U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO 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 Registrant 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) (Zip Code)
Registrant's Telephone Number, Including Area Code: (623) 932-6200
Indicate by check whether the Registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 16,613,560 as of September 28,
2002.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
Consolidated balance sheets as of September 28, 2002 and
December 31, 2001................................................ 3
Consolidated statements of operations for the quarter and
nine months ended September 28, 2002 and September 30, 2001...... 4
Consolidated statements of cash flows for the nine months
ended September 28, 2002 and September 30, 2001.................. 5
Notes to consolidated financial statements........................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ........................................... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....... 17
ITEM 4. CONTROLS AND PROCEDURES .......................................... 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................. 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................... 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................... 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 18
ITEM 5. OTHER INFORMATION................................................. 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPT. 28, DEC. 31,
2002 2001
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash ..................................................................... $ 480,770 $ 894,198
Accounts receivable, net of allowance of $323,000 in 2002 and
$219,000 in 2001 ....................................................... 4,088,295 4,982,793
Inventories .............................................................. 1,707,294 1,887,872
Other current assets ..................................................... 1,089,108 430,914
------------ ------------
Total current assets ................................................... 7,365,467 8,195,777
Property and equipment, net ................................................ 13,143,224 13,730,273
Goodwill, net .............................................................. 5,565,687 5,354,901
Trademarks, net ............................................................ 4,207,032 4,207,032
Other assets ............................................................... 172,998 200,077
------------ ------------
Total assets ............................................................... $ 30,454,408 $ 31,688,060
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 2,096,134 $ 2,430,857
Accrued liabilities ...................................................... 2,547,534 1,406,845
Current portion of long-term debt ........................................ 1,136,885 2,343,472
------------ ------------
Total current liabilities .............................................. 5,780,553 6,181,174
Noncurrent liabilities ..................................................... 4,596,677 8,661,255
------------ ------------
Total liabilities ...................................................... 10,377,230 14,842,429
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $100 par value; 50,000 shares authorized; no shares
issued or outstanding at September 28, 2002 and December 31, 2001 ...... -- --
Common stock, $.01 par value; 50,000,000 shares authorized; 16,613,560
and 15,687,518 shares issued and outstanding at September 28, 2002 and
December 31, 2001, respectively ........................................ 166,135 156,875
Additional paid-in capital ............................................... 22,326,420 21,175,485
Accumulated deficit ...................................................... (2,415,377) (4,486,729)
------------ ------------
Total shareholders' equity ............................................. 20,077,178 16,845,631
------------ ------------
Total liabilities and shareholders' equity ................................. $ 30,454,408 $ 31,688,060
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTER ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPT. 28, SEPT. 30, SEPT. 28, SEPT. 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net revenues ..................................... $ 15,209,269 $ 13,870,955 $ 44,845,108 $ 41,619,893
Cost of revenues ................................. 12,644,935 11,093,426 36,576,157 32,849,166
------------- ------------- ------------- -------------
Gross profit ................................... 2,564,334 2,777,529 8,268,951 8,770,727
Selling, general and administrative expenses ..... 2,014,543 2,355,452 6,348,637 6,977,159
------------- ------------- ------------- -------------
Operating income ............................... 549,791 422,077 1,920,314 1,793,568
Other income (expense), net ...................... 50 -- 11,391 5,739
Interest expense, net ............................ (118,671) (252,076) (435,303) (824,231)
Income before income tax provision ............. 431,170 170,001 1,496,402 975,076
Income tax credit (provision) .................... 619,950 (9,050) 574,950 (41,050)
------------- ------------- ------------- -------------
Net income ..................................... $ 1,051,120 $ 160,951 $ 2,071,352 $ 934,026
============= ============= ============= =============
Earnings per common share:
Basic .......................................... $ 0.06 $ 0.01 $ 0.13 $ 0.06
============= ============= ============= =============
Diluted ........................................ $ 0.06 $ 0.01 $ 0.12 $ 0.05
============= ============= ============= =============
Weighted average number of common shares:
Basic .......................................... 16,362,344 15,042,765 15,964,730 15,029,886
============= ============= ============= =============
Diluted ........................................ 17,961,882 17,920,140 17,909,308 17,690,877
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
4
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
--------------------------
SEPT. 28, SEPT. 30,
2002 2001
----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 2,071,352 $ 934,026
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation ................................................ 971,331 887,066
Amortization ................................................ 26,173 519,314
Valuation reserves .......................................... 275,159 214,165
Other non-cash charges ...................................... 341,662 301,179
Gain on disposition of equipment ............................ (2,924) (167,450)
Deferred income taxes ....................................... 638,000 --
Change in operating assets and liabilities:
Accounts receivable ......................................... 791,063 (1,107,056)
Inventories ................................................. 8,854 (1,798,009)
Other assets and liabilities ................................ (1,414,950) (264,786)
Accounts payable and accrued liabilities .................... 805,966 2,696,035
----------- -----------
Net cash provided by operating activities ............... 4,511,686 2,214,484
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............................ (387,264) (2,680,053)
Proceeds from disposition of property and equipment ........... 5,906 700,000
----------- -----------
Net cash used in investing activities ................... (381,358) (1,980,053)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ........................ 547,916 63,570
Payments made on long-term debt ............................... (1,653,403) (1,809,692)
Stock and debt issuance costs ................................. -- (10,774)
Net increase (decrease) in working capital line of credit ..... (3,438,269) 1,350,225
----------- -----------
Net cash used in financing activities ................... (4,543,756) (406,671)
----------- -----------
Net decrease in cash ............................................ (413,428) (172,240)
Cash at beginning of period ..................................... 894,198 327,553
----------- -----------
Cash at end of period ........................................... $ 480,770 $ 155,313
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest ...................... $ 421,220 $ 834,175
Summary of non-cash investing and financing activities:
Note payable issued to purchase property and equipment .... -- 275,523
Conversion of convertible debenture into common stock ..... 401,497 --
Common stock issued for acquisition ....................... 210,782 --
The accompanying notes are an integral part of these
consolidated financial statements.
5
POORE BROTHERS, INC. AND SUBSIDIARIES
UNAUDITED 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. 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(R) brand of totally natural potato
chips.
The Company is engaged in the development, production, marketing and
distribution of innovative salty snack food products that are sold primarily
through grocery retailers, mass merchandisers, club stores and vend distributors
across the United States. The Company (i) manufactures and sells its own brands
of salty snack food products, including Poore Brothers(R), Bob's Texas Style(R),
and Boulder Potato Company(R) brand batch-fried potato chips and Tato Skins(R)
brand potato snacks, (ii) manufactures and sells T.G.I. Friday's(R) brand salted
snacks under license from TGI Friday's Inc., (iii) manufactures private label
potato chips for grocery retailers in the southwest, and (iv) distributes 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-Q
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
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, 2001. The results of operations
for the nine months and quarter ended September 28, 2002 are not necessarily
indicative of the results expected for the full year.
Effective January 1, 2002, the Company changed the fiscal year from the
twelve calendar months ending on December 31 each year to the 52 week period
ending on the last Saturday occurring in the month of December of each calendar
year. Accordingly, the fiscal year of the Company immediately following the
fiscal year ending December 31, 2001 commenced January 1, 2002 and will end
December 28, 2002.
EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income 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
POORE BROTHERS, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED NINE MONTHS ENDED
------------------------- -------------------------
SEPT. 28, SEPT. 30, SEPT. 28, SEPT. 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
BASIC EARNINGS PER SHARE:
Net income $ 1,051,120 $ 160,951 $ 2,071,352 $ 934,026
=========== =========== =========== ===========
Weighted average number of
common shares 16,362,344 15,042,765 15,964,730 15,029,886
=========== =========== =========== ===========
Earnings per common share $ 0.06 $ 0.01 $ 0.13 $ 0.06
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Net income $ 1,051,120 $ 160,951 $ 2,071,352 $ 934,026
Addback: Debenture interest -- 10,150 16,075 31,026
----------- ----------- ----------- -----------
Adjusted income $ 1,051,120 $ 171,101 $ 2,087,427 $ 965,052
=========== =========== =========== ===========
Weighted average number of
Common shares 16,362,344 15,042,765 15,964,730 15,029,886
Incremental shares from assumed
conversions-
9% Convertible debentures -- 447,437 240,558 460,913
Warrants 511,463 740,331 534,995 700,819
Stock options 1,088,075 1,689,607 1,169,025 1,499,259
----------- ----------- ----------- -----------
Adjusted weighted average
number of common shares 17,961,882 17,920,140 17,909,308 17,690,877
=========== =========== =========== ===========
Earnings per common share $ 0.06 $ 0.01 $ 0.12 $ 0.05
=========== =========== =========== ===========
ADOPTION OF SFAS NOS. 141 AND 142
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "BUSINESS
COMBINATIONS," and SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS". SFAS
No. 141 requires companies to apply the purchase method of accounting for all
business combinations initiated after June 30, 2001 and prohibits the use of the
pooling-of-interests method. SFAS No. 142 changes the method by which companies
recognize intangible assets in purchase business combinations and generally
requires identifiable intangible assets to be recognized separately from
goodwill. In addition, it eliminates the amortization of all existing and newly
acquired intangible assets with indefinite lives on a prospective basis and
requires companies to assess goodwill for impairment, at least annually, based
on the fair value of the reporting unit. Goodwill must be tested for impairment
as of the beginning of the fiscal year in which SFAS No. 142 is adopted. The
Company has completed its testing of goodwill and has determined there is no
impairment as of January 1, 2002. The following table shows the pro forma impact
of this adoption for the quarter and nine months ended September 28, 2002 and
September 30, 2001.
7
POORE BROTHERS, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED NINE MONTHS ENDED
------------------------- -------------------------
SEPT. 28, SEPT. 30, SEPT. 28, SEPT. 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
NET INCOME
As reported $ 1,051,120 $ 160,951 $ 2,071,352 $ 934,026
Add back: Goodwill and trademark amortization -- 163,026 -- 489,078
----------- ----------- ----------- -----------
Adjusted $ 1,051,120 $ 323,977 $ 2,071,352 $ 1,423,104
=========== =========== =========== ===========
BASIC EARNINGS PER COMMON SHARE:
As reported $ 0.06 $ 0.01 $ 0.13 $ 0.06
Add back: Goodwill and trademark amortization 0.00 0.01 0.00 0.03
----------- ----------- ----------- -----------
Adjusted $ 0.06 $ 0.02 $ 0.13 $ 0.09
=========== =========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE:
As reported $ 0.06 $ 0.01 $ 0.12 $ 0.05
Add back: Goodwill and trademark amortization 0.00 0.01 0.00 0.03
----------- ----------- ----------- -----------
Adjusted $ 0.06 $ 0.02 $ 0.12 $ 0.08
=========== =========== =========== ===========
ADOPTION OF SFAS NO. 144
In August 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS". SFAS No. 144 supercedes SFAS No.
121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF" and the accounting and reporting provisions of APB
Opinion No. 30, "REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS". SFAS No. 144 modifies the method by which
companies account for certain asset impairment losses. Upon adoption on January
1, 2002, the Company had no material adverse impact on its financial position or
results of operations.
ADOPTION OF EITF ISSUE NO. 01-09
In 2001, the Emerging Issues Task Force (EITF) issued EITF Issue No. 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products" which codified and expanded its consensus opinions in
EITF Issue No. 00-14, "Accounting for Certain Sales Incentives," and EITF Issue
No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products." EITF Issue
No. 01-09 also discusses aspects of EITF Issue No. 00-22, "Accounting for Points
and Certain Other Time-Based Sales Incentive Offers, and Offers for Free
Products or Services to be Delivered in the Future." EITF Issue No. 01-09
addresses the accounting for certain consideration given by a vendor to a
customer and provides guidance on the recognition, measurement and income
statement classification for sales incentives. In general, the guidance requires
that consideration from a vendor to a retailer be recorded as a reduction in
revenue unless certain criteria are met. The Company has adopted the provisions
of EITF Issue No. 01-09 effective January 1, 2002 as required and as a result,
costs previously classified as "Selling, general and administrative expenses"
have been reclassified and reflected as reductions in "Net revenues." The
Company has also reclassified amounts in prior periods in order to conform to
the revised presentation of these costs.
8
POORE BROTHERS, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPT. 28, SEPT. 30, SEPT. 28, SEPT. 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET REVENUES
As originally reported $ 15,209,269 $ 14,684,558 $ 44,845,108 $ 44,551,490
Amounts reclassified -- (813,603) -- (2,931,597)
------------ ------------ ------------ ------------
New Basis $ 15,209,269 $ 13,870,955 $ 44,845,108 $ 41,619,893
============ ============ ============ ============
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
As originally reported $ 2,014,543 $ 3,169,055 $ 6,348,637 $ 9,908,756
Amounts reclassified -- (813,603) -- (2,931,597)
------------ ------------ ------------ ------------
New Basis $ 2,014,543 $ 2,355,452 $ 6,348,637 $ 6,977,159
============ ============ ============ ============
IMPACT OF OCTOBER 2000 FIRE AT GOODYEAR, ARIZONA PLANT
On October 28, 2000 the Company experienced a fire at the Goodyear, Arizona
manufacturing plant, causing a temporary shutdown of manufacturing operations at
the facility. The Company resumed full production of private label potato chips
in early January of 2001 and resumed full production of batch-fried potato chips
in late March of 2001. During the quarter ended March 31, 2001, the Company
recorded approximately $1.4 million of incremental expenses incurred as a result
of the fire, primarily associated with outsourcing production. These extra
expenses were charged to "cost of revenues" and offset by a $1.4 million credit
representing estimated future insurance proceeds. The Company also incurred
approximately $2.3 million in building and equipment reconstruction costs in
connection with the fire and the Company was advanced a total of $3.2 million by
the insurance company during the nine months ended September 30, 2001. "Other
income, net" on the accompanying Consolidated Statement of Operations for the
nine months ended September 30, 2001 includes (i) a gain of $167,000,
representing the excess of insurance proceeds over the book value of the
building and equipment of $533,000 damaged by the fire, and (ii) expenses not
reimbursed by the insurance company of approximately $154,000.
2. INVENTORIES
Inventories consisted of the following:
SEPT. 28, DEC. 31,
2002 2001
---------- ----------
Finished goods ................................. $ 762,459 $ 588,376
Raw materials .................................. 944,835 1,299,496
---------- ----------
$1,707,294 $1,887,872
========== ==========
3. LONG-TERM DEBT
The Company had 9% Convertible Debentures due July 1, 2002 (the "9%
Convertible Debentures") held by Wells Fargo Small Business Investment Company,
Inc. ("Wells Fargo SBIC"). The 9% Convertible Debentures were secured by land,
buildings, equipment and intangibles. Interest on the 9% Convertible Debentures
was paid by the Company on a monthly basis. Monthly principal payments of
approximately $4,000 were made by the Company on the Wells Fargo SBIC 9%
Convertible Debentures through June 2002, and the remaining balance was
converted by Wells Fargo SBIC in June 2002 to approximately 401,000 shares of
the Company's Common Stock.
9
POORE BROTHERS, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 7, 1999, the Company signed a $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 a $2.5 million line of credit and a $0.5 million
term loan previously obtained by the Company from Wells Fargo Business Credit,
Inc. ("Wells Fargo"), to refinance indebtedness effectively assumed by the
Company in connection with the acquisition of Wabash Foods in October 1999, and
is being used for general working capital needs. The U.S. Bancorp Line of Credit
bears interest at an annual rate of prime plus 1%. The U.S. Bancorp Term Loan A
bears interest at an annual rate of prime and requires monthly principal
payments of approximately $74,000, plus interest, until maturity in July 2006.
The U.S. Bancorp Term Loan B had an annual interest rate of prime plus 2.5% and
required monthly principal payments of approximately $29,000, plus interest,
which matured and was repaid in March 2001. 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 June 2000, the U.S Bancorp Credit Agreement was amended to include an
additional $300,000 term loan (the "U.S. Bancorp Term Loan C") and to refinance
a $715,000 non-interest bearing note due to U.S. Bancorp on June 30, 2000.
Proceeds from the U.S. Bancorp Term Loan C were used in connection with the
Boulder acquisition. The U.S. Bancorp Term Loan C had an annual rate of interest
of prime plus 2% and required monthly principal payments of approximately
$12,500, plus interest, until maturity in August 2002. The Company made a
payment of $200,000 on the $715,000 non-interest bearing note and refinanced the
balance in a term loan (the "U.S. Bancorp Term Loan D"). The U.S. Bancorp Term
Loan D had an annual interest rate of prime plus 2% and required monthly
principal payments of approximately $21,500, plus interest, which matured and
was repaid in June 2002.
In April 2001, the U.S. Bancorp Credit Agreement was amended to increase
the U.S. Bancorp Line of Credit from $3.0 million to $5.0 million, establish a
$0.5 million capital expenditure line of credit (the "CapEx Term Loan"), extend
the U.S. Bancorp Line of Credit maturity date from October 2002 to October 31,
2003, and modify certain financial covenants. The Company borrowed $241,430
under the CapEx Term Loan in December 2001. The CapEx Term Loan bears interest
at an annual rate of prime plus 1% and requires monthly principal payments of
approximately $10,000, plus interest, until maturity on October 31, 2003 when
the balance is due.
As of June 29, 2002, the U.S. Bancorp Credit Agreement was amended to
extend the U.S. Bancorp Line of Credit maturity date by two years to October 31,
2005, and modify certain financial covenants.
The U.S. Bancorp Credit Agreement is secured by accounts receivable,
inventories, equipment and general intangibles. Borrowings under the U.S.
Bancorp Line of Credit are limited to 80% of eligible receivables and 60% of
eligible inventories. At September 28, 2002, the Company had a borrowing base of
approximately $3,400,000 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 minimum annual operating results, a minimum
tangible capital base and a minimum fixed charge coverage ratio. At September
28, 2002 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 the financial performance criteria. There can be no
assurance, however, that the Company will 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.
10
POORE BROTHERS, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 28, 2002, there was no outstanding balance on the U.S.
Bancorp Line of Credit, $3,405,000 on the U.S. Bancorp Term Loan A, and $161,000
on the CapEx Term Loan.
On November 4, 1998, pursuant to the terms of the Wells Fargo Credit
Agreement, the Company issued to Wells Fargo a warrant (the "Wells Fargo
Warrant") to purchase 50,000 shares of Common Stock for an exercise price of
$0.93375 per share. The Wells Fargo Warrant is exercisable until November 3,
2003, the date of the termination of the Wells Fargo Warrant, and provides the
holder thereof certain demand and piggyback registration rights.
4. 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
adverse effect on the financial condition or results of operations.
5. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS
For the nine months ended September 28, 2002, one national warehouse
club/mass merchandiser customer and one national vending distributor of the
Company accounted for $9.1 million, or 20.4%, and $5.6 million, or 12.6%,
respectively, of the Company's consolidated net revenues. For the nine months
ended September 30, 2001, one national warehouse club customer and one national
vending distributor of the Company accounted for $8.0 million, or 19.1%, and
$5.0 million, or 12.0%, respectively, of the Company's consolidated net
revenues.
The Company's operations consist of two segments: manufactured products and
distributed products. The manufactured products segment produces potato chips,
potato crisps and tortilla chips, for sale primarily to snack food distributors
and retailers. The distributed products segment sells snack food products
manufactured by other companies to the Company's Arizona snack food
distributors. 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,
2001. The Company does not allocate selling, general and administrative
expenses, income taxes or unusual items to segments and has no significant
non-cash items other than depreciation and amortization.
MANUFACTURED DISTRIBUTED
PRODUCTS PRODUCTS CONSOLIDATED
------------ ----------- ------------
QUARTER ENDED SEPTEMBER 28, 2002
Revenues from external customers .................. $14,270,488 $ 938,781 $15,209,269
Depreciation and amortization in segment
gross profit .................................... 95,581 -- 95,581
Segment gross profit .............................. 2,442,168 122,166 2,564,334
QUARTER ENDED SEPTEMBER 30, 2001
Revenues from external customers .................. $12,619,777 $ 1,251,178 $13,870,955
Depreciation and amortization in segment
gross profit .................................... 220,751 -- 220,751
Segment gross profit .............................. 2,811,976 (34,447) 2,777,529
11
POORE BROTHERS, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MANUFACTURED DISTRIBUTED
PRODUCTS PRODUCTS CONSOLIDATED
------------ ----------- ------------
NINE MONTHS ENDED SEPTEMBER 28, 2002
Revenues from external customers .................. $41,890,848 $ 2,954,260 $44,845,108
Depreciation and amortization in segment
gross profit .................................... 706,815 -- 706,815
Segment gross profit .............................. 7,902,411 366,540 8,268,951
NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenues from external customers .................. $37,900,291 $ 3,719,602 $41,619,893
Depreciation and amortization in segment
gross profit .................................... 655,293 -- 655,293
Segment gross profit .............................. 8,730,139 40,588 8,770,727
The following table reconciles reportable segment gross profit to the
Company's consolidated income before income taxes.
QUARTER ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPT. 28, SEPT. 30, SEPT. 28, SEPT. 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Consolidated segment gross profit ................... $ 2,564,334 $ 2,777,529 $ 8,268,951 $ 8,770,727
Unallocated amounts:
Selling, general and administrative expenses ...... (2,014,543) (2,355,452) (6,348,637) (6,977,159)
Other (income) expense, net ....................... 50 -- 11,391 5,739
Interest expense, net ............................. (118,671) (252,076) (435,303) (824,231)
----------- ----------- ----------- -----------
Income before income tax provision .................. $ 431,170 $ 170,001 $ 1,496,402 $ 975,076
=========== =========== =========== ===========
6. INCOME TAXES
The income tax provision recorded in the quarter ended September 30, 2001
and for the nine month period then ended is a provision for state income taxes
only. The Company has been modestly profitable since 1999; however, it
experienced significant net losses in prior fiscal years resulting in a net
operating loss ("NOL") carryforward for federal income tax purposes. Generally
accepted accounting principles require that the Company record a valuation
allowance against the deferred tax asset associated with this NOL if it is "more
likely than not" that the Company will not be able to utilize it to offset
future taxes. During the quarter ended September 28, 2002, the Company concluded
that realization of its tax benefits from net operating loss carryforwards was
more likely than not. As a result, the valuation allowance for deferred tax
assets was reversed, resulting in a one-time, non-cash tax benefit of $0.6
million. In accordance with generally accepted accounting principles, the
Company will begin recognizing income tax provisions beginning with fourth
quarter 2002 financial results.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q, 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 AVAILING ITSELF OF THE
PROTECTIONS OF THE SAFE HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING
STATEMENTS. IN THIS QUARTERLY REPORT ON FORM 10-Q, 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 QUARTERLY
REPORT ON FORM 10-Q REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE
EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING SPECIFICALLY THE COMPANY'S
RELATIVELY BRIEF OPERATING HISTORY, SIGNIFICANT HISTORICAL OPERATING LOSSES AND
THE POSSIBILITY OF FUTURE OPERATING LOSSES, THE POSSIBILITY THAT THE COMPANY
WILL NEED ADDITIONAL FINANCING DUE TO FUTURE OPERATING LOSSES OR IN ORDER TO
IMPLEMENT THE COMPANY'S BUSINESS STRATEGY, THE POSSIBLE DIVERSION OF MANAGEMENT
RESOURCES FROM THE DAY-TO-DAY OPERATIONS OF THE COMPANY AS A RESULT OF RECENTLY
COMPLETED STRATEGIC ACQUISITIONS AND THE PURSUIT OF ADDITIONAL 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 COMMON STOCK FROM THE NASDAQ SMALLCAP MARKET AND THOSE OTHER RISKS AND
UNCERTAINTIES DISCUSSED HEREIN AND IN THE COMPANY'S OTHER PERIODIC REPORTS FILED
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 QUARTERLY REPORT ON FORM 10-Q 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 ITS BEHALF ARE
EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THIS SECTION.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 28, 2002 COMPARED TO THE QUARTER ENDED SEPTEMBER
30, 2001.
The Company reported third quarter net revenue of $15.2 million, a 10%
increase over third quarter 2001 net revenue of $13.9 million; third quarter
2001 net revenue included approximately $0.3 million from the Company's Texas
merchandising operation, which was sold in the fourth quarter of 2001. The
growth in net revenue was attributable to a nearly 50% increase in T.G.I.
FRIDAY'S(R) brand salted snack revenues which accounted for approximately
two-thirds of total net revenues in the quarter. T.G.I. FRIDAY'S(R) brand salted
snacks' growth was partially offset by lower shipments of Tato Skins(R) brand
snacks in the vending channel, due to deliberate cannibalization by T.G.I.
FRIDAY'S(R) brand salted snacks, and by lower shipments of private label potato
chips. Revenues from the Company's kettle-cooked potato chip brands and
distributed products were flat.
Net income of $1.1 million, or $0.06 per basic and diluted share, was
favorably impacted by a deferred tax valuation allowance reversal of $0.6
million, or approximately $0.04 per basic and diluted share. Excluding the
deferred tax valuation allowance reversal, net income increased 157% to a third
quarter record of $0.4 million, or $0.03 per basic and $0.02 per diluted share,
from $0.2 million, or $0.01 per basic and diluted share, in the prior-year
quarter. The Company's improved profitability was attributable to increased
revenue and improved operating efficiencies, which also allowed the Company to
13
significantly increase promotional spending to support future growth,
particularly for T.G.I. FRIDAY'S(R) brand salted snacks.
While manufacturing efficiencies improved due to increased revenues, gross
profit declined 8% to $2.6 million, or 17% of net revenue, solely due to the
previously mentioned increased promotional marketing programs. Profits were also
positively affected by both lower selling, general and administrative expenses,
which declined 14% to $2.0 million due to reduced spending levels and lower
amortization expense, and lower interest expense, which declined 53% to $0.1
million due to reduced indebtedness, improved working capital management and
lower interest rates.
During the third quarter, the Company concluded that realization of its tax
benefits from net operating loss carryforwards was more likely than not. As a
result, the valuation allowance for deferred tax assets was reversed, resulting
in a one-time, non-cash benefit of $0.6 million. In accordance with generally
accepted accounting principles, the Company will begin recognizing income tax
provisions beginning with fourth-quarter 2002 financial results.
NINE MONTHS ENDED SEPTEMBER 28, 2002 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001.
For the nine months ended September 28, 2002, net revenue increased 8% to a
record $44.8 million from $41.6 million in the first nine months of the prior
year; 2001 net revenue included $1.0 million from the Company's Texas
merchandising operation, which was sold in the fourth quarter of 2001. The
growth in net revenue was attributable to a substantial increase in T.G.I.
FRIDAY'S(R) brand salted snack revenues, which accounted for approximately
two-thirds of total revenues in the nine months. T.G.I. FRIDAY'S(R) brand salted
snacks' growth continues to be partially offset by lower shipments of Tato
Skins(R) and Poore Brothers(R) brand snacks in the vending channel, due to
deliberate cannibalization by T.G.I. FRIDAY'S(R) brand salted snacks, and by
lower shipments of private label potato chips. Total revenues from the Company's
other kettle-cooked potato chip brands and distributed products rose modestly.
Net income of $2.1 million, or $0.13 per basic and $0.12 per diluted share,
was also favorably impacted by the deferred tax valuation allowance reversal of
$0.6 million, or $0.04 per basic and diluted share. Excluding the deferred tax
valuation allowance reversal, net income increased 53% to $1.4 million, or $0.09
per basic and $0.08 per diluted share, from $0.9 million, or $0.06 per basic and
$0.05 per diluted share, in the prior year. The Company's improved profitability
was attributable to increased revenue and improved operating efficiencies, which
also allowed the Company to significantly increase promotional spending to
support future growth, particularly for T.G.I. FRIDAY'S(R) brand salted snacks.
While manufacturing efficiencies improved due to increased revenues, gross
profit declined 6% to $8.3 million, or 18% of net revenue, solely due to the
previously mentioned increased promotional marketing programs. Profits were also
positively affected by both lower selling, general and administrative expenses,
which declined 9% to $6.3 million due to reduced spending levels and lower
amortization expense, and lower interest expense, which declined 47% to $0.4
million due to reduced indebtedness, improved working capital management and
lower interest rates.
During the third quarter, the Company concluded that realization of its tax
benefits from net operating loss carryforwards was more likely than not. As a
result, the valuation allowance for deferred tax assets was reversed, resulting
in a one-time, non-cash benefit of $0.6 million. In accordance with generally
accepted accounting principles, the Company will begin recognizing income tax
provisions beginning with the fourth quarter 2002 financial results.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $1.6 million (a current ratio of 1.27:1) at
September 28, 2002 and $2.0 million (a current ratio of 1.33:1) at December 31,
2001. For the nine months ended September 28, 2002, the Company generated cash
flow of $4.5 million from operating activities, principally from operating
results, a decrease in accounts receivable and an increase in accrued
14
liabilities, invested $0.4 million in new equipment, reduced the line of credit
by $3.4 million and made $1.7 million in payments on long-term debt.
The Company had 9% Convertible Debentures due July 1, 2002 (the "9%
Convertible Debentures") held by Wells Fargo Small Business Investment Company,
Inc. ("Wells Fargo SBIC"). The 9% Convertible Debentures were secured by land,
buildings, equipment and intangibles. Interest on the 9% Convertible Debentures
was paid by the Company on a monthly basis. Monthly principal payments of
approximately $4,000 were made by the Company on the Wells Fargo SBIC 9%
Convertible Debentures through June 2002, and the remaining balance was
converted by Wells Fargo SBIC in June 2002 to approximately 401,000 shares of
the Company's Common Stock.
On October 7, 1999, the Company signed a $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 a $2.5 million line of credit and a $0.5 million
term loan previously obtained by the Company from Wells Fargo Business Credit,
Inc. ("Wells Fargo"), to refinance indebtedness effectively assumed by the
Company in connection with the acquisition of Wabash Foods in October 1999, and
is being used for general working capital needs. The U.S. Bancorp Line of Credit
bears interest at an annual rate of prime plus 1%. The U.S. Bancorp Term Loan A
bears interest at an annual rate of prime and requires monthly principal
payments of approximately $74,000, plus interest, until maturity in July 2006.
The U.S. Bancorp Term Loan B had an annual interest rate of prime plus 2.5% and
required monthly principal payments of approximately $29,000, plus interest,
which matured and was repaid in March 2001. 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 June 2000, the U.S Bancorp Credit Agreement was amended to include an
additional $300,000 term loan (the "U.S. Bancorp Term Loan C") and to refinance
a $715,000 non-interest bearing note due to U.S. Bancorp on June 30, 2000.
Proceeds from the U.S. Bancorp Term Loan C were used in connection with the
Boulder acquisition. The U.S. Bancorp Term Loan C had an annual interest rate of
prime plus 2% and required monthly principal payments of approximately $12,500,
plus interest, until maturity in August 2002. The Company made a payment of
$200,000 on the $715,000 non-interest bearing note and refinanced the balance in
a term loan (the "U.S. Bancorp Term Loan D"). The U.S. Bancorp Term Loan D had
an annual rate of interest of prime plus 2% and required monthly principal
payments of approximately $21,500, plus interest, which matured and was repaid
in June 2002.
In April 2001, the U.S. Bancorp Credit Agreement was amended to increase
the U.S. Bancorp Line of Credit from $3.0 million to $5.0 million, establish a
$0.5 million capital expenditure line of credit (the "CapEx Term Loan"), extend
the U.S. Bancorp Line of Credit maturity date from October 2002 to October 31,
2003, and modify certain financial covenants. The Company borrowed $241,430
under the CapEx Term Loan in December 2001. The CapEx Term Loan bears interest
at an annual rate of prime plus 1% and requires monthly principal payments of
approximately $10,000, plus interest, until maturity on October 31, 2003 when
the balance is due.
As of June 29, 2002, the U.S. Bancorp Credit Agreement was amended to
extend the U.S. Bancorp Line of Credit maturity date by two years to October 31,
2005, and modify certain financial covenants.
The U.S. Bancorp Credit Agreement is secured by accounts receivable,
inventories, equipment and general intangibles. Borrowings under the U.S.
Bancorp Line of Credit are limited to 80% of eligible receivables and 60% of
eligible inventories. At September 28, 2002, the Company had a borrowing base of
approximately $3,400,000 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 minimum annual operating results, a minimum
tangible capital base and a minimum fixed charge coverage ratio. At September
28, 2002 the Company was in compliance with 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 all financial performance criteria. There can be no assurance,
15
however, that the Company will 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.
As of September 28, 2002, there was no outstanding balance on the U.S.
Bancorp Line of Credit, $3,405,000 on the U.S. Bancorp Term Loan A, and $161,000
on the CapEx Term Loan.
On November 4, 1998, pursuant to the terms of the Wells Fargo Credit
Agreement, the Company issued to Wells Fargo a warrant (the "Wells Fargo
Warrant") to purchase 50,000 shares of Common Stock for an exercise price of
$0.93375 per share. The Wells Fargo Warrant is exercisable until November 3,
2003, the date of the termination of the Wells Fargo Warrant, and provides the
holder thereof certain demand and piggyback registration rights.
MANAGEMENT'S PLANS
In connection with the implementation of the Company's business strategy,
the Company may incur operating losses in the future and may require future debt
or equity financings (particularly in connection with future strategic
acquisitions, new brand introductions or capital expenditures). Expenditures
relating to acquisition-related integration costs, market and territory
expansion and new product development and introduction may adversely affect
promotional and operating expenses and consequently may adversely affect
operating and net income. These types of expenditures are expensed for
accounting purposes as incurred, while revenue generated from the result of such
expansion or new products may benefit future periods. 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, will enable the Company to meet its operating cash requirements for
the next twelve months. The belief is based on current operating plans and
certain assumptions, including those relating to the Company's future revenue
levels and expenditures, industry and general economic conditions and other
conditions. If any of these factors change, the Company may require future debt
or equity financings to meet its business requirements. There can be no
assurance that any required financings will be available or, if available, on
terms attractive to the Company.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In December 2001, the Securities and Exchange Commission (the "SEC") issued
an advisory requesting that all registrants describe their three to five most
"critical accounting policies". The SEC indicated that a "critical accounting
policy" is one which is both important to the portrayal of the Company's
financial condition and results and requires management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. The Company believes
that the following accounting policies fit this definition:
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. If the financial condition of the
Company's customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
INVENTORIES. The Company's inventories are stated at the lower of cost
(first-in, first-out) or market. The Company identifies slow moving or
obsolete inventories and estimates appropriate loss provisions related
thereto. Historically, these loss provisions have not been significant;
however, if actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.
GOODWILL AND TRADEMARKS. Goodwill and trademarks are reviewed for
impairment annually, or more frequently if impairment indicators arise.
Goodwill is required to be tested for impairment between the annual tests
if an event occurs or circumstances change that more-likely-than-not reduce
the fair value of a reporting unit below its carrying value. An indefinite
lived intangible asset is required to be tested for impairment between the
annual tests if an event occurs or circumstances change indicating that the
asset might be impaired. The Company believes at this time that the
carrying values continue to be appropriate.
ADVERTISING AND PROMOTIONAL EXPENSES. The Company expenses production costs
of advertising the first time the advertising takes place, except for
cooperative advertising costs which are expensed when the related sales are
recognized. Costs associated with obtaining shelf space (i.e. "slotting
fees") are expensed in the period in which such costs are incurred by the
Company. Anytime the Company offers consideration (cash or credit) as a
trade advertising or promotion allowance to a purchaser of products at any
point along the distribution chain, the amount is accrued and recorded as a
reduction in revenue. Any marketing programs that deal directly with the
consumer are recorded in selling, general and administrative expenses.
16
INCOME TAXES. The Company has been modestly profitable since 1999; however,
it experienced significant net losses in prior fiscal years resulting in a
net operating loss ("NOL") carryforward for federal income tax purposes of
approximately $4.7 million at December 31, 2001. Generally accepted
accounting principles require that the Company record a valuation allowance
against the deferred tax asset associated with this NOL if it is "more
likely than not" that the Company will not be able to utilize it to offset
future taxes. During the quarter ended September 28, 2002, the Company
concluded that realization of its tax benefits from net operating loss
carryforwards was more likely than not. As a result, the valuation
allowance for deferred tax assets was reversed, resulting in a one-time,
non-cash tax benefit of $0.6 million. In accordance with generally accepted
accounting principles, the Company will begin recognizing income tax
provisions beginning with fourth quarter 2002 financial results.
The above listing is not intended to be a comprehensive list of all of the
Company's accounting policies. In many cases the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. See the
Company's audited financial statements for the fiscal year ended December 31,
2001 and the notes thereto included in the Company's Annual Report on Form
10-KSB with respect to such period, which contain a description of the Company's
accounting policies and other disclosures required by accounting standards
generally accepted in the United States.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which the Company is exposed that may
adversely impact the Company's results of operations and financial position are
changes in certain raw material prices and interest rates. The Company has no
market risk sensitive instruments held for trading purposes.
Raw materials used by the Company are exposed to the impact of changing
commodity prices. The Company's most significant raw material requirements
include potatoes, potato flakes, wheat flour, corn and oil. The Company attempts
to minimize the effect of future price fluctuations related to the purchase of
raw materials primarily through forward purchasing to cover future manufacturing
requirements, generally for periods from one to 12 months. Futures contracts are
not used in combination with the forward purchasing of these raw materials. The
Company's procurement practices are intended to reduce the risk of future price
increases, but also may potentially limit the ability to benefit from possible
price decreases.
The Company also has interest rate risk with respect to interest expense on
variable rate debt, with rates based upon changes in the prime rate. Therefore,
the Company has an exposure to changes in those rates. At September 28, 2002 and
December 31, 2001, the Company had $3.6 million and $8.0 million of variable
rate debt outstanding. A hypothetical 10% adverse change in weighted average
interest rates during fiscal 2001 and 2000 would have had an unfavorable impact
of $0.036 million and $0.08 million respectively, on both the Company's net
earnings and cash flows.
ITEM 4. CONTROLS AND PROCEDURES
As required by SEC Rule 13a-15 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act), within 90 days prior to the filing
date of this report, the Company carried out an evaluation of the effectiveness
of the design and operation of the Company's disclosure controls and procedures.
This evaluation was carried out under the supervision and with the participation
of the Company's management, including the Company's President and Chief
Executive Officer and the Company's Chief Financial Officer. Based upon that
evaluation, the Company's President and Chief Executive Officer and the
Company's Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. Subsequent to the date the Company
carried out its evaluation, there have been no significant changes in the
Company's internal controls or in other factors which could significantly affect
internal controls.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in Company reports filed under the Exchange Act is accumulated and
communicated to management, including the Company's Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
17
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 Company's financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ..
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
10.1 -- Fourth Amendment to Credit Agreement (dated as of June 29, 2002),
by and between the Company and U.S. Bank National Association. (1)
99.1 -- Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 -- Restatement of financial information relating to EITF 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products" for the years ended December 31,
2000, December 31, 1999 and December 31, 1998. (1)
- ----------
(1) Filed herewith.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, 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 11, 2002 Eric J. Kufel
President and Chief Executive Officer
(principal executive officer)
By: /s/ Thomas W. Freeze
-------------------------------------
Dated: November 11, 2002 Thomas W. Freeze
Senior Vice President, Chief
Financial Officer, Treasurer and
Secretary (principal financial and
accounting officer)
19
CERTIFICATIONS
I, Eric J. Kufel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Poore Brothers,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 11, 2002
/s/ Eric J. Kufel
- -------------------------------------
Eric J. Kufel
President and Chief Executive Officer
(principal executive officer)
20
CERTIFICATIONS
I, Thomas W. Freeze, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Poore Brothers,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 11, 2002
/s/ Thomas W. Freeze
- --------------------------------------------
Thomas W. Freeze
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
(principal financial and accounting officer)
21
EXHIBIT INDEX
10.1 -- Fourth Amendment to Credit Agreement (dated as of June 29, 2002), by and
between the Company and U.S. Bank National Association
99.1 -- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 -- Restatement of financial information relating to EITF 01-09, "Accounting
for Consideration Given by a Vendor to a Customer or a Reseller of the
Vendor's Products" for the years ended December 31, 2000, December 31,
1999 and December 31, 1998.