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 March 29, 2003
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: 16,733,411 as of March 29,
2003.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated balance sheets as of March 29, 2003
and December 28, 2002........................................... 3
Consolidated statements of income for the quarters
ended March 29, 2003 and March 30, 2002......................... 4
Consolidated statements of cash flows for the quarters
ended March 29, 2003 and March 30, 2002......................... 5
Notes to consolidated financial statements........................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 14
ITEM 4. CONTROLS AND PROCEDURES........................................... 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................. 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................... 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................... 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 16
ITEM 5. OTHER INFORMATION................................................. 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 29, DECEMBER 28,
2003 2002
------------ ------------
ASSETS (unaudited)
Current assets:
Cash .................................................................... $ 993,608 $ 1,395,187
Accounts receivable, net of allowance of $473,000 in 2003
and $409,000 in 2002 .................................................. 4,906,390 4,427,531
Inventories ............................................................. 1,574,605 1,760,401
Deferred income tax asset ............................................... 361,042 421,942
Other current assets .................................................... 1,930,721 803,665
------------ ------------
Total current assets .................................................. 9,766,366 8,808,726
Property and equipment, net ............................................... 13,135,985 13,009,948
Goodwill .................................................................. 5,565,687 5,565,687
Intangible assets ......................................................... 4,207,032 4,207,032
Other assets .............................................................. 156,284 165,233
------------ ------------
Total assets .............................................................. $ 32,831,354 $ 31,756,626
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 4,032,753 $ 2,937,602
Accrued liabilities ..................................................... 2,685,348 2,806,149
Current portion of long-term debt ....................................... 1,035,893 1,105,004
------------ ------------
Total current liabilities ............................................ 7,753,994 6,848,755
Long-term debt, net of current portion .................................... 3,869,251 4,105,118
Deferred income tax liability ............................................. 80,512 80,512
------------ ------------
Total liabilities .................................................... 11,703,757 11,034,385
------------ ------------
Commitments and contingencies (Note 4)
Shareholders' equity:
Preferred stock, $100 par value; 50,000 shares authorized; no shares
issued or outstanding at March 29, 2003 and December 28, 2002 ......... -- --
Common stock, $.01 par value; 50,000,000 shares authorized; 16,733,411
and 16,729,911 shares issued and outstanding at March 29, 2003 and
December 28, 2002, respectively ....................................... 167,334 167,299
Additional paid-in capital .............................................. 22,507,150 22,404,835
Accumulated deficit ..................................................... (1,546,887) (1,849,893)
------------ ------------
Total shareholders' equity ............................................ 21,127,597 20,722,241
------------ ------------
Total liabilities and shareholders' equity ................................ $ 32,831,354 $ 31,756,626
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
3
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
QUARTER ENDED
----------------------------
MARCH 29, MARCH 30,
2003 2002
------------ ------------
(unaudited) (unaudited)
Net revenues ................................... $ 15,217,683 $ 14,277,520
Cost of revenues ............................... 12,186,603 11,760,688
------------ ------------
Gross profit ................................. 3,031,080 2,516,832
Selling, general and administrative expenses ... 2,473,446 1,964,924
------------ ------------
Operating income ............................. 557,634 551,908
Interest expense, net .......................... (71,628) (153,884)
------------ ------------
Income before income tax provision ........... 486,006 398,024
Income tax provision ........................... (183,000) (18,000)
------------ ------------
Net income ................................... $ 303,006 $ 380,024
============ ============
Earnings per common share:
Basic ........................................ $ 0.02 $ 0.02
============ ============
Diluted ...................................... $ 0.02 $ 0.02
============ ============
Weighted average number of common shares:
Basic ........................................ 16,730,642 15,692,387
============ ============
Diluted ...................................... 18,025,514 17,439,210
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
4
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTER ENDED
----------------------------
MARCH 29, MARCH 30,
2003 2002
------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 303,006 $ 380,024
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ............................................... 289,554 348,128
Amortization ............................................... 7,766 9,048
Accounts receivable and inventory provisions ............... 102,364 (15,897)
Other asset amortization ................................... 52,999 68,358
Gain on disposition of fixed assets ........................ (4,422) (2,550)
Tax benefit from exercise of stock options ................. 97,100 --
Change in operating assets and liabilities:
Accounts receivable ........................................ (543,285) 271,982
Inventories ................................................ 147,858 (486,432)
Other assets and liabilities ............................... (1,117,971) (164,964)
Accounts payable and accrued liabilities ................... 974,350 625,307
------------ ------------
Net cash provided by operating activities ............ 309,319 1,033,004
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment ........................................ (411,169) (102,422)
Proceeds from disposition of fixed assets .................... -- 2,550
------------ ------------
Net cash used in investing activities ................ (411,169) (99,872)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ....................... 5,250 10,001
Payments made on long-term debt .............................. (304,979) (633,167)
Net decrease in working capital line of credit ............... -- (1,109,123)
------------ ------------
Net cash used in financing activities ................ (299,729) (1,732,289)
------------ ------------
Net decrease in cash ........................................... (401,579) (799,157)
Cash at beginning of period .................................... 1,395,187 894,198
------------ ------------
Cash at end of period .......................................... $ 993,608 $ 95,041
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest ..................... $ 66,982 $ 167,267
The accompanying notes are an integral part of
these consolidated financial statements.
5
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Poore Brothers, Inc., a Delaware corporation (the "Company"), was formed in
1995 as a holding company to acquire a potato chip manufacturing and snack food
distribution business which had been founded by Donald and James Poore in 1986.
In December 1996, the Company completed an initial public offering of its
Common Stock. 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 salted 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 T.G.I.
Friday's(R) brand salted snacks under license from TGI Friday's Inc., (ii)
manufactures and sells its own brands of salted 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, (iii)
manufactures private label potato chips for grocery retail chains 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 of America. 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-K for the fiscal year
ended December 28, 2002. The results of operations for the quarter ended March
29, 2003 are not necessarily indicative of the results expected for the full
year.
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
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
QUARTER ENDED
----------------------------
MARCH 29, MARCH 30,
2003 2002
------------ ------------
BASIC EARNINGS PER SHARE:
Net income .......................................... $ 303,006 $ 380,024
============ ============
Weighted average number of common shares ............ 16,730,642 15,692,387
============ ============
Earnings per common share ........................... $ 0.02 $ 0.02
============ ============
DILUTED EARNINGS PER SHARE:
Net income .......................................... $ 303,006 $ 380,024
============ ============
Weighted average number of common shares ............ 16,730,642 15,692,387
Incremental shares from assumed conversions-
Warrants .......................................... 417,524 598,530
Stock options ..................................... 877,348 1,148,293
------------ ------------
Adjusted weighted average number of common shares ... 18,025,514 17,439,210
============ ============
Earnings per common share ........................... $ 0.02 $ 0.02
============ ============
The Company's stock-based compensation plan is accounted for under the
recognition and measurement provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. The Company has adopted
the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". Accordingly, no compensation cost has
been recognized for stock option grants. Awards under the plan vest over periods
ranging from one to three years, depending on the type of award. The following
table illustrates the effect on net income and earnings per share if the fair
value method had been applied to all outstanding and unvested awards in each
period presented, using the Black-Scholes valuation model.
MARCH 29, MARCH 30,
2003 2002
------------ ------------
Net income as reported ................................................. $ 303,006 $ 380,024
Deduct: Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax effects ... (156,439) (219,022)
------------ ------------
Pro forma net income ................................................... $ 146,567 $ 161,002
============ ============
Net income per share - basic - as reported ............................. $ 0.02 $ 0.02
Pro forma net income per share - basic ................................. $ 0.01 $ 0.01
Net income per share - diluted - as reported ........................... $ 0.02 $ 0.02
Pro forma net income per share - diluted ............................... $ 0.01 $ 0.01
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for options granted in 2002: dividend yield of 0%; expected
volatility of 44%; risk-free interest rate of 3.8%; and expected lives of 3
years. Under this method, the weighted-average fair value of the options granted
was $1.27 in 2002. There were no option grants during the quarter ended March
29, 2003.
7
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES
Inventories consisted of the following:
MARCH 29, DECEMBER 28,
2003 2002
------------ ------------
Finished goods .................................. $ 905,406 $ 1,091,200
Raw materials ................................... 669,199 669,201
------------ ------------
$ 1,574,605 $ 1,760,401
============ ============
3. LONG-TERM DEBT
The Company's Goodyear, Arizona manufacturing, distribution and
headquarters facility is subject to a $1.9 million mortgage loan from Morgan
Guaranty Trust Company of New York, which bears interest at 9.03% per annum and
is secured by the building and the land on which it is located. The loan matures
on July 1, 2012; however, monthly principal and interest installments of $18,425
are determined on a twenty-year amortization period.
The Company has entered into a variety of capital and operating leases for
the acquisition of equipment and vehicles. The leases generally have three to
seven year terms, bear interest at rates from 8.2% to 11.3%, require monthly
payments and expire at various times through 2008 and are collateralized by the
related equipment.
During 2002, the Company's remaining outstanding 9% Convertible Debenture
due July 1, 2002 in the principal amount of $427,656 held by Wells Fargo Small
Business Investment Company, Inc. ("Wells Fargo SBIC") was converted into
401,497 shares of the Company's common stock.
On October 7, 1999, the Company signed a new $9.15 million Credit Agreement
with U.S. Bancorp (the "U.S. Bancorp Credit Agreement"). 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. In June 2002, the U.S. Bancorp Credit Agreement was amended
to extend the U.S. Bancorp Line of Credit maturity date from October 31, 2003 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 March 29, 2003, the Company had a borrowing base of
approximately $3,151,000 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 March 29,
2003 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. 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 March 29, 2003, there was no outstanding balance on the U.S. Bancorp
Line of Credit, $2,958,608 on the U.S. Bancorp Term Loan A, and $100,590 on the
CapEx Term Loan.
8
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
effect on the financial statements taken as a whole.
5. BUSINESS SEGMENTS
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-K for the fiscal year ended December 28, 2002.
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 MARCH 29, 2003
Revenues from external customers .......... $ 14,038,831 $ 1,178,852 $ 15,217,683
Depreciation and amortization in segment
gross profit ............................ 205,034 -- 205,034
Segment gross profit ...................... 2,850,393 180,687 3,031,080
QUARTER ENDED MARCH 30, 2002
Revenues from external customers .......... $ 13,289,432 $ 988,088 $ 14,277,520
Depreciation and amortization in segment
gross profit ............................ 309,274 -- 309,274
Segment gross profit ...................... 2,422,383 94,449 2,516,832
The following table reconciles reportable segment gross profit to the
Company's consolidated income before income tax provision.
QUARTER ENDED
---------------------------
MARCH 29, MARCH 30,
2003 2002
------------ ------------
Consolidated segment gross profit ............... $ 3,031,080 $ 2,516,832
Unallocated amounts:
Selling, general and administrative expenses .. 2,473,446 1,964,924
Interest expense, net ......................... 71,628 153,884
------------ ------------
Income before income tax provision .............. $ 486,006 $ 398,024
============ ============
9
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The Company accounts for income taxes using a balance sheet approach
whereby deferred tax assets and liabilities are determined based on the
differences in financial reporting and income tax basis of assets and
liabilities. The differences are measured using the income tax rate in effect
during the year of measurement.
The Company experienced significant net losses in prior fiscal years
resulting in a net operating loss carryforward ("NOLC") for federal income tax
purposes of approximately $2.6 million at December 28, 2002. The Company's NOLC
will begin to expire in varying amounts between 2010 and 2018.
Generally accepted accounting principles require that a valuation allowance
be established when it is more likely than not that all or a portion of a
deferred tax asset will not be realized. Changes in valuation allowances from
period to period are included in the tax provision in the period of change. In
determining whether a valuation allowance is required, the Company takes into
account all positive and negative evidence with regard to the utilization of a
deferred tax asset including our past earnings history, expected future
earnings, the character and jurisdiction of such earnings, unsettled
circumstances that, if unfavorably resolved, would adversely affect utilization
of a deferred tax asset, carryback and carryforward periods, and tax strategies
that could potentially enhance the likelihood of realization of a deferred tax
asset. During the third quarter of 2002, the Company concluded that it was more
likely than not that its deferred tax asset at the time would be realized, and
also began providing for income taxes at a rate equal to the combined federal
and state effective rates, which approximates 38% under current tax rates,
rather than the 7.5% rate previously being used to record a tax provision for
only certain state income taxes.
10
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 POORE BROTHERS, INC. (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 STRATEGIC ACQUISITIONS, POTENTIAL DIFFICULTIES RESULTING
FROM THE INTEGRATION OF ACQUIRED BUSINESSES WITH THE COMPANY'S BUSINESS, OTHER
ACQUISITION-RELATED RISKS, SIGNIFICANT COMPETITION, CUSTOMER ACCEPTANCE OF NEW
PRODUCTS, DEPENDENCE UPON MAJOR CUSTOMERS, DEPENDENCE UPON LICENSE AGREEMENTS
WITH THIRD PARTIES, 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 IF THE COMPANY FAILS TO SATISFY THE
APPLICABLE LISTING CRITERIA (INCLUDING A MINIMUM SHARE PRICE) IN THE FUTURE 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 MARCH 29, 2003 COMPARED TO THE QUARTER ENDED MARCH 30, 2002.
Net revenues for the quarter ended March 29, 2003 were $15.2 million, an
increase of 7% from $14.3 million for the quarter ended March 30, 2002. The
Company's revenue increase was driven by strong growth of T.G.I. Friday's(R)
brand salted snacks in the vending and convenience store channels, partially
offset by fewer large-scale promotional events in the grocery channel. T.G.I.
Friday's(R) brand salted snacks revenue grew 16%, accounting for approximately
63% of the Company's net revenues in the quarter, and was partially offset by
lower revenue from Tato Skins(R) brand snacks in the vending channel. Revenue
from the Company's potato chip brands and distributed products rose modestly.
11
Gross profit for the quarter ended March 29, 2003 rose to $3.0 million, an
increase of 20%, compared to $2.5 million in the first quarter of 2002. Gross
profit margin improved to 19.9% in 2003 versus 17.6% in 2002 due principally to
lower overall trade promotion spending reflected in new revenue, offset by
higher transportation expense due to rising fuel costs. Manufacturing
efficiencies improved modestly, however the benefits were mostly offset by costs
from the Crunch Toons(TM) manufacturing tests.
Selling, general and administrative expenses increased to $2.5 million for
the quarter ended March 29, 2003 from $2.0 million for the quarter ended March
30, 2002, due primarily to marketing-related expenses associated with the
upcoming launch of Crunch Toons(TM) brand snacks and increased payroll and
benefit costs.
Net interest expense decreased to $0.1 million for the quarter ended March
29, 2003 from a net interest expense of $0.2 million for the quarter ended March
30, 2002. The decrease of $0.1 million was due to lower long-term debt
borrowings.
The Company has provided $183,000 and $18,000 for the quarters ended March
29, 2003 and March 30, 2002, respectively, for income taxes. No Federal tax
provision was recorded in the quarter ended March 30, 2002. During the third
quarter of 2002, the Company concluded that it was more likely than not that its
deferred tax asset at the time would be realized, and also began providing for
income taxes at a rate equal to the combined federal and state effective rates,
which approximates 38% under current tax rates, rather than the 7.5% rate
previously being used to record a tax provision for only certain state income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $2.0 million (a current ratio of 1.3:1) at March
29, 2003 and December 28, 2002. For the quarter ended March 29, 2003, the
Company generated cash flow of $0.3 million from operating activities,
principally from operating results, invested a net amount of $0.4 million in new
equipment, and made $0.3 million in payments on long-term debt.
During 2002, the Company's remaining outstanding 9% Convertible Debenture
due July 1, 2002 in the principal amount of $427,656 held by Wells Fargo Small
Business Investment Company, Inc. ("Wells Fargo SBIC") was converted into
401,497 shares of the Company's common stock.
On October 7, 1999, the Company signed a new $9.15 million Credit Agreement
with U.S. Bancorp (the "U.S. Bancorp Credit Agreement"). 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. In June 2002, the U.S. Bancorp Credit Agreement was amended
to extend the U.S. Bancorp Line of Credit maturity date from October 31, 2003 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 March 29, 2003, the Company had a borrowing base of
approximately $3,151,000 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 March 29,
2003 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. 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.
12
As of March 29, 2003, there was no outstanding balance on the U.S. Bancorp
Line of Credit, $2,958,608 on the U.S. Bancorp Term Loan A, and $100,590 on the
CapEx Term Loan.
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 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. The
allowance for doubtful accounts was $473,000 at March 29, 2003 and $409,000
at December 28, 2002, respectively.
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. Intangible
assets with indefinite lives are 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 trade
13
advertising or promotional 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.
INCOME TAXES. The Company has been profitable since 1999; however, it
experienced significant net losses in prior fiscal years resulting in a net
operating loss carryforward ("NOLC") for federal income tax purposes of
approximately $2.6 million at December 28, 2002. Generally accepted
accounting principles require that the Company record a valuation allowance
against the deferred tax asset associated with this NOLC if it is "more
likely than not" that the Company will not be able to utilize it to offset
future taxes. During the third quarter of 2002, the Company concluded that
it is more likely than not that its deferred tax asset at that time would
be realized and also began providing for income taxes at a rate equal to
the combined federal and state effective rates, which approximates 38%
under current tax rates, rather than the 7.5 % rate previously being used
to record a tax provision for only certain state income taxes. Subsequent
revisions to the estimated net realizable value of the deferred tax asset
could cause the provision for income taxes to vary significantly from
period to period, although the cash tax payments will remain unaffected
until the benefit of the NOLC is utilized.
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 28,
2002 and the notes thereto included in the Company's Annual Report on Form 10-K
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 of America.
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 18 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 December 28, 2002, the
Company had $3.0 million of variable rate debt outstanding. A hypothetical 10%
adverse change in weighted average interest rates during fiscal 2002 would have
had an unfavorable impact of $0.03 million on both the Company's net earnings
and cash flows.
The Company's primary concentration of credit risk is related to certain
trade accounts receivable. In the normal course of business, the Company extends
unsecured credit to its customers. In 2002, substantially all of the Company's
customers were distributors and retailers whose sales were concentrated in the
grocery industry, throughout the United States. The Company investigates a
customer's credit worthiness before extending credit. At December 28, 2002, two
customers accounted for approximately 27% of the Company's accounts receivable.
14
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.
15
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
(a) Exhibits:
99.1 -- Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Current Reports on Form 8-K:
(1) Current Report on Form 8-K, announcing the introduction of Crunch
Toons(TM) brand salted snacks (filed with the Commission on March
18, 2003).
16
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: May 1, 2003 Eric J. Kufel
President and Chief Executive Officer
(principal executive officer)
By: /s/ Thomas W. Freeze
-----------------------------------------------
Dated: May 1, 2003 Thomas W. Freeze
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
(principal financial and accounting officer)
17
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: May 1, 2003
/s/ Eric J. Kufel
- ---------------------------------------
Eric J. Kufel
President and Chief Executive Officer
(principal executive officer)
18
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: May 1, 2003
/s/ Thomas W. Freeze
- ---------------------------------------
Thomas W. Freeze
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
(principal financial and accounting officer)
19
EXHIBIT INDEX
99.1 -- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
20