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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 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 September 30, 2000, the number of issued and outstanding shares of common
stock of the Registrant was 14,117,384.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated balance sheets as of September 30, 2000
and December 31, 1999............................................ 3
Consolidated statements of operations for the three
and nine months ended September 30, 2000 and 1999................ 4
Consolidated statements of cash flows for the nine
months ended September 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.................................................. 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 15
ITEM 5. OTHER INFORMATION.................................................. 15
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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash ........................................................... $ 227,961 $ 104,364
Accounts receivable, net of allowance of
$284,000 and $206,000 in 2000 and 1999 ....................... 3,404,256 3,265,041
Inventories .................................................... 1,500,473 1,221,412
Other current assets ........................................... 598,490 325,146
------------ ------------
Total current assets ....................................... 5,731,180 4,915,963
Property and equipment, net ...................................... 12,252,308 13,678,133
Intangible assets, net ........................................... 10,193,657 7,198,283
Other assets ..................................................... 224,217 281,601
------------ ------------
Total assets ..................................................... $ 28,401,362 $ 26,073,980
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 1,815,695 $ 1,328,720
Accrued liabilities ............................................ 1,133,872 690,931
Current portion of long-term debt .............................. 2,041,065 2,116,226
------------ ------------
Total current liabilities .................................. 4,990,632 4,135,877
Long-term debt, less current portion ............................. 10,047,644 10,680,840
------------ ------------
Total liabilities .......................................... 15,038,276 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;
14,117,384 and 13,222,044 shares issued and outstanding
in 2000 and 1999 .............................................. 141,174 132,220
Additional paid-in capital ..................................... 18,809,558 17,386,827
Accumulated deficit ............................................ (5,587,646) (6,261,784)
------------ ------------
Total shareholders' equity ................................. 13,363,086 11,257,263
------------ ------------
Total liabilities and shareholders' equity ...................... $ 28,401,362 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues ................................... $ 10,713,076 $ 5,514,796 $ 30,960,747 $ 14,435,216
Cost of revenues ............................... 7,966,155 4,083,934 23,059,282 10,747,998
------------ ------------ ------------ ------------
Gross profit ................................. 2,746,921 1,430,862 7,901,465 3,687,218
Selling, general and administrative expenses ... 2,312,552 1,165,186 6,336,048 3,177,310
------------ ------------ ------------ ------------
Operating income ............................. 434,369 265,676 1,565,417 509,908
Interest income ................................ -- 7,963 1,016 20,943
Interest expense ............................... (310,038) (162,801) (864,794) (485,236)
------------ ------------ ------------ ------------
Income before income tax provision ........... 124,331 110,838 701,639 45,615
Income tax provision ........................... (10,500) -- (27,500) --
------------ ------------ ------------ ------------
Income before cumulative effect of a
change in accounting principle .............. 113,831 110,838 674,139 45,615
Cumulative effect of a change in accounting
principle ..................................... -- -- -- (71,631)
------------ ------------ ------------ ------------
Net income (loss) ............................. $ 113,831 $ 110,838 $ 674,139 $ (26,016)
============ ============ ============ ============
Earnings (loss) per common share:
Basic-
Income before cumulative effect of a
change in accounting principle .............. $ 0.01 $ 0.01 $ 0.05 $ 0.01
Cumulative effect of a change in accounting
principle.................................... -- -- -- (0.01)
------------ ------------ ------------ ------------
Net income (loss)............................. $ 0.01 $ 0.01 $ 0.05 $ (0.00)
============ ============ ============ ============
Diluted-
Income before cumulative effect of a
change in accounting principle ............ $ 0.01 $ 0.01 $ 0.05 $ 0.01
Cumulative effect of a change in accounting
principle ................................. -- -- -- (0.01)
------------ ------------ ------------ ------------
Net income (loss)............................. $ 0.01 $ 0.01 $ 0.05 $ (0.00)
============ ============ ============ ============
Weighted average number of common shares:
Basic ........................................ 14,103,443 7,832,997 13,641,453 7,832,997
============ ============ ============ ============
Diluted ...................................... 15,907,222 8,028,843 14,866,827 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>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................. $ 674,139 $ (26,016)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of a change in accounting principle......... -- 71,631
Depreciation ................................................. 802,543 447,563
Amortization ................................................. 453,726 213,506
Valuation reserves ........................................... 58,324 77,000
Other non-cash charges ....................................... 197,630 208,374
Change in operating assets and liabilities:
Accounts receivable .......................................... (149,754) (677,911)
Inventories .................................................. (187,423) (98,656)
Other assets and liabilities ................................. (381,723) (205,327)
Accounts payable and accrued liabilities ..................... 838,691 89,300
----------- -----------
Net cash provided by operating activities ............... 2,306,153 99,464
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............................. (295,020) (185,151)
Acquisition and related expenses ............................... (365,542) --
----------- -----------
Net cash used in investing activities ................... (660,562) (185,151)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and debt ................ 448,363 --
Payments made on long-term debt ................................ (1,385,078) (461,273)
Stock and debt issuance costs .................................. (2,000) --
Net increase (decrease) in working capital line of credit....... (583,279) 432,023
----------- -----------
Net cash used in financing activities ................... (1,521,994) (29,250)
----------- -----------
Net increase (decrease) in cash .................................. 123,597 (114,937)
Cash at beginning of period ...................................... 104,364 270,295
----------- -----------
Cash at end of period ............................................ $ 227,961 $ 155,358
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the nine months for interest .................. $ 784,206 $ 328,847
Summary of non-cash investing and financing activities:
Common stock issued for sales commissions ..................... 50,000 --
Common stock issued for acquisition ........................... 1,235,321 --
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
specialty salty snack food products that are sold primarily through grocery
retail chains in the southwestern United States and through vend distributors
across the United States. The Company manufactures and sells salty snack food
products, including T.G.I. Friday's(TM) brand snack chips, 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, and
Pizzarias(R) brand pizza chips, 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 nine months ended September
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income before cumulative effect of a change
in accounting principle ............................ $ 113,831 $ 110,838 $ 674,139 $ 45,615
=========== =========== =========== ===========
Weighted average number of common shares ............ 14,103,443 7,832,997 13,641,453 7,832,997
=========== =========== =========== ===========
Earnings per common share ........................... $ 0.01 $ 0.01 $ 0.05 $ 0.01
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Income before cumulative
effect of a change in accounting principle ........ $ 113,831 $ 110,838 $ 674,139 $ 45,615
=========== =========== =========== ===========
Weighted average number of common shares ............ 14,103,443 7,832,997 13,641,453 7,832,997
Incremental shares from assumed conversions-
Warrants .......................................... 596,836 96,660 447,333 --
Stock options ..................................... 1,206,943 99,186 778,041 --
----------- ----------- ----------- -----------
Adjusted weighted average number of common shares.... 15,907,222 8,028,843 14,866,827 7,832,997
=========== =========== =========== ===========
Earnings per common share ........................... $ 0.01 $ 0.01 $ 0.05 $ 0.01
=========== =========== =========== ===========
</TABLE>
2. LONG-TERM DEBT
At September 30, 2000, the Company had outstanding 9% Convertible
Debentures due July 1, 2002 (the "9% Convertible Debentures") in the principal
amount of $1,354,889 ($495,842 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 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 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.
7
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 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. Bank (the "U.S. Bank Credit Agreement") consisting of a $3.0 million
working capital line of credit (the "U.S. Bank Line of Credit"), a $5.8 million
term loan (the "U.S. Bank Term Loan A") and a $350,000 term loan (the "U.S. Bank
Term Loan B"). Borrowings under the U.S. Bank 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. Bank Line of Credit
bears interest at an annual rate of prime plus 1% and matures on October 4,
2002. The U.S. Bank Term Loan A bears interest at an annual rate of prime and
requires monthly principal payments of approximately $74,000, plus interest,
until maturity on July 1, 2006. The U.S. Bank Term Loan B bears interest at an
annual rate of prime plus 2.5% and requires monthly principal payments of
approximately $29,000, plus interest, until maturity on March 31, 2001. The U.S.
Bank 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 September 30, 2000,
the Company had a borrowing base of $2,568,000 and outstanding borrowings of
$1,439,000 under the U.S. Bank Line of Credit. The U.S. Bank Credit Agreement
requires the Company to be in compliance with certain financial performance
criteria, including a minimum cash flow coverage ratio, a minimum debt service
coverage ratio, minimum annual operating results, a minimum tangible capital
base and a minimum fixed charge coverage ratio. At September 30, 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. Bank Credit Agreement prior to the scheduled
maturity of the U.S. Bank Line of Credit or the U.S. Bank 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. Bank (the "U.S. Bank
Term Loan C"); $200,000 has been paid, and the balance has been refinanced and
requires monthly payments of approximately $21,000, plus interest at prime plus
2%, until maturity on June 30, 2002. On October 7, 1999, pursuant to the terms
of the U.S. Bank Credit Agreement, the Company issued to U.S. Bank a warrant
(the "U.S. Bank Warrant") to purchase 50,000 shares of Common Stock for an
exercise price of $1.00 per share. The U.S. Bank Warrant is exercisable until
October 7, 2004, the date of termination of the U.S. Bank 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 until maturity on June 15, 2002,
(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 until maturity on June 15, 2002, and (iii) obtained a term loan from U.S.
Bank (the "U.S. Bank Term Loan D") in the amount of $300,000 which bears
interest at an annual rate of prime plus 2% and requires monthly principal
payments of approximately $12,500, plus interest, until maturity on September
30, 2002.
8
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LITIGATION
The Company is periodically a party to various lawsuits arising in the
ordinary course of business. Management believes, based on discussions with
legal counsel, that the resolution of any 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 SEPTEMBER 30, 2000
Revenues from external customers ......... $ 9,539,900 $ 1,173,176 $10,713,076
Depreciation and amortization in segment
gross profit ........................... 247,407 -- 247,407
Segment gross profit ..................... 2,711,824 35,097 2,746,921
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers ......... $ 4,356,556 $ 1,158,240 $ 5,514,796
Depreciation and amortization in segment
gross profit ........................... 146,968 -- 146,968
Segment gross profit ..................... 1,351,461 79,401 1,430,862
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues from external customers ......... $27,315,146 $ 3,645,601 $30,960,747
Depreciation and amortization in segment
gross profit ........................... 767,852 -- 767,852
Segment gross profit ..................... 7,705,774 195,691 7,901,465
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers ......... $11,053,978 $ 3,381,238 $14,435,216
Depreciation and amortization in segment
gross profit ........................... 441,657 -- 441,657
Segment gross profit ..................... 3,452,193 235,025 3,687,218
</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 before income taxes and cumulative effect of a
change in accounting principle.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Consolidated segment gross profit ................... $2,746,921 $1,430,862 $7,901,465 $3,687,218
Unallocated amounts:
Selling, general and administrative expenses ....... 2,312,552 1,165,186 6,336,048 3,177,310
Interest expense, net .............................. 310,038 154,838 863,778 464,293
---------- ---------- ---------- ----------
Income before income taxes and cumulative effect
of a change in accounting principle ................ $ 124,331 $ 110,838 $ 701,639 $ 45,615
========== ========== ========== ==========
</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 725,252 unregistered shares of Common Stock with a fair value of
$1,235,000, (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 until maturity on June 15, 2002, and (iv) the assumption
by the Company of $271,000 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 until maturity on June 15, 2002.
The initial $301,000 cash payment was subsequently financed with the U.S. Bank
Term Loan D (see Note 2). 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 compared to 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 trademarks of $1,000,000
and goodwill of $1,505,000, which are being amortized on a straight-line basis
over 15 and 20 year periods, respectively. Boulder had sales of approximately
$0.9 million for the five months ended May 31, 2000.
6. SUBSEQUENT EVENT
On October 28, 2000, the Company had a fire at its Goodyear, Arizona
manufacturing plant and production is temporarily shut down. The Company
believes it has made arrangements to have third party manufacturers produce
sufficient volume to meet nearly all of the Company's needs until such time as
production resumes at the facility, which the Company estimates will be during
the first quarter of 2001. While the fire loss may have a potentially
significant adverse impact on fourth quarter results, the Company believes that
its property and business interruption insurance and the aggressive actions that
the Company is taking will potentially mitigate any such adverse impact.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net revenues for the three months ended September 30, 2000 were
$10,713,000, up $5,198,000 or 94% from $5,515,000 for the three months ended
September 30, 1999. Revenues for the manufactured products segment accounted for
89% and 79% of total net revenues in 2000 and 1999, respectively, while revenues
from distributed products accounted for 11% and 21% in 2000 and 1999,
respectively. Manufactured products segment revenues increased $5,085,000, or
114%, from sales of branded and private label products (including $3,931,000
from branded products acquired in October 1999 and June 2000), and $1,154,000
from branded batch-fried and private label products. Revenues from the
distribution and merchandising of products manufactured by others increased
$113,000, or 11%.
Gross profit for the three months ended September 30, 2000 was $2,747,000,
or 26% of net revenues, as compared to $1,431,000, or 26% of net revenues, for
the three months ended September 30, 1999. The increase of $1,316,000, or 92%,
in gross profit resulted from increased volume in the manufactured products
segment.
Selling, general and administrative expenses increased to $2,312,000, or
22% of net revenues, for the three months ended September 30, 2000 from
$1,165,000, or 21% of net revenues, for the same period in 1999. The increase of
$1,147,000, or 98%, compared to the third quarter of 1999 was primarily due to
increased sales and marketing costs for advertising, promotional spending, and
sales personnel costs in support of revenues from newly acquired brands. General
and administrative costs also increased as a result of the acquisitions,
including amortization of intangibles.
Net interest expense increased to $310,000 for the three months ended
September 30, 2000 from a net interest expense of $155,000 for the three months
ended September 30, 1999. The increase of $155,000 was due to interest expense
associated with the indebtedness incurred in connection with the acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
Net revenues for the nine months ended September 30, 2000 were $30,961,000,
up $16,526,000 or 114%, from $14,435,000 for the nine months ended September 30,
1999. Revenues for the manufactured products segment accounted for 88% and 77%
of total net revenues in 2000 and 1999, respectively, while revenues from
distributed products accounted for 12% and 23% in 2000 and 1999, respectively.
Manufactured products segment revenues increased $15,909,000, or 139%, from
sales of branded and private label products (including $11,324,000 from branded
products acquired in October 1999 and June 2000) and $4,585,000 from branded
batch-fried and private label products. Revenues from the distribution and
merchandising of products manufactured by others increased $616,000, or 20%.
Gross profit for the nine months ended September 30, 2000 was $7,901,000,
or 26% of net revenues, as compared to $3,687,000, or 26% of net revenues, for
the nine months ended September 30, 1999. The increase of $4,214,000, or 114%,
in gross profit resulted from increased volume in the manufactured products
segment.
Selling, general and administrative expenses increased to $6,336,000, or
20% of net revenues, for the nine months ended September 30, 2000 from
$3,177,000, or 22% of net revenues, for the same period in 1999. The increase of
$3,159,000, or 99%, compared to the same period of 1999, was primarily due to
increased sales and marketing costs for advertising, promotional spending, and
sales personnel costs in support of revenues from newly acquired brands. General
and administrative costs also increased as a result of the acquisitions,
including amortization of intangibles.
Net interest expense increased to $864,000 for the nine months ended
September 30, 2000 from a net interest expense of $464,000 for the nine months
ended September 30, 1999. The increase of $400,000 was due to interest expense
associated with the indebtedness incurred in connection with the acquisitions.
11
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LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $741,000 (a current ratio of 1.1:1) and $780,000 (a
current ratio of 1.2:1) at September 30, 2000 and December 31, 1999,
respectively. For the nine months ended September 30, 2000, the Company
generated cash flow of $2.3 million from operating activities, principally from
operating results and non-cash charges, invested $0.3 million in new equipment,
used $0.4 million in connection with an acquisition, and used the balance to
repay indebtedness.
At September 30, 2000, the Company had outstanding 9% Convertible
Debentures due July 1, 2002 in the principal amount of $1,354,889 ($495,842 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 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 September 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. Bank (the "U.S. Bank Credit Agreement") consisting of a $3.0 million
working capital line of credit (the "U.S. Bank Line of Credit"), a $5.8 million
term loan (the "U.S. Bank Term Loan A") and a $350,000 term loan (the "U.S. Bank
Term Loan B"). Borrowings under the U.S. Bank 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. Bank Line of Credit bears interest at an annual rate of
prime plus 1% and matures in October 2002. The U.S. Bank Term Loan A bears
interest at an annual rate of prime and requires monthly principal payments of
approximately $74,000, plus interest, until maturity on July 1, 2006. The U.S.
Bank Term Loan B bears interest at an annual rate of prime plus 2.5% and
requires monthly principal payments of approximately $29,000, plus interest,
until maturity on March 31, 2001. The U.S. Bank 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 September 30, 2000, the Company had a borrowing base of
$2,568,000 and outstanding borrowings of $1,439,000 under the U.S. Bank Line of
Credit. The U.S. Bank Credit Agreement requires the Company to be in compliance
with certain financial performance criteria, including a minimum cash flow
coverage ratio, a minimum debt service coverage ratio, minimum annual operating
results, a minimum tangible capital base and a minimum fixed charge coverage
ratio. At September 30, 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. Bank Credit Agreement
prior to the scheduled maturity of the U.S. Bank Line of Credit or the U.S. Bank
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. Bank; $200,000 has been paid and the balance has been refinanced and
requires monthly payments of approximately $21,000, plus interest at prime plus
2%, until maturity on June 30, 2002. On October 7, 1999, pursuant to the terms
12
<PAGE>
of the U.S. Bank Credit Agreement, the Company issued to U.S. Bank a warrant
(the "U.S. Bank Warrant") to purchase 50,000 shares of Common Stock for an
exercise price of $1.00 per share. The U.S. Bank Warrant is exercisable until
October 7, 2004, the date of termination of the U.S. Bank 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, (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, and (iii) obtained a term loan from U.S. Bank (the
"U.S. Bank Term Loan D") in the amount of $300,000 which bears interest at an
annual rate of prime plus 2% and requires monthly principal payments of
approximately $12,500, plus interest, until maturity on September 30, 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THIS FORM 10-QSB, INCLUDING ALL DOCUMENTS INCORPORATED BY REFERENCE, INCLUDES
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") 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 TAKING ADVANTAGE OF THE PROTECTIONS OF THE SAFE HARBOR WITH
RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. IN THIS FORM 10-QSB, 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 FORM 10-QSB REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE
EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING SPECIFICALLY THE COMPANY'S BRIEF
OPERATING HISTORY AND SIGNIFICANT OPERATING LOSSES TO DATE, THE PROBABILITY THAT
THE COMPANY WILL NEED ADDITIONAL FINANCING 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 OF
STRATEGIC ACQUISITIONS; POTENTIAL DIFFICULTIES RESULTING FROM THE INTEGRATION OF
ACQUIRED BUSINESSES 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 COMPANY'S COMMON STOCK FROM THE NASDAQ SMALLCAP MARKET AND
THOSE OTHER RISKS AND UNCERTAINTIES DISCUSSED HEREIN AND IN THE OTHER FILINGS BY
THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION, 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 FORM 10-QSB WILL IN FACT TRANSPIRE
OR PROVE TO BE ACCURATE. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE
AFTER THE DATE HEREOF. ALL SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON OUR BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THIS SECTION.
13
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is periodically 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 September 30, 2000, the Company issued 8,832 unregistered shares of
Common Stock in connection with the post-acquisition closing balance sheet
settlement adjustment between the Company and Boulder Potato Company (a Colorado
corporation) related to the Company's acquisition of the business and certain
related assets and liabilities of Boulder Potato Company. The shares were issued
in lieu of cash in satisfaction of $15,000 of the total $2,637,000 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
None.
ITEM 5. OTHER INFORMATION
None.
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.
15
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POORE BROTHERS, INC.
By: /s/ Eric J. Kufel
-------------------------------------
Dated: November 13, 2000 Eric J. Kufel
President and Chief Executive Officer
(principal executive officer)
By: /s/ Thomas W. Freeze
------------------------------------
Dated: November 13, 2000 Thomas W. Freeze
Senior Vice President, Chief
Financial Officer, Treasurer and
Secretary (principal financial and
accountings officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27.1 Financial Data Schedule.
