's prior written consent, the
continuation of all such leases will not be materially and adversely affected by
the transfer and sale of the Membership Interests contemplated by this Agreement
or, if any would be so affected, Seller and Company warrant they will cause an
appropriate written consent to such transaction to be delivered to Purchaser
prior to the Closing Date at no material cost or other material adverse
consequences to Company.
2.16 Premises. Seller and Company represent and warrant that, to the
knowledge of Seller and Company, except as set forth on Exhibit 2.16 hereto,
each parcel of real property, building, structure and improvement owned, leased
or otherwise utilized by Company (collectively, the "Premises") substantially
conforms to all applicable Laws, including zoning regulations and that, upon the
sale of the Membership Interests to Purchaser, Company will not be prohibited
from continuing to use such properties, buildings, structures or improvements,
for the purposes for which they are now utilized.
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2.17 Personal Property. To the knowledge of Seller and Company, Company's
personal property is in the aggregate and reasonably good condition and working
order and each individual item of personal property which would cost an excess
of $5,000.00 to replace is in reasonably good condition and working order.
2.18 No Disposition of Assets. Seller and Company represent and warrant
that, to the knowledge of Seller and Company, except as set forth on Exhibit
2.18 hereto, there has not been, since the Financial Statement Date, any sale,
lease or any other disposition or distribution by Company of assets or
properties reflected on the Balance Sheet having an aggregate fair market value
of more than $5,000 or any other subsequently acquired assets having an
aggregate fair market value of more than $5,000, except transactions in
inventory in the ordinary and regular course of business consistent with past
practices or as otherwise known to, and previously approved by, Purchaser.
2.19 Litigation. Seller and Company represent and warrant that, to the
knowledge of Seller and Company, except as set forth on Exhibit 2.19 hereto,
there is no suit, action, investigation or proceeding pending or threatened
against Company or Seller which, if adversely determined, would materially and
adversely affect the business, prospects, operations, earnings, properties or
the condition, financial or otherwise, of Company, nor do Company or Seller have
knowledge of any judgment, decree, injunction rule or order of any court,
governmental department, commission, agency, instrumentality or arbitrator
outstanding against Company having any such effect.
2.20 No Partnerships or Joint Ventures. Seller and Company represent and
warrant that except as set forth on Exhibit 2.20 hereto, Company is not a party
to any joint venture or partnership or other profit or loss sharing agreement.
2.21 Tax Returns and Audits. Seller and Company represent and warrant to
Purchaser that Seller does not pay any tax at the entity level (except for AD
VALOREM real and personal property taxes) including, without limitation, income
or transaction privilege or sales taxes. No liens or obligations relating to
said taxes will bind or affect Company or Purchaser post-Closing. Except as
disclosed on Exhibit 2.21, within the times and in the manner prescribed by law,
Company has filed all federal, state and local tax returns required by any
applicable tax Law.
2.22 Government Contracts. Seller and Company represent and warrant that,
to the knowledge of Seller and Company, except as set forth on Exhibit 2.22
hereto, no material contract or other material aspect of the business of Company
is subject to the Armed Services Procurement Regulations or other regulations of
any governmental agency or that Company has bid on or been awarded any "small
business set aside contract", any other "set aside contract" or other order or
contract requiring small business or other special status at any time since its
inception.
2.23 Compliance with Law.
(a) Seller and Company represent and warrant that, to the knowledge of
Seller and Company, except as set forth on Exhibit 2.23.1 hereto, Company has
not previously failed or is currently failing, to comply with any applicable
Laws relating to its business or the operation of its assets where such failure
or failures would individually, or in the aggregate have a material adverse
effect on the financial condition, business, operations or prospects of Company.
Except as set forth on Exhibit 2.23.1 hereto, neither Company nor Seller has
knowledge that Company is not materially in compliance with all applicable Laws
relating to: (i) anti-competitive practices; (ii) price fixing; (iii) health and
safety; and (iv) the environment. Except as set forth on Exhibit 2.23.1 hereto,
neither Company nor Seller has knowledge of any current proceedings of record or
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threatened proceedings, nor has either party received written notice from any
governmental or regulatory authority containing any charge or allegation of a
violation by Company of any Law, including, without limitation, any requirement
of the United States Federal Trade Commission, any state or foreign franchise
agency or regulatory authority, OSHA or any pollution or environmental control
agency (including air and water).
(b) Seller and Company represent and warrant that, to the knowledge of
Seller and Company, Exhibit 2.23.2 contains copies of all reports of inspections
by representatives of any federal, state or local governmental entity or agency
of the business and properties of Company since its organization through the
Effective Date hereof under OSHA and under all other applicable health and
safety Laws. Seller and Company represent and warrant, except as described in
Exhibit 2.23.2 there is no other written notice received by Company of any
actual or alleged violation by Company of any other material registration,
safety, health, environmental, anti-competitive or employment practice Laws that
would materially and adversely affect the financial condition, business, or a
material portion of the assets, operations, prospects, or earnings of Company.
2.24 Absence of Certain Business Practices. Seller and Company represent
and warrant that, except as set forth in Exhibit 2.24, neither Seller or
Company, or, to the knowledge of Seller and Company, any person employed by,
owning a direct or beneficial interest in, or Affiliated with, Seller or
Company, nor any officer, employee, member, manager or agent of Company or
Seller, any other person or entity acting on behalf of or associated with
Company or Seller, or any other entity, directly or indirectly owned or
controlled by Seller or Company, acting alone or together, has: (a) received,
directly or indirectly, any illegal rebates, payments, commissions, promotional
allowances or other economic benefit, regardless of its nature or type, from any
customer, supplier, trading company, shipping company, governmental employee or
other entity or individual with whom Company has done business directly or
indirectly; or (b) directly or indirectly, given or agreed to give any illegal
gift or similar benefit to any customer, supplier, trading company, shipping
company, governmental employee or other person or entity who is or may be in a
position to help or hinder the business of Company (or assist Company in
connection with any actual or proposed transaction) which: (i) might subject
Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding; (ii) if not given in the past, have had a material
adverse effect on the assets, business or operations of Company as reflected in
the Balance Sheet; or (iii) if not continued in the future, might adversely
affect the assets, business, operations or prospects of Company or which might
subject Company to suit or penalty in any private or governmental litigation or
proceeding.
2.25 ERISA and Related Employee Benefit Matters.
(a) Seller and Company represent and warrant that Exhibit 2.25.1 lists
each "employee welfare benefit plan" (within the meaning of Section 3 (l) of the
Employee Retirement Income Security Act of 1974 ("ERISA")) maintained by Company
or to which Company contributes or is required to contribute, including any
multi-employer plan ("Welfare Benefit Plans") and sets forth as of the most
recent valuation date: (i) the amount of any liability of Company for payments
due with respect to any Welfare Benefit Plan; (ii) the amount of any payment
made and to be made, stated separately, by Company with respect to any Welfare
Benefit Plan for the plan year during which the Closing is to occur; and (iii)
with respect to any Welfare Benefit Plan to which Section 505 of the Code
applies, a statement of assets and liabilities for such Welfare Benefit Plan as
of the most recent valuation date. Without limiting the foregoing, Exhibit
2.25.1 discloses any obligations of Company to provide retiree health benefits
to current or former employees of Company.
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(b) Seller and Company represent and warrant that Company does not and
has never maintained or contributed to any "employee pension benefit plan"
(within the meaning of Section 3(2) of ERISA).
(c) Seller and Company represent and warrant that, to the knowledge of
Seller and Company, except as shown on Exhibit 2.25.3: (a) any Welfare Benefit
Plans maintained by Company complies with the provisions of ERISA and the Code
and all other statutes, orders, governmental rules and regulations applicable to
such Welfare Benefit Plans; or (b) Company has performed all of its material
obligations currently required to have been performed under all such Welfare
Benefit Plans; or (c) there are no actions, suits or claims (other than routine
claims for benefits) pending or threatened against or with respect to any
Welfare Benefit Plans, or of facts that give rise to any actions, suits or
claims (other than routine claims for benefits) against such plans.
(d) Seller and Company represent and warrant that, to the knowledge of
Seller and Company, except as described on Exhibit 2.25.4: (a) each Welfare
Benefit Plan, if any, has been administered to date in compliance with the
requirements of ERISA and the Code; or (b) no plan fiduciary of any Welfare
Benefit Plan has engaged in: (i) any transaction in violation of Section 406(a)
or (b) of ERISA; or (ii) any "prohibited transaction" (within the meaning of
Section 4975(c)(1) of the Code) for which no exemption exists under Section 408
of ERISA or Section 4975(d) of the Code.
(e) Seller and Company represent and warrant that Exhibit 2.25.5 lists
each fringe benefit, profit sharing, deferred compensation, bonus, pension,
retainer, consulting, retirement, welfare or other incentive plan or agreement,
and any other employee benefit plan, arrangement or commitment not previously
listed on the Exhibits to this Section 2.25 that is maintained by Company or to
which Company contributes or is required to contribute.
(f) Seller and Company represent and warrant that, to the knowledge of
Seller and Company, Exhibit 2.25.6 contains a complete list of all employees of
Company as of April 1, 1999, the amount of vacation pay accrued to each such
employee as of said date, and identifies each employment agreement not
terminable on 30 days or less written notice.
(g) Copies of Plans. Seller and Company represent and warrant that, to
the knowledge of Seller and Company, Exhibit 2.25.7 lists and contains true and
complete copies of each Welfare Benefit Plan annual reports (Form 5500 series)
including, without limitation, all schedules thereto and all financial
statements with attached opinions of independent accountants and current summary
plan descriptions, filed by Company with any governmental agency since Company's
inception.
(h) Continuation Coverage Requirements for Health Plans. Seller and
Company represent and warrant that, to the knowledge of Seller and Company,
except as described on Exhibit 2.25.8, any group health plan of Company
(including any plans of Affiliates of Company that must be taken into account
under Section 4980B of the Code) has been operated in compliance with the group
health plan continuation coverage requirements of Section 4980B of the Code and
Title I, Part 6 of ERISA.
(i) Valid Plans. Seller and Company represent and warrant that, except
as described on Exhibit 2.25.9, Company and Seller have no knowledge (a) that
any Welfare Benefit Plan is not legal, valid and binding and in full force and
effect or that there are any actual or alleged defaults thereunder; or (b) the
rights of Company thereunder will be impaired by the consummation of the
purchase and sale of the Membership Interest contemplated by this Agreement; or
(c) any rights of Company thereunder will not be enforceable by Purchaser at and
after the Closing without the consent or agreement of any other party.
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2.26 Intellectual Property. Except as set forth in Exhibit 2.26 and this
Section, neither Seller nor Company make any representation or warranty
whatsoever with respect to Company's right, title, and interest in or its right
to use any Intellectual Property. Exhibit 2.26 sets forth a general description
of the facts and circumstances relating to the acquisition by Company of any
rights or interests in the copyrights, trademarks, service marks, patent
applications and registrations of the foregoing Intellectual Property. Company
has received no notice from any third party that the products or services
currently manufactured, distributed or provided by Company, or processes used by
Company, violate any license or infringe upon any intellectual property rights
or similar rights of any third party and, to the knowledge of Company and
Seller, such products, services or processes do not violate any license or
infringe upon any intellectual rights or similar rights of any third party.
2.27 Warranties. Except as set forth in Exhibit 2.27, neither Seller nor
Company has knowledge that there are any material claims existing or threatened
under or pursuant to any warranty of Company, whether expressed or implied, on
products or services sold by Company through the Closing.
2.28 Labor Relations. Seller and Company represent and warrant that, except
as set forth in Exhibit 2.28, neither Company nor Seller has knowledge that
Company has experienced any labor strikes, work stoppages or received any
demands for collective bargaining by any union or labor organization since
Company's formation or that any collective bargaining relationship exists
between Company and any union. Seller and Company represent and warrant, except
as set forth in Exhibit 2.28, to the knowledge of Company and Seller: (a)
Company has not experienced nor is experiencing any dispute or controversy with
any union or other organization of Company's employees or notice of any
threatened dispute or controversy; (b) there are no pending arbitration
proceedings and Company has received no notice of any threatened proceedings.
Seller and Company represent and warrant, except for those employees listed on
Exhibit 2.28, and those whose resignations will be sought by Purchaser
hereunder, to the knowledge of Company and Seller, no employees of Company and
no officers of Company have resigned, advised Company of an intention to resign
from such employment or refused to continue employment with Company since the
Financial Statement Date.
2.29 Insurance. Seller and Company represent and warrant that Exhibit 2.29
lists and includes copies of all certificates of coverage regarding all of
Company's existing insurance policies, the premiums therefore and the coverage
of each policy. Seller and or Company has heretofore provided to Purchaser true,
correct and complete copies of all such insurance policies and all such
insurance policies are in full force and effect. Seller and Company represent
and warrant that Company has not received any notice from any party stating or
otherwise indicating that the polices listed on Exhibit 2.29 are not in full
force and effect except those which shall expire by their terms on or prior to
the Closing Date.
2.30 Liability for Products. Seller and Company represent and warrant that,
except as set forth in Exhibit 2.30, neither Company nor Seller has knowledge of
any claims against Company for injury to person or property of its employees or
any third parties suffered as a result of the provision, sale or distribution,
at wholesale or at retail, of any product of Company, including, but not limited
to, claims arising out of the defective or unsafe nature of its products.
2.31 Environmental Matters.
(a) For purposes of this Section:
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(1) "Hazardous Materials" means any hazardous, infectious or
toxic substance, chemical, pollutant, contaminant, emission or waste which is or
becomes regulated by any local, state, federal or foreign authority. Hazardous
Materials include, without limitation, anything which is: (i) defined as a
"pollutant" pursuant to 33 U.S.C.'1362(6); (ii) defined as a "hazardous waste"
pursuant to 42 U.S.C. `6921; (iii) defined as a "regulated substance" pursuant
to 42 U.S.C. `6991; (iv) defined as a "hazardous substance" pursuant to 42
U.S.C.'9601(14); (v) defined as a "pollutant or contaminant" pursuant to 42
U.S.C. `9601(33); (vi) petroleum; (vii) asbestos; and (viii) polychlorinated
biphenyl.
(2) "Environmental Laws and Regulations" means all limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in any Laws relating to pollution, nuisance
or the environment including, without limitation, (i) the Federal Clean Air Act,
42 U.S.C. Sections 7401 et seq.; (ii) the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. Sections 9601 et seq.; (iii) the
Federal Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Sections
1101 et seq.; (iv) the Federal Insecticide, Fungicide and Rodenticide Act, 7
U.S.C. Sections 136 et seq.; (v) the Federal Water Pollution Control Act, 33
U.S.C. Sections 1251 et seq.; (vi) the Solid Waste Disposal Act, 42 U.S.C.
Sections 6901 et seq.; (vii) the Toxic Substances Control Act, 15 U.S.C.
Sections 2601 et seq.; (viii) Laws relating in whole or part to emissions,
discharges, releases or threatened releases of any Hazardous Material, whether
federal, state or local; and (ix) Laws relating in whole or part to the
manufacture, processing, distribution, use, coverage, disposal, transportation
storage or handling of any Hazardous Material.
(b) Seller and Company represent and warrant that, except as set forth
in Exhibit 2.31.1, neither Company nor Seller has knowledge that Company has
failed to obtain or is required to obtain any permit, license or other
authorization which Company does not currently possess in order to comply with
any Environmental Law or Regulation with respect to Company's operations as
presently conducted.
(c) Seller and Company represent and warrant that, to the knowledge of
Company and Seller and except as set forth in Exhibit 2.31.2, Company has not
received notice from any governmental or regulatory authority of any civil,
criminal, administrative or other action, suit, demand, claim, hearing, notice
of violation, proceeding, investigation, or demand pending, received, or
threatened against Company under any Environmental Law or Regulation.
(d) Seller and Company represent and warrant, to the knowledge of
Company and Seller, Exhibit 2.31.3 contains complete copies of all environmental
investigations, assessments, audits, studies, tests and related materials in
possession of Company, or known to Company to exist, which relate to the current
or prior operations of Company or any real property now or previously owned,
operated, leased or utilized by Company.
(e) Seller and Company represent and warrant that, to the knowledge of
Seller and Company, Company has not received notice from any governmental or
regulatory authority alleging or charging that Company's business and products
have not always been conducted, manufactured, and distributed, or are not
currently being conducted, manufactured and distributed, in accordance with all
applicable Environmental Laws or Regulations.
2.32 Capital Expenditures. Seller and Company represent and warrant Company
has outstanding commitments for capital expenditures as set forth in Exhibit
2.32, which Exhibit includes a schedule of substantially all moneys disbursed on
account of capital expenditures made by Company between the Financial Statement
Date and the Effective Date. Company warrants that no capital expenditures or
commitments will be made by Company except as set forth in Exhibit 2.32 or with
Purchaser's prior written consent.
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2.33 Suppliers. Seller and Company represent and warrant that, except as
set forth in Exhibit 2.33, neither Company nor Seller has knowledge that any
supplier of goods or services to Company that has made sales or provided
services representing, individually, more than $25,000.00 in payments or
contractual commitments by Company within the last 12 months has: (i) ceased, or
indicated any intention to cease, doing business with Company, or (ii) changed
or indicated any intention to change any material terms or conditions for future
supply or sale of products or services from the terms or conditions that existed
with respect to the supply or sale of such products or services during the 12
month period ending on the Effective Date.
2.34 Dealings with Affiliates. Seller and Company represent and warrant
that Exhibit 2.34 sets forth a complete list (including the parties) and copies
(or a detailed summary in the case of an oral agreement) of all material oral or
written contracts, arrangements or other agreements (except employment
agreements entered into in the ordinary course of business) to which Company is,
will be, or has been a party at any time from the organization of Company to the
Closing Date, and to which any other Affiliate of Company was, or is also, a
party.
2.35 Business Generally. Seller and Company represent and warrant that, to
the knowledge of Company and Seller, since December 31, 1998, there have been no
events, transactions or information which could reasonably be expected to have a
material adverse effect on the business and operations of Company, except as set
forth in Exhibit 2.35, and Company is not a party to any agreement, contract or
covenant limiting Company from competing in any kind of business or with any
person or other entity in any geographic area.
2.36 Bank Accounts. Seller and Company represent and warrant that Exhibit
2.36 is a list of all bank accounts, lock boxes, post office boxes and safe
deposit boxes maintained in the name of or controlled by Company and the names
of the persons having access thereto.
2.37 Compensation. Seller and Company represent and warrant that Exhibit
2.37 lists the most recent job title and total annual remuneration (including,
without limitation, salary, commissions and bonuses) for each officer, member,
manager, employee or consultant of Company who received total remuneration in
excess of $40,000.00 from Company during any fiscal year since Company's
inception or who is expected to receive total remuneration in excess of such
amount during the current fiscal year. Company represents and warrants it has
not, since the Financial Statement Date, and will not prior to the Closing Date,
increase or commit to increase the base compensation, commission bonus or the
rate (or any other component) of total compensation payable or to become payable
by Company to any employee (including any manager or officer), whether such
person is listed on Exhibit 2.37 or not, and no extraordinary compensation or
bonus will be paid by Company without prior consent of Purchaser.
2.38 Disclosure of Changes. Seller and Company represent and warrant that
each will promptly notify Purchaser in writing of any of the following events or
occurrences known to wither party: (a) any material threat or the commencement
of a lawsuit or claim against Seller or Company materially affecting Company,
the operation and conduct of Company's business or its prospects or challenging
the validity or propriety of, or seeking to enjoin or to set aside the purchase
and sale of the Membership Interests contemplated by this Agreement; (b) any
material adverse change in the financial condition of Company or Company's
business; or (c) any material change in any representations or warranties of
Seller or Company set forth in this Agreement.
2.39 Knowledge. For purposes of this Agreement, the term "known",
"knowledge" or phrase "to the knowledge of Seller and Company" or variants
thereof, shall mean the actual knowledge of facts, circumstances, conditions,
occurrences or events known to any officer, director, member, ten percent (10%)
or greater shareholder or key employee (i.e., Don Addington, Gary Folk and/or
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James Denman) of either Seller or Company. It is understood that none of the
foregoing persons have any affirmative duty to further investigate Company in
connection with this purchase and sale transaction.
2.40 Materiality. When used herein, the term "Material" (or variants
thereof) shall mean a change or variation in any item to which the adjective is
applied which would either cause that item to vary by more than ten percent
(10%) or which, if the item came to pass, would cause a variance of more than
ten percent (10%) in the earnings or Balance Sheet assets of Company. However,
no item or series of items shall be deemed "material" unless the net adverse
effect thereof is greater than $20,000.00.
2.41 Joint and Several Representations. Seller and Company acknowledge
that, although representations are stated as being made by Seller and Company,
in the event any representation hereunder is false, such representation shall be
deemed solely to have been made by Seller and Purchaser shall have full recourse
against the Escrowed Shares (as herein defined) for any Damages (as herein
defined) caused thereby. Seller hereby waives and discharges any right of
contribution, reimbursement, subrogation or otherwise against Company for the
falsehood of any representation made hereunder, Seller acknowledging that
Purchaser is relying upon the Escrowed Shares to reimburse Purchaser for
breached representations and warranties and would not seek recompense or
recourse against, if the transaction contemplated hereby close, its controlled
Affiliate, Company, nor would Purchaser accept any third party right of action
against Company, thereby diluting Purchaser's assets in such event.
ARTICLE 3: REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller, as follows:
3.1 Corporate Organization, etc. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the state of Delaware
and is therefore qualified to do business in Delaware.
3.2 Capitalization. As of the date of this Agreement, Purchaser has
authorized capital stock consisting of 15,000,000 shares of Common Stock, par
value $.01 per share and 50,000 shares of preferred stock, par value $100.00 per
share.
3.3 Authorization, etc. In the event that both: (i) Purchaser's Board of
Directors approves and ratifies this Agreement and the transactions contemplated
hereby, and (ii) all Required Shareholder Approvals are obtained, Purchaser will
have full corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby and no other corporate
proceedings on its part will be necessary to authorize this Agreement or the
transactions contemplated hereby.
3.4 No Violation. Upon fulfillment of Purchaser's conditions precedent
described in Sections 7.2, 7.12, 7.13 and 7.14 below, Purchaser will not be
subject to or obligated under any certificate of incorporation, bylaw, Law or
any agreement or instrument, or any license, franchise or permit, which would be
breached or violated by its execution, delivery or performance of this
Agreement. Purchaser will comply with all known Laws in connection with its
execution, delivery and performance of this Agreement and the transactions
contemplated hereby.
3.5 Governmental Authorities. Upon fulfillment of Purchaser's conditions
precedent described in Sections 7.2, 7.13 and 7.14 below, Purchaser will not be
required to submit any notice, report or other filing with, and no consent,
approval or authorization is required by, any governmental or regulatory
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authority in connection with Purchaser's execution or delivery of this Agreement
or the consummation of the transactions contemplated hereby, except for
necessary Articles of Incorporation amendments reflecting, if it is adopted, the
Required Shareholder Approvals and necessary securities regulatory filings
and/or notices.
ARTICLE 4: COVENANTS OF SELLER AND COMPANY
Except as otherwise consented to or approved by Purchaser, from the date of
execution hereof until the Closing, Seller and Company, and each of them,
covenant and agree as set forth in this Article 4 below. Company, however, shall
not be responsible for any actions in breach of, or inconsistent with its
covenants and agreements herein, taken by, or performed by Company at the
direction of Purchaser pursuant to that certain Management Agreement, by and
between Purchaser and Company, dated effective as of April 1, 1999 (the
"Management Agreement"). With respect to the covenants and agreements of Company
referenced herein, Seller covenants and agrees to cause Company, subject to the
terms of the Management Agreement to act or refrain from acting in a manner
inconsistent with such covenants and agreements.
4.1 Regular Course of Business. Company will: (i) operate its business in
the ordinary course, diligently and in good faith, consistent with past
management and operating practices; (ii) maintain substantially all of its
properties in customary repair, order and condition, reasonable wear and tear
excepted; (iii) maintain (except for expiration due to lapse of time) all leases
and contracts described herein in effect without change except as expressly
provided herein or except as caused by the actions or elections of third parties
outside the control of Company; (iv) substantially comply with the provisions of
all Laws applicable to the conduct of its business; (v) not knowingly cancel,
release, waive or compromise any debt, claim or right in its favor having a
value in excess of $1,000 other than in connection with returns for credit or
replacement in the ordinary course of business; and (vi) maintain insurance
coverage up to the Closing Date in current amounts.
4.2 Amendments. Except as required in connection with the transactions
contemplated in this Agreement, no change or amendment shall be made in
Company's Articles of Organization or Operating Agreement. Company will not
merge into or consolidate with any other limited liability company, corporation
or person, or change the character of its business.
4.3 No Transfer of Membership Interests. Unless and until this Agreement
expires or is terminated by the act of any party as permitted herein, Seller
shall not, directly or indirectly, exchange, transfer, assign, pledge or
encumber the Membership Interests, nor shall Seller grant, directly or
indirectly, any right to acquire, dispose of, vote or otherwise control in any
manner such Membership Interests except to Purchaser at Closing. Seller shall
not offer any interest in the Membership Interests, and Company shall not issue
any other membership interests or offer any of Company's assets for sale or
exchange to a third party nor will Seller or Company entertain any negotiation
from a third party respecting the same. If Seller shall breach its obligation
herein to refrain from offering any interest in the Membership Interests to a
third party, Seller shall be liable to Purchaser for liquidated damages in the
amount of Two Hundred Fifty Thousand Dollars ($250,000.00) as provided in
subsection 9.4(c) below, without Purchaser, to the fullest extent permitted by
law, waiving any other claims or causes of action Purchaser may have in the
event of such a breach.
4.4 Bonuses. Prior to Closing, Company will not pay, set aside, accrue,
agree to or become liable in any manner for any bonus, of any nature or type, to
Seller or to any employee, manager or officer of Company.
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4.5 Capital and Other Expenditures. Company will not make any capital
expenditures, or commitments with respect thereto, except as set forth in
Exhibit 2.32. Company will not prepay any debt or obligation (except for
prepaying trade accounts payable in the normal course of business to take
advantage of cash discounts).
4.6 Borrowing. Company will not: (i) incur, assume or guarantee any
indebtedness or capital leases; or (ii) create or permit to become effective any
mortgage, pledge, lien, encumbrance or charge of any kind upon its assets other
than in the ordinary course of business.
4.7 Other Commitments. Company will not enter into any transaction or make
any commitment or incur any obligations except in the ordinary course of
business consistent with past practices which individually exceed the sum of
$5,000 or, in the event of a related series of transactions, in the aggregate
exceed the sum of $10,000 without the prior consent of Purchaser.
4.8 Interim Financial Information. Company will prepare and deliver to
Purchaser and Seller unaudited monthly financial statements of Company within
twenty (20) business days following the end of each month ending between the
Financial Statement Date and the Closing Date certified by Company's President
or Manager as having been prepared in accordance with procedures employed by
Company in preparing prior monthly financial statements for internal purposes.
4.9 Full Access and Disclosure.
(a) Company shall afford to Purchaser and its counsel, accountants and
other authorized representatives access during business hours to Company's
plants, properties, books and records in order that Purchaser may have full
opportunity to make such reasonable investigations as it shall desire to make of
the affairs of Company and Company will cause its officers, members, managers
and employees to furnish such additional financial and operating data and other
information as Purchaser shall from time to time reasonably request.
(b) From time to time prior to the Closing Date, Company will promptly
supplement or amend in writing information previously delivered to Purchaser
with respect to any matter hereafter arising which, if existing or occurring at
the date of this Agreement, would have been required to be set forth or
disclosed.
4.10 Consents. Company will exert its reasonable best efforts to obtain on
or prior to the Closing Date all consents necessary for the consummation of the
transactions contemplated hereby.
4.11 Further Assurances. Company and Seller, directly and through their
respective legal counsel, will cooperate with Purchaser at all times and in all
reasonable manners requested by Purchaser and its counsel in endeavoring to
obtain the Required Shareholder Approvals or otherwise to fulfill Purchaser's
obligations under federal or state securities laws or regulations, NASDAQ Rules
or any other securities or similar law, rule or regulation applicable to
Purchaser or the transactions or the related proxy statements contemplated
hereby. Company and Seller further agree to cooperate in reviewing any proxy
statements for accuracy.
4.12 Fulfillment of Conditions. Seller and Company will take all
commercially reasonable steps and exert their good faith best efforts to perform
all necessary or desirable acts, and proceed diligently and in good faith, to
satisfy each condition to the obligations of Purchaser contained in this
Agreement and will not intentionally take or fail to take any action that could
reasonably be expected to result in the nonfulfillment of any such condition.
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ARTICLE 5: COVENANTS OF PURCHASER AND COMPANY
Except as otherwise consented to or approved by Seller, from the Effective
Date and continuing after the Closing as provided herein, Purchaser and Company
covenant and agree as set forth in this Article 5 below. Company, however, shall
not be responsible to Purchaser for any actions in breach of, or inconsistent
with its covenants and agreements herein, taken by, or performed by Company
after the Closing or at any time at the direction of Purchaser pursuant to the
Management Agreement. With respect to the covenants and agreements of Company
relating to the period following the Closing, Purchaser covenants and agrees to
cause Company to act and/or to refrain from acting in a manner inconsistent with
such covenants and agreements. Prior to Closing, pursuant to the Management
Agreement, Purchaser agrees not to take any knowing and willful steps which
would cause Company to act or refrain from acting in a manner consistent with
such covenants and agreements.
5.1 Confidentiality. Purchaser, on behalf of itself, and its directors,
officers, employees and agents, covenants and agrees to treat in confidence all
confidential and proprietary information provided by Seller and Company to
Purchaser or any of its Affiliates, employees, officers, and agents regarding
Company or its business, except information provided to it which is publicly
available or becomes publicly available through no act of Purchaser, or which is
disclosed to Purchaser by a third party which did not acquire the information
under an obligation of confidentiality. Purchaser shall take all reasonable
measures necessary to prevent disclosure of such confidential and proprietary
information to third parties without the prior written consent of Seller or
Company. Seller and Company agree that disclosure of information concerning
Company and the contemplated purchase and sale transaction that is not
confidential or proprietary to Company, and determined by a Purchaser's legal
counsel to be necessary to fulfill Purchaser's reporting requirements under
applicable securities laws, shall be permitted hereunder without such consent.
In the event of the termination of this Agreement prior to the Closing, at the
request of Seller or Company, Purchaser shall promptly return to Seller or
Company, as the case may be, all copies of confidential and proprietary
information previously provided to Purchaser, and Purchaser or shall not retain
any copies of the same.
5.2 Books and Records. Purchaser and Company covenant and agree to preserve
and keep Company's books and records for such period as Purchaser shall retain
same, but in no event less than a period of three (3) years from the Effective
Date, and shall, during such period of retention or for at least three (3)
years, make such books and records available to Seller and former officers,
members and managers of Seller and Company for any reasonable purpose. It is
understood that Company may retain, either in so-called "hard copy" and/or in
electronic media, copies of all such books and records available at Closing.
5.3 Fulfillment of Conditions. Purchaser will take all reasonable steps and
exert its good faith best efforts to perform all necessary or desirable acts,
and proceed diligently and in good faith, to satisfy each condition to the
obligations of Seller contained in this Agreement and will not take or fail to
take any action that could reasonably be expected to result in the
nonfulfillment of any such condition.
5.4 Approval of Board of Directors. Purchaser warrants that it will cause
its Board of Directors to formally consider and act upon a proposed resolution
that it approve and ratify the execution and delivery of this Agreement within
ten (10) days following the Effective Date, or such later date as Seller may
subsequently agree to in writing. Seller and Company agree that if Purchaser's
Board of Directors declines, for any reason whatsoever, to approve and ratify
this Agreement as provided herein, neither Seller nor Company will pursue any
action against Purchaser, Seller and Company acknowledging that the only
obligation of Purchaser (or of its officers, directors or agents) in this regard
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is to bring the matter before its Board of Directors for consideration within
ten (10) days of the Effective Date of this Agreement.
5.5 Third Party Consents and Approvals. Purchaser warrants that it will
make all reasonable good faith efforts to obtain prior to Closing, or such other
date agreed to in writing by Seller, the consent and approval of all lenders,
and regulatory authorities which must consent to the transactions contemplated
hereby based on existing agreements or securities laws affecting Purchaser
including, but not limited to, Wells Fargo Business Credit, Inc., Renaissance
Capital Group, Inc. and Wells Fargo Small Business Investment Company, Inc. A
current list of such parties is attached hereto as Exhibit 5.5.
ARTICLE 6: OTHER AGREEMENTS
Purchaser, Seller and Company represent, warrant, covenant and agree as
provided below.
6.1 Consultants, Brokers and Finders. Seller represents and warrants that
Seller has not retained any consultant, broker or finder in connection with the
transactions contemplated by this Agreement. Purchaser represents and warrants
that, except Stifel, Nicolaus & Company, Incorporated, St. Louis, Missouri
("Stifel"), the fees of which are payable by Purchaser under the terms of a
separate agreement, Purchaser has not retained any consultant, broker or finder
in connection with the transactions contemplated by this Agreement. Seller and
Purchaser each hereby agree to indemnify, defend and hold the other party and
its officers, members, managers, directors, employees and Affiliates, harmless
from and against any and all claims, liabilities or expenses for any brokerage
fees, commissions or finders' fees due to any consultant, broker or finder
alleged to have been retained by the indemnifying party.
6.2 Noncompetition Agreements. At the Closing, Purchaser and Seller agree
to execute a Noncompetition Agreement in substantially the form set forth in
Exhibit 6.2. At or prior to the Closing, Company and Seller agree to exert their
reasonable best efforts to encourage employees Gary Folk and Don Addington to
enter into noncompetition arrangements in conjunction with their Employment
Agreements defined in Section 6.5.
6.3 Taxes.
(a) Seller agrees to indemnify Purchaser for all Taxes of Company to
the extent such Taxes are assessed at the entity level to Company rather than
assessed directly to Seller and are not adequately provided for as current Taxes
on the Closing Liability Statement: (i) for taxable periods ending on or before
the Closing Date; and (ii) for any period not ending on or before the Closing
Date, for the portion of any Taxes attributable to the period ending on the
Closing Date. The amount of any deficiency in Taxes described herein shall be
treated as a Damage Claim recoverable by Purchaser as provided in Article 9.
(b) For any period that includes but does not end on the Closing Date:
(i) liability for any Taxes determined by reference to income, capital gains,
gross income, gross receipts, sales, net profits, windfall profits or similar
items or resulting from a transfer of assets shall be allocated between Seller
and Purchaser or Company based on the date on which such items accrued, and (ii)
liability for all other Taxes shall be allocated between Seller and Purchaser or
Company, pro rata based on the number of days in the taxable period for which
each party is liable for Taxes hereunder. In the event Seller is liable under
subsection 6.3(a) hereof for Taxes due as described in the preceding sentence,
the amount of such deficiency in Taxes shall be treated as a Damage Claim
recoverable by Purchaser as provided in Article 9 herein.
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(c) Company shall prepare and file all tax returns and reports of
Company due on or prior to the Closing Date, which returns and reports shall be
prepared and filed timely and on a basis consistent with existing procedures for
preparing such returns and reports and in a manner consistent with the prior
practice with respect to the treatment of specific items on the returns or
reports; PROVIDED, HOWEVER, that if the treatment of any item on any such return
or report has not been provided by prior practice, Company shall report such
items in a manner that would result in the least amount of Tax liability to
Company and Purchaser for periods ending after the Closing Date. Purchaser and
Company agree to reasonably assist in preparing tax returns and reports for the
period prior to the Closing Date and to cause Company to prepare and file all
tax returns and reports of Company due after the Closing Date, which returns and
reports, to the extent they relate to taxable periods beginning prior to, but
including, the Closing Date, and for the purpose of determining Seller's
liability for Taxes, shall be prepared and filed timely and on a basis
consistent with existing procedures for preparing such returns and in a manner
consistent with prior practice with respect to the treatment of specific items
on the returns and reports, unless such treatment does not have sufficient legal
support to avoid the imposition of penalties. In the event Seller is liable
under subsection 6.3(a) hereof for Taxes due in connection with the returns
described in the preceding sentence, the amount of such deficiency in Taxes
shall be treated as Damage Claim recoverable by Purchaser or Company as provided
in Article 9 herein.
(d) Purchaser, Company and Seller shall provide each other with such
assistance as may reasonably be requested by the others in connection with the
preparation of any return or report of Taxes, any audit or other examination by
any authority, or any judicial or administrative proceedings relating to
liabilities for Taxes. Purchaser, Company and Seller agree to retain for the
full period of any applicable statute of limitations and, upon request, provide
the others with any records or information which may be relevant to such
preparation, audit, examination, proceeding or determination.
(e) If, in connection with any examination, investigation, audit or
other proceeding in respect of any tax return covering the operations of Company
on or before the Closing Date, any governmental body or authority issues to
Company or Purchaser a written notice of deficiency, a notice of reassessment, a
proposed adjustment, an assertion of claim or demand concerning the taxable
period covered by such return, the party receiving the notice shall notify
Seller of its receipt of such communication from the governmental body or
authority within thirty (30) business days after receiving such notice of
deficiency, reassessment, adjustment or assertion of claim or demand. Except as
provided below, Seller shall, at its expense, have the nonexclusive right to
participate in the contest of any such assessment, proposal, claim reassessment,
demand or other proceedings in connection with any tax return covering taxable
periods of Company ending on or before the Closing Date. Purchaser and Company
shall reasonably cooperate with Seller and provide Seller reasonable access to
all relevant documents, records and other materials in their possession and,
upon Seller's request and reasonable notice, permit Seller to examine, review
and copy relevant documents and other materials at the offices of Company or
Purchaser at Seller's sole expense. Purchaser and Company will not be obligated
to settle or resolve any issue related to Taxes for any such period, which, if
so settled or resolved, could have an adverse affect on Company or Purchaser for
periods after the Closing Date, unless Seller agrees in writing with Purchaser
and Company, in terms reasonably satisfactory to Purchaser and Company, to
indemnify Purchaser and Company from any cost, damage, loss or expense relating
to such settlement or resolution. Notwithstanding anything in this Agreement to
the contrary, if any examination, investigation, audit or other proceeding
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relates to a tax return for a period that begins before and ends after the
Closing Date, Purchaser and Company shall manage and control all activities
relating to the attempted resolution of such examination, investigation, audit
or other proceeding, provided that Seller shall be permitted to participate in
any meetings and telephone conferences relating to the matter involving Company
and the entity conducting the examination, investigation, audit or proceeding,
upon request, receive copies of all correspondence received and transmitted by
Company or Purchaser in connection with such examination, investigation, audit
or proceeding, and, if a personal liability of Seller for pre-Closing Taxes is
involved (as opposed to a Damage Claim hereunder), Seller shall be entitled to
reasonably participate in any such proceeding and neither Purchaser nor Company
without Seller's consent (such consent not to be unreasonably withheld) will
settle such proceeding if such settlement would have a material adverse effect
on Seller's personal tax liability.
(f) If there is an adjustment to any return or report of Taxes for
Company which creates a deficiency in any Taxes for which Seller is liable under
the provisions of subsection 6.3(a) hereof, the amount of such deficiency in
Taxes shall be treated as a Damage Claim recoverable by Purchaser as provided in
Article 9 herein. No liability of Seller under this subsection 6.3(f) shall be
incurred until the occurrence of any action by any Tax authority that is final
or, if not final, is acquiesced in by Seller during the course of any audit or
any proceeding relating to Taxes.
(g) All federal, state, local, foreign and other transfer, sales, use
or similar Taxes applicable to, imposed upon or arising out of the transfer of
the Membership Interests shall be paid by the party upon whom the Tax is
assessed.
6.4 Escrow Agreement. Purchaser, Seller and Stifel, as "Escrow Agent", will
enter into an Escrow Agreement (herein so called) in substantially the form set
forth in Exhibit 6.4.
6.5 Employment Agreements, Resignations. Subject to the terms and
conditions of this Agreement, at the Closing, Company and Seller shall exert
their reasonable best efforts to encourage and cause Gary Folk and Don
Addington, to execute and deliver to Company two (2) original counterparts of
Employment Agreements (herein so called), each of which shall be dated as of the
Closing Date and in form and content identical to Exhibit 6.5.1. The Employment
Agreements shall provide for such persons' respective employment with Company
for an initial one (1) year term commencing on the Closing Date, at the same
rate as each person's annual salary on the Closing Date. Purchaser and Company
agree to cause Company to implement a voluntary so-called 401(k) profit-sharing
plan in 1999. However, it is understood that any contributions, if any, made to
such a plan by Company shall be in the sole and absolute discretion of Company.
Seller agrees to cause to be delivered to Purchaser at the Closing the
resignations of the officers and/or managers of Company identified on Exhibit
6.5.2 hereto.
6.6 Confidentiality. Seller on behalf of itself, and its directors,
officers, employees and agents, covenants and agrees to treat in confidence all
confidential and proprietary information provided by Purchaser and Company to
Seller or any of its Affiliates, employees, officers, and agents regarding
Company or its business, except information provided to it which is publicly
available or becomes publicly available through no act of Seller, or which is
disclosed to Seller by a third party which did not acquire the information under
an obligation of confidentiality. Seller shall take all reasonable measures
necessary to prevent disclosure of such confidential and proprietary information
to third parties without the prior written consent of Purchaser. Purchaser
agrees that disclosure of information concerning Company and the contemplated
purchase and sale transaction that is not confidential or proprietary to
Company, and determined by a Seller's legal counsel to be necessary to fulfill
Seller's reporting requirements under applicable securities laws, shall be
permitted hereunder without such consent. In the event of the termination of
this Agreement prior to the Closing, at the request of Purchaser, Seller or
Company shall promptly return to Purchaser all copies of confidential and
proprietary information previously provided to Seller or Company and Seller or
shall not retain any copies of the same.
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ARTICLE 7: CONDITIONS TO THE OBLIGATIONS OF PURCHASER
Except as otherwise provided herein, the obligation of Purchaser to
consummate the purchase of the Membership Interests and to perform its other
obligations under this Agreement shall be subject to the material satisfaction,
on or before the Closing Date, or such other date specified herein, of each of
the following conditions unless waived in writing by Purchaser:
7.1 Representations and Warranties, Performance. The representations and
warranties made by Seller and Company herein shall be true and correct on the
date of this Agreement and on the Closing Date with the same effect as though
made on such date; Seller shall have performed and complied in all material
respects with all material agreements, covenants and conditions required by this
Agreement to be performed and complied with by Seller prior to the Closing Date;
Seller and Company shall have caused the President, manager or an appropriate
officer of Company, to have delivered to Purchaser a certificate, dated the
Closing Date, in the form designated Exhibit 7.1 hereto, certifying to such
matters and the other conditions contained in this Article 7.
7.2 Consents and Approvals. All consents from, and filings with, third
parties, regulators and governmental agencies required prior to Closing to
consummate the transactions contemplated hereby, or which, either individually
or in the aggregate, if not obtained, would cause a material adverse effect on
the financial condition or business of Company, shall have been obtained and
delivered to Purchaser.
7.3 Opinion of Seller's Counsel. Purchaser shall have received the opinion
of Seller's independent legal counsel dated as of the Closing Date, to the
following effect:
(a) Seller is an Illinois corporation, duly organized, validly
existing and in good standing and has the requisite company power and company
authority: (a) to own, lease and operate its properties; (b) to carry on its
business in the places where and in the manner in which it is presently being
conducted; and (c) to consummate the transactions contemplated by, and to
perform its obligations under, this Agreement. The execution and delivery of
this Agreement, the consummation of the transactions contemplated by, and the
performance of the obligations under, this Agreement have been duly authorized
by Seller and no other proceedings on the part of Seller are necessary in
connection therewith.
(b) Although acknowledging that California law does not apply to this
Agreement, but assuming that California law governed this Agreement, this
Agreement (not including agreements contained or referenced in Exhibits attached
hereto) constitutes a legal, valid and binding obligation of Seller enforceable
against Seller in accordance with its terms, and when the Assignment Documents
(as defined below) are executed, delivered and/or recorded and/or filed, as
appropriate, title to the Membership Interests will be vested in Purchaser free
and clear of all liens and encumbrances; provided that counsel need not opine to
the enforceability of liquidated damage clauses.
(c) Neither the execution and delivery of this Agreement by Seller nor
the consummation of the transactions contemplated by, nor the performance of
Seller's obligations under, this Agreement (not including non-competition
agreements contained or referenced in Exhibits attached hereto) will: (a)
violate any provisions of Seller's Articles of Incorporation or bylaws; (b)
violate any statute, code, ordinance, rule or regulation of the State of
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California applicable to Seller, or (c) result in the creation of any lien,
security interest, charge or other encumbrance against the Membership Interests.
(d) No consent, approval, authorization or other action by any
federal, state or local governmental agency or instrumentality is required prior
to the Closing in connection with the execution and delivery by Seller of this
Agreement, the consummation by Seller of the purchase, sale and transfer of the
Membership Interests contemplated by, or the performance of Seller's obligations
under, this Agreement.
7.4 Opinion of Company's Counsel. Purchaser shall have received the opinion
of independent legal counsel of Company dated as of the Closing Date, to the
following effect:
(a) Company is a Delaware limited liability company, duly organized,
validly existing and in good standing in the jurisdictions identified on Exhibit
2.1.1 hereto, and has the requisite company power and company authority: (a) to
own, lease and operate its properties; (b) to carry on its business in the
places where and in the manner in which it is presently being conducted; and (c)
to consummate the transactions contemplated by, and to perform its obligations
under, this Agreement. The execution and delivery of this Agreement, the
consummation of the transactions contemplated by, and the performance of the
obligations under, this Agreement have been duly authorized by Company and no
other proceedings on the part of Company are necessary in connection therewith.
(b) Company's issued capital consists solely of the Membership
Interests. The Membership Interests have been duly authorized and are validly
issued, fully paid and nonassessable and have been issued and transferred to
Seller in compliance with all applicable state and federal securities laws.
(c) Although acknowledging that California law does not apply to this
Agreement but assuming that California law governed this Agreement, this
Agreement (not including non-competition agreements contained or referenced in
Exhibits attached hereto) would constitute a legal, valid and binding obligation
of Company enforceable against Company in accordance with its terms, and when
the Assignment Documents (as defined below) are executed, delivered and/or
recorded and/or filed, as appropriate, title to the Membership Interests will be
vested in Purchaser free and clear of all liens and encumbrances; provided that
counsel need not opine to the enforceability of liquidated damage clauses.
(d) Neither the execution and delivery of this Agreement by Company
nor the performance Company's obligations under this Agreement (not including
non-competition agreements contained or referenced in Exhibits attached hereto)
will: (a) violate any provisions of Company's Articles of Organization or
Operating Agreement; (b) violate any statute, code, ordinance, rule or
regulation of the State of California applicable to Company or the operation and
conduct of Company's business; or (c) result in the creation of any lien,
security interest, charge or other encumbrance upon any of Company's assets or
the Membership Interests.
(e) No consent, approval, authorization or other action by any
federal, state or local governmental agency or instrumentality is required prior
to the Closing in connection with the execution and delivery by Company of this
Agreement or the performance of Company's obligations under this Agreement.
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7.5 No Adverse Change. There shall have been no material adverse change
since the Financial Statement Date in the business, prospects, financial
condition, earnings or operations of Company other than those resulting from
actions taken by Purchaser under the Management Agreement.
7.6 No Proceeding or Litigation. No action, suit or proceeding before any
court or any governmental or regulatory authority shall have been commenced or
threatened, and no investigation by any governmental or regulatory authority
shall have been commenced or threatened against Seller, Company, Purchaser or
any of their respective principals, officers, directors, members or managers
seeking to restrain, prevent or change the transactions contemplated hereby or
questioning the validity or legality of any of such transactions or seeking
damages in connection with any of such transactions.
7.7 Review. A full due diligence review of Company and its business shall
have been completed by Purchaser, its legal counsel, its outside consultants, or
others appointed by Purchaser. Purchaser shall have been satisfied in its sole
and absolute discretion with the results of its due diligence review of Company
and its business operations, prospects and assets. Purchaser shall bear the
costs of such due diligence review.
7.8 Other Documents. Seller shall have furnished or caused Company to
furnish Purchaser with such other and further documents and certificates of its
officers and others as Purchaser shall reasonably request to evidence compliance
with the conditions set forth in this Agreement, including, but not limited to
the review and approval of complete audited Financial Statements for the year
ended December 31, 1998 and approval thereof in Purchaser's sole reasonable
discretion.
7.9 Identified Debt Limit. The total indebtedness of Company as reflected
on the Closing Statement of Liabilities shall not exceed the sum of the
principal amount of Company's term debt as of April 1, 1999, plus the maximum
permitted amount of Company's line of credit as of April 1, 1999.
7.10 Other Agreements. The Agreements described in Article 6 shall have
been entered into and delivered.
7.11 Withholding Certificate. Purchaser shall have received from Seller an
executed withholding certificate in the form attached hereto as Exhibit 7.11.
7.12 Approval of Purchaser's Board of Directors. Purchaser's Board of
Directors shall have considered and ratified the execution and delivery of this
Agreement within ten (10) days following the Effective Date as described in
Section 5.4 hereof, or such later date as agreed to in writing by Seller.
7.13 Required Shareholder Approvals. Purchaser shall have obtained the
Required Shareholder Approvals on or before October 22, 1999, or such later date
as provided in subsection 9.5(b) or agreed to in writing by Seller.
7.14 Approval of Third Parties and Board. Prior to October 22, 1999 or such
later date as agreed to in writing by Seller, Purchaser shall have received the
written consent and approval of the transactions contemplated by this Agreement
from the parties identified on Exhibit 5.5. Such written consent and approvals
shall have been in form and substance reasonably satisfactory to Purchaser in
its sole discretion. In that regard, Seller understands that Purchaser's Board
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of Directors has not, as of the date hereof, approved the transactions
contemplated hereby and may, at any time, indicate that Purchaser does not wish
to become involved in the transaction described herein. Seller and Company agree
that if the Board of Directors so acts, neither Seller nor Company will pursue
any action against Purchaser, Seller and Company acknowledging that the only
obligation of Purchaser (or of its officers, directors or agents) respecting the
transaction is to bring the matter before its Board of Directors for
consideration within ten (10) days of the date this Agreement is executed.
Purchaser also must receive, prior to Closing, the consents of all lenders,
regulatory authorities, shareholders (inclusive of the Required Shareholder
Approvals) and investors which must consent to the transactions contemplated
hereby based on existing agreements or securities laws affecting Purchaser
including, but not limited to, Wells Fargo Business Credit, Inc., Renaissance
Capital Group, Inc. and Wells Fargo Small Business Investment Company, Inc.
Purchaser shall also be entitled to receive, in form and substance reasonably
satisfactory to Purchaser, the consent of the Existing Lender (herein so called)
to Company to the transactions contemplated hereby (together with such
amendments to such financing documentation as may be reasonably requested by
Purchaser), together with the consent of said lender (or its affiliate), as
holder of an underlying lien encumbering Company's principal premises located in
Bluffton, Indiana, to, and ratification of, the existing lease respecting said
premises. Purchaser shall also be entitled to obtain, at Purchaser's expense, an
estoppel certificate, in form and substance reasonably satisfactory to
Purchaser, from the Lessor (herein so called) thereof and title
insurance/assurance related thereto, also in form and substance reasonably
satisfactory to Purchaser. When used herein, the term "Required Consents" shall
mean all of the consents required and/or described in this Section 7.14, with
the exceptions of consents given by governmental entities and by Existing Lender
and Lessor.
7.15 Intellectual Property Rights. Purchaser shall be satisfied in its sole
discretion that the Intellectual Property Rights listed in Exhibit 2.26 are
legally owned and used by Company.
7.16 Failure of Conditions.
(a) Seller agrees to use commercially reasonable efforts to satisfy
the conditions set forth in this Article 7 to the extent the same are applicable
to Seller. If Seller should be unable to satisfy any such condition or
conditions set forth in this Article 7, Seller shall notify Purchaser, and
Purchaser, by written notice to Seller to be given prior to the Closing or such
earlier date as specified herein, shall either: (i) waive such condition or
conditions and proceed to close; or (ii) cancel this Agreement.
(b) If Purchaser elects to cancel this Agreement pursuant to the
foregoing provisions, and the failure of condition is not due to Seller's
material breach hereunder, Purchaser shall have returned to it all documents
Purchaser either deposited with, or delivered to, Seller and thereupon this
Agreement shall be deemed null and void and neither party shall have any further
obligation or liability under this Agreement, except as otherwise expressly
provided in this Agreement.
(c) If Purchaser's cancellation is due to Seller's material breach
hereunder, Purchaser shall have returned to it all documents Purchaser either
deposited with, or delivered to, Seller and shall be entitled to the remedies of
Purchaser set forth in Section 9.4 below.
7.17 Escrow. In order to secure payment for the material breach, if any, of
the warranties or representations or indemnifications agreed upon in this
Purchase Agreement, the Escrow Agreement shall be executed and 500,000 shares of
Poore Brothers common stock, constituting a portion of the Closing Shares issued
at the Closing, shall be placed in Escrow. On the first anniversary date of the
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Closing, the Escrow Agent shall pay, or release as the case may be, all of the
remaining Escrow Fund (as defined in the Escrow Agreement) to Seller.
ARTICLE 8: CONDITIONS TO THE OBLIGATIONS OF SELLER
Except as otherwise provided herein, the obligation of Seller to consummate
the sale and transfer of the Membership Interests and to perform its other
obligations under this Agreement shall be subject to the material satisfaction,
on or before the Closing Date, or such other date specified herein, of each of
the following conditions unless waived in writing by Seller:
8.1 Representations and Warranties, Performance. The representations and
warranties made by Purchaser herein shall be true and correct on the date of
this Agreement and on the Closing Date with the same effect as though made on
such date; Purchaser shall have performed and materially complied with all
agreements, covenants and conditions required by this Agreement to be performed
and complied with by it prior to the Closing Date or such earlier date specified
herein; and Purchaser shall have delivered to Seller a certificate of a
responsible officer, dated as of the Closing Date, certifying to the fulfillment
of the conditions set forth herein, in the form designated as Exhibit 8.1 and
the other conditions contained in this Article 8.
8.2 No Proceeding or Litigation. No action, suit or proceeding before any
court or any governmental or regulatory authority shall have been commenced, or
threatened, and no investigation by any governmental or regulatory authority
shall have been commenced, or threatened, against Company, Purchaser, Seller, or
any of their respective principals, officers, members, managers or directors,
seeking to restrain, prevent or change the transactions contemplated hereby or
questioning the validity or legality of any of such transactions or seeking
damages in connection with any such transactions.
8.3 Opinion of Counsel. Seller shall have received an opinion of counsel to
Purchaser dated as of the Closing Date to the following effect:
(a) Purchaser is a Delaware corporation, duly organized, validly
existing, in good standing and has the requisite corporate power and corporate
authority to consummate the transactions contemplated by, and to perform its
obligations under, this Agreement. The execution and delivery of this Agreement,
the consummation of the transactions contemplated by, and the performance of the
obligations under, this Agreement have been duly authorized by requisite
corporate action on the part of Purchaser.
(b) This Agreement constitutes, and each other agreement or instrument
to be executed and delivered by Purchaser pursuant to the terms of this
Agreement constitutes, a legal, valid and binding obligation of Purchaser,
enforceable against Purchaser in accordance with their respective terms.
(c) Neither the execution and delivery of this Agreement by Purchaser
nor the consummation of the transactions contemplated by, nor the performance of
Purchaser's obligations under, this Agreement will: (a) violate any provisions
of the Articles or Bylaws of Purchaser; (b) violate any statute, code,
ordinance, rule or regulation of the State of Arizona applicable to Purchaser;
(c) to said counsel's knowledge, violate any judgment, order, writ, decree,
injunction or award of any court, arbitrator, mediator, government or
governmental agency or instrumentality to which Purchaser is a party or by which
Purchaser is bound; and (d) to said counsel's knowledge, violate, breach,
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conflict with, constitute a default under, result in the termination of or
accelerate the performance required by, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Purchaser is a party
or by which Purchaser is bound.
(d) To said counsel's knowledge, there is no pending or threatened
litigation or other legal proceeding against Purchaser or challenging the
validity or propriety of or seeking to enjoin or to set aside the transactions,
contemplated by this Agreement, except as set forth in Purchaser's public
filings, reports and/or announcements and in so-called audit letters from such
counsel to auditors of Purchaser, the content of which letters need not be
disclosed to Seller.
(e) No consent, approval, authorization or other action by, or filing
with, any federal, state or local governmental agency or instrumentality is
required in connection with the execution and delivery by Purchaser of this
Agreement, the consummation by Purchaser of the transactions contemplated by, or
the performance of Purchaser's obligations under, this Agreement; provided,
however, that counsel need not opine to securities issues, but only to Arizona
law and Delaware corporate law.
8.4 Payment/Issuance. The payment(s)/issuance(s) required at Closing and
described in Section 1.2 shall have been made.
8.5 Other Documents. Purchaser will furnish Seller with such other
documents and certificates to evidence compliance with the conditions set forth
in this Article 8 as may be reasonably requested by Seller.
8.6 Other Agreements. The agreements described in Article 6 shall have been
entered into and delivered.
8.7 Failure of Conditions. Purchaser agrees to use reasonable commercial
efforts to satisfy the conditions set forth in this Article 8 applicable to
Purchaser. Except as otherwise provided herein, if Purchaser should be unable to
satisfy any such condition or conditions set forth in this Article 8, Purchaser
shall notify Seller, and Seller, by written notice to Purchaser to be given
prior to the Closing, or such earlier date stated herein, shall either: (i)
waive such condition or conditions and proceed to close; or (ii) cancel this
Agreement. If Seller elects to cancel this Agreement pursuant to the foregoing
provisions of this Article 8, the provisions of this Agreement and the
Management Agreement shall be deemed null and void and neither party shall have
any further obligation or liability under this Agreement, except as otherwise
expressly provided in this Agreement.
ARTICLE 9: CLOSING
9.1 Closing. Unless this Agreement shall have been terminated or abandoned
pursuant to the provisions of Article 10 hereof, a closing (the "Closing") shall
be held on or before 5:00 p.m. on the day which is five (5) business days after
all of the Required Consents and other approvals described in Section 7.14 above
are fulfilled and/or have been obtained, but in no event later than November 30,
1999, or on such other date mutually agreed upon by Seller and Purchaser (the
"Closing Date"), at the offices of Mariscal, Weeks, McIntyre & Friedlander, P.A.
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located at 2901 N. Central Avenue, Suite 200, Phoenix, Arizona 85012, or at such
other place as Purchaser and Seller shall mutually designate.
9.2 Deliveries at Closing.
(a) At the Closing Seller shall duly endorse, with signatures
guaranteed, and deliver to Purchaser any certificate or certificate(s) issued by
Company evidencing Seller's ownership of the Membership Interests effective as
of the Closing Date. In addition, Seller shall execute, with signatures
guaranteed, and deliver to Purchaser an Assignment of Membership Interests and
in a form and content identical to Exhibit 9.2 (Assignment Document), and
Purchaser shall issue and deliver to Seller 3,900,000 of the Closing Shares and
execute and deliver to Seller the Warrant for Additional Shares. In addition,
Purchaser shall issue and deliver to Escrow Agent the remaining 500,000 Closing
Shares. All other agreements, certifications and documents required to be
executed and delivered hereunder at the Closing shall be duly and validly
executed, delivered or exchanged by and between the respective parties at or
prior to the Closing.
(b) From time to time after the Closing at Purchaser's request and
without further consideration from Purchaser, Seller shall execute and deliver
such other instruments of conveyance and transfer and take such other action as
Purchaser reasonably may require to convey, transfer to and vest in Purchaser
and to put Purchaser in possession of the Membership Interests to be sold,
conveyed, transferred and delivered hereunder.
(c) At the Closing, Seller shall deliver to Purchaser resignations of
all of the managing members of Company. Seller and Company shall also deliver,
if requested by Purchaser, a mutual general release wherein Seller and Company
shall release the other from all known and unknown claims in a form and
substance reasonably satisfactory to legal counsel for Seller and Purchaser.
9.3 Legal Actions. If, prior to the Closing Date, any action or proceeding
shall have been instituted by any third party unrelated to Seller, Purchaser or
Company before any court or governmental agency to restrain or prohibit this
Agreement or the consummation of the transactions contemplated herein, the
Closing shall be adjourned at the option of Seller or Purchaser for a period of
up to 120 days. If, at the end of such 120 day period, the action or proceeding
shall not have been resolved in a manner enabling the contemplated purchase and
sale transaction to proceed without material damage, loss or harm to Purchaser,
Seller or Company, Purchaser or Seller may, by written notice thereof to the
other parties, terminate its obligations hereunder.
9.4 Remedies of Purchaser Prior to or on Closing.
(a) In the event of any material breach or default of any warranty,
covenant, agreement, or obligation of Seller under this Agreement prior to the
Closing, Purchaser may at its option, and without prejudice to any other rights
or remedies provided under this Agreement for any such breach or default,
terminate this Agreement by delivering written notice of termination to Seller
on or before the Closing Date. The notice shall specify with particularity the
breach or default on which the notice is based.
(b) Notwithstanding the foregoing subsection 9.4(a), the parties
acknowledge that the Membership Interests are unique and that, in the event of a
breach or default by Seller under this Agreement, it would be extremely
impracticable to measure monetary damages and such damages would be an
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inadequate remedy for Purchaser. Therefore, in the event of any such breach or
default, Purchaser may, at its option, sue for specific performance.
(c) If Seller materially breaches Section 4.3 of this Agreement,
Seller shall pay to Purchaser the sum of Two Hundred Fifty Thousand Dollars
($250,000.00) as and for liquidated damages and not as a penalty. Purchaser and
Seller acknowledge that the agreed payment is a reasonable liquidated damage in
that Purchaser's damages at the time and place of such a breach would be
difficult, because of the uncertain nature of Company's future profitability, to
ascertain with precision, and that the foregoing represents a reasonable
liquidated damage in the estimation of the parties at this date. It is agreed
that the liquidated damage remedy set forth herein is declared to be severable
specifically from the balance of this Agreement.
9.5 Remedies of Seller Prior to or on Closing.
(a) In the event of any material breach or default of any warranty,
covenant, agreement, or obligation of Purchaser under this Agreement prior to
the Closing, Seller may at its option, and without prejudice to any other rights
or remedies provided under this Agreement for any such breach or default,
terminate this Agreement by delivering written notice of termination to
Purchaser on or before the Closing Date. The notice shall specify with
particularity the breach or default on which the notice is based.
(b) If Purchaser's Board of Directors has approved this Agreement in
accordance with Section 7.15 above and thereafter Purchaser fails to obtain the
Required Shareholder Approvals and the Required Consents on or before October
22, 1999, for any reason whatsoever other than the prior anticipatory breach or
wrongful termination of this Agreement by Seller, Purchaser shall immediately
pay Seller a "break-up fee" as compensation for Seller's expenditures in
connection with the contemplated transaction and not as a penalty or damages, of
either, (a) the sum of two hundred sixty thousand dollars ($260,000) or, (b) at
Purchaser's election, the issuance to Seller of two hundred thousand (200,000)
common shares of Purchaser that have not been registered under the 1933 Act.
Notwithstanding the foregoing, if the failure to obtain the Required Shareholder
Approvals is due to regulatory actions or events beyond Purchaser's reasonable
control such as, without limitation, actions taken by the Securities and
Exchange Commission, the National Association of Securities Dealers, or any
other regulatory authorities, said October 22, 1999 deadline date shall be
extended for a reasonable period of time not to exceed sixty (60) days to permit
Purchaser to endeavor to obtain all such necessary regulatory consents,
authorizations, etc., and to thereafter properly and fully present the matter to
Purchaser's shareholders. In addition, if the failure to obtain the Required
Consents is due to a failure of Seller or Company to cooperate with Purchaser's
endeavors to obtain such Required Consents, said October 22, 1999 deadline date
shall be extended for a reasonable period of time not to exceed sixty (60) days
to permit Purchaser to endeavor to obtain all such necessary Required Consents.
9.6 Termination. In the event of the termination of this Agreement by
either Purchaser or Seller as provided in this Article 9, upon such termination,
Purchaser shall deliver to Seller and Seller shall deliver to Purchaser any and
all documentation provided by each party to the other pursuant to the terms of
this Agreement.
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ARTICLE 10: TERMINATION AND ABANDONMENT
10.1 Methods of Termination. This Agreement may be terminated and the
transactions herein contemplated may be abandoned at any time prior to Closing:
(a) by mutual consent of Purchaser and Seller; or
(b) by either Purchaser or Seller, if (i) such party is not in breach
hereunder and the other party is in material breach hereunder and (ii) this
Agreement is not consummated on or before the Closing Date, including
extensions.
10.2 Procedure Upon Termination. In the event of termination and
abandonment pursuant to Section 10.1 hereof, this Agreement shall terminate and
shall be abandoned, without further action by any of the parties hereto. If this
Agreement is terminated as provided herein each party will upon request
redeliver all documents and other materials of any other party relating to the
transactions contemplated hereby, whether so obtained before or after the
execution hereof, to the party furnishing the same and any deposit shall be
returned to Purchaser.
ARTICLE 11: INDEMNIFICATION
11.1 Indemnification by Seller. Seller agrees to indemnify Purchaser and
each of its shareholders, officers and directors against any loss, damage or
expense (including, but not limited to reasonable attorneys' fees)
(collectively, "Damages") incurred or sustained by Purchaser or any of its
shareholders, officers or directors as a result of: (a) any material breach of
any provision, covenant or agreement contained in this Agreement by Seller other
than described in (b) or (c) below; (b) any material inaccuracy in any of the
representations or warranties made by Seller in Article 2 of this Agreement to
the extent any such inaccuracy relates and is attributable to events, actions,
occurrences, conditions or omissions existing prior to the Closing Date; or (c)
any material inaccuracy or misrepresentation in any certificate or other
document or instrument delivered by Seller or Company in accordance with any
provision of this Agreement (the item described in Clauses (b) and (c)
immediately above being collectively referred to as "Damage Claims"). The right
to indemnification as described in this Article ii shall be the exclusive remedy
of Purchaser with respect to Damage Claims. The obligations of Seller as set
forth in Section 11.1(b) and (c) shall be subject to and limited by the
following:
a. Purchaser shall give written notice to Seller stating specifically
the basis for the claim for Damages, the amount thereof and shall tender defense
thereof to Seller as provided in Section 11.2;
b. All Damage Claims shall cause an adjustment in the Purchase Price
and are payable solely pursuant to the Escrow Agreement. Except as provided in
Section 11.4 below, Seller shall not have personal liability to pay any of the
Damage Claims and when the Escrowed Shares (as also defined in the Escrow
Agreement) are fully released from Escrow, Purchaser shall have no other Damage
Claims against Seller except as provided in Section 11.4 below;
c. No claim for Damages by Purchaser shall be made if Purchaser or
Company has been compensated without cost to Company or Purchaser; and
d. No claim for Damages shall be made by Purchaser if any loss is
actually recovered by Company or Purchaser from insurers, or from any third
party.
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11.2 Tender of Defense for Damages. Promptly upon receipt by Purchaser of a
notice of a claim by a third party which may give rise to a Damage Claim,
Purchaser shall give written notice thereof to Seller. No failure or delay of
Purchaser in the performance of the foregoing shall relieve, reduce or otherwise
affect Damage Claims pursuant to this Agreement, except to the extent that such
failure or delay shall have adversely affected the ability to defend against
such Damage Claim. If Seller gives to Purchaser an agreement in writing, in a
form reasonably satisfactory to Purchaser's counsel, to defend such Damage
Claim, Seller may, at its sole expense, undertake the defense against such
Damage Claim and may contest or settle such Damage Claim on such terms, at such
time and in such manner as Seller, in its sole discretion, shall elect and
Purchaser shall execute such documents and take such steps as may be reasonably
necessary in the opinion of counsel for Seller to enable Seller to conduct the
defense of such Damage Claim. If Seller fails or refuses to defend any Damage
Claim, Seller may nevertheless, at its own expense, participate in the defense
of such claim by Purchaser and in any and all settlement negotiations relating
thereto. In any and all events, Seller shall have such access to the records and
files of Purchaser relating to any Damage Claim as may be reasonably necessary
to effectively defend or participate in the defense thereof.
11.3 [RESERVED]
11.4 Fraud Claims. Notwithstanding the other provisions of this Agreement,
Seller shall be fully and personally liable to, and Seller shall pay, protect
and defend and indemnify and save and hold Purchaser Indemnitees harmless
against any cost, claim, damage or liability to which they may be exposed or
which they may suffer (including reasonable attorney's and expert fees) which
have been determined by a court or arbitrator of competent jurisdiction to have
arisen from Seller's willful and intentional breach hereof or from fraud
(hereinafter, "Fraud Claims").
ARTICLE 12: MISCELLANEOUS PROVISIONS
12.1 Amendment and Modification. Subject to applicable law, this Agreement
may be amended, modified and supplemented only by written agreement of Seller
and Purchaser.
12.2 Waiver of Compliance; Consents. Any failure of Seller on the one hand,
or Purchaser on the other hand, to comply with any obligation, covenant,
agreement or condition herein may be waived in writing by Purchaser or Seller,
respectively, but such waiver or failure to insist upon strict compliance with
such obligation, covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure. Whenever this
Agreement requires or permits consent by or on behalf of any party hereto, such
consent shall be given in writing in a manner consistent with the requirements
for a waiver of compliance as set forth in this Section 12.2.
12.3 Expenses. Except in the event of a material breach of this Agreement
by a party as provided herein, each party will pay its own legal, accounting and
other expenses incurred by such party or on its behalf in connection with this
Agreement and the transactions contemplated herein. Such expenses of Company and
Seller, up to a limit of Twenty Five Thousand Dollars ($25,000.00), shall be
paid for by Company. All such expenses of Seller or Company in excess of Twenty
Five Thousand Dollars ($25,000.00), shall be paid for by Seller.
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12.4 Investigations, Survival of Warranties. The respective representations
and warranties of Seller and Purchaser contained herein or in any certificates
or other documents delivered prior to or at the Closing are true, accurate and
correct and shall not be deemed waived or otherwise affected by any
investigation made by any party hereto or by the occurrence of the Closing. Each
and every such representation and warranty of Seller, Company and Purchaser
shall, subject to the limitation of Seller's liability for breach set forth in
Article 11, survive for a period of one (1) year from the Closing Date;
provided, however, Purchaser causes of action described in Section 11.4 above
shall never expire.
12.5 Notices. Any notice, request, consent or communication (collectively,
a "Notice") under this Agreement shall be effective only if it is in writing and
(i) personally delivered, in (ii) sent by certified or registered mail, return
receipt requested, postage prepaid, (iii) sent by a nationally recognized
overnight delivery service, with delivery service, or (iv) facsimile, with
receipt confirmed by the transmitting party's equipment, addressed as follows:
(a) If to Seller:
Pate Foods Corporation
1455 Gardner Street
South Beloit, Illinois 60180
Telephone: (815) 389-3426
Facsimile: (815) 389-5058
With copy to:
Fisher Thurber, L.L.P.
Attn: David Fisher, Esq.
4225 Executive Square, Ste. 1600
La Jolla, California 92037
Telephone: (619) 535-9400
Facsimile: (619) 535-1616
or to such other person or address as Seller shall furnish to
Purchaser in writing.
(b) If to Purchaser:
Poore Brothers, Inc.
Attn: Mr. Thomas Freeze
3500 South La Cometa Dr.
Goodyear, Arizona 85338
Telephone: (602) 932-6200
Facsimile: (602) 925-2363
With a copy to:
Mariscal, Weeks, McIntyre & Friedlander, P.A.
Attn: Fred C. Fathe, Esq.
2901 North Central Avenue, #200
Phoenix, Arizona 85012
Telephone: (602) 285-5000
Telecopier: (602) 285-5100
or such other persons or addresses as shall be furnished in writing
by any party to the other party.
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A Notice shall be deemed to have been given as of the date when: (i) personally
delivered, (ii) five (5) days after the date when deposited in the United States
mail properly addressed, (iii) when receipt of a Notice sent by an overnight
delivery service is confirmed by such overnight delivery service, or (iv) when
receipt of the telecopy is confirmed, as the case may be, unless the sending
party has actual knowledge that a Notice was not received by the intended
recipient.
12.6 Governing Law, Dispute Resolution.
(a) 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.
(b) Any dispute between any of the parties hereto or any claim by a
party against another party arising out of or relating to this Agreement or
relating to any alleged breach thereof shall be determined by arbitration
in-accordance with the rules of commercial arbitration then in force of the
American Arbitration Association. The arbitration proceedings shall take place
in Phoenix, Arizona or such other location as the parties in dispute may agree
upon. The arbitration proceedings shall be subject to the substantive laws of
the state of Arizona. There shall be one arbitrator, as shall be agreed upon by
the parties to the dispute, who shall be an individual skilled in the legal and
business aspects of the subject matter of this Agreement and of the dispute. In
the absence of such an agreement, each party in dispute shall select one
arbitrator and the arbitrators so selected shall select a third arbitrator. In
the event the arbitrators cannot agree upon the selection of a third arbitrator,
such third arbitrator shall be appointed by the American Arbitration Association
at the request of any of the parties to the dispute. The arbitrator shall be an
individual skilled in the legal and the business aspects of the subject matter
of this Agreement and of the dispute. The decision rendered by the arbitrator
shall be accompanied by a written opinion in support thereof. Such decision
shall be final and binding upon the parties to the dispute without right of
appeal. Judgment upon any such decision may be entered into any court having
jurisdiction thereof, or application may be made to such court for a judicial
acceptance of the decision in an order of enforcement. Costs of the arbitration
(including the reasonable attorneys' fees of the prevailing party) shall be
assessed by the arbitrator against all or any of the parties to the dispute
(with the party who or which is not the prevailing party to be assessed the
prevailing party's reasonable attorneys' fees) and shall be paid promptly by the
party or parties so assessed.
12.7 Neutral Interpretation. This Agreement constitutes the product of the
negotiation of the parties hereto and the enforcement hereof shall be
interpreted in a neutral manner, and not more strongly for or against any party
based upon the source of the drafting hereof.
12.8 Securities Issues. Seller hereby acknowledges that Purchaser will be
relying upon exemptions from the registration requirements of the Securities Act
of 1933, as amended (the "1933 Act"), and of applicable State securities laws in
connection with the issuance of the Closing Shares, the Warrant and any future
issuance of the Warrant Shares to Seller. The Closing Shares, the Warrant and
the Warrant Shares are hereinafter collectively referred to as the "Securities".
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In connection with establishing the applicability of the above-mentioned
exemptions, Seller represents and warrants to, and agrees with, Purchaser as
follows:
(a) Immediately after the issuance of the Closing Shares and the
Warrant to Seller at Closing, Seller intends to transfer all of the Closing
Shares and the Warrant to an Affiliate entity, American Pacific Financial
Corporation, a corporation ("American Pacific"). American Pacific will
immediately thereafter transfer all of the Closing Shares and the Warrant to
Capital Foods, LLC, a limited liability company ("Capital Foods"). The
beneficial owners (as well as the percentage of ownership by each such person)
of the capital stock of Seller are the same as the beneficial owners of the
limited liability company interests of Capital Foods. The names and ownership
percentages of the beneficial owners of Seller, American Pacific and Capital
Foods are set forth in Exhibit 12.8.1 attached hereto.
(b) The domicile and principal place of business of Seller is the
State of Illinois. The domicile and principal place of business of each of
American Pacific and Capital Foods is the State of California.
(c) Seller understands that the transfers of the Closing Shares and
the Warrant described in Paragraph (a) above are subject to: (i) the delivery by
Seller to Purchaser of a legal opinion in form and substance substantially
identical to Exhibit 12.8.2 attached hereto regarding the legality of the
transfers of the Closing Shares and the Warrant described in Paragraph (a) above
pursuant to federal and state securities laws, and (ii) the delivery to
Purchaser of representations and warranties of each of American Pacific and
Capital Foods that are substantially similar to the representations and
warranties contained in this Section 12.8.
(d) Seller and each of the beneficial owners of Seller is an
"accredited investor" as such term is defined in Securities and Exchange
Commission (the "Commission") Rule 501 promulgated under the 1933 Act.
(e) The Securities are being acquired by Seller for its own account
for purposes of investment and not "with a view to" the "distribution" thereof,
as such terms are used in the 1933 Act, and the rules and regulations
thereunder. By executing this Agreement, Seller represents and warrants to
Purchaser that, except as described in Paragraph (a) above, Seller does not have
any contract, undertaking, agreement or arrangement, written or oral, with any
other person to sell, transfer or grant participation in any shares of the
Securities.
(f) Seller acknowledges that the Securities constitute "restricted
securities" under federal and state securities laws insofar as they have not
been registered under the 1933 Act or the securities laws of any other
jurisdiction, that they may not be resold or transferred without compliance with
the registration or qualification provisions of the 1933 Act or applicable
federal and state securities laws or an opinion of counsel that an exemption
from such registration and qualification requirements is available. Seller is
familiar with Commission Rule 144 promulgated under the 1933 Act, as presently
in effect, and the resale limitations imposed thereby and by the 1933 Act.
(g) Seller acknowledges and understands that any certificate or
certificates representing the Securities that are issued by Purchaser will bear
the following legend or a legend similar thereto:
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
STATE SECURITIES LAWS. SUCH SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO THE DISTRIBUTION
THEREOF. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE,
TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT AND COMPLIANCE WITH THE
REQUIREMENTS OF ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION AND/OR
COMPLIANCE IS NOT REQUIRED.
(h) Seller and its management (i) have such knowledge, sophistication
and experience in financial and business matters, including investments of this
type, to be capable of evaluating the merits and risks of an investment in the
Securities and of making an informed investment decision with respect thereto,
and (ii) fully understand the nature, scope and duration of limitations on
transfer contained in this Agreement. Seller is able to: (i) bear the economic
risk of its investment in the Securities; (ii) hold the Securities for an
indefinite period of time; and (iii) afford a complete loss of its investment.
(i) Seller has not been organized solely or primarily for the purpose
of acquiring the Securities.
(j) Seller has reviewed the recent reports filed by Purchaser with the
Securities and Exchange Commission (the "Commission") pursuant to the Securities
Exchange Act of 1934, as amended, as well as recent press releases issued by
Purchaser and has reviewed such additional documentation and information and has
conducted such research regarding Purchaser as it has deemed prudent and
necessary in connection with the issuance of the Securities to Seller. Based
upon such review and research, Seller believes that it is fully aware of the
current condition (financial and otherwise) and prospects of Purchaser. Seller
has obtained sufficient information to evaluate the merits and risks of Seller's
acquisition of the Securities and to make an informed investment decision.
Seller acknowledges receipt from Purchaser of copies of certain period and other
reports filed by Purchaser with the Commission since January 1, 1999, including
without limitation, Purchaser's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1998 and Purchaser's Quarterly Reports on Form 10 QSB for the
three month periods ended March 31, 1999 and June 30, 1999.
(k) Seller and its management have had an adequate opportunity to ask
questions of and receive answers from the officers of Purchaser concerning any
and all matters relating to the transaction described herein including, without
limitation, the background and experience of the officers and directors of
Purchaser, the plans for the operations of the business of Purchaser, and any
plans for additional acquisitions and the like. Seller and its management have
asked any and all questions in the nature described in the preceding sentence
and all questions have been answered to their satisfaction. All documents,
records and other information relating to Purchaser that have been requested by
Seller and that are considered by Seller to be material in making a decision to
acquire the Securities, have been delivered or made available to it, and
Seller's investment decision is based upon its own investigation and analysis
and not the representations or inducements of Purchaser or any party or parties
acting on its behalf.
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Seller understands that Purchaser will rely on the representations and
warranties contained in this Section 12.8 in connection with the issuance of the
Securities to Seller.
12.9 Nondisclosure. No party will disclose the existence or contents of
this Agreement or any of the discussions or communications regarding the
transactions contemplated by this Agreement to any third persons without the
prior written consent of the other party, except as required by applicable law;
provided, however, this disclosures shall be permitted without the prior written
consent of the other party: (i) to Seller's and Purchaser's respective members,
managers, directors, shareholders, key employees, attorneys, accountants and
lenders; (ii) to agents and advisors of Seller or Purchaser who may be retained
to render services in connection with the transactions contemplated by this
Agreement; and (iii) to all persons from whom consents, approvals or amendments
are required for the consummation of the transactions contemplated by this
Agreement. Notwithstanding the foregoing, Seller recognizes the public status of
Purchaser and any public filings and/or statements made or caused to be made by
Purchaser shall be an exception to the foregoing.
12.10 Publicity. All notices to third parties and all other publicity
concerning the transactions contemplated by this Agreement shall be jointly
planned and coordinated by and between Purchaser and Seller. Neither Purchaser
nor Seller shall act unilaterally in this regard without the prior written
approval of the other party; however, this approval shall not be unreasonably
withheld or delayed. Notwithstanding the foregoing, Seller recognizes the public
status of Purchaser and any public filings and/or statements made or caused to
be made by Purchaser shall be an exception to the foregoing.
12.11 Entire Agreement: Modification. Except as set forth below, this
Agreement constitutes the entire agreement between the parties and supersedes
all prior and contemporaneous agreements and undertakings of the parties with
respect to its subject matter, including, but not limited to, that certain
Letter of Intent between Purchaser and Seller, dated March 26, 1999, as
supplemented to date. No supplement, modification or amendment of this Agreement
shall be binding and enforceable unless executed in writing by the parties.
12.12 Exhibits and Recitals. The Exhibits attached to this Agreement and
the Recitals set forth above are hereby incorporated into and made a part of
this Agreement. The Article and Section headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. For purposes of this Agreement, any
information disclosed in any Exhibit to this Agreement shall be considered to be
disclosed in all other Exhibits to the extent that an explicit cross-reference
to such other Exhibits appears.
12.13 Counterparts, Facsimile Signatures. This Agreement may be executed in
several counterparts, and all so executed shall constitute one agreement,
binding on all of the parties. The parties agree that this Agreement may be
transmitted between them via facsimile. The parties intend that the faxed
signatures constitute original signatures and that a faxed agreement containing
the signatures (original or faxed) of all the parties is binding upon the
parties.
12.14 Attorneys Fees. 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 attorneys' fees and costs, as
determined by the judge of the court.
12.15 Parties in Interest. Except as expressly provided in Section 12.19
below, nothing in this Agreement is intended to confer upon any person other
than the parties, their respective heirs, representatives, successors and
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permitted assigns, any rights or remedies under or by reason of this Agreement,
nor is anything in this Agreement intended to relieve or discharge the liability
of any party, nor shall any provision of this Agreement give any entity any
right of subrogation against or action over or against any party.
12.16 Severability. The invalidity or unenforceability of all or any part
of any particular provision of this Agreement shall not affect the other
provisions hereof and this Agreement shall be continued in all respects as if
such invalid or unenforceable provision were omitted.
12.17 Risk of Loss. Seller shall bear all risk of loss with respect to
Company's assets arising on or prior to the Closing Date. In the event that all
or any part of Company's assets are damaged or destroyed by fire, windstorm,
flood or any other casualty on or prior to the Closing Date (whether or not
insured), Seller shall immediately notify Purchaser of such damage or
destruction. In such event, Seller and Purchaser agree as follows:
(a) If the amount of the casualty loss is less than Fifty Thousand
Dollars ($50,000.00), the Purchase Price shall be reduced by the amount of the
casualty loss, and Seller shall retain the right to receive proceeds of any
insurance policies which cover any such loss.
(b) If the amount of the casualty loss is Fifty Thousand Dollars
($50,000.00) or more, Purchaser shall have the option to: (a) terminate this
Agreement by written, notice to Seller, in which case the parties shall have no
further obligations under this Agreement; or (b) continue to proceed with the
transactions contemplated by this Agreement. If Purchaser elects to continue to
proceed with the transactions contemplated under this Agreement: (1) all
insurance proceeds collectible by reason of such casualty loss shall be deemed
to have been absolutely and irrevocably assigned to, and shall be payable
directly to, Purchaser; (2) Seller shall deliver to Purchaser, on or before the
Closing Date, a duly executed assignment of all insurance proceeds, in form and
substance acceptance to Purchaser; (3) Purchaser shall have the right to conduct
all settlement proceedings with respect to such insurance claims; and (4)
Purchaser shall have the right and option to extend the Closing Date for a
period of up to sixty (60) days from the date of such casualty loss.
12.18 Further Documentation. Each party will execute and deliver such
further instruments and documents and do such further acts and things as may be
required to carry out the intent and purpose of this Agreement.
12.19 [RESERVED]
12.20 Completion of Exhibits. This Agreement may be executed without all
the Exhibits except Exhibits 1.2.1 and 1.2.2 (Registration Rights Agreement and
Warrant) and Exhibit 6.4 (Escrow Agreement). The parties shall, on or before
August 31, 1999, diligently endeavor to complete the balance of said Exhibits.
The approval of both parties of all of such Exhibits shall be a condition
precedent to the obligations of the parties hereunder. If the parties are unable
to complete said Exhibits to their mutual reasonable satisfaction with said
time, this Agreement shall be canceled and neither party shall have further
liability to the other hereunder.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as
of the date first hereinabove set forth.
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SELLER: PATE FOODS CORPORATION
an Illinois corporation and
the sole member of WABASH FOODS, LLC
BY:
----------------------------------------
Its:
---------------------------------------
COMPANY: WABASH FOODS, LLC
a Delaware limited liability company
BY:
----------------------------------------
Larry R. Polhill, Manager
PURCHASER: POORE BROTHERS, INC.
a Delaware corporation
BY:
----------------------------------------
Its:
---------------------------------------
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SCHEDULE OF EXHIBITS
TO
AGREEMENT FOR PURCHASE AND SALE OF
LIMITED LIABILITY COMPANY MEMBERSHIP INTERESTS
EXHIBIT NO. TITLE
Exhibit 1.2.1 Registration Rights Agreement
Exhibit 1.2.2 Warrant
Exhibit 2.1.1 States Where Company is Qualified
Exhibit 2.1.2 Company's Articles, Etc.
Exhibit 2.4 Interests in Subsidiaries, Etc.
Exhibit 2.6 Violation of Seller or Company Organizational Documents
Exhibit 2.7 Governmental Consents
Exhibit 2.10 Disclosure of Certain Liabilities
Exhibit 2.11.1 Financial Statement Changes
Exhibit 2.11.2 Employee Compensation Changes
Exhibit 2.12 Defaults under Contracts
Exhibit 2.14 Liens and Encumbrances
Exhibit 2.15 Leases
Exhibit 2.16 Premises Law Violations
Exhibit 2.18 Asset Dispositions
Exhibit 2.19 Litigation
Exhibit 2.20 Company as Party to Partnership or Other Profit or Loss
Sharing Agreement
Exhibit 2.21 Defaulted Tax Filings
Exhibit 2.22 Governmental Contracts
<PAGE>
Exhibit 2.23.1 Law Compliance Failures
Exhibit 2.23.2 Inspection Reports and Violation Notices
Exhibit 2.24 Payment Practices
Exhibit 2.25.1 Schedule of Employee Welfare Benefit Plans
Exhibit 2.25.3 Notice of Non-Compliance of Welfare Benefit Plans
Exhibit 2.25.4 Notice of Welfare Plan Non-Compliance
Exhibit 2.25.5 Other Plans
Exhibit 2.25.6 Schedule of Employees and Accrued Vacation
Exhibit 2.25.7 Annual Reports
Exhibit 2.25.8 Notice of Health Plan Non-Compliance
Exhibit 2.25.9 Binding Nature of Welfare Benefit Plans
Exhibit 2.26 Intellectual Property Representation and Warrants
Exhibit 2.27 Schedule of Noticed Material Warranty Claims
Exhibit 2.28 Schedule of Known Labor Matters, Etc.
Exhibit 2.29 List and Copies of Insurance
Exhibit 2.30 Schedule of Noticed Product Liability Claims
Exhibit 2.31.1 Notices of Failure to Obtain Required Environmental
Permits, etc.
<PAGE>
Exhibit 2.31.2 Notices of Environmental Violations
Exhibit 2.31.3 Copies of Environmental Investigations and Reports
Exhibit 2.32 Scheduled Capital Expenditures
Exhibit 2.33 Known Supplier Matters
Exhibit 2.34 Schedule of Contracts With Affiliates
Exhibit 2.35 Schedule of Known Adverse Events, Transactions or
Information
Exhibit 2.36 Schedule of Bank Accounts
Exhibit 2.37 Persons Receiving Annual Remuneration in Excess of
$40,000.00
Exhibit 5.5 Schedule of Third Parties Required to Approve of Agreements
Exhibit 6.2 Form Non-Competition Agreement
Exhibit 6.4 Form Escrow Agreement
Exhibit 6.5.1 Form Employment Agreements
Exhibit 6.5.2 Employee Resignations to be Delivered by Seller
Exhibit 7.1 Certificate of Fulfillment of Conditions by Seller and
Company
Exhibit 7.11 Withholding Certificates
Exhibit 8.1 Certificate of Fulfillment of Conditions of Purchase
Exhibit 9.2 Form of Assignment Document
Exhibit 12.8.1 Beneficial Holdings in Seller
Exhibit 12.8.2 Form of Securities Opinion
<PAGE>
EXHIBIT F
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into as of
the ________ day of _________, 1999 by and between POORE BROTHERS, INC., a
Delaware corporation (the "Company"), and PATE FOODS CORPORATION, an Illinois
corporation ("Pate").
WHEREAS, the Company and Pate are parties to that certain Agreement for
Purchase and Sale of Membership Interests, dated as of __________, 1999 (the
"Purchase and Sale Agreement"), in connection with the purchase by the Company
from Pate of all of the outstanding membership interests of Wabash Foods, LLC, a
Delaware limited liability company. Pursuant to the Purchase and Sale Agreement,
the Company is required to provide Pate with certain registration rights with
respect to certain shares of the Company's common stock, par value $.01 per
share (the "Common Stock"), issuable to Pate pursuant to the Purchase and Sale
Agreement; and
WHEREAS, it is a condition precedent to the closing of the transactions
contemplated by the Purchase and Sale Agreement that the Company enter into this
Agreement with Pate.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth, the parties hereto agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall have
the following meanings:
(a) The term "1933 Act" means the Securities Act of 1933, as amended.
(b) The term "1934 Act" means the Securities Exchange Act of 1934, as
amended.
(c) The term "Holder" means Pate and any other person or entity
holding Registrable Securities (as defined below) to whom the registration
rights granted in this Agreement have been transferred pursuant to Section 9
hereof.
(d) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the 1933 Act, and the declaration or
ordering of effectiveness of such registration statement.
(e) The term "Registrable Securities" means (i) the Closing Shares (as
such term is defined in the Purchase and Sale Agreement), (ii) the Warrant
Shares (as defined below) and (iii) any shares of Common Stock issued as (or
issuable upon the conversion or exercise of any warrant, right or other security
which is issued as) a dividend or other distribution with respect to, or in
exchange for or in replacement of the Closing Shares or the Warrant Shares, but
excluding in all cases, however, any Registrable Securities sold by a person in
a transaction in which such person's rights under this Agreement are not
assigned; PROVIDED, HOWEVER, that any such securities shall cease to be
Registrable Securities when (i) one or more registration statements with respect
to the sale of such securities shall have become effective under the 1933 Act
and all such securities shall have been disposed of in accordance with the plan
of distribution set forth therein; (ii) such securities shall have been disposed
of in accordance with SEC (as defined below) Rule 144 promulgated under the 1933
Act, or any successor rule or regulation thereto; or (iii) such securities may
otherwise be sold to the public in a transaction not requiring registration
under the 1933 Act.
(f) The number of shares of "Registrable Securities Then Outstanding"
shall be equal to the sum of the number of shares of Common Stock outstanding
which are Registrable Securities.
(g) The term "Registration Expenses" means all registration,
qualification and filing fees, printing expenses, escrow fees and blue sky fees,
fees and disbursements of counsel for the Company and of the Company's
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independent certified public accountants, in each case incident to or required
by the registration under this Agreement, and any other fees and expenses of the
Company in connection with a registration under this Agreement which are not
Selling Expenses.
(h) The term "SEC" means the Securities and Exchange Commission
(i) The term "Selling Expenses" means all underwriting discounts,
selling commissions and stock transfer taxes applicable to the securities
registered by the Holders, and any other fees and expenses incurred by Holders
(including legal fees and expenses) in connection with a registration under this
Agreement.
(j) The term "Warrant Shares" means the shares of Common Stock
issuable upon exercise of the Warrant for Additional Shares (as such term is
defined in the Purchase and Sale Agreement).
(k) All other capitalized terms used in this Section that are not
defined herein shall have the meaning otherwise given in the Purchase and Sale
Agreement.
2. PIGGYBACK REGISTRATION RIGHTS.
(a) If, at any time or from time to time on or after the date of the
one year anniversary of this Agreement (the "Anniversary Date"), the Company
shall determine to register any of its Common Stock, either for its own account
or for the account of a security holder or holders pursuant to demand
registration rights which are exercised on or after the Anniversary Date, other
than pursuant to a Registration Statement on Form S-4 or Form S-8, the Company
will (i) promptly give each Holder written notice thereof, and (ii) include in
such registration (and any related qualification under blue sky or other state
securities laws), and in any underwriting involved therein, all of the
Registrable Securities specified in a written request or requests made by any
Holder within fifteen (15) days after receipt of such written notice from the
Company.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise the Holders as part of the written notice given pursuant to Section 2(a).
In such event, the right of any Holder to registration shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of
Registrable Securities owned by the Holder in the underwriting to the extent
provided under this Section 2. All Holders proposing to distribute their
Registrable Securities through such underwriting shall (together with the
Company and any other holders of securities of the Company distributing their
securities through such underwriting) enter into an underwriting agreement with
the managing or lead managing underwriter selected by the Company in the form
customarily used by such underwriter with such changes thereto as shall be
acceptable to the Company. Notwithstanding any other provision of this Section
2, if the managing or lead managing underwriter determines that market factors
require that the number of Registrable Securities and other securities requested
to be included in the registration be limited, the managing or lead managing
underwriter may reduce the number of Registrable Securities and securities of
any other holder of securities to be included in the registration. If the
registration includes an underwritten primary registration on behalf of the
Company, the reduction shall be taken (i) first from and to the extent of the
securities requested to be included in such registration by the Holders and the
holders of any other securities PRO RATA according to the number of securities
requested by the Holders and such holders to be included in the registration,
and (ii) thereafter from the securities to be registered on behalf of the
Company. If the registration consists only of an underwritten secondary
registration on behalf of holders of securities of the Company, the reduction
shall be taken (i) first from and to the extent of the securities requested to
be included in the registration by the Holders and any other holders of
securities included in the registration other than pursuant to demand
registration rights PRO RATA according to the number of securities requested by
the Holders and such holders to be included in the registration and (ii)
thereafter from securities, if any, to be registered on behalf of holders of
securities included in the registration pursuant to demand registration rights.
The Company shall advise all Holders and other holders participating in such
underwriting as to any such limitation and the number of shares that may be
included in the registration and underwriting. If any Holder disapproves of the
terms of any such underwriting, such Holder may elect to withdraw therefrom by
written notice to the Company and the managing or lead underwriter. Any
Registrable Securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration.
(c) Notwithstanding any other provision of this Agreement, the Company
may withdraw a registration for which registration rights have been exercised at
any time prior to the time it becomes effective.
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3. EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with a registration pursuant to this Agreement shall be borne by the
Company. All Selling Expenses relating to the Registrable Securities registered
on behalf of the Holders shall be borne by the Holders of such Registrable
Securities PRO RATA based upon the total number of Registrable Securities
included in the registration or, if such Selling Expenses are specifically
allocable to Registrable Securities held by specific Holders, by such Holders to
the extent related to the sale of such Registrable Securities.
4. REGISTRATION PROCEDURES.
(a) In connection with the registration of Registrable Securities
required pursuant to this Agreement, the Company shall as expeditiously as is
reasonable:
(i) Prepare and file with the SEC on any appropriate form a
registration statement with respect to such Registrable Securities and use
reasonable efforts to cause such registration statement to become effective.
(ii) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to keep such
registration statement effective and to comply with the provisions of the 1933
Act with respect to the disposition of all Registrable Securities and other
securities covered by such registration statement for a period of 180 days or
until the Holder or Holders have completed the distribution described in such
registration statement, whichever occurs first.
(iii) Furnish to each seller of such Registrable Securities such
number of conformed copies of such registration statement and of each such
amendment and supplement thereto (at least one of which shall include all
exhibits), such number of copies of the prospectus included in such registration
statement (including each preliminary prospectus and any summary prospectus), in
conformity with the requirements of the Act, such documents incorporated by
reference in such registration statement or prospectus, and such other documents
as such seller may reasonably request in order to facilitate the sale or
disposition of such Registrable Securities.
(iv) Use reasonable efforts to register or qualify all
Registrable Securities and other securities covered by such registration
statement under such other securities or "blue sky" laws of such jurisdictions
as the underwriter shall reasonably request, and do any and all other acts and
things as may be reasonably necessary to consummate the disposition in such
jurisdictions of the Registrable Securities covered by such registration
statement, except that the Company shall not for any such purpose be required to
qualify generally to do business as a foreign corporation in any jurisdiction
wherein it is not so qualified, or to subject itself to taxation in respect of
doing business in any such jurisdiction, or to consent to general service of
process in any such jurisdiction.
(v) Immediately notify each seller of Registrable Securities, at
any time when a prospectus relating thereto is required to be delivered under
the 1933 Act, of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing or if it is necessary, in the opinion
of counsel to the Company, to amend or supplement such prospectus to comply with
law, and at the request of any such seller prepare and furnish to any such
seller a reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing and shall otherwise comply in all
material respects with law and so that such prospectus, as amended or
supplemented, will comply with law.
(vi) Otherwise use reasonable efforts to comply with all
applicable rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve (12) months, beginning with the first month of the
first fiscal quarter after the effective date of such registration statement,
which earnings statement shall satisfy the provisions of Section 11(a) of the
1933 Act.
(vii) Use reasonable efforts to list such securities on each
securities exchange or over-the-counter market, if any, on which shares of
Common Stock are then listed.
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(viii) Use reasonable efforts to provide a transfer agent and
registrar for such Registrable Securities not later than the effective date of
such registration statement.
(ix) Issue to any underwriter to which any holder of Registrable
Securities may sell such Registrable Securities in connection with any such
registration (and to any direct or indirect transferee of any such underwriter)
certificates evidencing shares of Common Stock.
(b) If requested by the managing or lead managing underwriter for any
underwritten offering of Registrable Securities on behalf of a Holder or Holders
of Registrable Securities, the Company will enter into an underwriting agreement
with the underwriters of such offering, such agreement to contain such
representations and warranties by the Company and each such Holder and such
other terms and conditions as are contained in underwriting agreements
customarily used by such managing or lead managing underwriter with such changes
as shall be acceptable to the Company, including, without limitation, provisions
relating to indemnification or contribution in lieu thereof.
(c) The Holder or Holders of Registrable Securities included in any
registration shall furnish to the Company such information regarding such Holder
or Holders, the Registrable Securities held by them and the distribution
proposed by such Holder or Holders as the Company may from time to time
reasonably request and as shall be reasonably required in connection with any
registration, qualification or compliance referred to in this Agreement.
(d) The Holder or Holders of Registrable Securities included in any
registration shall, upon request by the Company and the managing or lead
managing underwriter, execute and deliver custodian agreements and powers of
attorney in form and substance reasonably satisfactory to the Company and such
Holder or Holders and as shall be reasonably necessary to consummate the
offering.
5. INDEMNIFICATION.
(a) The Company will indemnify each Holder with respect to which
registration has been effected pursuant to this Agreement, each of its officers
and directors, if any, and each underwriter, if any, and each person who
controls the Holder or any such underwriter within the meaning of Section 15 of
the 1933 Act, against any and all losses, claims, damages, liabilities or
expenses (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement or prospectus, or any amendment or
supplement thereto, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances in which they were made, not
misleading, or any violation by the Company of the 1933 Act or any rule or
regulation promulgated under the 1933 Act applicable to the Company in
connection with any such registration, and the Company will reimburse each such
Holder, each such underwriter and each person who controls any such underwriter,
for any legal and other expenses reasonably incurred, as such expenses are
incurred, in connection with investigating, preparing or defending any such
claims, loss, damage, liability or action; PROVIDED, HOWEVER, that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by such Holder or underwriter and stated to be specifically for
use therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration is being effected,
indemnify the Company, each of its directors and officers, each underwriter, if
any, of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the 1933 Act and each other such Holder against any and all
losses, claims, damages, liabilities and expenses (or actions in respect
thereof), arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement or
prospectus, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statement therein,
in the light of the circumstances under which they were made, not misleading,
and will reimburse the Company, such Holders, underwriters or control persons
for any legal or any other expenses reasonably incurred, as such expenses are
incurred, in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement or prospectus in reliance upon
and in conformity with written information furnished to the Company by such
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Holder. Notwithstanding the foregoing, the liability of each Holder under this
Section 5 shall be limited to an amount equal to the aggregate proceeds received
by such Holder from the sale of Registrable Securities hereunder, unless such
liability arises out of or is based on willful conduct by such Holder.
(c) Each party entitled to indemnification under this Section 5 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claims or any
litigation resulting therefrom; PROVIDED, HOWEVER, that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (which approval shall not be
unreasonably withheld), and the Indemnified Party may participate in such
defense at such Indemnified Party's expense; PROVIDED, HOWEVER, that the failure
of any Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement unless the failure to
give such notice is materially prejudicial to an Indemnifying Party's ability to
defend such action. Notwithstanding the foregoing, the Indemnifying Party shall
not be entitled to assume the defense for matters as to which there is, in the
opinion of counsel to the Indemnifying Party, a conflict of interest or separate
and different defenses. No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect of such claim or
litigation. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and as shall be reasonably required in connection with the defense of
such claim and the litigation resulting therefrom.
6. CONTRIBUTION.
(a) If the indemnification provided for in Section 5 hereof is
unavailable to the Indemnified Parties in respect of any losses, claims,
damages, liabilities or expenses (or actions in respect thereof) referred to
therein, then each such Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) in such proportion as is appropriate to
reflect the relative fault of the Indemnifying Party on the one hand and the
Indemnified Party on the other in connection with the statement or omission
which resulted in such losses, claims, damages, liabilities or expenses (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to, among
other things, whether the untrue statement (or alleged untrue statement), of a
material fact or the omission (or alleged omission) to state a material fact
relates to information supplied by the Indemnifying Party or the Indemnified
Party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
each Holder agree that it would not be just and equitable if contribution
pursuant to this Section 6 were determined by PRO RATA allocation or by any
other method of allocation which does not take account of the equitable
considerations referred to above. The amount paid or payable by an Indemnified
Party as a result of the losses, claims, damages, liabilities or expenses (or
actions in respect thereof) referred to above in this Section shall be deemed to
include any legal or other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any such action or claim.
(b) Notwithstanding anything to the contrary contained herein, the
obligation of each Holder to contribute pursuant to this Section 6 is several
and not joint and no selling Holder shall be required to contribute any amount
in excess of the amount by which the total price at which the Registrable
Securities of such selling Holder were offered to the public exceeds the amount
of any damages which such selling Holder has otherwise been required to pay by
reason of such untrue statement (or alleged untrue statement) or omission (or
alleged omission).
(c) No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
7. 1934 ACT REGISTRATION. The Company covenants and agrees that until such
time as there shall be no Registrable Securities outstanding:
(a) It will, if required by law, maintain an effective registration
statement (containing such information and documents as the SEC shall specify)
with respect to the Common Stock under Section 12(g) of the 1934 Act and will
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file in a timely manner such information, documents and reports as the SEC may
require or prescribe for companies whose stock has been registered pursuant to
said Section 12(g).
(b) It will, if a registration statement with respect to the Common
Stock under Section 12(b) or Section 12(g) of the 1934 Act is effective, make
whatever filings with the SEC or otherwise make generally available to the
public such financial and other information as may be necessary in order to
enable the Holders to sell shares of Common Stock pursuant to the provisions of
SEC Rule 144 promulgated under the 1933 Act, or any successor rule or regulation
thereto or any statute hereafter adopted to replace or to establish the
exemption that is now covered by said Rule 144 ("Rule 144").
The Company represents and warrants that such registration statement or any
information, documents or report filed with the SEC in connection therewith or
any information so made public shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements contained therein not misleading. The
Company agrees to indemnify and hold harmless (or to the extent the same is not
enforceable, make contribution to the Holders, each of its officers and
directors, from and against any and all losses, claims, damages, liabilities or
expenses (or actions in respect thereof) arising out of or resulting from any
breach of the foregoing representation or warranty, all on terms and conditions
comparable to those set forth in Section 5; PROVIDED, HOWEVER, that the Company
shall be given written notice and an opportunity to assume on terms and
conditions comparable to those set forth in Section 5 the defense thereof.
8. DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek
an injunction restraining or otherwise delaying any registration as the result
of any controversy that might arise with respect to the interpretation or
implementation of this Agreement.
9. TRANSFER OF REGISTRATION RIGHTS. The registration rights of any Holder
(and of any permitted transferee of any Holder or its permitted transferee)
under this Agreement with respect to any shares of Registrable Securities may be
transferred to any transferee who acquires (otherwise than in a registered
public offering) such shares of Registrable Securities; PROVIDED, HOWEVER, that
the Company is given written notice by the Holder at the time of such transfer
stating the name and address of the transferee and identifying the securities
with respect to which the rights under this Agreement are being assigned.
10. GOVERNING LAW. This Agreement shall be governed by and construed under
the internal laws of the State of Arizona without regard to conflicts of law.
11. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12. NOTICES. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
on the date of service if served personally on the party to whom notice is to be
given, or on the fifth day after the date of mailing if mailed to the party to
whom notice is to be given, by first class mail, registered or certified,
postage prepaid, and properly addressed as follows: if to the Holder, at its
address as shown in the Company records; and if to the Company, at its principal
office. Any party may change its address for purposes of this paragraph by
giving the other party written notice of the new address in the manner set forth
above.
13. ENTIRE AGREEMENT. This Agreement states the entire agreement of the
parties concerning the subject matter hereof, and supersedes all prior
agreements, written or oral, between them concerning such subject matter.
14. AMENDMENTS; WAIVERS. This Agreement may be amended, and compliance with
any provision of this Agreement may be omitted or waived, only by the written
agreement of the Holders of at least a majority in voting power of the
then-outstanding Registrable Securities to be bound thereby.
15. HEADINGS. The various headings of this Agreement are inserted for
convenience only and shall not affect the meaning or interpretation of this
Agreement or any provisions hereof.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the date
first above written.
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POORE BROTHERS, INC.
By:
------------------------------------
Name:
Title:
PATE FOODS CORPORATION
By:
------------------------------------
Name:
Title:
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EXHIBIT G
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE " 1933 ACT"), OR
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SECURITIES UNDER THE 1933 ACT, OR AN OPINION OF COUNSEL,
SATISFACTORY TO THE ISSUER HEREOF, TO THE EFFECT THAT REGISTRATION IS NOT
REQUIRED UNDER THE 1933 ACT.
WARRANT TO PURCHASE
COMMON STOCK OF
POORE BROTHERS, INC.
Date of Issuance: ___________, 1999 Warrant No. ____
This certifies that, for value received, POORE BROTHERS, INC., a Delaware
corporation (the "Company"), grants PATE FOODS CORPORATION, an Illinois
corporation, or registered assigns (the "Registered Holder"), the right to
subscribe for and purchase from the Company, at the price of one dollar ($1.00)
per share, as such price may be adjusted from time to time (the "Exercise
Price"), from and after 9:00 a.m. Phoenix time on ___________, 1999 (the
"Exercise Commencement Date") and to and including 5:00 p.m., Phoenix time on
___________, 2004 (the "Expiration Date"), four hundred thousand (400,000)
shares, as such number of shares may be adjusted from time to time (the "Warrant
Shares"), of the Company's common stock, par value $.01 per share (the "Common
Stock"), subject to the provisions and upon the terms and conditions herein set
forth. The Exercise Price and the number of Warrant Shares purchasable upon
exercise of this Warrant are subject to adjustment from time to time as provided
in Section 7 hereof.
SECTION 1. REGISTRATION. The Company shall register this Warrant, upon
records to be maintained by the Company for that purpose in the name of the
Registered Holder. The Company may deem and treat the Registered Holder as the
absolute owner of this Warrant for the purpose of any exercise hereof or any
distribution to the Registered Holder, and for all other purposes, and the
Company shall not be affected by any notice to the contrary.
SECTION 2. REGISTRATION OF TRANSFERS AND EXCHANGES.
(a) Subject to Section 11 hereof, the Company shall register the transfer
of this Warrant, in whole or in part, upon records to be maintained by the
Company for that purpose, upon surrender of this Warrant, with the Form of
Assignment attached hereto completed and duly endorsed by the Registered Holder,
to the Company at the office specified in or pursuant to Section 3(b). Upon any
such registration of transfer, a new Warrant, in substantially the form of this
Warrant, evidencing the Common Stock purchase rights so transferred shall be
issued to the transferee and a new Warrant, in similar form, evidencing the
remaining Common Stock purchase rights not so transferred, if any, shall be
issued to the Registered Holder.
(b) This Warrant is exchangeable, upon the surrender hereof by the
Registered Holder at the office of the Company specified in or pursuant to
Section 3(b) hereof, for new Warrants, in substantially the form of this Warrant
evidencing, in the aggregate, the right to purchase the number of Warrant Shares
which may then be purchased hereunder, each of such new Warrants to be dated the
date of such exchange and to represent the right to purchase such number of
Warrant Shares as shall be designated by the Registered Holder at the time of
such surrender.
SECTION 3. DURATION AND EXERCISE OF THIS WARRANT.
(a) This Warrant shall be exercisable by the Registered Holder, in whole,
or from time to time in part, on any business day before 5:00 p.m., Phoenix
time, during the period beginning on the Exercise Commencement Date and ending
on the Expiration Date. At 5:00 p.m., Phoenix time, on the Expiration Date, this
Warrant, to the extent not previously exercised, shall become void and of no
further force or effect.
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(b) Subject to Sections 4, and 11(a) hereof, upon exercise or surrender of
this Warrant, with the Form of Election to Purchase attached hereto completed
and duly endorsed by the Registered Holder, to the Company at its office at 3500
South La Cometa Drive, Goodyear, Arizona 85338, Attention: Chief Financial
Officer, or at such other address as the Company may specify in writing to the
Registered Holder, and upon payment of the Exercise Price multiplied by up to
the number of Warrant Shares then issuable upon exercise of this Warrant in
lawful money of the United States of America (except as otherwise provided for
in Section 3(c) hereof), all as specified by the Registered Holder in the Form
of Election to Purchase, the Company shall promptly issue and cause to be
delivered to or upon the written order of the Registered Holder, and in such
name or names as the Registered Holder may designate, a certificate for the
Warrant Shares issued upon such exercise. Any person so designated in the Form
of Election to Purchase, duly endorsed by the Registered Holder, as the person
to be named on the certificates for the Warrant Shares, shall be deemed to have
become holder of record of such Warrant Shares, evidenced by such certificates,
as of the Date of Exercise (as hereinafter defined) of such Warrant.
(c) The Registered Holder may pay the applicable Exercise Price pursuant to
Section 3(b), at the option of the Registered Holder, either (i) in cash or by
cashier's or certified bank check payable to the Company in an amount equal to
the product of the Exercise Price multiplied by the number of Warrant Shares
being purchased upon such exercise (the "Aggregate Exercise Price"), (ii) by
wire transfer of immediately available funds to the account which shall be
indicated in writing by the Company to the Registered Holder, or (iii) by
written notice to the Company that the Registered Holder is exercising this
Warrant and is authorizing the Company to withhold from the issuance to such
Registered Holder that number of Warrant Shares which when multiplied by the
Market Price (as hereinafter defined) for the Common Stock for the ten (10)
consecutive trading days immediately preceding the Date of Exercise is equal to
the Aggregate Exercise Price. Any Warrant Shares withheld by the Company in
connection with an exercise of this Warrant pursuant to clause (iii) of this
Section 3(c) shall no longer be issuable under this Warrant and this Warrant
shall be deemed to be automatically amended to reduce the number of Warrant
Shares issuable hereunder by an amount equal to the amount of such withheld
Warrant Shares.
(d) The "Date of Exercise" of any Warrant means the date on which the
Company shall have received (i) this Warrant, with the Form of Election to
Purchase attached hereto appropriately completed and duly endorsed, and (ii)
payment of the Aggregate Exercise Price as provided herein.
(e) This Warrant shall be exercisable either as an entirety or, from time
to time, for part only of the number of Warrant Shares which are issuable
hereunder; PROVIDED, HOWEVER, that no partial exercise of this Warrant shall
involve less than 5,000 Warrant Shares unless the aggregate remaining Warrant
Shares available for purchase pursuant to this Warrant is less than 5,000, in
which case this Warrant shall be exercisable for only all such remaining Warrant
Shares. If this Warrant shall have been exercised only in part, the Company
shall, at the time of delivery of the certificates for the Warrant Shares issued
pursuant to such exercise, deliver to the Registered Holder a new Warrant
evidencing the rights to purchase the remaining Warrant Shares, which Warrant
shall be substantially in the form of this Warrant.
(f) DEFINITION OF MARKET PRICE. As used in this Warrant, the term "Market
Price" shall mean the average of the daily closing prices per share of the
Common Stock for the ten (10) consecutive trading days immediately preceding the
day as of which Market Price is being determined. The closing price for each day
shall be the last reported sale price or, in case no such sale takes place on
such day, the average of the reported closing bid and asked prices, in either
case on the New York Stock Exchange, or, if the Common Stock is not listed or
admitted to trading on the New York Stock Exchange, on the principal national
securities exchange on which the shares are listed or admitted to trading, or,
if the shares are not so listed or admitted to trading, the average of the
highest reported bid and lowest reported asked prices as furnished by the
National Association of Securities Dealers, Inc. (the "NASD") through NASDAQ or
through a similar organization if NASDAQ is no longer reporting such information
or as reported on the NASD's OTC Electronic Bulletin Board ("OTC"). If shares of
Common Stock are not listed or admitted to trading on any exchange or quoted
through NASDAQ or any similar organization or reported on OTC, the Market Price
shall be deemed to be the fair value thereof determined in good faith by the
Company's Board of Directors as expressed by a resolution of such board as of a
date which is within fifteen (15) days of the date as of which the determination
is to be made.
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SECTION 4. PAYMENT OF TAXES AND EXPENSES.
(a) The Company will pay all expenses and taxes (other than any federal or
state income tax or similar obligations of the Registered Holder) and other
governmental charges attributable to the preparation, execution, issuance and
delivery of this Warrant, any new Warrant and the Warrant Shares; provided,
however, that the Company shall not be required to pay any tax in respect of the
transfer of this Warrant or the Warrant Shares, or the issuance or delivery of
certificates for Warrant Shares upon the exercise of this Warrant, to a person
or entity other than a Registered Holder or an Affiliate (as hereinafter
defined) of such Registered Holder; and further provided, that this paragraph
shall not obligate the Company to pay any expenses incurred by the Registered
Holder in connection with any registration of the Warrant, any new Warrant or
the Warrant Shares pursuant to the 1933 Act.
(b) An "Affiliate" of any person or entity means any other person or entity
directly or indirectly controlling, controlled by or under direct or indirect
common control with such person or entity.
SECTION 5. MUTILATED OR MISSING WARRANT CERTIFICATE. If this Warrant shall
be mutilated, lost, stolen or destroyed, upon request by the Registered Holder,
the Company will issue, in exchange for and upon cancellation of the mutilated
Warrant, or in substitution for the lost, stolen or destroyed Warrant, a new
Warrant, in substantially the form of this Warrant, of like tenor, but, in the
case of loss, theft or destruction, only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction of this Warrant
and, if requested by the Company, indemnity also reasonably satisfactory to it.
SECTION 6. RESERVATION AND ISSUANCE OF WARRANT SHARES.
(a) The Company will at all times have authorized, and reserve and keep
available, free from preemptive rights, for the purpose of enabling it to
satisfy any obligation to issue Warrant Shares upon the exercise of the rights
represented by this Warrant, the number of Warrant Shares deliverable upon
exercise of this Warrant.
(b) Before taking any action which could cause an adjustment pursuant to
Section 7 hereof reducing the Exercise Price below the par value of the Warrant
Shares, the Company will take any corporate action which may be necessary in
order that the Company may validly and legally issue at the Exercise Price, as
so adjusted, Warrant Shares that are fully paid and non-assessable.
(c) The Company covenants that all Warrant Shares will, upon issuance in
accordance with the terms of this Warrant, be (i) duly authorized, fully paid
and nonassessable, and (ii) free from all taxes with respect to the issuance
thereof and from all liens, charges and security interests.
SECTION 7. CERTAIN ADJUSTMENTS
(a) SUBDIVISIONS OR COMBINATIONS OF STOCK. In case the Company shall at any
time subdivide the outstanding shares of Common Stock into a greater number of
shares, the Exercise Price in effect immediately prior to such subdivision shall
be proportionately reduced, and conversely, in case the outstanding shares of
Common Stock shall be combined into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination shall be proportionately
increased. Upon each such adjustment of the Exercise Price, the holder of this
Warrant shall thereafter prior to the Expiration Date thereof be entitled to
purchase, at the Exercise Price resulting from such adjustment, the number of
Warrant Shares obtained by multiplying the Exercise Price in effect immediately
prior to such adjustment by the number of Warrant Shares issuable upon exercise
of such Warrant immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment.
3
<PAGE>
(b) CONSOLIDATION, MERGER, SALE OF ASSETS, REORGANIZATION, ETC. In case the
Company (i) consolidates with or merges into any other corporation and is not
the continuing or surviving corporation of such consolidation or merger, or (ii)
permits any other corporation to consolidate with or merge into the Company and
the Company is the continuing or surviving corporation but, in connection with
such consolidation or merger, the Common Stock is changed into or exchanged for
stock or other securities of any other corporation or cash or any other assets,
or (iii) transfers all or substantially all of its properties and assets to any
other corporation, or (iv) effects a capital reorganization or reclassification
of the capital stock of the Company in such a way that holders of the Common
Stock shall be entitled to receive stock, securities, cash and/or assets with
respect to or in exchange for the Common Stock, then, and in each such case,
proper provision shall be made so that the holder of this Warrant, upon the
exercise of this Warrant at any time after the consummation of such
consolidation, merger, transfer, reorganization or reclassification, shall be
entitled to receive (at the aggregate Exercise Price in effect for all Warrant
Shares issuable upon such exercise immediately prior to such consummation as
adjusted to the time of such transaction), in lieu of shares of Common Stock
issuable upon such exercise prior to such consummation, the stock and other
securities, cash and/or assets to which such holder would have been entitled
upon such consummation if such holder had so exercised such Warrant immediately
prior thereto (subject to adjustments subsequent to such corporate action as
nearly equivalent as possible to the adjustments provided for in this Section
7).
SECTION 8. CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the event that the
Company shall at any time prior to the exercise of this Warrant declare a
dividend (other than a dividend consisting solely of shares of Common Stock or a
cash dividend or distribution payable out of current or retained earnings) or
otherwise distribute to its stockholders any monies, assets, property, rights,
evidences of indebtedness, securities (other than shares of Common Stock),
whether issued by the Company or by another person or entity, or any other thing
of value, the Registered Holder shall thereafter be entitled, in addition to the
shares of Common Stock receivable upon the exercise of the Warrant, to receive,
upon the exercise of the Warrant, the same monies, property, assets, rights,
evidences of indebtedness, securities or any other thing of value that the
Registered Holder would have been entitled to receive at the time of such
dividend or distribution had the Registered Holder been an owner of record of
the shares of Common Stock into which the Warrant is then being exercised as of
the record date or other date of determination for such dividend or distribution
and an appropriate provision shall be made a part of any such dividend or
distribution. Notwithstanding any provision herein to the contrary, no
adjustment under this Section 8 shall be made with respect to any cash dividend
or distribution payable solely out of current or retained earnings of the
Company.
SECTION 9. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. The Registered Holder
shall not be entitled to vote or be deemed the holder of Common Stock or any
other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained herein be construed to confer upon
the holder of this Warrant, as such, the rights of a stockholder of the Company
or the right to vote for the election of directors or upon any matter submitted
to stockholders at any meeting thereof, or give or withhold consent to any
corporate action or to receive notice of meetings or other actions affecting
stockholders (except as provided herein), or to receive dividends or
subscription rights or otherwise, until the Date of Exercise shall have
occurred. No provision of this Warrant, in the absence of affirmative action by
the Registered Holder hereof to purchase shares of Common Stock, and no mere
enumeration herein of the rights and privileges of the Registered Holder, shall
give rise to any liability of such holder for the Exercise Price or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
SECTION 10. FRACTIONAL WARRANT SHARES. The Company shall not be required to
issue fractions of Warrant Shares upon exercise of the Warrant or to distribute
certificates which evidence fractional Warrant Shares. If any fraction of a
Warrant Share would, except for the provisions of this Section 10, be issuable
on the exercise of the Warrant (or specified portion thereof), the Company shall
pay to the Registered Holder an amount in cash equal to the Market Price as of
the Exercise Date, multiplied by such fraction.
SECTION 11. TRANSFER RESTRICTIONS; REGISTRATION OF THE WARRANT AND WARRANT
SHARES.
(a) Neither the Warrant nor the Warrant Shares have been registered under
the Act. The Registered Holder, by acceptance hereof, represents that it is
acquiring this Warrant to be issued to it for its own account and not with a
view to the distribution thereof, and agrees not to sell, transfer, pledge or
hypothecate this Warrant, any purchase rights evidenced hereby or any Warrant
Shares unless a registration statement is effective for this Warrant or the
Warrant Shares under the Act or in the opinion of such Registered Holder's
counsel reasonably satisfactory to the Company, a copy of which opinion shall be
delivered to the Company, such transaction is exempt from the registration
requirements of the Act.
4
<PAGE>
(b) Subject to the provisions of the following paragraph of this Section
11, each Certificate for Warrant Shares shall be stamped or otherwise imprinted
with a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE 1933
ACT, OR AN OPINION OF COUNSEL, SATISFACTORY TO THE ISSUER HEREOF, TO
THE EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER THE 1933 ACT.
(c) The restrictions and requirements set forth in the foregoing paragraph
shall apply with respect to Warrant Shares unless and until such Warrant Shares
are sold or otherwise transferred pursuant to an effective registration
statement under the Act or are otherwise no longer subject to the restrictions
of the Act, at which time the Company agrees to promptly cause such restrictive
legends to be removed and stop transfer restrictions applicable to such Warrant
Shares to be rescinded.
SECTION 12. REGISTRATION RIGHTS. The Registered Holder is entitled to
certain registration rights with respect to the Warrant Shares pursuant to a
Registration Rights Agreement dated as of __________, 1999, by and between the
Company and Pate Foods Corporation (the "Registration Rights Agreement"). Upon
any transfer of this Warrant or the Warrant Shares by the Registered Holder,
such registration rights may be transferred to the transferee of the Warrant or
the Warrant Shares only in accordance with the terms of the Registration Rights
Agreement.
SECTION 13. NOTICES. All notices, requests, demands and other
communications relating to this Warrant shall be in writing and shall be deemed
to have been duly given if delivered personally or sent by United States
certified or registered first-class mail, postage prepaid, return receipt
requested, to the parties hereto at the following addresses or at such other
address as any party hereto shall hereafter specify by notice to the other party
hereto:
(a) If to the Registered Holder of this Warrant or the holder of the
Warrant Shares, addressed to the address of such Registered Holder or holder as
set forth on books of the Company or otherwise furnished by the Registered
Holder or holder to the Company.
(b) If to the Company, addressed to:
Poore Brothers, Inc.
3500 South La Cometa Drive
Goodyear, Arizona 85338
Attn: Chief Financial Officer
SECTION 14. BINDING EFFECT. This Warrant shall be binding upon and inure to
the sole and exclusive benefit of the Company, its successors and assigns, and
the holder or holders from time to time of this Warrant and the Warrant Shares.
SECTION 15. SURVIVAL OF RIGHTS AND DUTIES. This Warrant shall terminate and
be of no further force and effect on the earlier of (i) 5:00 p.m., Phoenix time,
on the Expiration Date and (ii) the date on which this Warrant and all purchase
rights evidenced hereby have been exercised, except that the provisions of
Sections 4, 6(c), 11 and 12 hereof shall continue in full force and effect after
such termination date.
SECTION 16. GOVERNING LAW. This Warrant shall be construed in accordance
with and governed by the laws of the State of Arizona.
SECTION 17. AMENDMENT; WAIVER. This Warrant and any term hereof may be
amended, waived, discharged or terminated only by and with the written consent
of the Company and the holder of this Warrant.
5
<PAGE>
SECTION 18. SECTION HEADINGS. The Section headings in this Warrant are for
purposes of convenience only and shall not constitute a part hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
under its corporate seal by its officers thereunto duly authorized as of the
date hereof.
POORE BROTHERS, INC.
By:
------------------------------------
Name:
Title:
ATTEST:
----------------------------------------
Name:
Title:
6
<PAGE>
FORM OF ELECTION TO PURCHASE
(To Be Executed Upon Exercise of this Warrant)
To Poore Brothers, Inc.:
The undersigned, the record holder of this Warrant, hereby irrevocably
elects to exercise the right, represented by this Warrant (Warrant No. ___), to
purchase ___________ of the Warrant Shares and herewith tenders payment for such
Warrant Shares to the order Poore Brothers, Inc. of $_________ representing the
full purchase price for such shares at the price per share provided for in such
Warrant and the delivery of any applicable taxes payable by the undersigned
pursuant to such Warrant.
In lieu of paying the purchase price as provided in the preceding
paragraph, the undersigned will/will not (circle appropriate word(s)) make a
cashless exercise pursuant to Section 3(c) of the attached Warrant.
The undersigned requests that certificates for such shares be issued in the
name of
- ------------------------------- PLEASE INSERT SOCIAL SECURITY
OR TAX IDENTIFICATION NUMBER
- -------------------------------
- -------------------------------
- -------------------------------
- ------------------------------- ----------------------------------
(Please print name and address)
In the event that not all of the purchase rights represented by the Warrant
are exercised, a new Warrant, substantially identical to the attached Warrant,
representing the rights formerly represented by the attached Warrant which have
not been exercised, shall be issued in the name of and delivered to
- --------------------------------------------------------------------------------
(Please print name)
- --------------------------------------------------------------------------------
(Please print address)
Dated: ________________ Name of Holder (Print):
By: ________________________________
(Name): ____________________________
(Title): ___________________________
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, _______________________ hereby sells, assigns and
transfers to each assignee set forth below all of the rights of the undersigned
under the attached Warrant (Warrant No. _____) with respect to the number of
shares of Common Stock covered thereby set forth opposite the name of such
assignee unto:
Number of Shares of
Name of Assignee Address Common Stock
---------------- ------- -------------------
If the total of said purchase rights represented by the Warrant shall not
be assigned, the undersigned requests that a new Warrant Certificate evidencing
the purchase rights not so assigned be issued in the name of and delivered to
the undersigned.
Dated: _______________ Name of Holder (Print):
By: ________________________________
(Name): ____________________________
(Title): ___________________________
<PAGE>
EXHIBIT H
WABASH FOODS, LLC
BALANCE SHEETS
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
ASSETS (unaudited)
Current assets:
Cash $ 48,648 $ 62,043
Accounts receivable, less allowance
for doubtful accounts 965,800 790,380
Inventories 1,051,145 664,154
Prepaid expenses 220,199 238,426
----------- -----------
Total current assets 2,285,792 1,755,003
Equipment, net 4,751,507 4,994,045
Other assets 1,069,315 152,801
----------- -----------
Total assets $ 8,106,614 $ 6,901,849
=========== ===========
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Accounts payable $ 660,983 $ 417,692
Accrued expenses 219,210 105,301
Current maturities of notes payable 1,543,600 414,300
----------- -----------
Total current liabilities 2,423,793 937,293
Notes payable, less current maturities above 5,705,557 6,171,561
----------- -----------
Total liabilities 8,129,350 7,108,854
Members' deficit:
Accumulated deficit (22,736) (207,005)
----------- -----------
Total liabilities and members' deficit $ 8,106,614 $ 6,901,849
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
WABASH FOODS, LLC
STATEMENTS OF OPERATIONS
For the Period
From Inception
Six Months Ended (April 1998) through
June 30, 1999 June 30, 1998
----------- -----------
(unaudited) (unaudited)
Net sales $ 5,998,112 $ 1,448,937
Cost of sales 4,939,346 1,230,490
----------- -----------
Gross profit 1,058,766 218,447
Selling, general and
administrative expenses 446,302 143,429
----------- -----------
Income from operations 612,464 75,018
----------- -----------
Other income (expense)
Other income (expense) 22,499 (3,750)
Management fees (194,800) --
Interest expense (255,894) (7,476)
Total other income (expense) (428,195) (11,226)
----------- -----------
Net income $ 184,269 $ 63,792
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
WABASH FOODS, LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
From Inception
Six Months Ended (April 1998) through
June 30, 1999 June 30, 1998
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 184,269 $ 63,792
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 281,978 102,604
Provision for bad debts 5,387 --
Change in operating assets and liabilities:
Accounts receivable (180,807) (272,522)
Inventories (386,991) (222,859)
Other assets and liabilities (898,287) (72,189)
Accounts payable and accrued expenses 357,200 302,091
--------- ---------
Net cash used in operating activities (637,251) (99,083)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (39,440) (105,927)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement 663,296 160,863
--------- ---------
Net decrease in cash (13,395) (44,147)
Cash, beginning of period 62,043 0
--------- ---------
Cash, end of period $ 48,648 $ (44,147)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WABASH FOODS, LLC
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Wabash Foods, LLC (dba Wabash Snacks) was formed on February 24, 1998 in
the State of Delaware, and began operations on April 3, 1998 (after purchasing
the assets of the O'Boisie Corporation) in the Company's manufacturing facility
located in Bluffton, Indiana. The Company's fiscal year ends on December 31.
Wabash Foods is engaged in the production and marketing of salted snack food
products (including potato crisps, pizza chips and pretzels) sold across the
United States. Wabash Foods currently manufactures and sells products under the
Tato Skins(R), Pizzarias(R), O'Boisies(R), Braids(R) and Knots(R) brand names
and manufactures private label pretzels and tortilla chips for snack food
manufacturers. Wabash Foods generally sells its products to vending distributors
and retailers through independent distributors.
2. BASIS OF PRESENTATION
The financial statements include the accounts of Wabash Foods. The
financial statements have been prepared in accordance with the instructions for
a proxy statement pursuant to Section 14(a) of the Securities Exchange Act of
1934 and, therefore, do not include all the information and footnotes required
by generally accepted accounting principles. In the opinion of management, the
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary in order to make the financial statements not
misleading. The results of operations for the six months ended June 30, 1999 are
not necessarily indicative of the results expected for the full year.
3. NOTES PAYABLE
At June 30, 1999, Wabash Foods had outstanding a promissory note (the
"Equipment Note") to US Bancorp Republic Commercial Finance, Inc. ("US Bancorp")
in the principal amount of $5,800,000. The Equipment Note is due over seven
years in monthly principal installments of $69,050 commencing July 1, 1999. The
Equipment Note is secured by all equipment and interest on the Equipment Note is
paid on a monthly basis by Wabash Foods at the bank's reference rate (8.0% at
June 30, 1999). Principal payments on the Equipment Note have been temporarily
deferred by US Bancorp pending completion of the proposed acquisition of Wabash
Foods by Poore Brothers Inc. There are no significant restrictive financial
covenants in the related Financing Agreement that also covers the Line of Credit
discussed below.
Wabash Foods also has an agreement with US Bancorp for a $1.5 million
working capital line of credit (the "Line of Credit"). The balance outstanding
was $734,157 and $785,861 at June 30, 1999 and December 31, 1998, respectively.
The Line of Credit bears interest at US Bancorp's reference rate (8% at June 30,
1999) and, while due on demand, has no maturity date. The Line of Credit is
secured by accounts receivable, inventories, and equipment. The borrowing base
under the Line of Credit is limited to 80% of eligible receivables and 50% of
eligible inventories. As of August 27, 1999, Wabash Foods had a borrowing base
of approximately $860,384 under the Line of Credit.
Pursuant to an Agreement for Sale of Collateral with US Bancorp in March
1998, Wabash Foods issued to US Bancorp a $2.5 million Promissory Note (the
"Promissory Note") with principal payments commencing December 31, 1999. The
Promissory Note bears no interest. The Promissory Note was subsequently amended
to reduce the principal amount to $650,000 with the following required principal
installments: $200,000 due June 30, 1999; $200,000 due September 30, 1999; and
$250,000 due December 31, 1999. Principal payments on the Promissory Note have
been temporarily deferred by US Bancorp pending completion of the proposed
acquisition of Wabash Foods by Poore Brothers Inc.
Wabash Foods' management believes that the achievement of its plans and
objectives will enable Wabash Foods to attain a sufficient level of operating
cash flow, or be able to negotiate successfully a further deferral of principal
payments, to meet its debt repayment obligations. There can be no assurance,
however, that Wabash Foods will achieve a sufficient level of operating cash
flow to meet its debt repayment obligations. Any acceleration under the
Equipment Note, the Line of Credit, and or the Promissory Note could have a
material adverse effect upon Wabash Foods.
<PAGE>
WABASH FOODS, LLC DBA WABASH SNACKS
BLUFFTON, INDIANA
FINANCIAL STATEMENTS
FROM APRIL 3, 1998 (DATE OF INCEPTION) TO
DECEMBER 31, 1998
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Members
Wabash Foods, LLC
Bluffton, Indiana
We have audited the accompanying balance sheet of Wabash Foods, LLC dba Wabash
Snacks as of December 31, 1998, and the related statements of operations and
accumulated deficit and cash flows for the period from April 3, 1998 (date of
inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wabash Foods, LLC dba Wabash
Snacks as of December 31, 1998, and the results of its operations and its cash
flows for the period then ended in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying supplemental information is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is presented fairly, in all material respects, in relation to the basic
financial statements taken as a whole.
/s/ Clifton Gunderson P.L.C.
Clinton, Iowa
February 18, 1999
2
<PAGE>
WABASH FOODS, LLC DBA WABASH SNACKS
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
CURRENT ASSETS
Cash $ 62,043
Accounts receivable - less allowance for
doubtful accounts of $34,400 790,380
Inventories 664,154
Prepaid expenses 238,426
----------
Total current assets $1,755,003
EQUIPMENT
Total cost 5,414,782
Less accumulated depreciation 420,737
----------
Total equipment 4,994,045
OTHER ASSETS
Prepaid artwork 152,801
----------
TOTAL ASSETS $6,901,849
==========
3
<PAGE>
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 417,692
Current maturities of notes payable 414,300
Accrued expenses 105,301
-----------
Total current liabilities $ 937,293
NOTES PAYABLE, less current maturities above 6,171,561
-----------
Total liabilities 7,108,854
MEMBERS' DEFICIT
Accumulated deficit (207,005)
-----------
TOTAL LIABILITIES AND
MEMBERS' DEFICIT $ 6,901,849
===========
4
<PAGE>
WABASH FOODS, LLC DBA WABASH SNACKS
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FROM APRIL 3, 1998 (DATE OF INCEPTION) TO
DECEMBER 31, 1998
SALES $ 6,300,570
COST OF SALES 5,412,569
-----------
Gross profit 888,001
OPERATING EXPENSES
Sales and marketing expenses $ 254,790
General and administrative expenses 393,217
-----------
Total operating expenses 648,007
-----------
Income from operations 239,994
OTHER INCOME (EXPENSE)
Miscellaneous income 14,917
Uncollectible purchased receivables (184,886)
Interest expense (277,030)
-----------
Total other income (expense) (446,999)
-----------
Net loss (207,005)
ACCUMULATED DEFICIT, BEGINNING OF PERIOD --
-----------
ACCUMULATED DEFICIT, END OF PERIOD $ 207,005)
===========
5
<PAGE>
WABASH FOODS, LLC DBA WABASH SNACKS
STATEMENT OF CASH FLOWS
FROM APRIL 3, 1998 (DATE OF INCEPTION) TO
DECEMBER 31, 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(207,005)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 420,737
Uncollectible purchased receivables 184,886
Provision for bad debts 13,400
Effects of changes in operating assets and liabilities:
Accounts receivable (748,666)
Inventories (250,646)
Prepaid expenses (238,426)
Prepaid artwork (152,801)
Accounts payable 417,692
Accrued expenses 105,301
---------
Net cash used in operating activities $(455,528)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (28,290)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable (240,000)
Net borrowings under line of credit agreements 785,861
---------
Net cash provided by financing activities 545,861
---------
NET INCREASE IN CASH 62,043
CASH, BEGINNING OF PERIOD --
---------
CASH, END OF PERIOD $ 62,043
=========
6
<PAGE>
WABASH FOODS, LLC DBA WABASH SNACKS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1998
Wabash Foods, LLC dba Wabash Snacks was formed on February 24, 1998 in the State
of Delaware, and began operations on April 3, 1998. The Company is located in
Bluffton, Indiana and manufactures snack foods for private label manufacturers.
The Company grants credit to all of its customers, which are located throughout
North America. The Company's fiscal year ends on December 31. Significant
accounting policies followed by the Company are presented below.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PREPAID ARTWORK
Prepaid artwork is being amortized over five years using the straight-line
method.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
EQUIPMENT
Equipment is stated at cost.
The cost of equipment is being depreciated over estimated useful lives using the
straight-line method. Rates of depreciation vary from two to five years on
furniture and fixtures and from five to ten years on machinery and equipment.
ADVERTISING
The Company expenses advertising costs as incurred.
INCOME TAX MATTERS
No provision for income taxes is shown in the financial statements because the
Company is a limited liability company. As such, taxable income or loss passes
directly to the members.
This information is an integral part of the accompanying financial statements.
7
<PAGE>
WABASH FOODS, LLC DBA WABASH SNACKS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - PREPAID EXPENSES
Prepaid expenses at December 31, 1998 consist of the following:
Health insurance $ 6,015
Utility deposit 14,000
Rent 172,638
Artwork 41,005
Other 4,768
---------
TOTAL PREPAID EXPENSES $ 238,426
=========
NOTE 2 - INVENTORIES
Inventories at December 31, 1998 consist of the following:
Raw materials $ 272,676
Packaging 297,372
Finished goods 94,106
---------
TOTAL INVENTORIES $ 664,154
=========
NOTE 3 - EQUIPMENT
The following is a schedule, by major classes, of the cost and accumulated
depreciation of equipment as of December 31, 1998:
<TABLE>
<CAPTION>
ASSETS AT COST
-------------------------------------------------------
BALANCE BALANCE
APRIL DECEMBER
3, 1998 ACQUISITIONS DELETIONS 31, 1998
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Machinery and equipment $ -- $5,372,487 $ -- $5,372,487
Office furniture and fixtures -- 42,295 -- 42,295
------------- ---------- ------------- ----------
TOTAL $ -- $5,414,782 $ -- $5,414,782
============= ========== ============= ==========
</TABLE>
This information is an integral part of the accompanying financial statements.
8
<PAGE>
WABASH FOODS, LLC DBA WABASH SNACKS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 3 - EQUIPMENT (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION
------------------------------------------------------- DEPRECIATED
BALANCE BALANCE COST
APRIL DECEMBER DECEMBER
3, 1998 PROVISIONS DELETIONS 31, 1998 31, 1998
------------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Machinery and
equipment $ -- $ 409,510 $ -- $ 409,510 $4,962,977
Office furniture
and fixtures -- 11,227 -- 11,227 31,068
------------- ---------- -------------- ---------- ----------
TOTAL $ -- $ 420,737 $ -- $ 420,737 $4,994,045
============= ========== ============== ========== ==========
</TABLE>
Depreciation expense for the period ended December 31, 1998 totaled $420,737.
NOTE 4 - NOTES PAYABLE AND PLEDGED ASSETS
The following is a schedule of notes payable as of December 31, 1998:
Note payable to U.S. Bancorp Republic Commercial Finance, Inc.
Interest accrues at a variable rate equal to the reference rate per
U.S. Bank National Association. Rate in effect at December 31, 1998
was 7.75%. Interest is payable monthly. Principal payments of
$69,050 are payable monthly beginning July 1, 1999 through July 1,
2006, when all remaining principal is due. Secured by equipment. $ 5,800,000
Note payable to U.S. Bancorp Republic Commercial Finance, Inc.
Line of credit to $1,500,000. Interest accrues at a variable rate
equal to the reference rate per U.S. Bank National Association.
Rate in effect at December 31, 1998 was 7.75%. Interest is payable
monthly. There are no required principal payments and no maturity
date. Secured by accounts receivable, inventory, and equipment. 570,643
Note payable to U.S. Bancorp Republic Commercial Finance, Inc.
Line of credit to $750,000. Interest accrues at a variable rate
equal to the reference rate per U.S. Bank National Association.
Rate in effect at December 31, 1998 was 7.75%. Interest is payable
monthly. There are no required principal payments and no maturity
date. Secured by accounts receivable, inventory, and equipment. 215,218
-----------
Total notes payable 6,585,861
Less portion due in one year 414,300
-----------
LONG-TERM NOTES PAYABLE $ 6,171,561
===========
This information is an integral part of the accompanying financial statements.
9
<PAGE>
WABASH FOODS, LLC DBA WABASH SNACKS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 4 - NOTES PAYABLE AND PLEDGED ASSETS (CONTINUED)
Future maturities of notes payable are as follows:
Year ending December 31,
1999 $ 414,300
2000 828,600
2001 828,600
2002 828,600
2003 828,600
Later years 2,857,161
-----------
TOTAL $ 6,585,861
===========
The book value of assets pledged as security is as follows:
Accounts receivable $ 790,380
Inventories 664,154
Equipment 4,994,045
-----------
TOTAL $ 6,448,579
===========
NOTE 5 - ACCRUED EXPENSES
Accrued expenses at December 31, 1998 consist of the following:
Payroll $ 26,595
Vacation 21,809
Payroll taxes 3,555
Personal property taxes 27,334
Royalties 26,008
-----------
TOTAL ACCRUED EXPENSES $ 105,301
===========
This information is an integral part of the accompanying financial statements.
10
<PAGE>
WABASH FOODS, LLC DBA WABASH SNACKS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 6 - LEASE COMMITMENTS
The Company leases its building from a related party under an operating lease
agreement which expires April 30, 2018. Future minimum lease payments under this
lease are as follows:
1999 $ 202,500
2000 232,500
2001 240,000
2002 240,000
2003 240,000
Later years 3,420,000
-----------
TOTAL $ 4,575,000
===========
Total rental expense for the period ended December 31, 1998 was $135,000.
NOTE 7 - ADVERTISING
Advertising expense for the period ended December 31, 1998 totaled $56,560.
NOTE 8 - MAJOR CUSTOMER
The Company's sales for the period ended December 31, 1998 were $6,300,570.
Sales to one customer accounted for 29% of such sales. Accounts receivable from
this customer represented 22% of net accounts receivable at December 31, 1998.
NOTE 9 - RELATED PARTIES
The Company has entered into transactions with parties related through common
ownership. The following is a summary of transactions and balances with those
parties:
Rent paid $ 307,638
Loan administration fees 45,000
Salary expense 48,804
Salary reimbursements 2,324
Accounts receivable 2,324
Accounts payable 6,545
Rent paid includes $172,638 of prepaid rent as reported in Note 1 - Prepaid
expenses.
This information is an integral part of the accompanying financial statements.
11
<PAGE>
WABASH FOODS, LLC DBA WABASH SNACKS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 10 - STATEMENT OF CASH FLOWS
Supplemental disclosures for the statement of cash flows are listed below for
the period ended December 31, 1998:
Cash paid during the period for interest $ 277,030
===========
The Company had the following noncash transactions during 1998:
Organization of Company
Cost of assets purchased $ 6,040,000
Notes payable issued by seller (6,040,000)
-----------
CASH DOWNPAYMENT $ --
===========
NOTE 11 - ORGANIZATION
On March 31, 1998 the Company entered into a financing agreement to purchase
inventories and equipment for $5,800,000 from U.S. Bancorp Republic Commercial
Finance, Inc., with $413,508 allocated to inventories and $5,386,492 to
equipment. The Company subsequently entered into a financing agreement with U.S.
Bancorp Republic Commercial Finance, Inc. to purchase the accounts receivable
for $240,000. These assets had been surrendered to U.S. Bancorp Republic
Commercial Finance, Inc. effective January 30, 1998.
NOTE 12 - YEAR 2000 UNCERTAINTIES
Like most entities, the Company may be exposed to risks associated with Year
2000 dating problems. This problem affects computer software and hardware;
transactions with customers, vendors and other entities; and equipment dependent
on microchips. The Company has begun but not yet completed the process of
identifying and remediating potential Year 2000 problems. It is not possible for
any entity to guarantee the results of its own remediation efforts or to
accurately predict the impact of Year 2000 dating problems on third parties with
which the Company does business. If remediation efforts of the Company or third
parties with which it does business are not successful, it is possible the Year
2000 dating problem could negatively impact the Company's financial condition
and results of operations.
NOTE 13 - SUBSEQUENT EVENT
A letter of intent has been signed for the sale of the Company. The transaction
is expected to be finalized in the third quarter of 1999.
This information is an integral part of the accompanying financial statements.
12
