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, 2000
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)
(623) 932-6200
---------------------------
(Issuer's telephone number)
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of June 30, 2000, the number of issued and outstanding shares of common stock
of the Registrant was 14,098,552.
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, 2000 and
December 31, 1999 ................................................ 3
Consolidated statements of operations for the three and
six months ended June 30, 2000 and 1999 .......................... 4
Consolidated statements of cash flows for the six months
ended June 30, 2000 and 1999 ..................................... 5
Notes to consolidated financial statements ......................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION ............................................ 11
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.................................... 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash ....................................................... $ 155,134 $ 104,364
Accounts receivable, net of allowance of
$255,000 and $206,000 in 2000 and 1999 ................... 3,972,483 3,265,041
Inventories ................................................ 1,418,386 1,221,412
Other current assets ....................................... 619,261 325,146
------------ ------------
Total current assets .................................. 6,165,264 4,915,963
Property and equipment, net .................................. 12,392,126 13,678,133
Intangible assets, net ....................................... 10,346,639 7,198,283
Other assets ................................................. 235,698 281,601
------------ ------------
Total assets ................................................. $ 29,139,727 $ 26,073,980
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 1,737,087 $ 1,328,720
Accrued liabilities ........................................ 1,223,777 690,931
Current portion of long-term debt........................... 2,137,111 2,116,226
------------ ------------
Total current liabilities ............................. 5,097,975 4,135,877
Long-term debt, less current portion ......................... 10,820,665 10,680,840
------------ ------------
Total liabilities ..................................... 15,918,640 14,816,717
------------ ------------
Commitments and Contingencies
Shareholders' equity:
Preferred stock, $100 par value; 50,000 shares
authorized; no shares issued or outstanding in 2000
and 1999................................................... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 14,098,552 and 13,222,044 shares issued
and outstanding in 2000 and 1999 .......................... 140,985 132,220
Additional paid-in capital ................................. 18,781,578 17,386,827
Accumulated deficit ........................................ (5,701,476) (6,261,784)
------------ ------------
Total shareholders' equity ............................ 13,221,087 11,257,263
------------ ------------
Total liabilities and shareholders' equity .................. $ 29,139,727 $ 26,073,980
============ ============
</TABLE>
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,
------------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues ..................................... $ 10,539,835 $ 5,229,562 $ 20,247,671 $ 8,920,420
Cost of revenues ................................. 7,805,196 3,735,123 15,093,127 6,664,064
------------ ------------ ------------ -----------
Gross profit ............................... 2,734,639 1,494,439 5,154,544 2,256,356
Selling, general and administrative expenses ..... 2,148,476 1,133,093 4,023,495 2,012,124
------------ ------------ ------------ -----------
Operating income ........................... 586,163 361,346 1,131,049 244,232
Interest income .................................. -- 7,174 1,015 12,980
Interest expense ................................. (272,939) (163,131) (554,756) (322,435)
------------ ------------ ------------ -----------
Income (loss) before income tax provision... 313,224 205,389 577,308 (65,223)
Income tax provision ............................. (10,500) -- (17,000) --
------------ ------------ ------------ -----------
Income (loss) before cumulative effect of
a change in accounting principle .......... 302,724 205,389 560,308 (65,223)
Cumulative effect of a change in accounting
principle ...................................... -- -- -- (71,631)
------------ ------------ ------------ -----------
Net income (loss) .......................... $ 302,724 $ 205,389 $ 560,308 $ (136,854)
============ ============ ============ ===========
Earnings (loss) per common share:
Basic-
Income (loss) before cumulative effect of
a change in accounting principle .............. $ 0.02 $ 0.03 $ 0.04 $ (0.01)
Cumulative effect of a change in accounting
principle ..................................... -- -- -- (0.01)
------------ ------------ ------------ -----------
Net income (loss) .......................... $ 0.02 $ 0.03 $ 0.04 $ (0.02)
============ ============ ============ ===========
Diluted-
Income (loss) before cumulative effect of a
change in accounting principle ................ $ 0.02 $ 0.03 $ 0.04 $ (0.01)
Cumulative effect of a change in accounting
principle ..................................... -- -- -- (0.01)
------------ ------------ ------------ -----------
Net income (loss) .......................... $ 0.02 $ 0.03 $ 0.04 $ (0.02)
============ ============ ============ ===========
Weighted average number of common shares:
Basic ........................................... 13,555,332 7,832,997 13,407,919 7,832,997
============ ============ ============ ===========
Diluted ......................................... 14,497,498 10,143,829 14,208,083 7,832,997
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
----------- ---------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................... $ 560,308 $ (136,854)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Cumulative effect of a change in accounting principle ...... -- 71,631
Depreciation ............................................... 530,964 298,878
Amortization ............................................... 289,311 142,352
Valuation reserves ......................................... 50,302 57,000
Other non-cash charges ..................................... 123,085 131,963
Change in operating assets and liabilities:
Accounts receivable ........................................ (685,171) (600,955)
Inventories ................................................ (130,124) (57,941)
Other assets and liabilities ............................... (348,655) (221,283)
Accounts payable and accrued liabilities ................... 834,944 811,735
----------- -----------
Net cash provided by operating activities ............. 1,224,964 496,526
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .......................... (163,259) (117,586)
Acquisition and related expenses ............................ (344,884) --
----------- -----------
Net cash used in investing activities ................. (508,143) (117,586)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ...................... 135,238 --
Payments made on long-term debt ............................. (809,718) (305,891)
Stock and debt issuance costs ............................... (2,000) --
Net increase (decrease) in working capital line of credit.... 10,429 301,982
----------- -----------
Net cash used in financing activities ................. (666,051) (3,909)
----------- -----------
Net increase in cash ......................................... 50,770 375,031
Cash at beginning of period .................................. 104,364 270,295
----------- -----------
Cash at end of period ........................................ $ 155,134 $ 645,326
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the six months for interest ................ $ 498,722 $ 222,026
Summary of non-cash investing and financing activities:
Common stock issued for sales commissions ................. 50,000 --
Common stock issued for acquisition ....................... 1,220,278 --
Note payable issued for acquisition ....................... 830,000 --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Poore Brothers, Inc. (the "Company"), a Delaware corporation, was organized
in February 1995 as a holding company and on May 31, 1995 acquired substantially
all of the equity of Poore Brothers Southeast, Inc. ("PB Southeast") in an
exchange transaction. The exchange transaction with PB Southeast was accounted
for similar to a pooling-of-interests since both entities had common ownership
and control immediately prior to the transaction. During 1997, the Company sold
its Houston, Texas distribution business and closed its PB Southeast
manufacturing operation. In November 1998, the Company acquired the business and
certain assets (including the Bob's Texas Style(R) potato chip brand) of Tejas
Snacks, L.P. ("Tejas"), a Texas-based potato chip manufacturer. In October 1999,
the Company acquired Wabash Foods, LLC ("Wabash") including the Tato Skins(R),
O'Boisies(R), and Pizzarias(R) trademarks, and assumed all of Wabash Foods'
liabilities. In June 2000, the Company acquired Boulder Natural Foods, Inc.
("Boulder") and the Boulder Potato Company (TM) brand of totally natural potato
chips.
The Company is engaged in the production, marketing and distribution of
premium salty snack food products that are sold through grocery retail chains in
the southwestern United States and through vend distributors across the United
States. The Company manufactures and sells its own brands of salty snack food
products, including Poore Brothers(R) and Bob's Texas Style(R) brand batch-fried
potato chips, Boulder Chips(TM) brand totally natural potato chips, Tato
Skins(R) brand potato snacks, Pizzarias(R) brand pizza chips, and O'Boisies(R)
brand potato crisps, 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 accounting principles generally accepted in the United States. 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, 1999. The results of operations for the six months ended June 30,
2000 are not necessarily indicative of the results expected for the full year.
CHANGE IN ACCOUNTING PRINCIPLE
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.
EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income (loss)
by the weighted average number of shares of common stock outstanding during the
period. Exercises of outstanding stock options or warrants and conversion of
convertible debentures are assumed to occur for purposes of calculating diluted
earnings per share for periods in which their effect would not be anti-dilutive.
6
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income (loss) before cumulative effect
of a change in accounting principle ............. $ 302,724 $ 205,389 $ 560,308 $ (65,223)
=========== =========== =========== ===========
Weighted average number of common shares ......... 13,555,332 7,832,997 13,407,919 7,832,997
=========== =========== =========== ===========
Earnings (loss) per common share ................. $ 0.02 $ 0.03 $ 0.04 $ (0.01)
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Income (loss) before cumulative effect of
a change in accounting principle ................ $ 302,724 $ 205,389 $ 560,308 $ (65,223)
Impact on income of assumed conversions-
9% convertible debenture interest .............. -- 50,018 -- --
----------- ----------- ----------- -----------
Income(loss)available to common
shareholders ................................... $ 302,724 $ 255,407 $ 560,308 $ (65,223)
=========== =========== =========== ===========
Weighted average number of common shares ......... 13,555,332 7,832,997 13,407,919 7,832,997
Incremental shares from assumed conversions-
9% convertible debentures ...................... -- 2,229,114 -- --
Warrants ....................................... 363,923 64,786 327,761 --
Stock options .................................. 578,243 16,932 472,403 --
----------- ----------- ----------- -----------
Adjusted weighted average number of
common shares ................................... 14,497,498 10,143,829 14,208,083 7,832,997
=========== =========== =========== ===========
Earnings (loss) per common share ................. $ 0.02 $ 0.03 $ 0.04 $ (0.01)
=========== =========== =========== ===========
</TABLE>
2. LONG-TERM DEBT
At June 30, 2000, the Company had outstanding 9% Convertible Debentures due
July 1, 2002 (the "9% Convertible Debentures") in the principal amount of
$1,370,067 ($511,020 held by Wells Fargo and $859,047 held by Renaissance
Capital). 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
$5,000 are required to be made by the Company on the Wells Fargo 9% Convertible
Debenture beginning in July 2000 through June 2002. In November 1999,
Renaissance Capital converted 50% ($859,047) of its Debentures holdings into
859,047 shares of common stock and agreed unconditionally to convert into common
stock the remaining $859,047 not later than December 31, 2000. For the period
November 1, 1999 through December 31, 2000, Renaissance Capital agreed to waive
all mandatory principal redemption payments and to accept 30,000 unregistered
shares of the Company's Common Stock and a warrant to purchase 60,000 shares of
common stock at $1.50 per share in lieu of cash interest payments. For the
period November 1, 1998 through October 31, 1999, Renaissance Capital agreed to
7
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
waive all mandatory principal redemption payments and to accept 183,263
unregistered shares of the Company's Common Stock in lieu of cash interest
payments.
The Convertible Debenture Loan Agreement contains covenants requiring the
maintenance of certain financial performance criteria, including an interest
coverage ratio, minimum working capital of $500,000, a current ratio of 1.1:1
and minimum shareholders' equity. At June 30, 2000, the Company was in
compliance with all of the financial ratio requirements. In the event of
default, the holders of the 9% Convertible Debentures have the right, upon
written notice and after a thirty-day period during which such default may be
cured, to demand immediate payment of the then unpaid principal and accrued but
unpaid interest under the 9% Convertible Debentures. Management believes that
the achievement of the Company's plans and objectives will enable the Company to
attain a sufficient level of profitability to remain in compliance with the
financial ratios. There can be no assurance, however, that the Company will
attain any such profitability and remain in compliance with the financial
ratios. Any acceleration under the 9% Convertible Debentures prior to their
maturity on July 1, 2002 could have a material adverse effect on the Company.
On October 7, 1999, the Company signed a new $9.15 million Credit Agreement
with U.S. Bancorp (the "U.S. Bancorp Credit Agreement") consisting of a $3.0
million working capital line of credit (the "U.S. Bancorp Line of Credit"), a
$5.8 million term loan (the "U.S. Bancorp Term Loan A") and a $350,000 term loan
(the "U.S. Bancorp Term Loan B"). Borrowings under the U.S. Bancorp Credit
Agreement were used to pay off the previously existing Wells Fargo Line of
Credit and Wells Fargo Term Loan and to refinance existing debt of Wabash Foods,
LLC in October 1999, and will also be used for general working capital needs.
The U.S. Bancorp Line of Credit bears interest at an annual rate of prime plus
1% and matures on October 4, 2002. The U.S. Bancorp Term Loan A bears interest
at an annual rate of prime and requires monthly principal payments of
approximately $74,000 commencing February 1, 2000, plus interest, until maturity
on July 1, 2006. The U.S. Bancorp Term Loan B bears interest at an annual rate
of prime plus 2.5% and requires monthly principal payments of approximately
$29,000 commencing April 30, 2000, plus interest, until maturity on March 31,
2001. The U.S. Bancorp Credit Agreement is secured by accounts receivable,
inventories, equipment and general intangibles. Borrowings under the line of
credit are limited to 80% of eligible receivables and 60% of eligible
inventories. At June 30, 2000, the Company had a borrowing base of $2,426,000
and outstanding borrowings of $2,033,000 under the U.S. Bancorp Line of Credit.
The U.S. Bancorp Credit Agreement requires the Company to be in compliance with
certain financial performance criteria, including a minimum cash flow coverage
ratio, a minimum debt service coverage ratio, minimum annual operating results,
a minimum tangible capital base and a minimum fixed charge coverage ratio. At
June 30, 2000, the Company was in compliance with all of the financial
covenants. 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 covenants. There can be no
assurance, however, that the Company will attain any such profitability and
remain in compliance. Any acceleration under the U.S. Bancorp Credit Agreement
prior to the scheduled maturity of the U.S. Bancorp Line of Credit or the U.S.
Bancorp Term Loans could have a material adverse effect on the Company. The
Company also assumed from Wabash Foods a $715,000 non-interest bearing note
payable to U.S. Bancorp; $200,000 has been paid, and the balance has been
refinanced and requires monthly payments of approximately $21,000 commencing
July 31, 2000, plus interest at prime plus 2%, until maturity on June 30, 2002.
On October 7, 1999, pursuant to the terms of the U.S. Bancorp Credit Agreement,
the Company issued to U.S. Bancorp a warrant (the "U.S. Bancorp Warrant") to
purchase 50,000 shares of Common Stock for an exercise price of $1.00 per share.
The U.S. Bancorp Warrant is exercisable until October 7, 2004, the date of
termination of the U.S. Bancorp Warrant, and provides the holder thereof certain
piggyback registration rights.
In connection with the Boulder acquisition (see Note 5), the Company (i)
issued a note to the seller in the amount of $830,000 which bears interest at
6.4%, is secured by the Boulder assets acquired, and requires monthly principal
and interest payments of approximately $37,000 commencing July 15, 2000, until
maturity on June 15, 2002, and (ii) assumed a note to the seller in the amount
of $130,000 which bears interest at 6.0% and requires monthly principal and
interest payments of approximately $6,000 commencing July 15, 2000, until
maturity on June 15, 2002.
8
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
and other salted snack food products 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,
1999. 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.
<TABLE>
<CAPTION>
MANUFACTURED DISTRIBUTED
PRODUCTS PRODUCTS CONSOLIDATED
-------- -------- ------------
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000
Revenues from external customers............ $ 9,340,217 $ 1,199,618 $10,539,835
Depreciation and amortization in segment
gross profit ............................ 241,917 -- 241,917
Segment gross profit ....................... 2,654,590 80,049 2,734,639
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
SIX MONTHS ENDED JUNE 30, 2000
Revenues from external customers ........... $17,775,246 $ 2,472,425 $20,247,671
Depreciation and amortization in segment
gross profit ............................ 520,172 -- 520,172
Segment gross profit ....................... 4,998,318 156,226 5,154,544
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
</TABLE>
9
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reconciles reportable segment gross profit to the
Company's consolidated income (loss) before income taxes and cumulative effect
of a change in accounting principle.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Consolidated segment gross profit ...... $2,734,639 $1,494,439 $5,154,544 $ 2,256,356
Unallocated amounts:
Selling, general and administrative
expenses ........................ 2,148,476 1,133,093 4,023,495 2,012,124
Interest expense, net ............. 272,939 155,957 553,741 309,455
---------- ---------- ---------- -----------
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle .............. $ 313,224 $ 205,389 $ 577,308 $ (65,223)
========== ========== ========== ===========
</TABLE>
5. ACQUISITION
On June 8, 2000, the Company acquired Boulder Natural Foods, Inc. (a
Colorado corporation) and the business and certain related assets and
liabilities of Boulder Potato Company, a totally natural potato chip marketer,
based in Boulder Colorado. The assets, which were acquired through a newly
formed wholly owned subsidiary of the Company, Boulder Natural Foods, Inc. (an
Arizona corporation), included the Boulder Potato Company(TM) and Boulder
Chips(TM) brands, other intangible assets, receivables, inventories and
specified liabilities. In consideration for these assets and liabilities, the
Company paid a total purchase price of $2,637,000, consisting of: (i) the
issuance of 716,420 unregistered shares of Common Stock with a fair value of
$1,220,000, (ii) a cash payment of $301,000, (iii) the issuance of a note to the
seller in the amount of $830,000 which bears interest at 6.4%, is secured by the
Boulder assets acquired, and requires monthly principal and interest payments of
approximately $37,000 commencing July 15, 2000, until maturity on June 15, 2002,
and (iv) the assumption by the Company of $286,000 in liabilities, including a
note to the seller in the amount of $130,000 which bears interest at 6.0% and
requires monthly principal and interest payments of approximately $6,000
commencing July 15, 2000, until maturity on June 15, 2002. In addition, the
Company may be required to issue additional unregistered shares of Common Stock
to the seller on each of the first, second and third anniversary of the closing
of the acquisition. Any such issuances will be dependent upon, and will be
calculated based upon, increases in sales of Boulder Potato Company(TM) products
as against previous periods. The acquisition was accounted for using the
purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16, "ACCOUNTING FOR BUSINESS COMBINATIONS." Accordingly, only the
results of operations subsequent to the acquisition date have been included in
the Company's results. In connection with the acquisition, the Company recorded
intangibles of $2,484,000, which are being amortized on a straight-line basis
over a 15-20 year period. Boulder had sales of approximately $0.9 million for
the five months ended May 31, 2000.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 1999
Net revenues for the three months ended June 30, 2000 were $10,540,000, up
$5,310,000 or 102% from $5,230,000 for the three months ended June 30, 1999.
Revenues for the manufactured products segment accounted for 89% and 78% of
total net revenues in 2000 and 1999, respectively, while revenues from
distributed products accounted for 11% and 22% in 2000 and 1999, respectively.
Manufactured products segment revenues increased $5,236,000, or 128%, from sales
of branded and private label products, including $3,750,000 from branded Wabash
products (acquired by the Company in October 1999) and $1,486,000 from branded
batch-fried and private label products. Revenues from the distribution and
merchandising of products manufactured by others increased $74,000.
Gross profit for the three months ended June 30, 2000, was $2,735,000, or
26% of net revenues, as compared to 1,494,000, or 29% of net revenues, for the
three months ended June 30, 1999. The $1,241,000 increase, or 83%, in gross
profit resulted from the increased volume in the manufactured products segment.
Selling, general and administrative expenses increased to $2,148,000, or
20% of net revenues, for the three months ended June 30, 2000 from $1,133,000,
or 22% of net revenues, for the same period in 1999. The increase of $1,015,000,
or 90%, compared to the second quarter of 1999, was primarily due to increased
advertising, promotional spending, and sales commissions, as well as some
increased administrative costs to support business growth.
Net interest expense increased to $273,000 for the three months ended June
30, 2000 from a net interest expense of $156,000 for the three months ended June
30, 1999. The increase of $117,000 was due principally to interest expense
associated with the indebtedness from the Wabash acquisition.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1999
Net revenues for the six months ended June 30, 2000 were $20,247,000, up
$11,327,000 or 127%, from $8,920,000 for the six months ended June 30, 1999.
Revenues for the manufactured products segment accounted for 88% and 75% of
total net revenues in 2000 and 1999, respectively, while revenues from
distributed products accounted for 12% and 25% in 2000 and 1999, respectively.
Manufactured products segment revenues increased $11,078,000, or 165%, from
sales of branded and private label products, including $7,487,000 from branded
Wabash products (acquired by the Company in October 1999) and $3,591,000 from
branded batch-fried and private label products. Revenues from the distribution
and merchandising of products manufactured by others increased $249,000.
Gross profit for the six months ended June 30, 2000, was $5,155,000, or 26%
of net revenues, as compared to $2,256,000, or 25% of net revenues, for the six
months ended June 30, 1999. The $2,899,000 increase, or 129%, in gross profit
resulted from the increased volume in the manufactured products segment.
Selling, general and administrative expenses increased to $4,023,000, or
20% of net revenues, for the six months ended June 30, 2000 from $2,012,000 or
23% of net revenues, for the same period in 1999. The increase of $2,011,000, or
100%, compared to the six months of 1999, was primarily due to increased
advertising, promotional spending, and sales commissions, as well as some
increased administrative costs to support business growth.
Net interest expense increased to $554,000 for the six months ended June
30, 2000 from a net interest expense of $309,000 for the six months ended June
30, 1999. The increase of $245,000 was principally due to interest expense
associated with the indebtedness from the Wabash acquisition.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $1,067,000 (a current ratio of 1.2:1) and $780,000
(a current ratio of 1.2:1) at June 30, 2000 and December 31, 1999, respectively.
For the six months ended June 30, 2000, the Company generated cash flow of $1.2
million from operating activities, principally from operating results and
non-cash charges, invested $0.2 million in new equipment, and used the balance
to repay indebtedness.
At June 30, 2000, the Company had outstanding 9% Convertible Debentures due
July 1, 2002 in the principal amount of $1,370,067 ($511,020 held by Wells Fargo
and $859,047 held by Renaissance Capital). The 9% Convertible Debentures are
secured by land, building, equipment and intangibles. Interest on the 9%
Convertible Debentures is paid by the Company on a monthly basis. Monthly
principal payments of approximately $5,000 are required to be made by the
Company on the Wells Fargo 9% Convertible Debenture beginning in July 2000
through June 2002. In November 1999, Renaissance Capital converted 50%
($859,047) of its 9% Convertible Debenture holdings into 859,047 shares of
Common Stock and agreed unconditionally to convert into Common Stock the
remaining $859,047 principal not later than December 31, 2000. For the period
November 1, 1999 through December 31, 2000, Renaissance Capital agreed to waive
all mandatory principal redemption payments and to accept 30,000 unregistered
shares of the Company's Common Stock and a warrant to purchase 60,000 shares of
common stock at $1.50 per share in lieu of cash interest payments.
The Convertible Debenture Loan Agreement contains covenants requiring the
maintenance of certain financial performance criteria including an interest
coverage ratio, minimum working capital of $500,000, a current ratio of 1.1:1
and a minimum shareholders' equity. At June 30, 2000, the Company was in
compliance with all of the financial ratio requirements. In the event of
default, the holders of the 9% Convertible Debentures have the right, upon
written notice and after a thirty-day period during which such default may be
cured, to demand immediate payment of the then unpaid principal and accrued but
unpaid interest under the 9% Convertible Debentures. Management believes that
the achievement of the Company's plans and objectives will enable the Company to
attain a sufficient level of profitability to remain in compliance with the
financial ratios. There can be no assurance, however, that the Company will
attain any such profitability and remain in compliance with the financial
ratios. Any acceleration under the 9% Convertible Debentures prior to their
maturity on July 1, 2002 could have a material adverse effect upon the Company.
On October 7, 1999, the Company signed a new $9.15 million Credit Agreement
with U.S. Bancorp (the "U.S. Bancorp Credit Agreement") consisting of a $3.0
million working capital line of credit (the "U.S. Bancorp Line of Credit"), a
$5.8 million term loan (the "U.S. Bancorp Term Loan A") and a $350,000 term loan
(the "U.S. Bancorp Term Loan B"). Borrowings under the U.S. Bancorp Credit
Agreement were used to pay off the Wells Fargo Line of Credit and Wells Fargo
Term Loan and to refinance existing debt of Wabash Foods, LLC, and will also be
used for general working capital needs. The U.S. Bancorp Line of Credit bears
interest at an annual rate of prime plus 1% and matures in October 2002. The
U.S. Bancorp Term Loan A bears interest at an annual rate of prime and requires
monthly principal payments of approximately $74,000 commencing February 1, 2000,
plus interest, until maturity on July 1, 2006. The U.S. Bancorp Term Loan B
bears interest at an annual rate of prime plus 2.5% and requires monthly
principal payments of approximately $29,000 commencing April 30, 2000, plus
interest, until maturity on March 31, 2001. The U.S. Bancorp Credit Agreement is
secured by accounts receivable, inventories, equipment and general intangibles.
Borrowings under the line of credit are limited to 80% of eligible receivables
and 60% of eligible inventories. At June 30, 2000, the Company had a borrowing
base of $2,426,000 and outstanding borrowings of $2,033,000 under the U.S.
Bancorp Line of Credit. The U.S. Bancorp Credit Agreement requires the Company
to be in compliance with certain financial performance criteria, including a
minimum cash flow coverage ratio, a minimum debt service coverage ratio, minimum
annual operating results, a minimum tangible capital base and a minimum fixed
charge coverage ratio. At June 30, 2000, the Company was in compliance with all
of the financial covenants. 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 covenants.
There can be no assurance, however, that the Company will attain any such
profitability and remain in compliance. Any acceleration under the U.S. Bancorp
Credit Agreement prior to the scheduled maturity of the U.S. Bancorp Line of
Credit or the U.S. Bancorp Term Loans could have a material adverse effect upon
the Company. The Company also assumed from Wabash Foods a $715,000 non-interest
bearing note payable to U.S. Bancorp; $200,000 has been paid and the balance has
been refinanced and requires monthly payments of approximately $21,000
commencing July 31, 2000, plus interest at prime plus 2%, until maturity on June
30, 2002. On October 7, 1999, pursuant to the terms of the U.S. Bancorp Credit
Agreement, the Company issued to U.S. Bancorp a warrant (the "U.S. Bancorp
Warrant") to purchase 50,000 shares of Common Stock for an exercise price of
12
<PAGE>
$1.00 per share. The U.S. Bancorp Warrant is exercisable until October 7, 2004,
the date of termination of the U.S. Bancorp Warrant, and provides the holder
thereof certain piggyback registration rights.
In connection with the Boulder acquisition (see Note 5), the Company (i)
issued a note to the seller in the amount of $830,000 which bears interest at
6.4%, is secured by Boulder assets acquired, and requires monthly principal and
interest payments of approximately $37,000 commencing July 15, 2000, until
maturity on June 15, 2002, and (ii) assumed a note to the seller in the amount
of $130,000 which bears interest at 6.0% and requires monthly principal and
interest payments of approximately $6,000 commencing July 15, 2000, until
maturity on June 15, 2002.
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 as incurred for accounting purposes, while sales
generated from the result of such expansion may benefit future periods. As a
result of the 1997 restructuring actions, the November 1998 Tejas Snacks
acquisition, the October 1999 Wabash Foods acquisition, and the June 2000
Boulder Potato Company acquisition, management believes that the Company will
generate positive cash flow from operations during the next twelve months which,
along with its existing working capital and borrowing facilities, should enable
the Company to meet its operating cash requirements. This 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.
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
On June 8, 2000, the Company issued 716,420 unregistered shares of Common
Stock in connection with the acquisition by the Company of Boulder Natural
Foods, Inc. (a Colorado corporation) and the business and certain related assets
and liabilities of Boulder Potato Company. The shares were issued in lieu of
cash in satisfaction of $1,220,000 of the total $2,636,000 purchase price. These
issuances were made in reliance upon the exemption from registration under the
Securities Act set forth in Section 4(2) as they did not involve a public
offering
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual Meeting of Shareholders of the Company (the "Meeting") was
held on May 22, 2000.
(b) Proxies for the Meeting were solicited pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended. There was no
solicitation in opposition to the management's nominees as listed in
the proxy statement and all of such nominees were elected.
(c) At the Meeting, the Company's shareholders voted upon the election of
seven directors of the Company. Management's nominees were Messrs.
Thomas W. Freeze, Richard E. Goodspeed, Mark S. Howells, Eric J.
Kufel, James W. Myers, Robert C. Pearson and Aaron M. Shenkman. There
were no other nominees. The following are the respective numbers of
votes cast "for" and "withheld" with respect to each nominee. There
were no votes cast against or broker non-votes with respect to any
nominee.
Name of Nominee Votes Cast for Votes Withheld
--------------- -------------- --------------
Thomas W. Freeze 12,483,931 36,429
Richard E. Goodspeed 12,483,131 37,229
Mark S. Howells 12,484,031 36,329
Eric J. Kufel 12,483,131 37,229
James W. Myers 12,483,831 36,529
Robert C. Pearson 12,483,831 36,529
Aaron M. Shenkman 12,327,001 193,359
There were no other matters voted upon at the Meeting.
ITEM 5. OTHER INFORMATION
None.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
------ -----------
10.1 Agreement for Purchase and Sale of Assets of Boulder Potato
Company dated as of June 8, 2000, by and among Frank P. Maggio,
Pamela S. Fox, Mark C. Maggio, John F. Maggio, Boulder Potato
Company and the Company.*
10.2 Secured Promissory Note and Security Agreement dated as of June
8, 2000, by and between Boulder Potato Company and the Company.*
10.3 Registration Rights Agreement dated as of June 8, 2000, by and
between Boulder Potato Company and the Company.*
10.4 Escrow Agreement dated as of June 8, 2000, by and among Frank P.
Maggio, Pamela S. Fox, Mark C. Maggio, John F. Maggio, Boulder
Potato Company and the Company.*
10.5 Employment Agreement dated June 8, 2000, by and between Mark C.
Maggio and the Company.*
10.6 Employment Agreement dated June 8, 2000, by and between John F.
Maggio and the Company.*
27.1 Financial Data Schedule.*
----------
* Filed herewith.
(b) Current Reports on Form 8-K:
Current Report on Form 8-K, reporting the acquisition of Boulder
Natural Foods, Inc., and the Boulder Potato Company(TM) brand (filed with
the Commission on June 12, 2000).
15
<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 11, 2000 By /s/ Eric J. Kufel
--------------------------------------
Eric J. Kufel
President and Chief Executive Officer
(principal executive officer)
Dated: August 11, 2000 By: /s/ Thomas W. Freeze
--------------------------------------
Thomas W. Freeze
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
(principal financial and accounting
officer)
16
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.1 Agreement for Purchase and Sale of Assets of Boulder Potato
Company dated as of June 8, 2000, by and among Frank P. Maggio,
Pamela S. Fox, Mark C. Maggio, John F. Maggio, Boulder Potato
Company and the Company.
10.2 Secured Promissory Note and Security Agreement dated as of June
8, 2000, by and between Boulder Potato Company and the Company.
10.3 Registration Rights Agreement dated as of June 8, 2000, by and
between Boulder Potato Company and the Company.
10.4 Escrow Agreement dated as of June 8, 2000, by and among Frank P.
Maggio, Pamela S. Fox, Mark C. Maggio, John F. Maggio, Boulder
Potato Company and the Company.
10.5 Employment Agreement dated June 8, 2000, by and between Mark C.
Maggio and the Company.
10.6 Employment Agreement dated June 8, 2000, by and between John F.
Maggio and the Company.
27.1 Financial Data Schedule.
