-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MxyvPo/HcVEYRZsgdaZhWgGVXuKBxdclXdkqZ6qO2l0DHcyk5lpJcYL5doE85vy6 wEGgKxrYsohtvX5NXieZ+g== 0000950147-00-000481.txt : 20000331 0000950147-00-000481.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950147-00-000481 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POORE BROTHERS INC CENTRAL INDEX KEY: 0000944508 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FOOD PREPARATIONS & KINDRED PRODUCTS [2090] IRS NUMBER: 860786101 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-14556 FILM NUMBER: 585889 BUSINESS ADDRESS: STREET 1: 3500 S LA COMETA DR CITY: GOODYEAR STATE: AZ ZIP: 85338 BUSINESS PHONE: 6029326200 MAIL ADDRESS: STREET 1: 2664 SOUTH LITCHFIELD RD CITY: GOODYEAR STATE: AZ ZIP: 85338 10KSB 1 ANNUAL REPORT FOR THE YEAR ENDED 12/31/99 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission File Number: 1-14556 POORE BROTHERS, INC. (Name of Small Business issuer in its charter) Delaware 86-0786101 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3500 South La Cometa Drive Goodyear, Arizona 85338 (623) 932-6200 (Address, zip code and telephone number of principal executive offices) ---------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The Registrant's revenues for the most recent fiscal year were $23,275,543. At March 24, 2000, the aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant was approximately $22,065,085. At March 24, 2000, the number of issued and outstanding shares of common stock of the Registrant was 13,347,044. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-KSB, 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 Annual Report on Form 10-KSB, 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 Annual Report on Form 10-KSB reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including specifically the Company's brief operating history and significant operating losses to date, the probability that the Company will need additional financing due to continued operating losses or in order to implement the Company's business strategy, the possible diversion of management resources from the day-to-day operations of the Company as a result of the Company's pursuit of strategic acquisitions; potential difficulties resulting from the integration of acquired businesses with 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, par value $.01 per share (the "Common Stock"), the possible de-listing of the Common Stock from the Nasdaq SmallCap Market and those other risks and uncertainties discussed herein, that could cause actual results to differ materially from historical results or those anticipated. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Annual Report on Form 10-KSB will in fact transpire or prove to be accurate. Readers are cautioned to consider the specific risk factors described herein and in "Risk Factors," and 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. 1 ITEM 1. DESCRIPTION OF BUSINESS BUSINESS Poore Brothers, Inc. and its subsidiaries (collectively, the "Company") are engaged in the production, marketing and distribution of premium salty snack food products that are sold primarily through grocery retail chains in the southwestern United States and through vend distributors across the United States. The Company manufactures and sells its own brands of salty snack food products including Poore Brothers(R) and Bob's Texas Style(R) brand batch-fried potato chips, Tato Skins(R) brand potato snacks, Pizzarias(R) brand pizza chips, and O'Boisies(R) brand potato crisps, manufactures private label potato chips for grocery store chains, and distributes and merchandises snack food products that are manufactured by others. For the year ended December 31, 1999, revenues totaled $23,275,543. Approximately 80% of sales were attributable to products manufactured by the Company (65% branded snack food products, 15% private label sales) and approximately 20% of sales were attributable to the distribution by the Company of snack food products manufactured by other companies. The Company generally sells its products to retailers and vend operators through independent distributors. Poore Brothers(R) and Bob's Texas Style(R) potato chips are manufactured with a batch-frying process that the Company believes produces potato chips with enhanced crispness and flavor. They are currently produced in ten flavors: Original, Salt & Vinegar, Jalapeno, Barbecue, Parmesan & Garlic, Cajun, Dill Pickle, Grilled Steak & Onion, Habanero and Unsalted. Poore Brothers(R) potato chips are currently offered in all flavors and Bob's Texas Style(R) potato chips are currently offered in seven of such flavors. The Company also manufactures potato chips for sale on a private label basis using a continuous frying process. The Company currently has three California and three Arizona grocery chains as customers for its private label potato chips. The Company's potato chips are manufactured at a Company-owned facility in Goodyear, Arizona. See "PRODUCTS" and "MARKETING AND DISTRIBUTION." Since the Company's October 1999 acquisition of Wabash Foods, LLC ("Wabash Foods"), the Company has produced Tato Skins(R) brand potato crisps, Pizzarias(R) brand pizza chips, and O'Boisies(R) brand potato crisps utilizing a sheeting and frying process that includes patented technology. The Company licenses the patented technology from a third party and has an exclusive right to use the technology within North America until the patents expires between 2004 and 2006. Tato Skins(R) brand potato crisps are offered in three flavors: Baked Potato, Cheese n'Bacon and Sour Cream n' Onion flavors. Pizzarias(R) brand pizza chips are offered in three flavors: Supreme, Pepperoni and Cheddar flavors. These products are manufactured at the Wabash Foods plant in Bluffton, Indiana, which is leased by the Company. The Company also produces at the Indiana plant pretzels and tortilla chips on a private label basis for snack food manufacturers. See "PRODUCTS" and "PATENTS AND TRADEMARKS". The Company's business objective is to be a leading regional manufacturer, marketer and distributor of premium branded and private label salty snack foods by providing high quality products at competitive prices that are superior in taste, texture, flavor variety and brand personality to comparable products. The Company's philosophy is to compete in the market niches not served by the dominant national competition. A significant element of the Company's growth strategy is to pursue additional strategic acquisition opportunities. The Company plans to acquire snack food brands that provide strategic fit and possess strong brand equity in a geographic region or channel of distribution in order to expand, complement or diversify the Company's existing business. To assist in this strategy, the Company has retained Stifel, Nicolaus & Company, Incorporated ("Stifel"), a regional investment banking and brokerage firm, as the Company's financial advisor to assist the Company in connection with strategic acquisitions. The Company also plans to increase sales of its existing products, increase distribution and merchandising revenues and continue to improve its manufacturing capacity utilization. See "BUSINESS STRATEGY." The Company's executive offices are located at 3500 South La Cometa Drive, Goodyear, Arizona 85338, and its telephone number is (623) 932-6200. RISK FACTORS BRIEF OPERATING HISTORY; SIGNIFICANT LOSSES TO DATE; ACCUMULATED DEFICIT. Although certain of the Company's subsidiaries have operated for several years, the Company as a whole has a relatively brief operating history upon which an evaluation of its prospects can be made. Such prospects are subject to the substantial risks, expenses and difficulties frequently encountered in the establishment and growth of a new business in the snack food industry, which is 2 characterized by a significant number of market entrants and intense competition. The Company had significant operating losses prior to fiscal 1999. The Company incurred net losses of $3,034,097 and $874,091 for the fiscal years ended December 31, 1997 and 1998, respectively, and net income for the fiscal year ended December 31, 1999 of $74,240. At December 31, 1999, the Company had an accumulated deficit of $6,261,784 and net working capital of $780,086. See "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION." Even if the Company is successful in making additional strategic acquisitions, increasing distribution and sales volume of the Company's existing products and developing new products, it may be expected to incur substantial additional expenses, including integration costs of recently completed and future acquisitions, advertising and promotional costs, and "slotting" expenses (i.e., the cost of obtaining shelf space in certain grocery stores). Accordingly, the Company may incur additional losses in the future as a result of the implementation of the Company's business strategy, even if revenues increase significantly. There can be no assurance that the Company's business strategy will prove successful or that the Company will be profitable in the future. NEED FOR ADDITIONAL FINANCING. A significant element of the Company's business strategy is the pursuit of selected strategic acquisition opportunities for the purpose of expanding, complementing and/or diversifying the Company's business. In connection with the acquisition of the business and certain assets of Tejas Snacks, L.P. ("Tejas") in November 1998, the Company needed to borrow funds from Wells Fargo Business Credit, Inc. (hereinafter "Wells Fargo" and formerly Norwest Business Credit, Inc.) pursuant to a Credit and Security Agreement (the "Wells Fargo Credit Agreement"), in order to satisfy a portion of the cash consideration payable to Tejas. The Wells Fargo Credit Agreement was paid in full on October 7, 1999 in connection with the Wabash Foods acquisition and related U.S. Bancorp Republic Commercial Finance, Inc. ("U.S. Bancorp") financing. See "BUSINESS -- COMPANY HISTORY" and "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES." It is likely that in the future the Company will require funds in excess of cash flow generated from operations in order to consummate any additional acquisitions involving cash consideration to the sellers. Any such funds would most likely be obtained through third party financing (debt or equity). In addition, the Company may, in the future, require third party financing (debt or equity) as a result of continued operating losses or expansion of the Company's business through non-acquisition means. There can be no assurance that any such required financing will be available or, if available, on terms attractive to the Company. Any third party financing obtained by the Company may result in dilution of the equity interests of the Company's shareholders. RISKS ASSOCIATED WITH ACQUISITIONS. A significant element of the Company's business strategy is the pursuit of selected strategic acquisition opportunities for the purpose of expanding, complementing and/or diversifying the Company's business; however, no assurance can be given that the Company will be able to identify, finance and complete additional suitable acquisitions on acceptable terms, or that future acquisitions, if completed, will be successful. The Company's recently completed acquisition of Wabash Foods, as well as any future acquisitions, could divert management's attention from the daily operations of the Company and otherwise require additional management, operational and financial resources. Moreover, there is no assurance that the Company would successfully integrate acquired companies or their management teams into the Company's operating structure, retain management teams of acquired companies on a long-term basis, or operate acquired companies profitably. Acquisitions may also involve a number of other risks, including adverse short-term effects on the Company's operating results, dependence on retaining key personnel and customers, amortization of acquired intangible assets, and risks associated with unanticipated liabilities or contingencies. LEVERAGE; FINANCIAL COVENANTS PURSUANT TO 9% CONVERTIBLE DEBENTURES AND PURSUANT TO U.S. BANCORP CREDIT AGREEMENT; NON-COMPLIANCE WITH FINANCIAL COVENANTS AND POSSIBLE ACCELERATION OF INDEBTEDNESS. At December 31, 1999, the Company had outstanding 9% Convertible Debentures due July 1, 2002 (the "9% Convertible Debentures") in the aggregate principal amount of $1,370,067 and outstanding indebtedness under the U.S. Bancorp Credit Agreement in the aggregate principal amount of $8,172,579. The indebtedness under the 9% Convertible Debentures and the U.S. Bancorp Credit Agreement is secured by substantially all of the Company's assets. The Company is required to comply with certain financial covenants pursuant to the loan agreement pursuant to which the 9% Convertible Debentures were issued (the "Debenture Loan Agreement") so long as the 9% Convertible Debentures are outstanding and pursuant to the U.S. Bancorp Credit Agreement so long as borrowings from U.S. Bancorp thereunder remain outstanding. Should the Company be in default under any of such covenants, the holders of the 9% Convertible Debentures and U.S. Bancorp, as applicable, shall have the right, upon written notice and after the expiration of any applicable period during which such default may be cured, to demand immediate payment of all of the then unpaid principal and accrued but unpaid interest under the 9% Convertible Debentures or pursuant to the U.S. Bancorp 3 Credit Agreement, respectively. At December 31, 1999, the Company was in compliance with all financial covenants under the Debenture Loan Agreement (including working capital, minimum shareholders' equity, current ratio and interest coverage requirements) and the U.S. Bancorp Credit Agreement (including minimum annual operating results, minimum fixed charge coverage, minimum tangible capital basis, minimum cash flow coverage and minimum debt service coverage requirements). There can be no assurance that the Company will be in compliance with the financial covenants in the future. Any acceleration of the 9% Convertible Debentures or the borrowings under the U.S. Bancorp Credit Agreement prior to their respective maturities could have a material adverse effect upon the Company. See "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--LIQUIDITY AND CAPITAL RESOURCES." VOLATILITY OF MARKET PRICE OF COMMON STOCK. The market price of the Common Stock has experienced a high level of volatility since the completion of the Company's initial public offering in December 1996. Commencing with an offering price of $3.50 per share in the initial public offering, the market price of the Common Stock experienced a substantial decline, reaching a low of $0.50 per share (based on last reported sale price of the Common Stock on the NASDAQ SmallCap Market) on December 22, 1998. During fiscal 1999, the market price of the Common Stock (based on last reported sale price of the Common Stock on the Nasdaq SmallCap Market) ranged from a high of $1.69 per share to a low of $0.56 per share. The last reported sales price of the Common Stock on the Nasdaq SmallCap Market on March 24, 2000 was $1.78 per share. There can be no assurance as to the future market price of the Common Stock. See "NASDAQ LISTING MAINTENANCE REQUIREMENTS." COMPLIANCE WITH NASDAQ LISTING MAINTENANCE REQUIREMENTS. In order for the Company's Common Stock to continue to be listed on the Nasdaq SmallCap Market, the Company is required to be in compliance with certain continued listing standards. One of such requirements is that the bid price of listed securities be equal to or greater than $1.00. As of November 9, 1998, the closing bid price of the Company's Common Stock had remained below $1.00 per share for thirty consecutive trading days. As a result, the Company received a notice from the Nasdaq Stock Market, Inc. ("Nasdaq") that the Company was not in compliance with the closing bid price requirements for continued listing of the Common Stock on the Nasdaq SmallCap Market and that such Common Stock would be de-listed after February 15, 1999 if the closing bid price was not equal to or greater than $1.00 per share for a period of at least ten consecutive trading days during the ninety-day period ending February 15, 1999. On February 9, 1999, the Company submitted to Nasdaq a request for a hearing to discuss the possibility of obtaining an extension of such ninety-day period. The Company's hearing request was granted by Nasdaq and a hearing was held on April 16, 1999. The de-listing of the Common Stock was stayed pending a determination by Nasdaq after the hearing. On October 19, 1999, the Company was notified by Nasdaq that a determination had been made to permit the Company's Common Stock to continue to be listed on the Nasdaq SmallCap Market. The determination was based upon the Company's compliance with the Nasdaq closing bid price requirement of $1.00 per share and the satisfaction by the Company of various information requests. If, in the future, the Company's Common Stock fails to be in compliance with the minimum closing bid price requirement for at least thirty consecutive trading days or the Company fails to be in compliance with any other Nasdaq continued listing requirements, then the Common Stock could be de-listed from the Nasdaq SmallCap Market. Upon any such de-listing, trading, if any, in the Common Stock would thereafter be conducted in the over-the-counter market on the so-called "pink sheets" or the "Electronic Bulletin Board" of the National Association of Securities Dealers, Inc. ("NASD"). As a consequence of any such de-listing, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Company's Common Stock. See "VOLATILITY OF MARKET PRICE OF COMMON STOCK". COMPETITION. The market for salty snack foods, such as those sold by the Company, including potato chips, tortilla chips, dips, pretzels and meat snacks, is large and intensely competitive. Competitive factors in the salty snack food 4 industry include product quality and taste, brand awareness among consumers, access to supermarket shelf space, price, advertising and promotion, variety of snacks offered, nutritional content, product packaging and package design. The Company competes in that market principally on the basis of product quality and taste. The snack food industry is primarily dominated by Frito-Lay, Inc., which has substantially greater financial and other resources than the Company and sells brands that are more widely recognized than are the Company's products. Numerous other companies that are actual or potential competitors of the Company, many with greater financial and other resources (including more employees and more extensive facilities) than the Company, offer products similar to those of the Company. In addition, many of such competitors offer a wider range of products than that offered by the Company. Local or regional markets often have significant smaller competitors, many of whom offer batch fried products similar to those of the Company. Expansion of Company operations into new markets has and will continue to encounter significant competition from national, regional and local competitors that may be greater than that encountered by the Company in its existing markets. In addition, such competitors may challenge the Company's position in its existing markets. While the Company believes that its products and methods of operation will enable it to compete successfully, there can be no assurance of its ability to do so. PROMOTIONAL AND SHELF SPACE COSTS. Successful marketing of food products generally depends upon obtaining adequate retail shelf space for product display, particularly in supermarkets. Frequently, food manufacturers and distributors, such as the Company, incur additional costs in order to obtain additional shelf space. Whether or not the Company incurs such costs in a particular market is dependent upon a number of factors, including existing demand for the Company's products, relative availability of shelf space and general competitive conditions. The Company may incur significant shelf space or other promotional costs as a necessary condition of entering into competition in particular markets or stores. If incurred, such costs may materially affect the Company's financial performance. NO ASSURANCE OF CONSUMER ACCEPTANCE OF COMPANY'S EXISTING AND FUTURE PRODUCTS. Consumer preferences for snack foods are continually changing and are extremely difficult to predict. The ability of the Company to develop successful operations in new markets will depend upon customer acceptance of, and the Company's ability to manufacture, its products. There can be no assurance that the Company's products will achieve a significant degree of market acceptance, that acceptance, if achieved, will be sustained for any significant period or that product life cycles will be sufficient to permit the Company to recover start-up and other associated costs. In addition, there can be no assurance that the Company will succeed in the development of any new products or that any new products developed by the Company will achieve market acceptance or generate meaningful revenue for the Company. UNCERTAINTIES AND RISKS OF FOOD PRODUCT INDUSTRY. The food product industry in which the Company is engaged is subject to numerous uncertainties and risks outside of the Company's control. Profitability in the food product industry is subject to adverse changes in general business and economic conditions, oversupply of certain food products at the wholesale and retail levels, seasonality, the risk that a food product may be banned or its use limited or declared unhealthful, the risk that product tampering may occur that may require a recall of one or more of the Company's products, and the risk that sales of a food product may decline due to perceived health concerns, changes in consumer tastes or other reasons beyond the control of the Company. FLUCTUATIONS IN PRICES OF SUPPLIES; DEPENDENCE UPON AVAILABILITY OF SUPPLIES AND PERFORMANCE OF SUPPLIERS. The Company's manufacturing costs are subject to fluctuations in the prices of potatoes, potato flakes, wheat flour, corn and oil, as well as other ingredients of the Company's products. Potatoes, potato flakes, wheat flour and corn are widely available year-round. The Company uses a variety of oils in the production of its products. The Company is dependent on its suppliers to provide the Company with products and ingredients in adequate supply and on a timely basis. Although the Company believes that its requirements for products and ingredients are readily available, and that its business success is not dependent on any single supplier, the failure of certain suppliers to meet the Company's performance specifications, quality standards or delivery schedules could have a material adverse effect on the Company's operations. In particular, a sudden scarcity, a substantial price increase, or an unavailability of product ingredients could materially adversely affect the Company's operations. There can be no assurance that alternative ingredients would be available when needed and on commercially attractive terms, if at all. LACK OF PROPRIETARY MANUFACTURING METHODS FOR CERTAIN PRODUCTS; FUTURE EXPIRATION OF PATENTED TECHNOLOGY LICENSED BY THE COMPANY. The taste and quality of Poore Brothers(R) and Bob's Texas Style(R) brand potato chips is largely due to two elements of the Company's manufacturing process: its use of batch frying and its use of distinctive seasonings to produce a variety of flavors. The 5 Company does not have exclusive rights to the use of either element; consequently, competitors may incorporate such elements into their own processes. The Company licenses patented technology from a third party in connection with the manufacture of its Tato Skins(R), Pizzarias(R) and O'Boisies(R) brand products, and has an exclusive right to use such technology within North America until the patents expire between 2004 and 2006. Upon the expiration of the patents, competitors of the Company, certain of which may have significantly greater resources than the Company, may utilize the patented technology in the manufacture of products that are similar to those currently manufactured by the Company with such patented technology. The entry of any such products into the marketplace could have a material adverse effect on sales of Tato Skins(R), Pizzarias(R) and O'Boisies(R) brand products by the Company. DEPENDENCE UPON MAJOR CUSTOMERS. One customer of the Company, Fry's Food Stores (a subsidiary of Kroger, Inc.), accounted for 14% of the Company's 1999 net sales, with the remainder of the Company's net sales being derived from sales to a limited number of additional customers, either grocery chains or regional distributors, none of which individually accounted for more than 10% of the Company's sales for 1999. A decision by any major customer to cease or substantially reduce its purchases could have a material adverse effect on the Company's business. RELIANCE ON KEY EMPLOYEES; NON-COMPETE AGREEMENTS. The Company's success is dependent in large part upon the abilities of its officers, including Eric J. Kufel, President and Chief Executive Officer, Glen E. Flook, Vice President-Manufacturing, and Thomas W. Freeze, Vice President and Chief Financial Officer. The inability of the officers to perform their duties or the inability of the Company to attract and retain other highly qualified personnel could have a material adverse effect upon the Company's business and prospects. The Company does not maintain, nor does it currently contemplate obtaining, "key man" life insurance with respect to such employees. The employment of the officers of the Company is on an "at-will" basis. The Company has non-compete agreements with all of its officers, except Wendell T. Jones, Vice President of Sales-Arizona. See "ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY." GOVERNMENTAL REGULATION. The packaged food industry is subject to numerous federal, state and local governmental regulations, including those relating to the preparation, labeling and marketing of food products. The Company is particularly affected by the Nutrition Labeling and Education Act of 1990 ("NLEA"), which requires specified nutritional information to be disclosed on all packaged foods. The Company believes that the labeling on its products currently meets these requirements. The Company does not believe that complying with the NLEA regulations materially increases the Company's manufacturing costs. There can be no assurance, however, that new laws or regulations will not be passed that could require the Company to alter the taste or composition of its products. Such changes could affect sales of the Company's products and have a material adverse effect on the Company. PRODUCT LIABILITY CLAIMS. As a manufacturer and marketer of food products, the Company may be subjected to various product liability claims. There can be no assurance that the product liability insurance maintained by the Company will be adequate to cover any loss or exposure for product liability, or that such insurance will continue to be available on terms acceptable to the Company. Any product liability claim not fully covered by insurance, as well as any adverse publicity from a product liability claim, could have a material adverse effect on the financial condition or results of operations of the Company. MAJOR SHAREHOLDER; POSSIBLE CHANGE IN CONTROL. As a result of the Wabash Foods acquisition, Capital Foods, LLC ("Capital Foods") (an affiliate of the former owner of Wabash Foods) became the single largest shareholder of the Company, with approximately 33% of the outstanding shares of Common Stock (without giving effect to the possible exercise of a warrant to purchase 400,000 shares of Common Stock also held by Capital Foods). Accordingly, Capital Foods is in a position to exercise a substantial influence on the business and affairs of the Company and may be deemed (either alone or together with Company management) to control the Company. Although the Company is not aware of any plans or proposals on the part of Capital Foods to recommend or undertake any material change in the management or business of the Company, there is no assurance that Capital Foods will not adopt or support any such plans or proposals in the future. 6 Apart from transfer restrictions arising under applicable provisions of the securities laws, there are no restrictions on the ability of Capital Foods to transfer any or all of its shares of Common Stock at any time. One or more of such transfers could have the effect of transferring control of the Company to one or more parties not currently known to the Company. Following expiration of the required holding period (one year, in the case of reliance upon the exemption provided by Rule 144 under the Securities Act) for the shares of Common Stock held by Capital Foods, Capital Foods (or other holder(s) of such shares) will be generally free to resell any or all of such shares without registration under the Securities Act. Such sales will be subject to volume limitations under Rule 144 only if Capital Foods or such other holder is deemed an "affiliate" of the Company at or about the time of resale or resells shares prior to completion of a two-year holding period. In addition, Capital Foods or its transferees have certain "piggyback" registration rights which will permit such resales pursuant to an effective registration statement under the Securities Act. Depending upon their timing, magnitude and other factors, such resales, or the possibility thereof, could adversely affect the market price of the Common Stock. CERTAIN ANTI-TAKEOVER PROVISIONS. The Company's Certificate of Incorporation authorizes the issuance of up to 50,000 shares of "blank check" Preferred Stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors of the Company. The Company may issue such shares of Preferred Stock in the future without shareholder approval. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of discouraging, delaying or preventing a change of control of the Company, and preventing holders of Common Stock from realizing a premium on their shares. In addition, under Section 203 of the Delaware General Corporation Law (the "DGCL"), the Company is prohibited from engaging in any business combination (as defined in the DGCL) with any interested shareholder (as defined in the DGCL) unless certain conditions are met. This statutory provision could also have an anti-takeover effect. COMPANY HISTORY Messrs. Donald and James Poore (the "Poore Brothers") founded Poore Brothers Foods, Inc. ("PB Foods") in 1986 after substantial experience in the potato chip industry. The Poore Brothers also founded Poore Brothers Distributing in 1990 and Poore Brothers of Texas in 1991, which provided distribution capabilities for the Company's Poore Brothers(R) brand products. In 1983, prior to the formation of PB Foods, the Poore Brothers co-founded Groff's of Texas, Inc. (a predecessor business to Tejas, previous owner of the Bob's Texas Style(R) potato chip brand acquired by the Company in November 1998), which also manufactured batch-fried potato chips. In May 1993, Mark S. Howells, the Company's Chairman, and associated individuals formed Poore Brothers Southeast ("PB Southeast"), which acquired a license from PB Foods to manufacture and distribute Poore Brothers(R) brand products. In 1994, PB Southeast opened a manufacturing plant in LaVergne, Tennessee. In November 1994, PB Southeast entered into a Purchase Agreement (the "Purchase Agreement") with PB Foods, the Poore Brothers and Amelia E. Poore, that provided for the acquisition by PB Southeast of (i) substantially all of the assets, subject to certain liabilities, of PB Foods; (ii) a 100% equity interest in PB Distributing; and (iii) an 80% equity interest in PB Texas, after giving effect to a 32% equity interest to be purchased from other shareholders of PB Texas not parties to the Purchase Agreement. Thereafter, the Company was formed as a holding company and the rights and obligations of PB Southeast under the Purchase Agreement were assigned to the Company. The transactions contemplated by the Purchase Agreement were consummated on May 31, 1995. Subsequent to the acquisition date, the Company acquired the remaining 20% equity interest in PB Texas. The aggregate purchase price paid by the Company in connection with these transactions was $4,057,163, $3,232,593 of which was paid in cash, $500,000 of which was payable pursuant to a five-year promissory note (that was repaid in January 1997) and the remainder of which was satisfied by the issuance of 300,000 shares of the Company's Common Stock to the seller. The Purchase Agreement contains a non-compete covenant pursuant to which each of the Poore Brothers agreed not to compete against the Company, directly or indirectly, in various states for a five-year period expiring on May 31, 2000. Also in May 1995, the Company entered into an exchange agreement with certain shareholders of PB Southeast, including Mark S. Howells and Jeffrey J. Puglisi, a former director of the Company, pursuant to which the Company agreed 7 to acquire from them more than 99% of the outstanding shares of the capital stock of PB Southeast, in exchange for the issuance to them of 1,560,000 shares of Common Stock, concurrently with and subject to the consummation of the closing under the Purchase Agreement. Such exchange was consummated on May 31, 1995. The remaining shares of PB Southeast were purchased by the Company in November 1998. In December 1996, the Company completed an initial public offering of its Common Stock, pursuant to which 2,250,000 shares of Common Stock were offered and sold to the public at an offering price of $3.50 per share. Of such shares, 1,882,652 shares were sold by the Company and 367,348 shares were sold by the holders of the 9% Convertible Debentures (Renaissance Capital Growth & Equity Income Fund III, Inc. ("Renaissance Capital") and Wells Fargo Small Business Investment Company, Inc. ("Wells Fargo"), formerly Wells Fargo Equity Capital, Inc.), which acquired such shares upon the conversion of $400,409 principal amount of the 9% Convertible Debentures. The initial public offering was underwritten by Paradise Valley Securities, Inc. (the "Underwriter"). The net proceeds to the Company from the sale of the 1,882,652 shares of Common Stock, after deducting underwriting discounts and commissions and the expenses of the offering payable by the Company, were approximately $5,300,000. On January 6, 1997, 337,500 additional shares of Common Stock were sold by the Company upon the exercise by the Underwriter of an over-allotment option granted to it in connection with the initial public offering. After deducting applicable underwriting discounts and expenses, the Company received net proceeds of approximately $1,000,000 from the sale of such additional shares. In 1997, the Company implemented a restructuring program pursuant to which a number of actions were taken in order to improve the Company's cost structure and provide greater strategic focus, including: (i) On June 4, 1997, the Company sold the Houston, Texas distribution business of PB Texas (which was unprofitable and which the Company viewed as having little prospects for generating future sales growth or profits) to Mr. David Hecht ("Hecht") pursuant to an Asset Purchase, Licensing and Distribution Agreement effective June 1, 1997. Under the agreement, Hecht was sold certain assets of PB Texas (including inventory, vehicles and capital equipment) and became the Company's distributor in the Houston, Texas market. (ii) In September 1997, the Company consolidated its entire manufacturing operations into a newly constructed 60,000 square foot manufacturing, distribution and headquarters facility in Goodyear, Arizona and, as a result, the Company closed its unprofitable PB Southeast manufacturing facility in LaVergne, Tennessee on September 30, 1997. In addition, the Company purchased new processing and packaging equipment. These actions were taken in order to improve the Company's overall manufacturing efficiency. On November 4, 1998, the Company acquired the business and certain assets of Tejas, a Texas-based potato chip manufacturer. The assets, which were acquired through a newly formed wholly owned subsidiary of the Company, Tejas PB Distributing, Inc., included the Bob's Texas Style(R) potato chips brand, inventories and certain capital equipment. In consideration for these assets, the Company issued 523,077 unregistered shares of Common Stock with a fair value of $450,000 and paid approximately $1,180,000 in cash. The Company utilized available cash as well as funds available pursuant to the Norwest Credit Agreement to satisfy the cash portion of the consideration. In connection with the acquisition, production of Bob's Texas Style(R) brand potato chips was transferred to the Company's Goodyear, Arizona facility. On October 7, 1999, the Company acquired Wabash Foods, including the Tato Skins(R), O'Boisies(R), and Pizzarias(R) trademarks, and assumed all of Wabash Foods' liabilities. The Company acquired all of the membership interests of Wabash Foods from Pate Foods Corporation in exchange for the issuance by the Company to Pate Foods Corporation of (i) 4,400,000 unregistered shares of Common Stock, and (ii) a warrant to purchase 400,000 unregistered shares of Common Stock at an exercise price of $1.00 per share. The warrant has a five-year term and is immediately exercisable. Wabash Foods' products continue to be manufactured by the Company at its leased Bluffton, Indiana facility. BUSINESS STRATEGY The Company's business objective is to be a leading regional manufacturer, marketer and distributor of premium branded and private label salty snack foods by providing high quality products at competitive prices that are superior in 8 taste, texture, flavor variety and brand personality to comparable products. The Company's philosophy is to compete in the market niches not served by the dominant national competition. The Company plans to achieve growth in manufactured product sales by acquiring other snack food brands and growing existing products. In addition, the Company plans to increase distribution and merchandising revenues, and continue to improve its manufacturing capacity utilization. The primary elements of the Company's business strategy are as follows: PURSUE STRATEGIC ACQUISITIONS IN THE BRANDED SNACK FOOD CATEGORY. A significant element of the Company's growth strategy is to pursue additional strategic acquisition opportunities. The Company's plan is to acquire unique snack food brands or distribution that provide strategic fit and possess strong brand equity in a geographic region or channel of distribution in order to expand, complement or diversify the Company's business. The acquisitions of the Tejas and Wabash Foods businesses in November 1998 and October 1999, respectively, were two such strategic acquisitions. The Company is continuing to search for other companies with strong, differentiated snack food brands and distribution. The Company has retained Stifel, Nicolaus & Company, Incorporated, a regional investment banking and brokerage firm, as the Company's financial advisor to assist the Company in the pursuit of strategic acquisitions. BUILD BRANDED AND PRIVATE LABEL SNACK FOOD SALES. The Company plans to build the market share of its products through continued trade advertising and promotion activity in selected markets and channels, as well as by new product innovations. Marketing efforts include, among other things, joint advertising with distributors, supermarkets and other manufacturers, in-store advertisements and in-store displays. The Company is also participating in selected event sponsorships and marketing relationships with the Arizona Diamondbacks baseball team and other professional sports franchises. The Company believes that these events offer opportunities to conduct mass sampling to motivate consumers to try its branded products. Opportunities to achieve new or expanded distribution in alternate channels, such as airlines and the national vend channel, will continue to be targeted. In addition, the Company plans to re-launch the Wabash Foods brands with new packaging for the retail grocery and club channel products. In 1999, the Company expanded its Arizona batch-frying capacity by 40%, and its Indiana facility is operating at approximately fifteen percent of its capacity. The Company believes that additional improvements to manufactured products' gross profit margins are possible with the achievement of the business strategies discussed above. Depending on product mix, the existing manufacturing facilities could produce, in the aggregate, up to three times the current volume and thereby further reduce manufacturing product costs. The Company currently has arrangements with three California and three Arizona grocery chains for the manufacture and distribution by the Company of their respective private label potato chips, in various types and flavors as specified by them. The Company also has arrangements with several snack food manufacturers to produce products for them at its Indiana facility. The Company grew its private label revenues by 60% in both 1998 and 1999 and believes that contract manufacturing opportunities exist. While they are extremely price competitive and can be short in duration, the Company believes that they provide a profitable opportunity for the Company to improve the capacity utilization of its facilities. The Company intends to seek additional private label customers located near its facilities who demand superior product quality at a reasonable price. INCREASE DISTRIBUTION AND MERCHANDISING REVENUES. The Company believes that its Arizona distribution operation provides it with a key competitive advantage in its home market. The Company plans to grow its Arizona snack food distribution business by growing its stable of core brands. The Company believes that an opportunity also exists to grow the Company's Texas merchandising business through additional product lines. The merchandising operation offers retailers and manufacturers cost effective merchandising support for their products in south/central Texas. PRODUCTS MANUFACTURED SNACK FOOD PRODUCTS. Poore Brothers(R) brand potato chips were first introduced by the Poore Brothers in 1986 and in November 1998, the Company acquired the Bob's Texas Style(R) potato chips brand. Both brands of potato chips are marketed by the Company as a premium product based on their distinctive combination of cooking method and variety of distinctive flavors. The potato chips are produced in ten flavors: Original, Salt & Vinegar, Jalapeno, Barbecue, Parmesan & Garlic, Cajun, Dill Pickle, Grilled Steak & Onion, Habanero and Unsalted. Poore Brothers(R) potato chips are currently offered in all flavors and Bob's Texas Style(R) potato chips are currently offered in seven of such flavors. 9 The Company currently has agreements with three California and three Arizona grocery chains pursuant to which the Company produces their respective private label potato chips in the styles and flavors specified by such grocery chains. The Company produces Tato Skins(R) brand potato crisps, Pizzarias(R) brand pizza chips and O'Boisies(R) brand potato crisps utilizing a sheeting and frying process that includes patented technology utilized by the Company. The Company licenses the technology from a third party and has an exclusive right to use the technology within North America until the patents expire between 2004 and 2006. See "PATENTS AND TRADEMARKS." Tato Skins(R) brand potato crisps are offered in three flavors: Baked Potato, Cheese n' Bacon and Sour Cream n' Onion flavors. Pizzarias(R) brand pizza chips are offered in three flavors: Supreme, Pepperoni and Cheese flavors. O'Boisies (R) brand potato crisps are offered in three flavors: Original, Sour Cream and Onion and Cheddar flavors. The Company also produces pretzels and tortilla chips on a private label basis for snack food manufacturers. DISTRIBUTED SNACK FOOD PRODUCTS. Through its Arizona distribution subsidiary, Poore Brothers Distributing, the Company purchases and resells throughout Arizona snack food products manufactured by others. Such products include pretzels, tortilla chips, dips, crackers and meat snacks. Through its Texas subsidiary, Tejas PB Distributing, Inc. ("Tejas Distributing"), the Company merchandises, but does not purchase and resell, snack food products for a major grocery retailer in south/central Texas. In addition to the Company's Bob's Texas Style(R) brand products, Tejas Distributing merchandises such products as private label potato chips, tortilla chips, pretzels and cheese puffs manufactured by other companies. MANUFACTURING The Company believes that a key element of the success to date of the Poore Brothers(R) and Bob's Texas Style(R) brand potato chips has been the Company's use of certain cooking techniques and key ingredients in the manufacturing process to produce potato chips with improved flavor. These techniques currently involve two elements: the Company's use of a batch-frying process for its brand name products, as opposed to the conventional continuous line cooking method, and the Company's use of distinctive seasonings to produce potato chips in a variety of flavors. Although it produces less volume, the Company believes that its batch-frying process is superior to conventional continuous line cooking methods because it enhances crispness and flavor through greater control over temperature and other cooking conditions. In September 1997, the Company consolidated all of its manufacturing operations into its present facility in Goodyear, Arizona, which was newly constructed at the time. In 1999, the Company purchased and installed additional batch-frying equipment. The Goodyear facility has the capacity to produce approximately 3,500 pounds of potato chips per hour, with approximately 1,400 pounds of such capacity used to batch fry the Company's branded products and 2,100 pounds of such capacity used to continuous fry the Company's private label products. The Company owns additional batch-frying equipment which, if needed, could be installed without significant time or cost. The Company believes that a key element of the success to date of the Tato Skins(R), Pizzarias(R) and O'Boisies(R) brand products has been its use of manufacturing techniques and key ingredients in the manufacturing process to produce snacks with unique shapes, texture and flavor. These techniques currently involve two elements: the Company's use of sheeting and frying and the Company's use of distinctive seasonings to produce snack chips in a variety of flavors. In April 1998, Wabash Foods began operations utilizing the facility and equipment formerly owned and operated by the O'Boisie Corporation in Bluffton, Indiana. In connection therewith, Wabash Foods negotiated a 20-year lease on the manufacturing facility that was utilized by O'Boisie Corporation. The Bluffton, Indiana facility has the capacity to produce over 11,000 pounds of product per hour. Such capacity includes three fryer lines that can produce an aggregate of approximately 7,800 pounds per hour of Tato Skins(R), O'Boisies(R) and Pizzarias(R), and four pretzel ovens that can produce an aggregate of approximately 3,520 pounds of pretzels per hour. Currently, the Indiana facility is operating at approximately 15% of capacity. There can be no assurance that the Company will obtain sufficient business to recoup the costs of its investment in its manufacturing facilities. See "ITEM 2. DESCRIPTION OF PROPERTY." 10 MARKETING AND DISTRIBUTION The Company's products are distributed by a select group of independent distributors. Poore Brothers(R) brand potato chip products have achieved significant market presence in Arizona, New Mexico, Southern California, Hawaii, Denver, Colorado, St. Louis, Missouri and Grand Rapids, Michigan. The Company's Bob's Texas Style(R) brand potato chip products have achieved significant market presence in south/central Texas, including Houston, San Antonio and Austin. The Company's Tato Skins(R), Pizzarias(R) and O'Boisies(R) snack food products have achieved significant market presence in the vending channel nationwide through an independent network of brokers and distributors, particularly in the midwest and eastern regions. The Company attributes the success of its products in these markets to consumer loyalty. The Company believes this loyalty results from the products' differentiated taste, texture and flavor variety which result from its manufacturing processes. The Company sells its Poore Brothers(R) brand products primarily in the southwest, but also in targeted markets in the western and midwest United States. Substantially all of the Company's Bob's Texas Style(R) products are sold in south/central Texas. The Company's Arizona distribution business operates throughout Arizona, with 35 independently operated service routes. Each route is operated by an independent distributor who merchandises as many as 100 items at major grocery store chains in Arizona, such as Albertson's, ABCO, Basha's, Fry's, Safeway, and Fred Myers stores. In addition to servicing major supermarket chains, the Company's distributors service many independent grocery stores, club stores (including Price/Costco and SAM's Club), and military facilities throughout Arizona. In addition to Poore Brothers(R) brand products, the Company distributes throughout Arizona a wide variety of snack food items manufactured by other companies, including pretzels, tortilla chips, cheese puffs, dips, crackers and meat snacks. Through its Texas subsidiary, Tejas PB Distributing, Inc. ("Tejas Distributing"), the Company merchandises, but does not purchase and resell, snack food products for a major grocery retailer in south/central Texas. In addition to the Company's Bob's Texas Style(R) brand products, Tejas Distributing merchandises such products as private label potato chips, tortilla chips, pretzels and cheese puffs manufactured by other companies. Outside of Arizona and south/central Texas, the Company selects vending brokers and retail distributors to distribute its branded products primarily on the basis of quality of service, call frequency on customers, financial capability and relationships they have with supermarkets and vending distributors, including access to "shelf space" for snack food. As of December 31, 1999, the Company had arrangements with over 50 distributors and brokers covering a number of major cities, including Honolulu, San Diego, Los Angeles, Las Vegas, Denver, Albuquerque, El Paso, San Antonio, Houston, Dallas, Wichita, Kansas City, St. Louis, Cincinnati, Chicago, Philadelphia and Grand Rapids. Successful marketing of the Company's products depends, in part, upon obtaining adequate shelf space for such products, particularly in supermarkets and vending machines. Frequently, the Company incurs additional marketing costs in order to obtain additional shelf space. Whether or not the Company will continue to incur such costs in the future will depend upon a number of factors, including existing demand for the Company's products, relative availability of shelf space and general competitive conditions. The Company may incur significant shelf space or other promotional costs as a necessary condition of entering into competition in particular markets or stores. Any such costs may materially affect the Company's financial performance. The Company's marketing programs are designed to increase product trial and build brand awareness in core markets. Most of the Company's marketing spending is focused on trade advertising and trade promotions designed to attract new consumers to the products at a reduced retail price. The Company's marketing programs also include selective event sponsorship designed to increase brand awareness and to provide opportunities to mass sample branded products. Sponsorship of the Arizona Diamondbacks and Phoenix Coyotes typify the Company's efforts to reach targeted consumers and provide them with a sample of the Company's products to encourage new and repeat purchases. SUPPLIERS The principal raw materials used by the Company are potatoes, potato flakes, wheat flour, corn, oil and packaging material. The Company believes that the raw materials it needs to produce its products are readily available from numerous suppliers on commercially reasonable terms. Potatoes, potato flakes, wheat flour and corn are widely available year-round. The Company uses a variety of oils in the production of its products and the Company believes that 11 alternative sources for such oils, as well as alternative oils, are readily abundant and available. The Company also uses seasonings and packaging materials in its manufacturing process. The Company chooses its suppliers based primarily on price, availability and quality and does not have any long-term arrangements with any supplier. Although the Company believes that its required products and ingredients are readily available, and that its business success is not dependent on any single supplier, the failure of certain suppliers to meet the Company's performance specifications, quality standards or delivery schedules could have a material adverse effect on the Company's operations. In particular, a sudden scarcity, a substantial price increase, or an unavailability of product ingredients could materially adversely affect the Company's operations. There can be no assurance that alternative ingredients would be available when needed and on commercially attractive terms, if at all. CUSTOMERS One customer of the Company, Fry's Food Stores (a subsidiary of Kroger, Inc.), accounted for 14% of the Company's 1999 net sales. The remainder of the Company's revenues were derived from sales to a limited number of additional customers, either grocery chains or regional distributors, none of which individually accounted for more than 10% of the Company's sales in 1999. A decision by any of the Company's major customers to cease or substantially reduce their purchases could have a material adverse effect on the Company's business. MARKET OVERVIEW AND COMPETITION According to the Snack Food Association ("SFA"), the U.S. market for salty snack foods reached $18.2 billion at retail in 1998 (the latest year for which data is available) with potato chips, tortilla chips and pretzels accounting for approximately 52% of the market, and popcorn, nuts, meat snacks and other products accounting for the balance. Total salted snack sales, in dollar terms, increased every year during the from 1990 through 1998, ranging from an increase of 8.5% (in 1997) to 0.3% (in 1995), with a 1998 increase of 7.3%. Potato chip, tortilla chips and pretzel combined sales have similarly increased, with 1998 retail sales of $9.4 billion, an 8.1% increase over 1997 sales of $8.7 billion. The Company's products compete generally against other salty snack foods, including potato chips, tortilla chips and pretzels. The salty snack food industry is large and highly competitive and is dominated primarily by Frito-Lay, Inc., a subsidiary of PepsiCo, Inc. Frito-Lay, Inc. possesses substantially greater financial, production, marketing, distribution and other resources than the Company and brands that are more widely recognized than the Company's products. Numerous other companies that are actual or potential competitors of the Company, many with greater financial and other resources (including more employees and more extensive facilities) than the Company, offer products similar to those of the Company. In addition, many of such competitors offer a wider range of products than offered by the Company. Local or regional markets often have significant smaller competitors, many of whom offer products similar to those of the Company. Expansion of the Company's operations into new markets has and will continue to encounter significant competition from national, regional and local competitors that may be greater than that encountered by the Company in its existing markets. In addition, such competitors may challenge the Company's position in its existing markets. While the Company believes that its specialized products and methods of operation will enable it to compete successfully, there can be no assurance of its ability to do so. The principal competitive factors affecting the market of the Company's products include product quality and taste, brand awareness among consumers, access to shelf space, price, advertising and promotion, variety of snacks offered, nutritional content, product packaging and package design. The Company competes in the market principally on the basis of product quality and taste. GOVERNMENT REGULATION The manufacture, labeling and distribution of the Company's products are subject to the rules and regulations of various federal, state and local health agencies, including the FDA. In May 1994, regulations under the NLEA concerning labeling of food products, including permissible use of nutritional claims such as "fat-free" and "low-fat," became effective. The Company is complying with the NLEA regulations and closely monitors the fat content of its products through various testing and quality control procedures. The Company does not believe that compliance with the NLEA regulations materially increases the Company's manufacturing costs. There can be no assurance that new laws or regulations will 12 not be passed that could require the Company to alter the taste or composition of its products. Such changes could affect sales of the Company's products and have a material adverse effect on the Company. In addition to laws relating to food products, the Company's operations are governed by laws relating to environmental matters, workplace safety and worker health, principally the Occupational Safety and Health Act. The Company believes that it presently complies in all material respects with such laws and regulations. EMPLOYEES As of December 31, 1999, the Company had 224 full-time employees, including 203 in manufacturing and distribution, 6 in sales and marketing and 15 in administration and finance. The Company's employees are not represented by any collective bargaining organization and the Company has never experienced a work stoppage. The Company believes that its relations with its employees are good. PATENTS AND TRADEMARKS The Company produces Tato Skins(R) brand potato crisps, Pizzarias(R) brand pizza chips, and O'Boisies(R) brand potato crisps utilizing a sheeting and frying process that includes patented technology that the Company licenses from Miles Willard Technologies, LLC, an Idaho limited liability company ("Miles Willard"). Pursuant to the license agreement between the Company and Miles Willard, the Company has an exclusive right to use the patented technology within North America until the patents expire between 2004 and 2006. In consideration for the use of these patents, the Company is required to make royalty payments to Miles Willard on sales of products manufactured utilizing the patented technology. The Company owns the following trademarks, which are registered in the United States: Poore Brothers(R), An Intensely Different Taste(R), Texas Style(R), Tato Skins(R), O'Boisies(R), Pizzarias(R), Braids(R) and Knots(R). The Company considers its trademarks to be of significant importance in the Company's business. The Company is not aware of any circumstances that would have a material adverse effect on the Company's ability to use its trademarks. ITEM 2. DESCRIPTION OF PROPERTY The Company owns a 60,000 square foot facility located on 7.7 acres of land in Goodyear, Arizona, approximately 15 miles west of Phoenix, Arizona. Construction of this new facility was completed in June 1997. In August 1997, the Company completed the transition of all of its Arizona operations into the new facility. The site will enable the Company to expand its facilities in the future to a total building size of 120,000 square feet. The facility is financed by a mortgage with Morgan Guaranty Trust Company of New York that matures in June 2012. The Company leases a 140,000 square foot facility located in Bluffton, Indiana, approximately 20 miles south of Ft. Wayne, Indiana. Prior to the Keebler Company's acquisition of the facility in 1980, the plant contained three pretzel lines with 40,000 square feet of processing space and 40,000 square feet of warehousing space. In 1985, the Keebler Company completed a 60,000 square foot fryer room addition and installed the three fryer lines that still operate in the facility. The Company has entered into a lease expiring in April 2018 with respect to the facility with two five-year renewal options. Monthly lease payments through April 2000 are $17,500 and then increase to $20,000 per month for the remainder of the lease term with an annual CPI adjustment. The Company is responsible for all insurance costs, utilities and real estate taxes. The Company believes that its facilities are adequately covered by insurance. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock, $.01 par value, of the Company (the "Common Stock") began trading on the Nasdaq SmallCap Market tier of the Nasdaq Stock Market on December 6, 1996 under the symbol "POOR", following the Company's initial public offering. On October 11, 1999, the Company changed its symbol to "SNAK". The following table sets forth, for the periods indicated, the high and low reported sales prices for the Common Stock on the Nasdaq SmallCap Market. The trading market in the Company's securities may at times be relatively illiquid due to low trading volume. Sales Prices ----------------- Period of Quotation High Low ------------------- ----- ----- Fiscal 1998: First Quarter $1.44 $0.97 Second Quarter $1.63 $1.09 Third Quarter $1.44 $0.75 Fourth Quarter $1.06 $0.41 Fiscal 1999: First Quarter $0.94 $0.53 Second Quarter $1.88 $0.66 Third Quarter $1.39 $1.00 Fourth Quarter $1.75 $1.25 In order for the Company's Common Stock to continue to be listed on the Nasdaq SmallCap Market, the Company is required to be in compliance with certain continued listing standards. One of such requirements is that the bid price of listed securities be equal to or greater than $1.00. As of November 9, 1998, the closing bid price of the Company's Common Stock had remained below $1.00 per share for thirty consecutive trading days. As a result, the Company received a notice from Nasdaq that the Company was not in compliance with the closing bid price requirements for continued listing of the Common Stock on the Nasdaq SmallCap Market and that such Common Stock would be de-listed after February 15, 1999 if the closing bid price was not equal to or greater than $1.00 per share for a period of at least ten consecutive trading days during the ninety-day period ending February 15, 1999. On February 9, 1999, the Company submitted to Nasdaq a request for a hearing to discuss the possibility of obtaining an extension of such ninety-day period. The Company's hearing request was granted by Nasdaq and a hearing was held on April 16, 1999. The de-listing of the Common Stock was stayed pending a determination by Nasdaq after the hearing. On October 19, 1999, the Company was notified by Nasdaq that a determination had been made to permit the Company's Common Stock to continue to be listed on the Nasdaq SmallCap Market. The determination was based upon the Company's compliance with the Nasdaq closing bid price requirement of $1.00 per share and the satisfaction by the Company of various information requests. If, in the future, the Company's Common Stock fails to be in compliance with the minimum closing bid price requirement for at least thirty consecutive trading days or the Company fails to be in compliance with any other Nasdaq continued listing requirements, then the Common Stock could be de-listed from the Nasdaq SmallCap Market. Upon any such de-listing, trading, if any, in the Common Stock would thereafter be conducted in the over-the-counter market on the so-called "pink sheets" or the "Electronic Bulletin Board" of the National Association of Securities Dealers, Inc. ("NASD"). As a consequence of any such de-listing, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the price of the Company's Common Stock. On March 24, 2000, there were 13,347,044 shares of Common Stock outstanding. As of such date, the shares of Common Stock were held of record by approximately 2,600 shareholders. The Company has never declared or paid any dividends on the shares of Common Stock. Management intends to retain any future earnings for the operation and expansion of the Company's business and does not anticipate paying any dividends at any time in the foreseeable future. In any event, certain debt agreements of the Company limit the Company's ability to declare and pay dividends. 14 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 Net sales for the year ended December 31, 1999 were $23,275,000, up $10,107,000, or 77%, from $13,168,000 for 1998. Sales of products manufactured by the Company accounted for 80% and 78% of the total sales in 1999 and 1998, respectively, while sales of products manufactured by others accounted for 20% and 22% in 1999 and 1998, respectively. Manufactured products segment revenues increased $8,250,000, or 82%, from sales of branded and private label product, including $2,290,000 from the Bob's Texas Style(R) brand acquired by the Company in November 1998 and $3,449,000 in connection with the Wabash Foods acquisition in October 1999. The remaining $2,511,000 increase, or 25%, was attributable to the Poore Brothers(R) brand and private label products. Revenues from the distribution and merchandising of products manufactured by others increased $1,858,000, or 64%. The majority of this increase, $1,158,000, was from the Texas merchandising operation, acquired by the Company in November 1998 in connection with the Tejas acquisition. The remaining $700,000 increase, or 26%, was due to increased sales of distributed product lines. Gross profit for the year ended December 31, 1999, was $5,707,000, or 25% of net sales, as compared to $3,244,000, or 25% of net sales, for 1998. The $2,463,000 increase, or 76%, in gross profit resulted from the increased volume of manufactured products. Selling, general and administrative expenses increased to $4,764,000, or just 20% of net sales for the year ended December 31, 1999, from $3,603,000, or 27% of net sales for 1998. This represented a $1,161,000 increase, or 32%, compared to 1998, primarily due to an $838,000, or 55%, increase in marketing, advertising and promotional spending and $210,000 of other sales-related expenses associated with the 77% increase in sales volume. Net interest expense increased to $750,000 for the year ended December 31, 1999 from $515,000 for 1998. This increase was due to lower interest income of $15,000 on investments and increased interest expense of $220,000 on indebtedness related to the Tejas and Wabash acquisitions. An extraordinary loss of $47,000 was recorded in October 1999 associated with debt extinguishment charges in connection with the acquisition of Wabash Foods. The cumulative effect of a change in accounting principle resulted in a $72,000 charge in the first quarter of 1999 and was related to the Company's expensing of previously capitalized organization costs as required by Statement of Position 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES," which was effective for the Company's fiscal year beginning January 1, 1999. The Company's net income for the year ended December 31, 1999 was $74,000, and the net loss for the year ended December 31, 1998 was $874,000. The increase in net income was attributable primarily to the increased gross profit offset by higher selling, general and administrative expenses. YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 Net sales for the year ended December 31, 1998 were $13,168,000, down $2,564,000, or 16%, from $15,732,000 for 1997. Sales of products manufactured by the Company accounted for 78% and 71% of the total sales in 1998 and 1997, respectively, while sales of products manufactured by others accounted for 22% and 29% in 1998 and 1997, respectively. The sale of the Texas distribution business in June 1997 represented approximately $1,452,000 of the total sales decline, consisting of $1,213,000 in sales of products manufactured by others and $239,000 in sales of Poore Brothers manufactured potato chips. An additional $697,000 decrease occurred in sales of products manufactured by others due to the elimination of several unprofitable product lines during the second quarter of 1997. These decreases were partially offset by increased revenue from other product lines of $282,000, or 11%. Manufactured potato chip sales for the year ended December 31, 1998 were $10,286,000, down $696,000, or 6%, from $10,982,000 (excluding PB Texas) for the year ended December 31, 1997. This decrease was driven principally by lower volume as a result of the Company's discontinuance of unprofitable promotion programs with certain customers and the shutdown of the Tennessee manufacturing facility in the third quarter of 1997. Sales of 15 private label potato chips increased $649,000, or 60%, to $1,728,000 primarily as a result of sales to a new customer beginning in late 1997, helping to offset the overall decrease in manufactured potato chips. Gross profit for the year ended December 31, 1998, was $3,244,000, or 25% of net sales, as compared to $2,022,000, or 13% of net sales, for 1997. The $1,222,000 increase in gross profit, or 60%, occurred despite 16% lower sales. This increase is a result of the restructuring actions implemented in 1997, benefits from negotiated raw material cost savings and a continued improvement in manufacturing and operating efficiencies at the Company's Goodyear, Arizona facility. Operating expenses decreased to $3,603,000, or 27% of net sales for the year ended December 31, 1998, from $4,728,000, or 30% of net sales for 1997. This represented a $1,125,000 decrease, or 24%, compared to 1997. The decrease was primarily attributable to $164,000 in charges recorded by the Company in 1997 related to severance, equipment write-downs and lease termination costs in connection with the sale of the Company's Texas distribution business in June 1997; $581,000 in charges recorded by the Company in 1997 in connection with the closure of the LaVergne, Tennessee manufacturing facility in September 1997; and a decrease in selling, general and administrative expenses. Selling, general and administrative expenses decreased $380,000, or 10%, to $3,603,000 for the year ended December 31, 1998 from $3,982,000 for 1997 despite a $29,000 increase in depreciation and amortization and a $169,000, or 13%, increase in marketing, advertising and promotional spending. Offsetting these increases were a 21% decrease in payroll costs and $344,000 in lower sales-related expenses, office expenses and occupancy costs resulting from 1997's restructuring actions. Net interest expense increased to $515,000 for the year ended December 31, 1998 from $328,000 for 1997. This was due primarily to an increase in interest expense of $105,000 related to a full year of interest expense on the permanent financing of the Company's Arizona manufacturing facility and production equipment in 1998, and an $82,000 decrease in interest income generated from investment of the remaining proceeds of the initial public offering. The Company's net losses for the years ended December 31, 1998 and 1997 were $874,000 and $3,034,000, respectively. The reduction in net loss was attributable primarily to the increased gross profit and lower operating expenses, offset by higher net interest expense. LIQUIDITY AND CAPITAL RESOURCES Net working capital was $780,086 (a current ratio of 1.2:1) and $768,155 (a current ratio of 1.4:1) at December 31, 1999 and 1998, respectively. For the fiscal year ended December 31, 1999, the Company generated cash flow of $235,838 from operating activities, principally from operating results, and invested $423,008 in new equipment. On October 7, 1999, the Company signed a new $9.15 million Credit Agreement with U.S. Bancorp (the "U.S. Bancorp Credit Agreement") consisting of a $3.0 million working capital line of credit (the "U.S. Bancorp Line of Credit"), a $5.8 million term loan (the "U.S. Bancorp Term Loan A") and a $350,000 term loan (the "U.S. Bancorp Term Loan B"). Borrowings under the U.S. Bancorp Credit Agreement were used to pay off the Wells Fargo Line of Credit (as defined below) and the Wells Fargo Term Loan (as defined below) and to refinance existing debt of Wabash Foods in October 1999, and will be used in the future for general working capital needs. The U.S. Bancorp Line of Credit bears interest at an annual rate of prime plus 1% and matures in October 2002. The U.S. Bancorp Term Loan A bears interest at an annual rate of prime and requires monthly principal payments of approximately $74,000 which commenced in February 1, 2000, plus interest, until maturity on July 1, 2006. The U.S. Bancorp Term Loan B bears interest at an annual rate of prime plus 2.5% and requires monthly principal payments of approximately $29,000 commencing April 30, 2000, plus interest, until maturity on March 31, 2001. The U.S. Bancorp Credit Agreement is secured by accounts receivable, inventories, equipment and general intangibles. Borrowings under the line of credit are limited to 80% of eligible receivables and 60% of eligible inventories and at December 31, 1999, the Company had a borrowing base of approximately $2,360,000 under the U.S. Bancorp Line of Credit. The U.S. Bancorp Credit Agreement requires the Company to be in compliance with certain financial covenants, including a minimum cash flow coverage ratio, a minimum debt service coverage ratio, minimum annual operating results, a minimum tangible capital base and a minimum fixed charge coverage ratio. At December 31, 1999, 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 performance criteria. 16 There can be no assurance, however, that the Company will attain any such profitability and remain in compliance. Any acceleration under the U.S. Bancorp Credit Agreement prior to the scheduled maturity of the U.S. Bancorp Line of Credit or the U.S. Bancorp Term Loans could have a material adverse effect upon the Company. As of December 31, 1999, there was an outstanding balance of $2,022,579 on the U.S. Bancorp Line of Credit, $5,800,000 on the U.S. Bancorp Term Loan A and $350,000 on the U.S. Bancorp Term Loan B. In addition, the Company assumed from Wabash Foods a $715,000 non-interest bearing note payable to U.S. Bancorp which is due in full on June 30, 2000. On October 7, 1999, pursuant to the terms of the U.S. Bancorp Credit Agreement, the Company issued to U.S. Bancorp a warrant (the "U.S. Bancorp Warrant") to purchase 50,000 shares of Common Stock for an exercise price of $1.00 per share. The U.S. Bancorp warrant is exercisable until October 7, 2004, the date of termination of the U.S. Bancorp Warrant, and provides the holder thereof certain piggyback registration rights. On November 4, 1998, the Company signed a new $2.5 million Credit Agreement with Wells Fargo which included a $2.0 million working capital line of credit (the "Wells Fargo Line of Credit") and a $0.5 million term loan (the "Wells Fargo Term Loan"). The outstanding balance on the Wells Fargo Line of Credit was $847,013 at December 31, 1998. The Wells Fargo Line of Credit had an annual rate of interest of prime plus 1.5% and matured in November 2001 while the Wells Fargo Term Loan had an annual rate of interest of prime plus 3% and required monthly principal payments of approximately $28,000, plus interest, until maturity on May 1, 2000. The Wells Fargo Credit Agreement was secured by accounts receivable, inventories, equipment and general intangibles. The Wells Fargo Line of Credit and Term Loan were paid in full on October 7, 1999 in connection with the above-described Wabash Foods acquisition and related U.S. Bancorp financing. The Company's Goodyear, Arizona manufacturing, distribution and headquarters facility is subject to a $2.0 million mortgage loan from Morgan Guaranty Trust Company of New York, 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 based 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 five-year terms, bear interest at rates from 8.2% to 11.3%, require monthly payments and expire at various times through 2002 and are collateralized by the related equipment. At December 31, 1999, the Company had outstanding 9% Convertible Debentures due July 1, 2002 in the principal amount of $1,370,067 ($511,020 held by Wells Fargo and $859,047 held by Renaissance Capital). The 9% Convertible Debentures are secured by land, building, equipment and intangibles. Interest on the 9% Convertible Debentures is paid by the Company on a monthly basis. Monthly principal payments of approximately $5,000 are required to be made by the Company on the Wells Fargo 9% Convertible Debenture beginning in July 2000 through June 2002. In November 1999, Renaissance Capital converted 50% ($859,047) of its 9% Convertible Debenture holdings into 859,047 shares of Common Stock and agreed unconditionally to convert into Common Stock the remaining $859,047 principal not later than December 31, 2000. For the period November 1, 1999 through December 31, 2000, Renaissance Capital agreed to waive all mandatory principal redemption payments and to accept 30,000 unregistered shares of the Company's Common Stock and a warrant to purchase 60,000 shares of common stock at $1.50 per share in lieu of cash interest payments. The holders of the 9% Convertible Debentures previously granted the Company a waiver for noncompliance with a financial ratio effective through June 30, 1999. As consideration for the granting of such waiver in February 1998, the Company issued warrants to Renaissance Capital and Wells Fargo, representing the right to purchase 25,000 and 7,143 shares of the Company's Common Stock, respectively, at an exercise price of $1.00 per share. Each warrant became exercisable upon issuance and expires on July 1, 2002. As a result of an event of default, the holders of the 9% Convertible Debentures have the right, upon written notice and after a thirty-day period during which such default may be cured, to demand immediate payment of the then unpaid principal and accrued but unpaid interest under the Debentures. The Company is currently in compliance with all the financial ratios, including working capital of at least $500,000; a minimum of $4,500,000 shareholders' equity; and a current ratio at the end of any fiscal quarter of at least 1.1:1. Management believes that the achievement of the Company's plans and objectives will enable the Company to attain a sufficient level of profitability to remain in compliance with the financial ratios. There can be no assurance, however, that the Company will attain any such profitability and remain in compliance with the financial ratios. Any acceleration under the 9% Convertible Debentures prior to their maturity on July 1, 2002 could have a material adverse effect upon the Company. 17 At December 31, 1999, the Company had net operating loss carryforwards available for federal income taxes of approximately $5.3 million. The Company's ability to utilize its net operating loss carryforwards to offset future taxable income may be limited under the Internal Revenue Code Section 382 change in ownership rules. A valuation allowance has been provided for the full amount of the net operating loss carryforward since the Company believes the realizability of the deferred tax asset does not meet the more likely than not criteria under SFAS 109, "Accounting for Income Taxes." The Company's accumulated net operating loss carryforwards will begin to expire in varying amounts between 2010 and 2018. MANAGEMENT'S PLANS In connection with the implementation of the Company's business strategy, the Company may incur additional operating losses in the future and is likely to require future debt or equity financings (particularly in connection with future strategic acquisitions). Expenditures relating to acquisition-related integration costs, market and territory expansion and new product development may adversely affect selling, general and administrative expenses and consequently may adversely affect operating and net income. These types of expenditures are expensed for accounting purposes as incurred, while revenue generated from the result of such expansion may benefit future periods. As a result of the 1997 restructuring actions, the November 1998 Tejas acquisition, and the October 1999 Wabash acquisition, management believes that the Company will generate positive cash flow from operations, during the next twelve months, which along with its existing working capital and borrowing facilities, should enable the Company to meet its operating cash requirements through 2000. 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. INFLATION AND SEASONALITY While inflation has not had a significant effect on operations in the last year, management recognizes that inflationary pressures may have an adverse effect on the Company as a result of higher asset replacement costs and related depreciation and higher material costs. Additionally, the Company may be subject to seasonal price increases for raw materials. The Company attempts to minimize the fluctuation in seasonal costs by entering into purchase commitments in advance, which have the effect of smoothing out price volatility. The Company will attempt to minimize overall price inflation, if any, through increased sales prices and productivity improvements. ITEM 7. FINANCIAL STATEMENTS Page ---- REPORTS Report of independent public accountants with respect to financial statements for the years ended December 31, 1999 and 1998 26 FINANCIAL STATEMENTS Consolidated balance sheets as of December 31, 1999 and 1998 27 Consolidated statements of operations for the years ended December 31, 1999 and 1998 28 Consolidated statements of shareholders' equity for the years ended December 31, 1999 and 1998 29 Consolidated statements of cash flows for the years ended December 31, 1999 and 1998 30 Notes to consolidated financial statements 31 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 18 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The executive officers and Directors of the Company, and their ages, are as follows: Name Age Position ---- --- -------- Eric J. Kufel 33 President, Chief Executive Officer, Director Glen E. Flook 41 Vice President-Manufacturing Thomas W. Freeze 48 Vice President, Chief Financial Officer, Treasurer, Secretary, and Director Thomas G. Bigham 46 Vice President of Sales-Texas Wendell T. Jones 59 Vice President of Sales-Arizona Kevin M. Kohl 44 Vice President, National Sales Manager James M. Poore 53 Vice President Mark S. Howells 46 Chairman, Director Richard E. Goodspeed 62 Director James W. Myers 65 Director Robert C. Pearson 64 Director Aaron M. Shenkman 59 Director ERIC J. KUFEL. Mr. Kufel has served as President, Chief Executive Officer and a Director of the Company since February 1997. From November 1995 to January 1997, Mr. Kufel was Senior Brand Manager at The Dial Corporation and was responsible for the operating results of Purex Laundry Detergent. From June 1995 to November 1995, Mr. Kufel was Senior Brand Manager for The Coca-Cola Company where he was responsible for the marketing and development of Minute Maid products. From November 1994 to June 1995 Mr. Kufel was Brand Manager for The Coca-Cola Company, and from June 1994 to November 1994, Mr. Kufel was Assistant Brand Manager for The Coca-Cola Company. From January 1993 to June 1994, Mr. Kufel was employed by The Kellogg Company in various capacities including being responsible for introducing the Healthy Choice line of cereal and executing the marketing plan for Kellogg's Frosted Flakes cereal. Mr. Kufel earned a Masters of International Management from the American Graduate School of International Management in December 1992. GLEN E. FLOOK. Mr. Flook has served as Vice President-Manufacturing since March 1997. From January 1994 to February 1997, Mr. Flook was employed by The Dial Corporation as a Plant Manager for a manufacturing operation that generated $40 million in annual revenues. From January 1983 to January 1994, Mr. Flook served in various capacities with Frito-Lay, Inc., including Plant Manager and Production Manager. THOMAS W. FREEZE. Mr. Freeze has served as Vice President, Chief Financial Officer, Secretary and Treasurer of the Company since April 1997 and as a Director since October 1999. From April 1994 to April 1997, Mr. Freeze served as Vice President, Finance and Administration -- Retail of New England Business Service, Inc. From October 1989 to April 1994, Mr. Freeze served as Vice President, Treasurer and Secretary of New England Business Service, Inc. THOMAS G. BIGHAM. Mr. Bigham has been Vice President of Sales - Texas since November 1998. From December 1996 to November 1998, Mr. Bigham was President of Tejas, whose business and certain assets were purchased by the Company in November 1998. From 1994 to December 1996, Mr. Bigham was President of Eagle Brands of Houston, Inc. WENDELL T. JONES. Mr. Jones has been the Vice President of Sales-Arizona since August 1998. From February 1997 to August 1998, Mr. Jones served as Director of Sales-Arizona. Previously, Mr. Jones was National Sales Manager of the Company from January 1996 to February 1997. From 1969 to 1996, Mr. Jones served in various capacities at Frito-Lay, Inc., including Director of Sales, Operations Manager and Manager-Trade Development. KEVIN M. KOHL. Mr. Kohl has been Vice President, National Sales Manager since May 1999. From November 1998 to April 1999, Mr. Kohl served as Vice President of Sales - Texas of the Company. From July 1996 to November 1998, Mr. Kohl was Executive Vice President of Tejas, whose business and certain assets were purchased by the Company in November 1998. From July 1994 to June 1996, Mr. Kohl was President of Mighty Eagle, Inc. d/b/a Atlanta Eagle. From June 1992 to July 1994, Mr. Kohl was a Regional Director of Eagle Snacks, Inc. 19 JAMES M. POORE. Mr. Poore has served as a Vice President of the Company since June 1995. Mr. Poore co-founded PB Foods in 1986 and served as its Vice President, Secretary, Treasurer and Director until May 1995. In addition, Mr. Poore served as the Secretary and a Director of PB Distributing, a subsidiary of the Company, from January 1990 to May 1995, and as Chairman of the Board and a Director of PB Texas, a subsidiary of the Company, from May 1991 to May 1995. In 1983, he co-founded Groff's of Texas, Inc., a potato chip manufacturer in Brookshire, Texas, and served as its President until January 1986. MARK S. HOWELLS. Mr. Howells has served as Chairman of the Board of the Company since March 1995. For the period from March 1995 to August 1995, Mr. Howells also served as President and Chief Executive Officer of the Company. He served as the Chairman of the Board of PB Southeast, a former subsidiary of the Company, from its inception in May 1993 until it was dissolved in 1999 and served as its President and Chief Executive Officer from May 1993 to August 1994. Since 1988, Mr. Howells has devoted a majority of his time to serving as the President and Chairman of Arizona Securities Group, Inc. d/b/a Puglisi Howells & Co., a registered securities broker-dealer. RICHARD E. GOODSPEED. Mr. Goodspeed currently serves as a management consultant to several companies, primarily in the food (manufacturing and retail) industry. Mr. Goodspeed served as President and Chief Operating Officer of The Vons Companies, Inc. from 1994 to 1998 and as a Director from 1994 to 1997. From 1989 to 1994, he served as President and Chief Operating Officer of Lucky Stores, Inc., a subsidiary of American Stores Company, and from 1992 to 1994, he also served as Executive Vice President of American Stores Company. JAMES W. MYERS. Mr. Myers has served as a Director since January 1999. Mr. Myers has been President of Myers Management & Capital Group, Inc., a consulting firm specializing in strategic, organizational and financial advisory services to CEO's, since January 1996. From December 1989 to December 1995, Mr. Myers served as President of Myers, Craig, Vallone & Francois, Inc., a management and corporate finance consulting firm. Previously, Mr. Myers was an executive with a variety of consumer goods companies. Mr. Myers is currently a director of ILX Resorts, Inc., a publicly traded time-share sales and resort property company. ROBERT C. PEARSON. Mr. Pearson has served as a Director of the Company since March 1996. Mr. Pearson has been Senior Vice President-Corporate Finance for Renaissance Capital Group, Inc. since April 1997. Previously, Mr. Pearson had been an independent financial and management consultant specializing in investments with emerging growth companies. He has performed services for Renaissance Capital Partners ("RCP") in connection with the Company and other RCP investments. RCP is the operating manager of Renaissance Capital, the owner of a 9% Convertible Debenture. From 1990 to 1994, Mr. Pearson served as Executive Vice President and Chief Financial Officer of Thomas Group, Inc., a publicly traded consulting firm. Prior to 1990, Mr. Pearson was Vice President-Finance of Texas Instruments, Incorporated. Mr. Pearson is currently a director of Tava Technologies, Inc. (a publicly traded information technology services company), Dexterity Surgical, Inc. (a publicly traded surgical instruments manufacturer and distributor), and Interscience Computer, Inc. (a distributor of consumables for laser printers). Pursuant to the Debenture Loan Agreement, so long as the 9% Convertible Debentures have not been fully converted into shares of Common Stock or redeemed or paid by the Company, Renaissance Capital shall be entitled to designate a nominee to the Company's Board of Directors subject to election by the Company's stockholders. Renaissance Capital designated Mr. Pearson as a nominee to the Board of Directors. AARON M. SHENKMAN. Mr. Shenkman has served as a Director of the Company since June 1997. He has served as the General Partner of Managed Funds LLC since October 1997. He served as the Vice-Chairman of Helen of Troy Corp., a distributor of personal care products, from March 1997 to October 1997. From February 1984 to February 1997, Mr. Shenkman was the President of Helen of Troy Corp. From 1993 to 1996, Mr. Shenkman also served as a Director of Craftmade International, a distributor of ceiling fans. ITEMS 9-12. DOCUMENTS INCORPORATED BY REFERENCE Information with respect to a portion of Item 9 and Items 10, 11 and 12 of Form 10-KSB is hereby incorporated by reference into this Part III of the Annual Report of Form 10-KSB from the Company's Proxy Statement relating to the Company's 2000 Annual Meeting of Shareholders to be filed by the Company with the Commission on or about April 17, 2000. 20 ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K The following documents are filed as part of this Annual Report on Form 10-KSB: (a) The following exhibits as required by Item 601 of Regulation S-B: EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3.1 -- Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on February 23, 1995. (1) 3.2 -- Certificate of Amendment to the Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on March 3, 1995. (1) 3.3 -- Certificate of Amendment to the Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on October 7,1999. (Incorporated by reference to the Company's definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on September 15, 1999.) 3.3 -- By-Laws of the Company. (1) 4.1 -- Specimen Certificate for shares of Common Stock. (1) 4.2 -- Form of Underwriter's Warrant issued by the Company to Paradise Valley Securities, Inc. on December 11, 1996. (1) 4.3 -- Convertible Debenture Loan Agreement dated May 31, 1995 by and among the Company, Poore Brothers Arizona, Inc. ("PB Arizona"), PB Distributing, PB Texas, PB Southeast, Renaissance Capital and Wells Fargo. (1) 4.4 -- 9.00% Convertible Debenture dated May 31, 1995, issued by the Company to Renaissance Capital. (1) 4.5 -- 9.00% Convertible Debenture dated May 31, 1995, issued by the Company to Wells Fargo. (1) 4.6 -- Form of Warrant issued as of February 1998 to Renaissance Capital and Wells Fargo. (3) 4.7 -- Warrant dated November 4, 1998, issued by the Company to Norwest. (4) 4.8 -- Warrant to purchase 400,000 shares of Common Stock, issued by the Company to Wabash Foods on October 7, 1999. (Incorporated by reference to the Company's definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on September 15, 1999.) 4.9 -- Form of Revolving Note, Term Note A and Term Note B issued by the Company to U.S. Bancorp Republic Commercial Finance, Inc. on October 7, 1999. (5) 4.10 -- Warrant to purchase 50,000 shares of Common Stock, issued by the Company to U.S. Bancorp Republic Commercial Finance, Inc. on October 7, 1999. (5) 10.1 -- Employment Agreement dated May 31, 1995, by and between PB Arizona and James M. Poore. (1) 10.2 -- Non-Qualified Stock Option Agreements dated August 1, 1995, August 31, 1995 and February 29, 1996, by and between the Company and Mark S. Howells. (1) 21 10.3 -- Non-Qualified Stock Option Agreements dated August 1, 1995, August 31, 1995 and February 29, 1996, by and between the Company and Jeffrey J. Puglisi. (1) 10.4 -- Non-Qualified Stock Option Agreement dated August 1, 1995, by and between the Company and Parris H. Holmes, Jr. (1) 10.5 -- Form of Security Agreements dated May 31, 1995, by and among Renaissance Capital, Wells Fargo and each of the Company, PB Arizona, PB Southeast, PB Texas and PB Distributing. (1) 10.6 -- Master Equipment Lease Agreement dated September 22, 1995, by and between Banc One Arizona Leasing Corporation and PB Arizona ("Banc One Lease Agreement"), with equipment schedules. (1) 10.7 -- Corporate Guaranty dated September 25, 1995, issued by PB Distributing to Banc One Arizona Leasing Corporation in connection with the Banc One Lease Agreement. (1) 10.8 -- Equipment Lease Agreement dated December 12, 1995, by and between PB Arizona and FINOVA Capital Corporation. (1) 10.9 -- Guaranty dated December 12, 1995, issued by the Company to FINOVA Capital Corporation. (1) 10.10 -- Master Lease Agreement (the "LCA Lease Agreement") dated February 1, 1996, by and between PB Arizona and LCA Capital Corp. (also known as LCA, a Division of Associates Commercial Corporation) ("LCA"). (1) 10.11 -- Purchase Agreement dated February 1, 1996, by and between PB Arizona and LCA in connection with the LCA Lease Agreement. (1) 10.12 -- Corporate Guaranty dated as of February 1, 1996, issued by the Company to LCA in connection with LCA Lease Agreement. (1) 10.13 -- Agreement dated August 29, 1996, by and between the Company and Westminster Capital, Inc. ("Westminster"), as amended. (1) 10.14 -- Form of Independent Distributor Agreement by and between PB Distributing and independent distributors. (1) 10.15 -- Amendment No. 1 dated October 14, 1996, to Warrant dated September 11, 1996, issued by the Company to Westminster. (1) 10.16 -- Letter Agreement dated November 5, 1996, amending the Non-Qualified Stock Option Agreement dated February 29, 1996, by and between the Company and Mark S. Howells. (1) 10.17 -- Letter Agreement dated November 5, 1996, amending the Non-Qualified Stock Option Agreement dated February 29, 1996, by and between the Company and Jeffrey J. Puglisi. (1) 10.18 -- Non-Qualified Stock Option Agreement dated as of October 22, 1996, by and between the Company and Mark S. Howells. (1) 10.19 -- Letter Agreement dated as of November 5, 1996, by and between the Company and Jeffrey J. Puglisi. (1) 10.20 -- Letter Agreement dated as of November 5, 1996, by and between the Company and David J. Brennan. (1) 10.21 -- Stock Option Agreement dated October 22, 1996, by and between the Company and David J. Brennan. (1) 10.22 -- Letter Agreement dated November 1, 1996, by and among the Company, Mark S. Howells, Jeffrey J. Puglisi, David J. Brennan and Parris H. Holmes, Jr. (1) 22 10.23 -- Letter Agreement dated December 4, 1996, by and between the Company and Jeffrey J. Puglisi, relating to stock options. (1) 10.24 -- Letter Agreement dated December 4, 1996, by and between the Company and Mark S. Howells, relating to stock options. (1) 10.25 -- Letter Agreement dated December 4, 1996, by and between the Company and Parris H. Holmes, Jr., relating to stock options. (1) 10.26 -- Letter Agreement dated December 4, 1996, by and between the Company and David J. Brennan, relating to stock options. (1) 10.27 -- Form of Underwriting Agreement entered into on December 6, 1996, by and between the Company, Paradise Valley Securities, Inc., Renaissance Capital and Wells Fargo. (Incorporated by reference to Amendment No. 4 to the Company's Registration Statement on Form SB-2, Registration No. 333-5594-LA.) 10.28 -- Employment Agreement dated January 24, 1997, by and between the Company and Eric J. Kufel. (2) 10.29 -- First Amendment to Employment Agreement dated February 2, 1997, by and between the Company and David J. Brennan. (2) 10.30 -- Employment Agreement dated February 14, 1997, by and between the Company and Glen E. Flook. (2) 10.31 -- Commercial Real Estate Purchase Contract and Receipt for Deposit dated January 22, 1997, by and between the Company and D.F. Properties, Inc. (2) 10.32 -- Employment Agreement dated April 10, 1997, by and between the Company and Thomas W. Freeze. (Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the three-month period ended March 31, 1997.) 10.33 -- Asset Purchase, Licensing and Distribution Agreement dated as of June 1, 1997, by and between PB Texas and David Hecht. (Incorporated by reference to the Company's Current Report on Form 8-K dated June 4, 1997.) 10.34 -- Fixed Rate Note dated June 4, 1997, by and between La Cometa Properties, Inc. and Morgan Guaranty Trust Company of New York. (3) 10.35 -- Deed of Trust and Security Agreement dated June 4, 1997, by and between La Cometa Properties, Inc. and Morgan Guaranty Trust Company of New York. (3) 10.36 -- Guaranty Agreement dated June 4, 1997, by and between the Company and Morgan Guaranty Trust Company of New York. (3) 10.37 -- Equipment Lease Agreement dated June 9, 1997, by and between PB Arizona and FINOVA Capital Corporation. (3) 10.38 -- Separation Agreement and Release of All Claims dated August 14, 1998, by and between the Company and Scott D. Fullmer. (4) 10.39 -- Letter Agreement dated August 18, 1998, by and between the Company and Everen. (4) 10.40 -- Credit and Security Agreement dated October 23, 1998, by and between the Company (and certain of its subsidiaries) and Norwest. (4) 23 10.41 -- Patent and Trademark Security Agreement dated October 23, 1998, by and between the Company (and certain of its subsidiaries) and Norwest. (4) 10.42 -- Agreement for Purchase and Sale of Assets dated October 29, 1998, by and among the Company, Tejas, Kevin M. Kohl and Thomas G. Bigham. (4) 10.43 -- Employment Agreement dated November 12, 1998, by and between Tejas PB Distributing, Inc. and Thomas G. Bigham. (4) 10.44 -- Employment Agreement dated November 12, 1998, by and between Tejas PB Distributing, Inc. and Kevin M. Kohl. (4) 10.45 -- Management Agreement effective April 1, 1999 by and between the Company and Wabash Foods. (Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the three-month period ended March 31, 1999.) 10.46 -- Agreement for Purchase and Sale of Limited Liability Company Membership Interests dated as of August 16, 1999, by and between Pate Foods Corporation, Wabash Foods and the Company. (Incorporated by reference to the Company's definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on September 15, 1999.) 10.47 -- Letter Agreement dated July 30, 1999 by and between the Company and Stifel, Nicolaus & Company, Incorporated. (Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the three-month period ended September 30, 1999.) 10.48 -- Poore Brothers, Inc. 1995 Stock Option Plan, as amended. (5) 10.49 -- Credit Agreement, dated as of October 3, 1999, by and between the Company and U.S. Bancorp Republic Commercial Finance, Inc. (5) 10.50 -- Security Agreement, dated as of October 3, 1999, by and between the Company and U.S. Bancorp Republic Commercial Finance, Inc. (5) 10.51 -- Commercial Lease, dated May 1, 1998, by and between Wabash Foods, LLC and American Pacific Financial Corporation. (5) 21.1 -- List of Subsidiaries of the Company. (5) 27.1 -- Financial Data Schedule for 1999. (5) (1) Incorporated by reference to the Company's Registration Statement on Form SB-2, Registration No. 333-5594-LA. (2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996. (3) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the three-month period ended June 30, 1997. (4) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the three-month period ended September 30, 1998. (5) Filed herewith. (b) Reports on Form 8-K. (1) Current Report on Form 8-K, reporting the completion of the acquisition of Wabash Foods by the Company (filed with the Commission on October 21, 1999). 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 30, 2000 POORE BROTHERS, INC. By: /s/ Eric J. Kufel ------------------------------------ Eric J. Kufel President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Eric J. Kufel President, Chief Executive Officer, March 30, 2000 - ------------------------- and Director (Principal Executive Eric J. Kufel Officer) /s/ Thomas W. Freeze Vice President, Chief Financial March 30, 2000 - ------------------------- Officer, Treasurer, Secretary, Thomas W. Freeze and Director (Principal Financial Officer and Principal Accounting Officer) /s/ Mark S. Howells Chairman, Director March 30, 2000 - ------------------------- Mark S. Howells /s/ Richard E. Goodspeed Director March 30, 2000 - ------------------------- Richard E. Goodspeed /s/ James W. Myers Director March 30, 2000 - ------------------------- James W. Myers /s/ Robert C. Pearson Director March 30, 2000 - ------------------------- Robert C. Pearson /s/ Aaron M. Shenkman Director March 30, 2000 - ------------------------- Aaron M. Shenkman 25 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Poore Brothers, Inc. We have audited the accompanying consolidated balance sheets of POORE BROTHERS, INC. (a Delaware corporation) and SUBSIDIARIES as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Poore Brothers, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Phoenix, Arizona, February 4, 2000. 26 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------------- 1999 1998 ------------ ------------ ASSETS Current assets: Cash ............................................... $ 104,364 $ 270,295 Accounts receivable, net of allowance of $206,000 in 1999 and $24,000 in 1998 ............. 3,265,041 1,712,955 Inventories ........................................ 1,221,412 465,038 Other current assets ............................... 325,146 281,994 ------------ ------------ Total current assets ........................... 4,915,963 2,730,282 Property and equipment, net .......................... 13,678,133 6,270,374 Intangible assets, net ............................... 7,198,283 3,723,906 Other assets, net .................................... 281,601 214,327 ------------ ------------ Total assets ....................................... $ 26,073,980 $ 12,938,889 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ................................... $ 1,328,720 $ 870,204 Accrued liabilities ................................ 690,931 439,404 Current portion of long-term debt .................. 2,116,226 652,519 ------------ ------------ Total current liabilities ...................... 4,135,877 1,962,127 Long-term debt, less current portion ................. 10,680,840 5,720,247 ------------ ------------ Total liabilities .................................. 14,816,717 7,682,374 ------------ ------------ Commitments and contingencies Shareholders' equity: Preferred stock, $100 par value; 50,000 shares authorized; no shares issued or outstanding at December 31, 1999 and 1998, respectively ...... -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 13,222,044 and 7,832,997 shares issued and outstanding at December 31, 1999 and 1998, respectively ........................... 132,220 78,329 Additional paid-in capital ......................... 17,386,827 11,514,210 Accumulated deficit ................................ (6,261,784) (6,336,024) ------------ ------------ Total shareholders' equity ..................... 11,257,263 5,256,515 ------------ ------------ Total liabilities and shareholders' equity ..... $ 26,073,980 $ 12,938,889 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 27 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, ------------------------------- 1999 1998 ------------ ------------ Net revenues ............................................... $ 23,275,543 $ 13,167,993 Cost of revenues ........................................... 17,568,425 9,923,890 ------------ ------------ Gross profit ............................................. 5,707,118 3,244,103 Selling, general and administrative expenses ............... 4,763,896 3,603,156 ------------ ------------ Operating income (loss) .................................. 943,222 (359,053) ------------ ------------ Interest income ............................................ 30,866 46,371 Interest expense ........................................... (780,616) (561,409) ------------ ------------ (749,750) (515,038) ------------ ------------ Income (loss) before extraordinary loss and cumulative effect of a change in accounting principle ............... 193,472 (874,091) Extraordinary loss on extinguishment of debt ............... (47,601) -- Cumulative effect of a change in accounting principle ...... (71,631) -- ------------ ------------ Net income (loss) ........................................ $ 74,240 $ (874,091) ============ ============ Earnings (loss) per common share: Basic- Income (loss) before extraordinary loss and cumulative effect of a change in accounting principle ............. $ 0.02 $ (0.12) Extraordinary loss on extinguishment of debt ............. -- -- Cumulative effect of a change in accounting principle..... (0.01) -- ------------ ------------ Net income (loss) per common share ................. $ 0.01 $ (0.12) ============ ============ Diluted- Income (loss) before extraordinary loss and cumulative effect of a change in accounting principle ............. $ 0.02 $ (0.12) Extraordinary loss on extinguishment of debt ............. -- -- Cumulative effect of a change in accounting principle .... (0.01) -- ------------ ------------ Net income (loss) per common share ................... $ 0.01 $ (0.12) ============ ============ Weighted average number of common shares: Basic .................................................... 8,988,110 7,210,810 ============ ============ Diluted .................................................. 9,134,414 7,210,810 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 28 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional --------------------------- Paid-in Accumulated Shares Amount Capital Deficit Total ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1997 ........... 7,051,657 $ 70,516 $ 10,794,768 $ (5,461,933) $ 5,403,351 Exercise of common stock options ... 75,000 750 80,366 -- 81,116 Issuance of warrants ............... -- -- 48,703 -- 48,703 Issuance of common stock ........... 706,340 7,063 590,373 -- 597,436 Net loss ........................... -- -- -- (874,091) (874,091) ---------- --------- ------------ ------------ ------------ Balance, December 31, 1998 ........... 7,832,997 78,329 11,514,210 (6,336,024) 5,256,515 Exercise of common stock options.... 100,000 1,000 124,000 -- 125,000 Issuance of warrants ............... -- -- 505,261 -- 505,261 Issuance of common stock ........... 5,289,047 52,891 5,243,356 -- 5,296,247 Net income ......................... -- -- -- 74,240 74,240 ---------- --------- ------------ ------------ ------------ Balance, December 31, 1999 ........... 13,222,044 $ 132,220 $ 17,386,827 $ (6,261,784) $ 11,257,263 ========== ========= ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 29 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ----------------------------- 1999 1998 ----------- ----------- CASH FLOWS USED IN OPERATING ACTIVITIES: Net income (loss) .............................................. $ 74,240 $ (874,091) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation .................................................. 725,068 580,674 Amortization .................................................. 337,430 248,490 Valuation reserves ............................................ 168,784 79,000 Extraordinary loss on extinguishment of debt .................. 47,601 -- Cumulative effect of a change in accounting principle ......... 71,631 -- Other non-cash charges ........................................ 418,247 160,343 Change in operating assets and liabilities, net of effect of business acquired: Accounts receivable ......................................... (803,681) (263,637) Note receivable ............................................. -- 78,414 Inventories ................................................. (21,608) 37,790 Other assets and liabilities ................................ (239,749) (138,276) Accounts payable and accrued liabilities .................... (542,125) (17,314) ----------- ----------- Net cash used in operating activities ................ 235,838 (108,607) ----------- ----------- CASH FLOWS USED IN INVESTING ACTIVITIES: Proceeds from sale of equipment and property ................... 14,125 27,267 Purchase of equipment .......................................... (423,008) (225,780) Acquisition related expenses ................................... (482,872) (1,251,564) ----------- ----------- Net cash used in investing activities ................ (891,755) (1,450,077) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock ......................... 125,000 81,116 Stock and debt issuance costs .................................. (97,693) (102,713) Proceeds from issuance of debt ................................. 350,000 500,000 Payments made on long-term debt ................................ (757,219) (533,091) Net increase in working capital line of credit ................. 869,898 260,916 ----------- ----------- Net cash provided by financing activities ............ 489,986 206,228 ----------- ----------- Net decrease in cash and cash equivalents ........................ (165,931) (1,352,456) Cash and cash equivalents at beginning of year ................... 270,295 1,622,751 ----------- ----------- Cash at end of year .............................................. $ 104,364 $ 270,295 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest ......................... $ 541,096 $ 539,843 Summary of noncash investing and financing activities: Financing warrants issued .................................. 36,249 48,703 Common Stock issued for acquisitions ....................... 4,400,000 450,000 Common Stock warrants issued for acquisitions .............. 423,566 -- Common Stock and warrant issued in lieu of interest payments......................................... 90,447 154,629 Conversion of Convertible debenture into Common Stock ...... 859,047 --
The accompanying notes are an integral part of these consolidated financial statements. 30 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Poore Brothers, Inc. (the "Company"), a Delaware corporation, was organized in February 1995 as a holding company and on May 31, 1995 acquired substantially all of the equity of Poore Brothers Southeast, Inc. ("PB Southeast") in an exchange transaction. The exchange transaction with PB Southeast was accounted for similar to a pooling-of-interests since both entities had common ownership and control immediately prior to the transaction. On May 31, 1995, the Company also acquired (i) substantially all of the assets, subject to certain liabilities, of Poore Brothers Foods, Inc.; (ii) a 100% equity interest in Poore Brothers Distributing, Inc.; and (iii) an 80% equity interest in Poore Brothers of Texas, Inc. ("PB Texas"). Subsequently, the Company acquired the remaining 20% equity interest in PB Texas. These businesses had no common ownership with the Company and therefore these acquisitions were accounted for as purchases in accordance with Accounting Principals Board ("APB") Opinion No. 16, "Business Combination". Accordingly, only the results of their operations subsequent to acquisition have been included in the Company's results. In 1997, PB Texas was sold and PB Southeast was closed. On November 5, 1998, the Company acquired the business and certain assets (including the Bob's Texas Style(R) potato chips brand) of Tejas Snacks, L.P. ("Tejas"), a Texas-based potato chip manufacturer. See Note 2. On October 7, 1999, the Company acquired a 100% equity interest in Wabash Foods, LLC ("Wabash"), an Indiana based snack food manufacturer of Tato Skins(R), O'Boisies(R), and Pizzarias(R). See Note 2. BUSINESS OBJECTIVES, RISKS AND PLANS The Company is engaged in the production, marketing and distribution of premium salty snack food products that are sold through grocery retail chains in the southwestern United States and through vend distributors across the United States. The Company manufactures and sells its own brands of salty snack food products, including Poore Brothers(R) and Bob's Texas Style(R) brand batch-fried potato chips, Tato Skins(R) brand potato snacks, Pizzarias(R) brand pizza chips, and O'Boisies(R) brand potato crisps, manufactures private label potato chips for grocery store chains, and distributes and merchandises snack food products that are manufactured by others. The Company's business objective is to be a leading regional manufacturer, marketer and distributor of premium branded and private label salty snack foods by providing high quality products at competitive prices that are superior in taste, texture, flavor variety and brand personality to comparable products. The Company's philosophy is to compete in the market niches not served by the dominant national competition. The Company plans to achieve growth in manufactured product sales by acquiring other snack food brands and increasing sales of existing products. In addition, the Company plans to increase distribution and merchandising revenues, and continue to improve its manufacturing capacity utilization. Although certain of the Company's subsidiaries have operated for several years, the Company as a whole has a relatively brief operating history. The Company had significant operating losses prior to fiscal 1999. Successful future operations are subject to certain risks, uncertainties, expenses and difficulties frequently encountered in the establishment and growth of a new business in the snack food industry. The market for salty snack foods, such as potato chips, tortilla chips, popcorn and pretzels, is large and intensely competitive. The industry is dominated by one significant competitor and includes many other competitors with greater financial and other resources than the Company. The Company's acquisition of Tejas and Wabash, and the growth in volume of manufactured products have assisted in lowering unit costs of the Company's manufactured products. As a result, management believes that the Company will continue to generate positive cash flow from operations in 2000, which, along with its existing working capital and borrowing facilities, should enable the Company to meet its operating cash requirements through 2000. PRINCIPLES OF CONSOLIDATION 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. 31 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 1999 and 1998, the carrying value of cash, accounts receivable, accounts payable, and accrued liabilities approximate fair values since they are short-term in nature. The carrying value of the long-term debt approximates fair-value based on the borrowing rates currently available to the Company for long-term borrowings with similar terms. The Company estimates fair values of financial instruments by using available market information. Considerable judgement is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates may not be indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value amounts. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Cost includes expenditures for major improvements and replacements. Maintenance and repairs are charged to operations when incurred. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the appropriate accounts, and the resulting gain or loss is recognized. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, ranging from 2 to 30 years. INTANGIBLE ASSETS In accordance with Statement of Position 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES", effective January 1, 1999, the Company was required to change its accounting principle for organization costs. Previously, the Company capitalized such costs and amortized them using the straight-line method over five years. At December 31, 1998, such costs totaled $257,051 and the accumulated amortization totaled $185,420. In the first quarter of 1999, the Company wrote-off the remaining $71,631 and will expense as incurred any future organization costs. The write-off has been reflected in the Consolidated Statement of Operations for the year ended December 31, 1999 as the "Cumulative effect of a change in accounting principle" in accordance with APB No. 20, "Accounting Changes". Goodwill is recorded at cost and amortized using the straight-line method over a twenty-year period. The Company assesses the recoverability of goodwill at each balance sheet date by determining whether amortization of the assets over their original estimated useful life can be recovered through estimated future undiscounted cash flows. Total goodwill was $3,941,009 and $2,608,742 at December 31, 1999 and 1998, respectively, including $126,702 from the November 1998 Tejas acquisition (see Note 2) and $1,327,227 from the October 1999 Wabash acquisition (see Note 2). Accumulated amortization was $587,431 and $445,356 at December 31, 1999 and 1998, respectively. Trademarks are recorded at cost and are amortized using the straight-line method over a fifteen-year period. The Company allocated $1,500,000 of the Tejas purchase price to trademarks and $2,500,000 of the Wabash purchase price to trademarks. Accumulated amortization was $155,295 and $11,111 at December 31, 1999 and 1998, respectively. 32 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) REVENUE RECOGNITION Revenues and related cost of revenues are recognized upon shipment of products. ADVERTISING COSTS The Company expenses production costs of advertising the first time the advertising takes place, except for cooperative advertising costs which are accrued and expensed when the related sales are recognized. Costs associated with obtaining shelf space (i.e., "slotting fees") are expensed in the year in which such costs are incurred by the Company. Advertising expenses were approximately $265,000 and $469,000 in 1999 and 1998, respectively. INCOME TAXES Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or income tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. EARNINGS PER SHARE Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Exercises of outstanding stock options or warrants and conversion of convertible debentures are assumed to occur for purposes of calculating diluted earnings per share for periods in which their effect would not be anti-dilutive. Years Ended December 31, ------------------------- 1999 1998 ----------- ----------- BASIC EARNINGS (LOSS) PER SHARE: Income (loss) before extraordinary loss and cumulative effect of a change in accounting principle $ 193,472 $ (874,091) =========== =========== Weighted average number of common shares 8,988,110 7,210,810 =========== =========== Earnings (loss) per common share $ 0.02 $ (0.12) =========== =========== DILUTED EARNINGS (LOSS) PER SHARE: Income (loss) before extraordinary loss and cumulative effect of a change in accounting principle $ 193,472 $ (874,091) =========== =========== Weighted average number of common shares 8,988,110 7,210,810 Incremental shares from assumed conversions - Warrants 95,497 -- Stock options 50,807 -- ----------- ----------- Adjusted weighted average number of common shares 9,134,414 7,210,810 =========== =========== Earnings (loss) per common share $ 0.02 $ (0.12) =========== =========== Options and warrants to purchase 2,104,227 shares of Common Stock were outstanding at December 31, 1999, but were not included in the computation of diluted earnings per share because the option and warrant exercise prices were greater than the average market price per share of the Common Stock. Conversion of the convertible debentures was not assumed as the effect of its conversion would be anti-dilutive. 33 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 133, "Accounting for Derivative Instruments and for Hedging Activities", was issued in July 1998 and is effective for years beginning after June 15, 2000, as amended by SFAS No. 137. SFAS No. 133 requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. Upon adoption in the first quarter of 2001, the Company expects there will be no impact on its financial condition or results of operations. 2. ACQUISITIONS: On October 7, 1999, the Company acquired all of the membership interests of Wabash from Pate Foods Corporation in exchange for (i) 4,400,000 unregistered shares of Common Stock with a fair value of $4,400,000, (ii) a warrant to purchase 400,000 unregistered shares of Common Stock at an exercise price of $1.00 per share with a fair value of $290,000, and (iii) the assumption of $8,073,000 in liabilities, or a total purchase price of $12,763,000. The warrant has a five-year term and is immediately exercisable. As a result, the Company acquired all the assets of Wabash Foods, LLC, including the Tato Skins(R), O'Boisies(R), and Pizzarias(R) trademarks. The acquisition was accounted for using the purchase method of accounting in accordance with APB Opinion No. 16. Accordingly, only the results of operations subsequent to the acquisition date have been included in the Company's results. In connection with the acquisition, the Company recorded goodwill of $1,327,227, which is being amortized on a straight-line basis over a twenty-year period. Unaudited pro forma information has been provided below for the years ended December 31, 1999 and 1998 assuming the acquisition of Wabash took place at the beginning of the period presented. The unaudited pro forma condensed results of operations include adjustments to reflect amortization on intangible assets (e.g. goodwill and trademarks) and the elimination of $299,307 in management fees earned by the Company prior to the acquisition. The unaudited pro forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented nor does it project the Company's results of operations for any future period. PRO FORMA CONDENSED RESULTS OF OPERATIONS (UNAUDITED) Years Ended December 31, --------------------------- 1999 1998 ------------ ------------ Net revenues $ 32,594,488 $ 19,729,112 Income (loss) before extraordinary loss and cumulative effect of change in accounting principle $ 2,431 $ (1,049,416) Earnings (loss) per common share - diluted $ 0.00 $ (0.09) Weighted average number of common shares - diluted 12,509,756 11,607,158 On November 5, 1998, the Company acquired the business and certain assets of Tejas Snacks, L. P., a Texas-based potato chip manufacturer. The assets, which were acquired through a newly formed wholly owned subsidiary of the Company, Tejas PB Distributing, Inc., included the Bob's Texas Style(R) potato chips trademark, inventories and certain capital equipment. In exchange for these assets, the Company issued 523,077 unregistered shares of Common Stock with a fair value of $450,000 and paid $1.25 million in cash, or a total purchase price of $1.7 million. The Company utilized available cash as well as funds available pursuant to the Norwest Credit Agreement to satisfy the cash portion of the consideration. Tejas had sales of approximately $2.8 million for the nine months ended September 30, 1998. In connection with the acquisition, the Company transferred production of the Bob's Texas Style(R) brand potato chips to its Arizona facility. The acquisition was accounted for using the purchase method of accounting in accordance with APB Opinion No. 16. Accordingly, only the results of operations subsequent to the acquisition date have been included in the Company's results. In connection with the acquisition, the Company recorded goodwill of $126,702, which is being amortized on a straight-line basis over twenty years. 34 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 3. CONCENTRATIONS OF CREDIT RISK: The Company's cash is placed with major banks. The Company, in the normal course of business, maintains balances in excess of Federal insurance limits. The Company had no amount in excess of the insurance limit at December 31, 1999 and $106,165 in excess of the insurance limit at December 31, 1998. Financial instruments subject to credit risk consist primarily of trade accounts receivable. In the normal course of business, the Company extends unsecured credit to its customers. In 1999 and 1998, substantially all of the Company's customers were distributors whose sales were concentrated to retailers in the grocery industry, primarily in the southwest United States. The Company investigates a customer's credit worthiness before extending credit. The Company buys back trade accounts receivable of Arizona-based retailers from its distributors in settlement of their obligations to the Company. 4. INVENTORIES: Inventories consisted of the following: December 31, -------------------------- 1999 1998 ----------- ----------- Finished goods .............................. $ 330,568 $ 193,624 Raw materials ............................... 1,268,987 285,348 Reserve for excess and obsolete inventory.... (378,143) (13,934) ----------- ----------- $ 1,221,412 $ 465,038 =========== =========== 5. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following: December 31, -------------------------- 1999 1998 ------------ ------------ Buildings and improvements ................... $ 3,438,492 $ 3,430,572 Equipment .................................... 11,496,139 3,490,140 Land ......................................... 272,006 272,006 Vehicles ..................................... 79,927 75,376 Furniture and office equipment ............... 300,282 204,432 ------------ ------------ 15,586,846 7,472,526 Less accumulated depreciation and amortization ................................ (1,908,713) (1,202,152) ------------ ------------ $ 13,678,133 $ 6,270,374 ============ ============ Depreciation expense was $725,068 and $580,674 in 1999 and 1998, respectively. Included in equipment are assets held under capital leases with an original cost of $1,295,828 and $1,315,657 at December 31, 1999 and 1998, respectively and accumulated amortization of $617,590 and $407,756 at December 31, 1999 and 1998, respectively. In the event that facts and circumstances indicate that the cost of the property and equipment may be impaired, an evaluation of recoverability would be performed. This evaluation would include the comparison of the future estimated undiscounted cash flows associated with the assets to the carrying amount of these assets to determine if a writedown is required. 35 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. LONG-TERM DEBT: Long-term debt consisted of the following:
December 31, ----------------------------- 1999 1998 ------------ ------------ Convertible Debentures due in monthly installments through July 1, 2002; interest at 9%; collateralized by land, buildings, equipment and intangibles ............. $ 1,370,067 $ 2,229,114 Term loan due in monthly installments through May 1, 2000; interest at prime rate plus 3% (10.75% at December 31, 1998); collateralized by accounts receivable, inventories, equipment and general intangibles paid in full in 1999 .......................... -- 472,222 Working capital line of credit due October 4, 2002; interest at prime rate plus 1% (9.5% at December 31, 1999); collateralized by accounts receivable, inventories, equipment and general intangibles ............................................... 2,022,579 -- Term loan due in monthly installments beginning February 1, 2000 through July 1, 2006; interest at prime rate (8.5% at December 31,1999); collateralized by accounts receivable, inventories, equipment and general intangibles ............ 5,800,000 -- Working capital line of credit; paid in full in 1999 .............................................. -- 847,013 Term loan due in monthly installments beginning April 30, 2000 through March 31, 2001; interest at prime rate plus 2.5% (11% at December 31,1999); collateralized by accounts receivable, inventories, equipment and general intangibles............. 350,000 -- Mortgage loan due in monthly installments through July 2012; interest at 9.03%; collateralized by land and building ......................................... 1,940,509 1,965,921 Non-interest bearing note payable due in full on June 30, 2000 ............................................. 715,000 -- Capital lease obligations due in monthly installments through 2002; interest rates ranging from 8.2% to 11.3%; collateralized by equipment................................ 598,911 858,496 ------------ ------------ 12,797,066 6,372,766 Less current portion ...................................... (2,116,226) (652,519) ------------ ------------ $ 10,680,840 $ 5,720,247 ============ ============
Annual maturities of long-term debt are as follows: December 31, Year 1999 ---- ----------- 2000.............................................. $ 2,116,226 2001.............................................. 1,371,290 2002.............................................. 4,263,117 2003.............................................. 928,727 2004.............................................. 932,155 Thereafter........................................ 3,185,551 ----------- $12,797,066 =========== The Company's Goodyear, Arizona manufacturing, distribution and headquarters facility is subject to a $2.0 million mortgage loan from Morgan Guaranty Trust Company of New York, 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 based on a twenty-year amortization period. 36 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. LONG-TERM DEBT: (CONTINUED) The Company has entered into a variety of capital and operating leases for the acquisition of equipment and vehicles. The leases generally have five-year terms, bear interest at rates from 8.2% to 11.3%, require monthly payments and expire at various times through 2002 and are collateralized by the related equipment. At December 31, 1999, the Company had outstanding 9% Convertible Debentures due July 1, 2002 in the principal amount of $1,370,067 ($511,020 held by Wells Fargo and $859,047 held by Renaissance Capital). The 9% Convertible Debentures are secured by land, building, equipment and intangibles. Interest on the 9% Convertible Debentures is paid by the Company on a monthly basis. Monthly principal payments of approximately $5,000 are required to be made by the Company on the Wells Fargo 9% Convertible Debenture beginning in July 2000 through June 2002. In November 1999, Renaissance Capital converted 50% ($859,047) of its Debenture holdings into 859,047 shares of Common Stock and agreed unconditionally to convert into Common Stock the remaining $859,047 not later than December 31, 2000. For the period November 1, 1999 through December 31, 2000, Renaissance Capital agreed to waive all mandatory principal redemption payments and to accept 30,000 unregistered shares of the Company's Common Stock and a warrant to purchase 60,000 shares of common stock at $1.50 per share in lieu of cash interest payments. For the period November 1, 1998 through October 31, 1999, Renaissance Capital agreed to waive all mandatory principal redemption payments and to accept 183,263 unregistered shares of the Company's Common Stock in lieu of cash interest payments. The holders of the 9% Convertible Debentures previously granted the Company a waiver for noncompliance with a financial ratio effective through June 30, 1999. As consideration for the granting of such waiver in February 1998, the Company issued warrants to Renaissance Capital and Wells Fargo representing the right to purchase 25,000 and 7,143 shares of the Company's Common Stock, respectively, at an exercise price of $1.00 per share. Each warrant became exercisable upon issuance and expires on July 1, 2002. As a result of an event of default, the holders of the 9% Convertible Debentures have the right, upon written notice and after a thirty-day period during which such default may be cured, to demand immediate payment of the then unpaid principal and accrued but unpaid interest under the Debentures. The Company is currently in compliance with all the financial ratios, including working capital of at least $500,000; a minimum of $4,500,000 shareholders' equity; and a current ratio at the end of any fiscal quarter of at least 1.1:1. Management believes that the achievement of the Company's plans and objectives will enable the Company to attain a sufficient level of profitability to remain in compliance with the financial ratios. There can be no assurance, however, that the Company will attain any such profitability and remain in compliance with the financial ratios. Any acceleration under the 9% Convertible Debentures prior to their maturity on July 1, 2002 could have a material adverse effect upon the Company. On October 7, 1999, the Company signed a new $9.15 million Credit Agreement with U.S. Bancorp (the "U.S. Bancorp Credit Agreement") consisting of a $3.0 million working capital line of credit (the "U.S. Bancorp Line of Credit"), a $5.8 million term loan (the "U.S. Bancorp Term Loan A") and a $350,000 term loan (the "U.S. Bancorp Term Loan B"). Borrowings under the U.S. Bancorp Credit Agreement were used to pay off the previously existing Wells Fargo Line of Credit and Wells Fargo Term Loan and to refinance existing debt of Wabash Foods, LLC in October 1999, and will also be used for general working capital needs. The U.S. Bancorp Line of Credit bears interest at an annual rate of prime plus 1% and matures on October 4, 2002. The U.S. Bancorp Term Loan A bears interest at an annual rate of prime and requires monthly principal payments of approximately $74,000 commencing February 1, 2000, plus interest, until maturity on July 1, 2006. The U.S. Bancorp Term Loan B bears interest at an annual rate of prime plus 2.5% and requires monthly principal payments of approximately $29,000 commencing April 30, 2000, plus interest, until maturity on March 31, 2001. The U.S. Bancorp Credit Agreement is secured by accounts receivable, inventories, equipment and general intangibles. Borrowings under the line of credit are limited to 80% of eligible receivables and 60% of eligible inventories. At December 31, 1999, the Company had a borrowing base of $2,360,000 under the U.S. Bancorp Line of Credit. The U.S. Bancorp Credit Agreement requires the Company to be in compliance with certain financial performance criteria, including a minimum cash flow coverage ratio, a minimum debt service coverage ratio, minimum annual operating results, a minimum tangible capital base and a minimum fixed charge coverage ratio. At December 31, 1999, the Company was in compliance with all of the financial covenants. Management believes that the fulfillment of the Company's plans and objectives will enable the Company to attain a sufficient level of profitability to remain in compliance with these financial covenants. There can be no assurance, however, that the Company will attain any such profitability and remain in compliance. Any acceleration under the U.S. Bancorp Credit Agreement prior to the scheduled maturity of the U.S. Bancorp Line of Credit or the U.S. Bancorp Term Loans could have a material adverse effect upon the Company. The Company also assumed from Wabash Foods a $715,000 non-interest bearing note payable to 37 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. LONG-TERM DEBT: (CONTINUED) U.S. Bancorp which is due in full on June 30, 2000. On October 7, 1999, pursuant to the terms of the U.S. Bancorp Credit Agreement, the Company issued to U.S. Bancorp a warrant (the "U.S. Bancorp Warrant") to purchase 50,000 shares of Common Stock for an exercise price of $1.00 per share. The U.S. Bancorp Warrant is exercisable until October 7, 2004, the date of termination of the U.S. Bancorp Warrant, and provides the holder thereof certain piggyback registration rights. On November 4, 1998, the Company signed a new $2.5 million Credit Agreement with Wells Fargo Business Credit, Inc. (hereinafter "Wells Fargo" and formerly Norwest Business Credit, Inc.) which included a $2.0 million working capital line of credit (the "Wells Fargo Line of Credit") and a $0.5 million term loan (the "Wells Fargo Term Loan"). Borrowings under the Wells Fargo Credit Agreement were used to pay off borrowings under the Company's previous $1,000,000 Line of Credit with First Community Financial Corporation, to finance a portion of the consideration paid by the Company in connection with the Tejas acquisition, and for general working capital needs. The Wells Fargo Line of Credit had an annual rate of interest of prime plus 1.5% and matures in November 2001 while the Wells Fargo Term Loan had an annual rate of interest of prime plus 3% and required monthly principal payments of approximately $28,000, plus interest, until maturity on May 1, 2000. The Wells Fargo Line of Credit was secured by receivables, inventories, equipment and general intangibles. Borrowings under the Wells Fargo Line of Credit were based on 85% of eligible receivables and 60% of eligible inventories. As of December 31, 1998, the Company had a borrowing base of approximately $1,374,000 under the Wells Fargo Line of Credit. The Wells Fargo Credit Agreement required the Company to be in compliance with certain financial performance criteria, including minimum debt service coverage ratio, minimum quarterly and annual operating results, and minimum quarterly and annual changes in book net worth. At December 31, 1998, the Company was not in compliance with a maximum quarterly net loss limitation of $50,000 (actual net loss of $146,366) and a minimum debt service coverage ratio requirement of not less than 0.50 to 1 (actual of 0.30 to 1) under the Wells Fargo Credit Agreement. Wells Fargo granted the Company a waiver for the period ended December 31, 1998 and agreed to modify the financial ratio requirements for future periods. As of December 31, 1998, there was an outstanding balance of $847,013 on the Wells Fargo Line of Credit and $472,222 on the Wells Fargo 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 termination of the Wells Fargo Warrant, and provides the holder thereof certain demand and piggyback registration rights. The Company's Line of Credit and Term Loan with Wells Fargo were paid in full on October 7, 1999 in connection with the Wabash Foods, LLC acquisition and related U.S. Bancorp Republic Commercial Finance, Inc. financing. 7. COMMITMENTS AND CONTINGENCIES: Rental expense under operating leases was $97,300 and $34,632 for each of the years 1999 and 1998. Minimum future rental commitments under non-cancelable leases as of December 31, 1999 are as follows: Capital Operating Year Leases Leases Total ---- ---------- ---------- ---------- 2000 ............................ $ 306,667 $ 287,863 $ 594,530 2001 ............................ 228,682 260,635 489,317 2002 ............................ 133,242 253,915 387,157 2003 ............................ -- 249,015 249,015 2004 ............................ -- 244,507 244,507 Thereafter ...................... -- 4,080,000 4,080,000 ---------- ---------- ---------- Total ........................... 668,591 $5,375,935 $6,044,526 ========== ========== Less amount representing interest (69,680) ---------- Present value ................... $ 598,911 ========== 38 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. SHAREHOLDERS' EQUITY: COMMON STOCK In November 1999, Renaissance Capital converted 50% ($859,047) of its 9% Convertible Debenture (see Note 6) holdings into 859,047 shares of Common Stock and agreed unconditionally to convert into Common Stock the remaining $859,047 not later than December 31, 2000. The Company's outstanding 9% Convertible Debentures are convertible into 1,370,067 shares of Common Stock at a conversion price of $1.00 per share, subject to anti-dilution adjustments. Certain additional shares of Common Stock have been issued in connection with financings (see Note 6). In October 1999 and November 1998, the Company issued 4,400,000 and 523,077 unregistered shares of Common Stock in connection with the acquisitions of Wabash and Tejas, respectively (see Note 2). PREFERRED STOCK The Company has authorized 50,000 shares of $100 par value Preferred Stock, none of which was outstanding at December 31, 1999 and 1998. The Company may issue such shares of Preferred Stock in the future without shareholder approval. WARRANTS During 1998 and 1999, warrant activity was as follows: Warrants Weighted Average Outstanding Exercise Price --------- -------------- Balance, December 31, 1997 ............. 525,000 $ 2.68 Granted .............................. 378,298 0.89 --------- Balance, December 31, 1998 ............. 903,298 1.93 Granted .............................. 510,000 1.06 --------- Balance, December 31, 1999 ............. 1,413,298 $ 1.62 ========= At December 31, 1999, outstanding warrants had exercise prices ranging from $0.88 to $4.38 and a weighted average remaining term of 4.3 years. Warrants that were exercisable at December 31, 1999 totaled 1,265,221 with a weighted average exercise price per share of $1.70. In October 1999, the Company issued a warrant to purchase 400,000 unregistered shares of Common Stock at an exercise price of $1.00 per share in connection with the acquisition of Wabash. The warrant has a five-year term and is immediately exercisable (see Note 2). As of July 30, 1999, the Company agreed to the assignment of a warrant from Everen Securities, Inc. to Stifel, Nicolaus & Company Incorporated, the Company's acquisitions and financial advisor, representing the right to purchase 296,155 unregistered shares of Common Stock at an exercise price of $.875 per share and expiring in August 2003. The warrant provides the holder thereof certain anti-dilution and piggyback registration rights. The warrant was exercisable as to 50% of the shares when the Company's pro forma annual sales reached $30 million, which it did when the Company completed the Wabash acquisition in October 1999. The fair value of the warrant was included in the cost of the acquisition. The remaining 50% of the warrant is exercisable when the Company's pro forma annual sales reach $100 million. Certain other warrants have been issued in connection with financings (see Note 6). 39 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. SHAREHOLDERS EQUITY: (CONTINUED) STOCK OPTIONS The Company's 1995 Stock Option Plan (the "Plan"), as amended in October 1999, provides for the issuance of options to purchase 2,000,000 shares of Common Stock. The options granted pursuant to the Plan expire over a five-year period and generally vest over three years. In addition to options granted under the Plan, the Company also issued non-qualified options to purchase Common Stock to certain Directors which were exercisable on issuance and expire ten years from date of grant. All options are issued at fair market value and are noncompensatory. Fair market value is determined based on the price of sales of Common Stock occurring at or near the time of the option award. At December 31, 1999, outstanding options have exercise prices ranging from $.59 to $3.50 per share. During 1998 and 1999, stock option activity was as follows:
Plan Options Non-Plan Options --------------------------- --------------------------- Weighted Weighted Options Average Options Average Outstanding Exercise Price Outstanding Exercise Price ----------- -------------- ----------- -------------- Balance, December 31, 1997 1,067,618 $2.90 820,000 $1.18 Granted ................. 855,400 1.18 -- -- Canceled ................ (625,334) 3.20 -- -- Exercised ............... (75,000) 1.08 -- -- ---------- ---------- Balance, December 31, 1998 1,222,684 1.66 820,000 1.18 Granted ................. 357,500 1.46 -- -- Canceled ................ (96,534) 2.77 -- -- Exercised ............... -- -- 100,000 1.25 ---------- ---------- Balance, December 31, 1999 1,483,650 $1.54 720,000 $1.17 ========== ==========
At December 31, 1999, outstanding Plan options had exercise prices ranging from $0.59 to $3.50 and a weighted average remaining term of 3.5 years. Plan options that were exercisable at December 31, 1999 totaled 604,034 with a weighted average exercise price per share of $1.76. All Non-Plan options were exercisable at December 31, 1999 and had an average remaining term of 5.6 years. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation", which defines a fair value based method of accounting for employee stock options or similar equity instruments. However, it also allows an entity to continue to account for these plans according to APB No. 25, provided pro forma disclosures of net income (loss) and earnings (loss) per share are made as if the fair value based method of accounting defined by SFAS No. 123 had been applied. The Company has elected to continue to measure compensation expense related to employee (including directors) stock purchase options using APB No. 25. Had compensation cost for the Company's stock options been determined based on the fair value at the date of grant for awards in 1995 through 1999 consistent with the provisions of SFAS 123, the Company's net income (loss) and net income (loss) per share would have been changed to the pro forma amounts indicated below:
Years Ended December 31, -------------------------- 1999 1998 ---------- ----------- Net income (loss) - as reported .................................... $ 74,240 $ (874,091) Net loss - pro forma ............................................... (237,887) (1,163,000) Basic net income (loss) per share of common stock - as reported..... 0.01 (0.12) Basic net loss per share of common stock - pro forma ............... (0.03) (0.16)
40 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. SHAREHOLDERS EQUITY: (CONTINUED) STOCK OPTIONS (CONTINUED) The fair value of options granted prior to the Company's initial public offering were computed using the minimum value calculation method. For all other options, 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: dividend yield of 0%; expected volatility of 90% and 121%; risk-free interest rate of 5.41% and 4.93%; and expected lives of 3 years for 1999 and 1998, respectively. Under this method, the weighted average fair value of the options granted was $1.06 and $.72 per share in 1999 and 1998, respectively. 9. 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. There was no current or deferred benefit for income taxes for the years ended December 31, 1999 and 1998. The following table provides a reconciliation between the amount determined by applying the statutory federal income tax rate to the pretax loss and benefit for income taxes: Years Ended December 31, ---------------------- 1999 1998 --------- --------- Provision / (benefit) at statutory rate .... $ 25,242 $(297,191) State income tax, net ...................... 3,712 (47,809) Nondeductible expenses ..................... 15,600 5,250 Net operating loss utilized and benefited .. (44,554) 0 Net operating loss not recognized .......... 0 339,750 --------- --------- $ 0 $ 0 ========= ========= The income tax effects of loss carryforwards and temporary differences between financial and income tax reporting that give rise to the deferred income tax assets and liabilities are as follows: Years Ended December 31, -------------------------- 1999 1998 ----------- ----------- Net operating loss carryforward .......... $ 2,083,000 $ 2,215,000 Bad debt expense ......................... 80,000 10,000 Accrued liabilities ...................... 17,000 30,000 Other .................................... 26,000 0 ----------- ----------- 2,206,000 2,255,000 Deferred tax asset valuation allowance.... (2,206,000) (2,255,000) ----------- ----------- Net deferred tax assets ............. $ 0 $ 0 =========== =========== In assessing the realizability of its deferred tax assets, the Company considers whether it is more likely than not some or all of such assets will be realized. As a result of historical operating losses, the Company has fully reserved its net deferred tax assets as of December 31, 1999 and December 31, 1998. At December 31, 1999, the Company had a net operating loss carryforward ("NOLC") for federal income tax purposes of approximately $5.3 million. The Company's ability to utilize its NOLC to offset future taxable income may be limited under the Internal Revenue Code Section 382 change in ownership rules. The Company's NOLC will begin to expire in varying amounts between 2010 and 2018. 41 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS: For the year ended December 31, 1999 and 1998, one Arizona grocery chain customer of the Company accounted for $3,284,000, or 14% and $2,067,000 or 16%, 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, pretzels and tortilla chips for sale primarily to snack food distributors. The distributed products segment sells snack food products manufactured by other companies to the Company's Arizona snack food distributors and also merchandises in Texas for a fee, but does not purchase and resell, snack food products for manufacturers. The Company's reportable segments offer different products and services. All of the Company's revenues are attributable to external customers in the United States and all of its assets are located in the United States. The Company does not allocate assets based on its reportable segments. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (Note 1). The Company does not allocate selling, general and administrative expenses, income taxes or unusual items to segments and has no significant non-cash items other than depreciation and amortization. Manufactured Distributed Products Products Consolidated ----------- ----------- ----------- 1999 Revenues from external customers $18,535,760 $ 4,739,783 $23,275,543 Depreciation and amortization included in segment gross profit 712,216 -- 712,216 Segment gross profit 5,315,253 391,865 5,707,118 1998 Revenues from external customers $10,285,805 $ 2,882,188 $13,167,993 Depreciation and amortization included in segment gross profit 577,413 -- 577,413 Segment gross profit 2,975,108 268,995 3,244,103 The following table reconciles reportable segment gross profit to the Company's consolidated income (loss) before extraordinary loss and cumulative effect of a change in accounting principle: 1999 1998 ----------- ----------- Segment gross profit $ 5,707,118 $ 3,244,103 Unallocated amounts: Selling, general and administrative expenses 4,763,896 3,603,156 Interest expense, net 749,750 515,038 ----------- ----------- Income (loss) before extraordinary loss and cumulative effect of a change in accounting principle $ 193,472 $ (874,091) =========== =========== 42 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. LITIGATION: In June 1996, a lawsuit was commenced in an Arizona state court against two directors of the Company, Mark S. Howells and Jeffrey J. Puglisi, and PB Southeast which alleged, among other things, that James Gossett had an oral agreement with Mr. Howells to receive a 49% ownership interest in PB Southeast, that Messrs. Howells and Puglisi breached fiduciary duties and other obligations to Mr. Gossett and that he was entitled to exchange such alleged stock interest for shares in the Company. Messrs. Howells and Puglisi and PB Southeast filed a counterclaim against Mr. Gossett alleging various acts of nonperformance and breaches of fiduciary duty on the part of Mr. Gossett. In November 1998, the lawsuits were settled and all claims dismissed with prejudice. The Company's only expense in the settlement was its own legal fees. In September 1997, a lawsuit was commenced against PB Distributing by Chris Ivey and his company, Shelby and Associates (collectively, "Ivey"). The complaint alleged, among other things, that PB Distributing defrauded Ivey as part of Ivey's purchase of a distributing company from Walter Distributing Company and James Walter and that as a result, Ivey suffered damages of at least $390,000. In July 1998, the Company settled the litigation with Ivey. The $13,000 settlement included the release of all claims and the dismissal of the lawsuit. 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. 12. RELATED PARTY TRANSACTIONS: The land and building (140,000 square feet) occupied by the Company in Bluffton, Indiana is leased pursuant to a twenty year lease dated May 1, 1998 with American Pacific Financial Corporation, an affiliate of Pate Foods Corporation from whom the Company purchased Wabash in October 1999. The lease extends through April 2018 and contains two additional five-year lease renewal periods at the option of the Company. Lease payments are approximately $20,000 per month, plus CPI adjustments, and the Company is responsible for all real estate taxes, utilities and insurance. 43 EXHIBIT INDEX 4.9 -- Form of Revolving Note, Term Note A and Term Note B issued by the Company to U.S. Bancorp Republic Commercial Finance, Inc. on October 7, 1999. 4.10 -- Warrant to purchase 50,000 shares of Common Stock, issued by the Company to U.S. Bancorp Republic Commercial Finance, Inc. on October 7, 1999. 10.48 -- Poore Brothers, Inc. 1995 Stock Option Plan, as amended. 10.49 -- Credit Agreement, dated as of October 3, 1999, by and between the Company and U.S. Bancorp Republic Commercial Finance, Inc. 10.50 -- Security Agreement, dated as of October 3, 1999, by and between the Company and U.S. Bancorp Republic Commercial Finance, Inc. 10.51 -- Commercial Lease, dated May 1, 1998, by and between Wabash Foods, LLC and American Pacific Financial Corporation. 21.1 -- List of subsidiaries of Poore Brothers, Inc. 27.1 -- Financial Data Schedule for 1999 EX-4.9 2 FORM OF REVOLVING NOTE DATED 10/3/99 REVOLVING NOTE $3,000,000 October 3, 1999 Minneapolis, Minnesota FOR VALUE RECEIVED, POORE BROTHERS, INC., a corporation organized under the laws of the State of Delaware ("PBI"), POORE BROTHERS ARIZONA, INC., an Arizona corporation ("PBAI"), POORE BROTHERS DISTRIBUTING, INC., an Arizona corporation ("PBDI"), TEJAS PB DISTRIBUTING, INC., an Arizona corporation ("Tejas") and WABASH FOODS, LLC, a Delaware limited liability company ("Wabash"), (PBI, PBAI, PBDI, Tejas and Wabash each a Borrower and collectively the "Borrower" or the "Borrowers"), hereby jointly and severally promise to pay to the order of U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC. (the "Lender") at its main office in Minneapolis, Minnesota, in lawful money of the United States of America in immediately available funds on the Revolving Maturity Date (as such term and each other capitalized term used herein are defined in the Credit Agreement hereinafter referred to) the principal amount of THREE MILLION DOLLARS AND NO CENTS ($3,000,000) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender under the Credit Agreement, and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding at the rates and times set forth in the Credit Agreement. This note is the Revolving Note referred to in the Credit Agreement dated as of October 3, 1999 (as the same may be hereafter from time to time amended, restated or modified, the "Credit Agreement") between the undersigned and the Lender. This note is secured, it is subject to certain permissive and mandatory prepayments and its maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement. In the event of default hereunder, the undersigned agrees to pay all costs and expenses of collection, including reasonable attorneys' fees. The undersigned waives demand, presentment, notice of nonpayment, protest, notice of protest and notice of dishonor. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF. POORE BROTHERS, INC. By ------------------------------------- Title POORE BROTHERS ARIZONA, INC. By ------------------------------------- Title POORE BROTHERS DISTRIBUTING, INC. By ------------------------------------- Title TEJAS PB DISTRIBUTING, INC. By ------------------------------------- Title WABASH FOODS, LLC By ------------------------------------- Title TERM NOTE A $5,800,000 October 3, 1999 Minneapolis, Minnesota FOR VALUE RECEIVED, POORE BROTHERS, INC., a corporation organized under the laws of the State of Delaware ("PBI"), POORE BROTHERS ARIZONA, INC., an Arizona corporation ("PBAI"), POORE BROTHERS DISTRIBUTING, INC., an Arizona corporation ("PBDI"), TEJAS PB DISTRIBUTING, INC., an Arizona corporation ("Tejas") and WABASH FOODS, LLC, a Delaware limited liability company ("Wabash"), (PBI, PBAI, PBDI, Tejas and Wabash each a Borrower and collectively the "Borrower" or the "Borrowers"), hereby jointly and severally promise to pay to the order of U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC. (the "Lender") at its main office in Minneapolis, Minnesota, in lawful money of the United States of America in immediately available funds, the principal amount of FIVE MILLION EIGHT HUNDRED THOUSAND DOLLARS AND NO CENTS ($5,800,000), and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding at the rates and times set forth in the Credit Agreement. The principal hereof is payable in seventy-eight monthly installments, each payment in the amount of $74,359, commencing on February 1, 2000 and the first day of each month thereafter until July 1, 2006 when the remaining principal balance and all accrued interest shall be payable. This note is the Term Note A referred to in the Credit Agreement dated as of October 3, 1999 (as the same may hereafter be from time to time amended, restated or otherwise modified, the "Credit Agreement") between the undersigned and the Lender. This note is secured and its maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement. In the event of default hereunder, the undersigned agrees to pay all costs and expenses of collection, including reasonable attorneys' fees. The undersigned waives demand, presentment, notice of nonpayment, protest, notice of protest and notice of dishonor. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF. POORE BROTHERS, INC. By ------------------------------------- Title POORE BROTHERS ARIZONA, INC. By ------------------------------------- Title POORE BROTHERS DISTRIBUTING, INC. By ------------------------------------- Title TEJAS PB DISTRIBUTING, INC. By ------------------------------------- Title WABASH FOODS, LLC By ------------------------------------- Title TERM NOTE B $350,000 October 3, 1999 Minneapolis, Minnesota FOR VALUE RECEIVED, POORE BROTHERS, INC., a corporation organized under the laws of the State of Delaware ("PBI"), POORE BROTHERS ARIZONA, INC., an Arizona corporation ("PBAI"), POORE BROTHERS DISTRIBUTING, INC., an Arizona corporation ("PBDI"), TEJAS PB DISTRIBUTING, INC., an Arizona corporation ("Tejas") and WABASH FOODS, LLC, a Delaware limited liability company ("Wabash"), (PBI, PBAI, PBDI, Tejas and Wabash each a Borrower and collectively the "Borrower" or the "Borrowers"), hereby jointly and severally promise to pay to the order of U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC. (the "Lender") at its main office in Minneapolis, Minnesota, in lawful money of the United States of America in immediately available funds, the principal amount of THREE HUNDRED FIFTY THOUSAND DOLLARS AND NO CENTS ($350,000), and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding at the rates and times set forth in the Credit Agreement. The principal hereof is payable in twelve monthly installments, each payment in the amount of $29,166.67, commencing on April 30, 2000 and the last day of each month thereafter until March 31, 2001 when the remaining principal balance and all accrued interest shall be payable. This note is the Term Note B referred to in the Credit Agreement dated as of October 3, 1999 (as the same may hereafter be from time to time amended, restated or otherwise modified, the "Credit Agreement") between the undersigned and the Lender. This note is secured and its maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement. In the event of default hereunder, the undersigned agrees to pay all costs and expenses of collection, including reasonable attorneys' fees. The undersigned waives demand, presentment, notice of nonpayment, protest, notice of protest and notice of dishonor. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF. POORE BROTHERS, INC. By ------------------------------------- Title POORE BROTHERS ARIZONA, INC. By ------------------------------------- Title POORE BROTHERS DISTRIBUTING, INC. By ------------------------------------- Title TEJAS PB DISTRIBUTING, INC. By ------------------------------------- Title WABASH FOODS, LLC By ------------------------------------- Title EX-4.10 3 WARRANT TO PURCHASE COMMON STOCK THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE " 1933 ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE 1933 ACT, OR AN OPINION OF COUNSEL, SATISFACTORY TO THE ISSUER HEREOF, TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER THE 1933 ACT. WARRANT TO PURCHASE COMMON STOCK OF POORE BROTHERS, INC. Date of Issuance: October , 1999 Warrant No. ______ This certifies that, for value received, POORE BROTHERS, INC., a Delaware corporation (the "Company"), grants U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC., a Minnesota corporation, or registered assigns (the "Registered Holder"), the right to subscribe for and purchase from the Company, at the price of one dollar ($1.00) per share, as such price may be adjusted from time to time (the "Exercise Price"), from and after 9:00 a.m. Phoenix time on October ____, 1999 (the "Exercise Commencement Date") and to and including 5:00 p.m., Phoenix time on June 30, 2004 (the "Expiration Date"), fifty thousand (50,000) shares, as such number of shares may be adjusted from time to time (the "Warrant Shares"), of the Company's common stock, par value $.01 per share (the "Common Stock"), subject to the provisions and upon the terms and conditions herein set forth. The Exercise Price and the number of Warrant Shares purchasable upon exercise of this Warrant are subject to adjustment from time to time as provided in Section 7 hereof. SECTION 1. REGISTRATION. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose in the name of the Registered Holder. The Company may deem and treat the Registered Holder as the absolute owner of this Warrant for the purpose of any exercise hereof or any distribution to the Registered Holder, and for all other purposes, and the Company shall not be affected by any notice to the contrary. SECTION 2. REGISTRATION OF TRANSFERS AND EXCHANGES. (a) Subject to Section 11 hereof, the Company shall register the transfer of this Warrant, in whole or in part, upon records to be maintained by the Company for that purpose, upon surrender of this Warrant, with the Form of Assignment attached hereto completed and duly endorsed by the Registered Holder, to the Company at the office specified in or pursuant to Section 3(b). Upon any such registration of transfer, a new Warrant, in substantially the form of this Warrant, evidencing the Common Stock purchase rights so transferred shall be issued to the transferee and a new Warrant, in similar form, evidencing the remaining Common Stock purchase rights not so transferred, if any, shall be issued to the Registered Holder. (b) This Warrant is exchangeable, upon the surrender hereof by the Registered Holder at the office of the Company specified in or pursuant to Section 3(b) hereof, for new Warrants, in substantially the form of this Warrant evidencing, in the aggregate, the right to purchase the number of Warrant Shares which may then be purchased hereunder, each of such new Warrants to be dated the date of such exchange and to represent the right to purchase such number of Warrant Shares as shall be designated by the Registered Holder at the time of such surrender. SECTION 3. DURATION AND EXERCISE OF THIS WARRANT. (a) This Warrant shall be exercisable by the Registered Holder, in whole, or from time to time in part, on any business day before 5:00 p.m., Phoenix time, during the period beginning on the Exercise Commencement Date and ending on the Expiration Date. At 5:00 p.m., Phoenix time, on the Expiration Date, this Warrant, to the extent not previously exercised, shall become void and of no further force or effect. (b) Subject to Sections 4, and 11(a) hereof, upon exercise or surrender of this Warrant, with the Form of Election to Purchase attached hereto completed and duly endorsed by the Registered Holder, to the Company at its office at 3500 South La Cometa Drive, Goodyear, Arizona 85338, Attention: Chief Financial Officer, or at such other address as the Company may specify in writing to the Registered Holder, and upon payment of the Exercise Price multiplied by up to the number of Warrant Shares then issuable upon exercise of this Warrant in 1 lawful money of the United States of America (except as otherwise provided for in Section 3(c) hereof), all as specified by the Registered Holder in the Form of Election to Purchase, the Company shall promptly issue and cause to be delivered to or upon the written order of the Registered Holder, and in such name or names as the Registered Holder may designate, a certificate for the Warrant Shares issued upon such exercise. Any person so designated in the Form of Election to Purchase, duly endorsed by the Registered Holder, as the person to be named on the certificates for the Warrant Shares, shall be deemed to have become holder of record of such Warrant Shares, evidenced by such certificates, as of the Date of Exercise (as hereinafter defined) of such Warrant. (c) The Registered Holder may pay the applicable Exercise Price pursuant to Section 3(b), at the option of the Registered Holder, either (i) in cash or by cashier's or certified bank check payable to the Company in an amount equal to the product of the Exercise Price multiplied by the number of Warrant Shares being purchased upon such exercise (the "Aggregate Exercise Price"), (ii) by wire transfer of immediately available funds to the account which shall be indicated in writing by the Company to the Registered Holder, or (iii) by written notice to the Company that the Registered Holder is exercising this Warrant and is authorizing the Company to withhold from the issuance to such Registered Holder that number of Warrant Shares which when multiplied by the Market Price (as hereinafter defined) for the Date of Exercise is equal to the Aggregate Exercise Price. Any Warrant Shares withheld by the Company in connection with an exercise of this Warrant pursuant to clause (iii) of this Section 3(c) shall no longer be issuable under this Warrant and this Warrant shall be deemed to be automatically amended to reduce the number of Warrant Shares issuable hereunder by an amount equal to the amount of such withheld Warrant Shares. (d) The "Date of Exercise" of any Warrant means the date on which the Company shall have received (i) this Warrant, with the Form of Election to Purchase attached hereto appropriately completed and duly endorsed, and (ii) payment of the Aggregate Exercise Price as provided herein. (e) This Warrant shall be exercisable either as an entirety or, from time to time, for part only of the number of Warrant Shares which are issuable hereunder; provided, however, that no partial exercise of this Warrant shall involve less than 25,000 Warrant Shares unless the aggregate remaining Warrant Shares available for purchase pursuant to this Warrant is less than 25,000, in which case this Warrant shall be exercisable for only all such remaining Warrant Shares. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of the certificates for the Warrant Shares issued pursuant to such exercise, deliver to the Registered Holder a new Warrant evidencing the rights to purchase the remaining Warrant Shares, which Warrant shall be substantially in the form of this Warrant. (f) Definition of Market Price. As used in this Warrant, the term "Market Price" shall mean the average of the daily closing prices per share of the Common Stock for the ten (10) consecutive trading days immediately preceding the day as of which Market Price is being determined. The closing price for each day shall be the last reported sale price or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices, in either case on the New York Stock Exchange, or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the shares are listed or admitted to trading, or, if the shares are not so listed or admitted to trading, the average of the highest reported bid and lowest reported asked prices as furnished by the National Association of Securities Dealers, Inc. (the "NASD") through NASDAQ or through a similar organization if NASDAQ is no longer reporting such information or as reported on the NASD's OTC Electronic Bulletin Board ("OTC"). If shares of Common Stock are not listed or admitted to trading on any exchange or quoted through NASDAQ or any similar organization or reported on OTC, the Market Price shall be deemed to be the fair value thereof determined in good faith by the Company's Board of Directors as expressed by a resolution of such board as of a date which is within fifteen (15) days of the date as of which the determination is to be made. SECTION 4. PAYMENT OF TAXES AND EXPENSES. (a) The Company will pay all expenses and taxes (other than any federal or state income tax or similar obligations of the Registered Holder) and other governmental charges attributable to the preparation, execution, issuance and delivery of this Warrant, any new Warrant and the Warrant Shares; provided, however, that the Company shall not be required to pay any tax in respect of the transfer of this Warrant or the Warrant Shares, or the issuance or delivery of certificates for Warrant Shares upon the exercise of this Warrant, to a person or entity other than a Registered Holder or an Affiliate (as hereinafter defined) of such Registered Holder; and further provided, that this paragraph shall not obligate the Company to pay any expenses incurred by the Registered Holder in connection with any registration of the Warrant, any new Warrant or the Warrant Shares pursuant to the 1933 Act. 2 (b) An "Affiliate" of any person or entity means any other person or entity directly or indirectly controlling, controlled by or under direct or indirect common control with such person or entity. SECTION 5. MUTILATED OR MISSING WARRANT CERTIFICATE. If this Warrant shall be mutilated, lost, stolen or destroyed, upon request by the Registered Holder, the Company will issue, in exchange for and upon cancellation of the mutilated Warrant, or in substitution for the lost, stolen or destroyed Warrant, a new Warrant, in substantially the form of this Warrant, of like tenor, but, in the case of loss, theft or destruction, only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of this Warrant and, if requested by the Company, indemnity also reasonably satisfactory to it. SECTION 6. RESERVATION AND ISSUANCE OF WARRANT SHARES. (a) The Company will at all times have authorized, and reserve and keep available, free from preemptive rights, for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon the exercise of the rights represented by this Warrant, the number of Warrant Shares deliverable upon exercise of this Warrant. (b) Before taking any action which could cause an adjustment pursuant to Section 7 hereof reducing the Exercise Price below the par value of the Warrant Shares, the Company will take any corporate action which may be necessary in order that the Company may validly and legally issue at the Exercise Price, as so adjusted, Warrant Shares that are fully paid and non-assessable. (c) The Company covenants that all Warrant Shares will, upon issuance in accordance with the terms of this Warrant, be (i) duly authorized, fully paid and nonassessable, and (ii) free from all taxes with respect to the issuance thereof and from all liens, charges and security interests. SECTION 7. CERTAIN ADJUSTMENTS (a) Subdivisions or Combinations of Stock. In case the Company shall at any time subdivide the outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased. Upon each such adjustment of the Exercise Price, the holder of this Warrant shall thereafter prior to the Expiration Date thereof be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of such Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (b) CONSOLIDATION, MERGER, SALE OF ASSETS, REORGANIZATION, ETC. IN CASE THE COMPANY (I) CONSOLIDATES WITH OR MERGES INTO ANY OTHER CORPORATION AND IS NOT THE CONTINUING OR SURVIVING CORPORATION OF SUCH CONSOLIDATION OR MERGER, OR (II) PERMITS ANY OTHER CORPORATION TO CONSOLIDATE WITH OR MERGE INTO THE COMPANY AND THE COMPANY IS THE CONTINUING OR SURVIVING CORPORATION BUT, IN CONNECTION WITH SUCH CONSOLIDATION OR MERGER, THE COMMON STOCK IS CHANGED INTO OR EXCHANGED FOR STOCK OR OTHER SECURITIES OF ANY OTHER CORPORATION OR CASH OR ANY OTHER ASSETS, OR (III) TRANSFERS ALL OR SUBSTANTIALLY ALL OF ITS PROPERTIES AND ASSETS TO ANY OTHER CORPORATION, OR (IV) EFFECTS A CAPITAL REORGANIZATION OR RECLASSIFICATION OF THE CAPITAL STOCK OF THE COMPANY IN SUCH A WAY THAT HOLDERS OF THE COMMON STOCK SHALL BE ENTITLED TO RECEIVE STOCK, SECURITIES, CASH AND/OR ASSETS WITH RESPECT TO OR IN EXCHANGE FOR THE COMMON STOCK, THEN, AND IN EACH SUCH CASE, PROPER PROVISION SHALL BE MADE SO THAT THE HOLDER OF THIS WARRANT, UPON THE EXERCISE OF THIS WARRANT AT ANY TIME AFTER THE CONSUMMATION OF SUCH CONSOLIDATION, MERGER, TRANSFER, REORGANIZATION OR RECLASSIFICATION, SHALL BE ENTITLED TO RECEIVE (AT THE AGGREGATE EXERCISE PRICE IN EFFECT FOR ALL WARRANT SHARES ISSUABLE UPON SUCH EXERCISE IMMEDIATELY PRIOR TO SUCH CONSUMMATION AS ADJUSTED TO THE TIME OF SUCH TRANSACTION), IN LIEU OF SHARES OF COMMON STOCK ISSUABLE UPON SUCH EXERCISE PRIOR TO SUCH CONSUMMATION, THE STOCK AND OTHER SECURITIES, CASH AND/OR ASSETS TO WHICH SUCH HOLDER WOULD HAVE BEEN ENTITLED UPON SUCH CONSUMMATION IF SUCH HOLDER HAD SO EXERCISED SUCH WARRANT IMMEDIATELY PRIOR THERETO (SUBJECT TO ADJUSTMENTS SUBSEQUENT TO SUCH CORPORATE ACTION AS NEARLY EQUIVALENT AS POSSIBLE TO THE ADJUSTMENTS PROVIDED FOR IN THIS SECTION 7). SECTION 8. CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the event that the Company shall at any time prior to the exercise of this Warrant declare a dividend (other than a dividend consisting solely of shares of Common Stock or a cash dividend or distribution payable out of current or retained earnings) or otherwise distribute to its stockholders any monies, assets, property, rights, evidences of indebtedness, securities (other than shares of Common Stock), whether issued by the Company or by another person or entity, or any other thing of value, the Registered Holder shall thereafter be entitled, in addition to the 3 shares of Common Stock receivable upon the exercise of the Warrant, to receive, upon the exercise of the Warrant, the same monies, property, assets, rights, evidences of indebtedness, securities or any other thing of value that the Registered Holder would have been entitled to receive at the time of such dividend or distribution had the Registered Holder been an owner of record of the shares of Common Stock into which the Warrant is then being exercised as of the record date or other date of determination for such dividend or distribution and an appropriate provision shall be made a part of any such dividend or distribution. Notwithstanding any provision herein to the contrary, no adjustment under this Section 8 shall be made with respect to any cash dividend or distribution payable solely out of current or retained earnings of the Company. SECTION 9. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. The Registered Holder shall not be entitled to vote or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, the rights of a stockholder of the Company or the right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or give or withhold consent to any corporate action or to receive notice of meetings or other actions affecting stockholders (except as provided herein), or to receive dividends or subscription rights or otherwise, until the Date of Exercise shall have occurred. No provision of this Warrant, in the absence of affirmative action by the Registered Holder hereof to purchase shares of Common Stock, and no mere enumeration herein of the rights and privileges of the Registered Holder, shall give rise to any liability of such holder for the Exercise Price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. SECTION 10. FRACTIONAL WARRANT SHARES. The Company shall not be required to issue fractions of Warrant Shares upon exercise of the Warrant or to distribute certificates which evidence fractional Warrant Shares. If any fraction of a Warrant Share would, except for the provisions of this Section 10, be issuable on the exercise of this Warrant (or specified portion thereof), the Company shall pay to the Registered Holder an amount in cash equal to the Market Price as of the Exercise Date, multiplied by such fraction. SECTION 11. TRANSFER RESTRICTIONS; REGISTRATION OF THE WARRANT AND WARRANT SHARES. (a) Neither the Warrant nor the Warrant Shares have been registered under the Act. The Registered Holder, by acceptance hereof, represents that it is acquiring this Warrant to be issued to it for its own account and not with a view to the distribution thereof, and agrees not to sell, transfer, pledge or hypothecate this Warrant, any purchase rights evidenced hereby or any Warrant Shares unless a registration statement is effective for this Warrant or the Warrant Shares under the Act or in the opinion of such Registered Holder's counsel reasonably satisfactory to the Company, a copy of which opinion shall be delivered to the Company, such transaction is exempt from the registration requirements of the Act. (b) Subject to the provisions of the following paragraph of this Section 11, each Certificate for Warrant Shares shall be stamped or otherwise imprinted with a legend in substantially the following form: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE 1933 ACT, OR AN OPINION OF COUNSEL, SATISFACTORY TO THE ISSUER HEREOF, TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER THE 1933 ACT. (c) The restrictions and requirements set forth in the foregoing paragraph shall apply with respect to Warrant Shares unless and until such Warrant Shares are sold or otherwise transferred pursuant to an effective registration statement under the Act or are otherwise no longer subject to the restrictions of the Act, at which time the Company agrees to promptly cause such restrictive legends to be removed and stop transfer restrictions applicable to such Warrant Shares to be rescinded. SECTION 12. REGISTRATION RIGHTS. The Registered Holder is entitled to certain registration rights with respect to the Warrant Shares pursuant to a Registration Rights Agreement dated as of October ___, 1999, by and between the Company and U.S. Bancorp Republic Commercial Finance, Inc. (the "Registration Rights Agreement"). Upon any transfer of this Warrant or the Warrant Shares by the Registered Holder, such registration rights may be transferred to the transferee of the Warrant or the Warrant Shares only in accordance with the terms of the Registration Rights Agreement. SECTION 13. NOTICES. All notices, requests, demands and other communications relating to this Warrant shall be in writing and shall be deemed to have been duly given if delivered personally or sent by United States certified or registered first-class mail, postage prepaid, return receipt 4 requested, to the parties hereto at the following addresses or at such other address as any party hereto shall hereafter specify by notice to the other party hereto: (a) If to the Registered Holder of this Warrant or the holder of the Warrant Shares, addressed to the address of such Registered Holder or holder as set forth on books of the Company or otherwise furnished by the Registered Holder or holder to the Company. (b) If to the Company, addressed to: Poore Brothers, Inc. 3500 South La Cometa Drive Goodyear, Arizona 85338 Attn: Chief Financial Officer SECTION 14. BINDING EFFECT. This Warrant shall be binding upon and inure to the sole and exclusive benefit of the Company, its successors and assigns, and the holder or holders from time to time of this Warrant and the Warrant Shares. SECTION 15. SURVIVAL OF RIGHTS AND DUTIES. This Warrant shall terminate and be of no further force and effect on the earlier of (i) 5:00 p.m., Phoenix time, on the Expiration Date and (ii) the date on which this Warrant and all purchase rights evidenced hereby have been exercised, except that the provisions of Sections 4, 6(c), 11 and 12 hereof shall continue in full force and effect after such termination date. SECTION 16. GOVERNING LAW. This Warrant shall be construed in accordance with and governed by the laws of the State of Arizona. SECTION 17. AMENDMENT; WAIVER. This Warrant and any term hereof may be amended, waived, discharged or terminated only by and with the written consent of the Company and the holder of this Warrant. SECTION 18. SECTION HEADINGS. The Section headings in this Warrant are for purposes of convenience only and shall not constitute a part hereof. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed under its corporate seal by its officers thereunto duly authorized as of the date hereof. POORE BROTHERS, INC. By: ------------------------------------ Name: Title: ATTEST: ---------------------------------------- Name: Title: 5 FORM OF ELECTION TO PURCHASE (To Be Executed Upon Exercise of this Warrant) To Poore Brothers, Inc.: The undersigned, the record holder of this Warrant, hereby irrevocably elects to exercise the right, represented by this Warrant (Warrant No. ___), to purchase ___________ of the Warrant Shares and herewith tenders payment for such Warrant Shares to the order Poore Brothers, Inc. of $_________ representing the full purchase price for such shares at the price per share provided for in such Warrant and the delivery of any applicable taxes payable by the undersigned pursuant to such Warrant. In lieu of paying the purchase price as provided in the preceding paragraph, the undersigned will/will not (circle appropriate word(s)) make a cashless exercise pursuant to Section 3(c) of the attached Warrant. The undersigned requests that certificates for such shares be issued in the name of - ------------------------------- PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER - ------------------------------- - ------------------------------- - ------------------------------- - ------------------------------- ---------------------------------- (Please print name and address) In the event that not all of the purchase rights represented by the Warrant are exercised, a new Warrant, substantially identical to the attached Warrant, representing the rights formerly represented by the attached Warrant which have not been exercised, shall be issued in the name of and delivered to - -------------------------------------------------------------------------------- (Please print name) - -------------------------------------------------------------------------------- (Please print address) Dated: ________________ Name of Holder (Print): By: ________________________________ (Name): ____________________________ (Title): ___________________________ 6 FORM OF ASSIGNMENT FOR VALUE RECEIVED, _______________________ hereby sells, assigns and transfers to each assignee set forth below all of the rights of the undersigned under the attached Warrant (Warrant No. _____) with respect to the number of shares of Common Stock covered thereby set forth opposite the name of such assignee unto: Number of Shares of Name of Assignee Address Common Stock ---------------- ------- ------------------- If the total of said purchase rights represented by the Warrant shall not be assigned, the undersigned requests that a new Warrant Certificate evidencing the purchase rights not so assigned be issued in the name of and delivered to the undersigned. Dated: _______________ Name of Holder (Print): By: ________________________________ (Name): ____________________________ (Title): ___________________________ 7 EX-10.48 4 1995 STOCK OPTION PLAN POORE BROTHERS, INC. 1995 STOCK OPTION PLAN (AS AMENDED THROUGH OCTOBER 6, 1999) 1. PURPOSE. The Poore Brothers, Inc. 1995 Stock Option Plan (the "Plan") is intended to provide incentives which will attract and retain highly competent persons as directors, officers and key employees of Poore Brothers, Inc. (the "Company") and its subsidiaries by providing them opportunities to acquire shares of Common Stock, par value $.01 per share ("Common Stock"), of the Company. 2. ADMINISTRATION. The Plan will be administered by a committee of the Board of Directors (the "Committee") which shall be comprised of one or more directors who shall be ineligible to receive options while serving as a member of the Committee; PROVIDED, HOWEVER, that if the Common Stock of the Company becomes registered under the Securities Exchange Act of 1934, as amended (the "1934 Act"), members of the Committee must qualify as disinterested persons within the meaning of Rule 16b-3 under the 1934 Act; and PROVIDED FURTHER, HOWEVER, that, in the absence of a Committee, all of the authority and powers granted to the Committee under the Plan may be exercised by the then-serving members of the Board of Directors of the Company. The Committee is authorized, subject to the provisions of the Plan, to establish such rules and regulations as it deems necessary for proper administration of the Plan and to make such determinations and interpretations and to take such action in connection with the Plan as it deems necessary or advisable. All determinations and interpretations made by the Committee shall be binding and conclusive on all participants and their legal representatives. No member of the Board, no member of the Committee and no employee of the Company or its subsidiaries shall be liable for any act or failure to act hereunder, by any other member or employee or by an agent to whom duties in connection with the administration of this Plan have been delegated or, except in circumstances involving his bad faith, gross negligence or fraud, for any act or failure to act by the member or employee. 3. PARTICIPANTS. Participants will consist of such directors, officers and key employees of the Company or its subsidiaries as the Committee in its sole discretion determines to be significantly responsible for the success and future growth and profitability of the Company and whom the Committee may designate from time to time to receive Stock Options under the Plan. Designation of a participant in any year shall not require the Committee to designate such person to receive a Stock Option in any other year or, once designated, to receive the same type or amount of Stock Option as granted to the participant in any year. The Committee shall consider such factors as it deems pertinent in selecting participants and in determining the type and amount of their respective Stock Options. 4. SHARES RESERVED UNDER THE PLAN. Two Million (2,000,000) shares of authorized but unissued shares of Common Stock are reserved for issue and may be issued in connection with Stock Options granted under the Plan. Any shares subject to Stock Options or issued under such options may thereafter be subject to new options under this Plan if there is a lapse, expiration or termination of any such options prior to issuance of the shares or if shares are issued under such options and thereafter are reacquired by the Company pursuant to rights reserved by the Company upon issuance thereof, subject to any Securities and Exchange Commission rules regarding the availability of such shares, if applicable. 5. STOCK OPTIONS. Stock Options will consist of awards from the Company, in the form of agreements, which will enable the holder to purchase a specific number of shares of Common Stock, at set terms and at a fixed purchase price, subject to adjustment as hereinafter provided. Stock Options may be "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code ("Incentive Stock Options") or Stock Options which do not constitute Incentive Stock Options ("Nonqualified Stock Options"). The Committee will have the authority to grant to any participant one or more Incentive Stock Options, Nonqualified Stock Options, or both types of Stock Options. Each Stock Option shall be subject to such terms and conditions consistent with the Plan as the Committee may impose from time to time, subject to the following limitations: a) EXERCISE PRICE. Each Stock Option granted hereunder shall have such per-share exercise price as the Committee may determine at the date of grant; PROVIDED, HOWEVER, that the per-share exercise price for Incentive Stock Options shall not be less than 100% of the Fair Market Value of the Common Stock on the date the option is granted; and PROVIDED, FURTHER, that the per-share exercise price for Nonqualified Stock Options shall not be less than 85% of the Fair Market Value of the Common Stock on the date the option is granted. 1 b) PAYMENT OF EXERCISE PRICE. The option exercise price may be paid by check or, in the discretion of the Committee, by the delivery of shares of Common Stock, or a combination thereof, or such other consideration as the Committee may deem appropriate. c) EXERCISE PERIOD. Stock Options granted under the Plan shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee; PROVIDED, however, that no Stock Options shall be exercisable earlier than six months after the date they are granted. In addition, Stock Options shall not be exercisable later than ten years after the date they are granted. All Stock Options shall terminate at such earlier times and upon such conditions or circumstances as the Committee shall in its discretion set forth in such Stock Option at the date of grant. d) LIMITATIONS ON INCENTIVE STOCK OPTIONS. Incentive Stock Options may be granted only to participants who are employees of the Company or one of its subsidiaries (within the meaning of Section 424(f) of the Internal Revenue Code) at the date of grant. The aggregate Fair Market Value (determined as of the time the option is granted) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a participant during any calendar year (under all option plans of the Company) shall not exceed $100,000.00. Incentive Stock Options may not be granted to any participant who, at the time of grant, owns stock possessing (after the application of the attribution rules of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company, unless the option price is fixed at not less than 110% of the Fair Market Value of the Common Stock on the date of grant and the exercise of such option is prohibited by its terms after the expiration of five years from the date of grant of such option. 6. ADJUSTMENT PROVISIONS. a) If the Company shall at any time change the number of issued shares of Common Stock without new consideration to the Company (such as by stock dividend, stock split, recapitalization, reorganization, exchange of shares, liquidation, combination or other change in corporate structure affecting the Common Stock), the total number of shares available for Stock Options under this Plan shall be appropriately adjusted and the number of shares covered by each outstanding Stock Option and the reference price shall be adjusted so that the net value of such Stock Option shall not be changed. (1) In the case of any sale of assets, merger, consolidation, combination or other corporate reorganization or restructuring of the Company with or into another corporation which results in the outstanding Common Stock being converted into or exchanged for different securities, cash or other property, or any combination thereof (an "Acquisition"), subject to the provisions of this Plan and any limitation applicable to the Stock Option, any participant to whom a Stock Option has been granted shall have the right thereafter and during the term of the Stock Option, to receive upon exercise thereof in whole or in part the Acquisition Consideration (as defined below) receivable upon the Acquisition by a holder of the number of shares of Common Stock which might have been obtained upon exercise of the Stock Option or portion thereof, as the case may be, immediately prior to the Acquisition. The term "Acquisition Consideration" shall mean the kind and amount of securities, cash or other property or any combination thereof receivable in respect of one share of Common Stock upon consummation of an Acquisition. (b) Notwithstanding any other provision of this Plan, the Committee may authorize the issuance, continuation or assumption of Stock Options or provide for other equitable adjustments after changes in the Common Stock resulting from any other merger, consolidation, sale of assets, acquisition of property or stock, recapitalization reorganization or similar occurrence upon such terms and conditions as it may deem equitable and appropriate. 7. NONTRANSFERABILITY. a) Each Stock Option granted under the Plan to a participant shall not be transferable and shall be exercisable, during the participant's lifetime, only by the participant. b) If the participant shall cease to be either a director or a regular full-time employee of the Company or its subsidiaries for any reason other than a termination for cause or a termination by reason of death, any unexercised portion of said Stock Option shall terminate sixty (60) days after the date of the termination of employment, or upon the expiration of the Stock Option, whichever shall first occur. 2 c) If the event that the participant's employment is terminated for cause, the unexercised portion of the Stock Option shall terminate immediately upon the giving of the notice of such termination. For purposes of this paragraph, "for cause" shall mean incompetence, gross negligence, insubordination, conviction of a felony or willful misconduct by the participant as determined in good faith by the Board of Directors of the Company, the Committee or the Board of Directors of the subsidiary of the Company by which the participant is employed. Nothing in this Plan or in any Stock Option granted pursuant to this Plan shall confer on any participant the right to continue in the employ of the Company or any of its subsidiaries, or interfere in any way with the right of the Company or any of its subsidiaries to terminate the participant's employment at any time. d) In the event of the death of the participant, the participant's estate shall have the privilege of exercising any Stock Options not theretofore exercised by the participant, to the extent that the participant was entitled to exercise such rights on the date of the participant's death; but in such event, the period of time within which the purchase or exercise may be made shall be the earlier of (a) 180 days next succeeding the death of the participant or (b) the expiration of the term of the Stock Option. 8. OTHER PROVISIONS. The award of any Stock Option under the Plan may also be subject to such other provisions (whether or not applicable to any Stock Option awarded to any other participant) as the Committee determines appropriate, including without limitation, provisions for the installment purchase of Common Stock under Stock Options, provisions to assist the participant in financing the acquisition of Common Stock, provisions for the forfeiture of, or restrictions on resale or other disposition of shares acquired under any form of Stock Option, provisions for the acceleration of exercisability or vesting of Stock Options in the event of a change of control of the Company, provisions for the payment of the value of Stock Options to participants in the event of a change of control of the Company, provisions for the forfeiture of, or provisions to comply with federal and state securities laws, or understandings or conditions as to the participant's employment in addition to those specifically provided for under the Plan. 9. FAIR MARKET VALUE. For purposes of this Plan and any Stock Options awarded hereunder, "Fair Market Value" shall be the average of the highest and lowest sale prices for the Company's Common Stock on the date of calculation (or on the last preceding trading date if the Company's Common Stock was not traded on the date of calculation) if the Company's Common Stock is readily tradable on a national securities exchange or other market system, and if the Company's Common Stock is not readily tradable, Fair Market Value shall mean the amount determined in good faith by the Committee as the fair market value of the Common Stock of the Company. 10. WITHHOLDING. All payments or distributions made pursuant to the Plan shall be net of any amounts required to be withheld pursuant to applicable federal, state and local tax withholding requirements. If the Company proposes or is required to distribute Common Stock pursuant to the Plan, it may require the recipient to remit to it an amount sufficient to satisfy such tax withholding requirements prior to the delivery of any certificates for such Common Stock. The Committee may, in its discretion and subject to such rules as it may adopt, permit a participant to pay all or a portion of the federal, state and local withholding taxes arising in connection with the exercise of a Nonqualified Stock Option by election to have the Company withhold shares of Common Stock having a Fair Market Value equal to the amount to be withheld. 11. TENURE. A participant's right, if any, to continue to serve the Company or a subsidiary of the Company as an officer, director, employee, or otherwise, shall not be enlarged or otherwise affected by his designation as a participant under the Plan. 12. DURATION, AMENDMENT AND TERMINATION. No Stock Option shall be granted more than ten years after the date of the approval of the Plan by the stockholders of the Company, PROVIDED, HOWEVER, that the terms and conditions applicable to any Stock Option granted prior to such date may thereafter be amended or modified by mutual agreement between the Company and the participant or such other persons as may then have an interest therein. Also, by mutual agreement between the Company and a participant hereunder or under any other present or future plan of the Company, Stock Options may be granted to such participant in substitution and exchange for, and in cancellation of, any Stock Options previously granted such participant under the Plan, or any other present or future plan of the Company. The Board of Directors may amend the Plan from time to time or terminate the Plan at any time. However, no action authorized by this paragraph shall reduce the amount of any existing Stock Option or change the terms and conditions thereof without the participant's consent. No amendment of the Plan shall, without approval of the stockholders of the Company, (i) materially increase the total number of shares which may be issued under the Plan; (ii) materially increase the amount or type of Stock Options that may be granted under the Plan; (iii) materially modify the requirements as to eligibility for Stock Options under the Plan; (iv) result in any member of the Committee losing his or her status as a disinterested person under Rule 16b-3 under the 1934 Act; or (vi) extend the term of this Plan. 3 13. GOVERNING LAW. The Plan, Stock Options granted hereunder and action taken in connection herewith shall be governed and construed in accordance with the laws of the State of Delaware (regardless of the law that might otherwise govern under applicable Delaware principles of conflict of laws). 14. GOVERNMENT REGULATIONS. The Plan and the grant and exercise of Stock Options hereunder, and the obligation of the Company to sell and deliver shares under such Benefits, shall be subject to all applicable laws, rules and regulations, including without limitation all applicable federal and state securities laws. 15. STOCKHOLDER APPROVAL. The Plan was adopted by the Board of Directors of the Company on May 25, 1995. The Plan and any Stock Options granted thereunder shall be null and void if stockholder approval is not obtained within twelve (12) months of the adoption of the Plan by the Board of Directors. 4 EX-10.49 5 CREDIT AGREEMENT DATED 10/3/99 CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of October 3, 1999, is by and between POORE BROTHERS, INC., a corporation organized under the laws of the State of Delaware, ("PBI"), POORE BROTHERS ARIZONA, INC., an Arizona corporation ("PBAI"), POORE BROTHERS DISTRIBUTING, INC., an Arizona corporation ("PBDI"), TEJAS PB DISTRIBUTING, INC., an Arizona corporation ("Tejas") and WABASH FOODS, LLC, a Delaware limited liability company ("Wabash"), (PBI, PBAI, PBDI, Tejas and Wabash each a Borrower and collectively the "Borrower" or the "Borrowers"), and U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC., a Minnesota corporation (the "Lender"). ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION I.1 DEFINED TERMS. As used in this Agreement the following terms shall have the following respective meanings: "ACCOUNTS": Each and every right to payment of Borrower, whether such right to payment arises out of a sale or lease of goods by Borrower, or other disposition of goods or other property of Borrower, out of a rendering of services by Borrower, out of a loan by Borrower, out of damage to or loss of goods in the possession of a railroad or other carrier or any other bailee, out of overpayment of taxes or other liabilities of Borrower, or which otherwise arises under any contract or agreement, or from any other cause, whether such right to payment now exists or hereafter arises and whether such right to payment is or is not yet earned by performance and howsoever such right to payment may be evidenced, together with all other rights and interest (including all liens and security interests) which Borrower may at any time have by law or agreement against any account debtor (as defined in the Uniform Commercial Code in effect in the State of Minnesota) or other obligor obligated to make any such payment or against any of the property of such account debtor or other obligor; specifically (but without limitation), the term includes all present and future instruments, documents, chattel papers, accounts and contract rights of Borrower. "ADVANCE": As defined in Section 2.1. "ANNIVERSARY DATE": shall mean October 3, 2000 and each October 3rd thereafter. "ANNUAL NET PROFIT": The after tax net income or net loss as determined in accordance with GAAP. "BORROWING BASE": As defined in Section 2.5. "BORROWING BASE CERTIFICATE": As defined in Section 2.5. "BUSINESS DAY": Any day (other than a Saturday, Sunday or legal holiday in the State of Minnesota) on which banks are permitted to be open at the location of the Lender. "CAPITAL EXPENDITURES": For any period, the sum of all amounts that would, in accordance with GAAP, be included as additions to property, plant and equipment on a consolidated statement of cash flows for the Borrower during such period, in respect of (a) the acquisition, construction, improvement, replacement or betterment of land, buildings, machinery, equipment or of any other fixed assets or leaseholds, (b) to the extent related to and not included in (a) above, materials, contract labor (excluding expenditures properly chargeable to repairs or maintenance in accordance with GAAP), and (c) other capital expenditures and other uses recorded as capital expenditures or similar terms having substantially the same effect. "CASH FLOW COVERAGE RATIO": For the period of determination with respect to the Borrowers the ratio of EBITDA to consolidated interest expense. "CLOSING DATE": Any Business Day between the date of this Agreement and October 15, 1999 selected by the Borrower for the making of the initial Advance on the Revolving Loan hereunder; provided that all the conditions precedent to the obligation of the Lender to make the initial Advance on the Revolving Loan, as set forth in Article III, have been, or, on such Closing Date, will be, satisfied. The Borrower shall give the Lender not less than one Business Day's prior notice of the day selected as the Closing Date. 1 "COMMITMENTS": The Revolving Commitment, the Term Loan A Commitment and the Term Loan B Commitment. "DEBT SERVICE COVERAGE RATIO": For any period of determination with respect to the Borrowers, the ratio of (a) EBITDA, to (b) all required principal payments with respect to total Indebtedness (including all payments with respect to capitalized lease obligations of the Borrower) plus interest payments, in each case determined for said period in accordance with GAAP. "DEFAULT": Any event which, with the giving of notice (whether such notice is required under Section 7.1, or under some other provision of this Agreement, or otherwise) or lapse of time, or both, would constitute an Event of Default. "EBITDA": For any period of determination, the consolidated Annual Net Profit of the Borrower before deductions for income taxes, interest expense, depreciation and amortization, all as determined in accordance with GAAP. "ELIGIBLE ACCOUNTS": Accounts owned by the Borrower which the Lender, in its sole and absolute discretion, deems eligible for Advances, but which, at a minimum, are subject to a first priority perfected security interest in favor of the Lender and not subject to any assignment, claim or Lien other than the Lien in favor of the Lender and other Liens consented to by the Lender in writing, but specifically excluding (a) Accounts which are not earned; (b) Accounts which are unpaid more than ninety (90) days after the original invoice date or 60 days past the due date, whichever is less; (c) Accounts owed by debtors 15% or more of whose Accounts owed are otherwise ineligible; (d) Accounts representing progress billings, or retainages, or for work covered by any payment or performance bond; (e) Accounts owed by any of the Borrower's Affiliates; (f) Accounts owed by debtors not located in the United States, unless supported by a letter of credit issued by a U.S. bank in favor of the Borrower which has been delivered to the Lender; (g) Accounts as to which any warranty or representation contained in any security agreement or other agreement of the Borrower with or given to the Lender with respect to any such Account is untrue in any material respect; (h) Accounts as to which the account debtor has disputed liability, or made any claim with respect to any other Account due from such account debtor to the Borrower; (i) Accounts subject to setoff; (j) Accounts as to which the account debtor has filed a petition for bankruptcy or any other petition for relief under the Bankruptcy Code, assigned any assets for the benefit of creditors, or if any petition or other application for relief under the Bankruptcy Code has been filed against the account debtor, or if the account debtor has failed, suspended business, become insolvent, or has had or suffered a receiver or a trustee to be appointed for all or a significant portion of its assets or affairs; (k) Accounts owed by any government or government agency; (l) Accounts evidenced by a promissory note or other instrument; and (m) Accounts as to which the Lender reasonably believes that collection of any such Account is insecure or that any such Account may not be paid by reason of the account debtor's financial inability to pay. "ELIGIBLE INVENTORY": Inventory of the Borrower which the Lender, in its sole and absolute discretion, deems eligible for Advances, but which meets the following minimum requirements: (a) it is owned by the Borrower, is subject to a first priority perfected security interest in favor of the Lender, and is not subject to any assignment, claim or Lien other than (i) a Lien in favor of the Lender and (ii) Liens consented to by the Lender in writing; (b) it consists of raw materials or finished product (not including work in process and supplies); (c) if held for sale or lease or furnishing under contracts of service, it is (except as the Lender may otherwise consent in writing) new and unused; (d) except as the Lender may otherwise consent, it is not stored with a bailee, warehouseman or similar party; if so stored with the Lender's consent, such bailee, warehouseman or similar party has issued and delivered to the Lender, in form and substance acceptable to the Lender, such documents and agreements as the Lender may require, including, without limitation, warehouse receipts therefor in the Lender's name; (e) the Lender has determined, in its reasonable discretion, that it is not unacceptable due to age, type, category, quality and/or quantity; (f) it is not held by the Borrower on consignment and is not subject to any other repurchase or return agreement; (g) it is not held by a customer of the Borrower or any other Person on consignment; (h) it materially complies with all standards imposed by any governmental agency having regulatory authority over such goods and/or their use, manufacture or sale; (i) it is not raw potatoes, seasonings, film bags, apparel or advertising displays; and (j) the warranties, representations and covenants contained in any security 2 agreement or other agreement of the Borrower with or given to the Lender relating directly or indirectly to the Borrower's Inventory are applicable to it without exception. "EVENT OF DEFAULT": Any event described in Section 7.1. "FIXED CHARGE COVERAGE RATIO": For any period of determination with respect to the Borrower, the ratio of (a) EBITDA, to (b) all required principal payments with respect to total Indebtedness (including all payments with respect to capitalized lease obligations of the Borrower) plus interest payments, plus unfinanced Capital Expenditures, in each case determined for said period in accordance with GAAP. "GAAP": Generally accepted accounting principles set forth in the statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of any date of determination. "INDEBTEDNESS": Any indebtedness for borrowed money. "INTANGIBLE ASSETS": All of Borrowers' right, title, and interest in and to any bank deposit accounts, customer deposit accounts, deposits, rights related to prepaid expenses, negotiable or nonnegotiable instruments or securities, chattel paper, choses in action, causes of action and all other intangible personal property of every kind and nature (other than Accounts), including without limitation, corporate or other business records, inventions, designs, patents, patent applications, trademarks, trade names, trade secrets, goodwill, registrations, copyrights, licenses, franchises, customer lists, tax refunds, tax refund claims, customs claims, guarantee claims, cooperative memberships or patronage benefits, notes payable to Borrowers for capital stock, leasehold interests in real and personal property and any security interests or other security held by or granted to Borrowers to secure payment by any account debtor of any of the Accounts, and any other "general intangibles" (as defined in the Uniform Commercial Code). "INVENTORY": Any and all of the Borrower's goods, including, without limitation, goods in transit, wherever located which are or may at any time be leased by the Borrower to a lessee, held for sale or lease, furnished under any contract of service or held as raw materials, work in process, or supplies or materials used or consumed in the Borrower's business, or which are held for use in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, and all goods, the sale or other disposition of which has given rise to an Account, which are returned to and/or repossessed and/or stopped in transit by the Borrower or the Lender, or at any time hereafter in the possession or under the control of the Borrower or the Lender, or any agent or bailee of either thereof, and all documents of title or other documents representing the same. "LANDLORD WAIVERS": Those waivers to be executed by La Cometa Properties, Inc. and American Pacific Financial Corporation in form and substance satisfactory to the Lender. "LIEN": With respect to any Person, any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of each lessor under any capitalized lease), in, of or on any assets or properties of such Person, now owned or hereafter acquired, whether arising by agreement or operation of law. "LOAN DOCUMENTS": This Agreement, the Notes, and any documents described in Section 3.1(a)(vii), (a)(ix), (a)(x), (a)(xi) and (a)(xii). "NOTES": The Revolving Note and the Term Notes. "PERSON": Any natural person, corporation, partnership, limited partnership, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity. 3 "PRODUCER PAYABLES": All amounts at any time payable by Borrower for the purchase of Inventory or other products from producers of agricultural products and which are subject to PACA laws. "REFERENCE RATE": The rate of interest from time to time publicly announced by U.S. Bank National Association as its "reference rate." The Lender may lend to its customers at rates that are at, above or below the Reference Rate. For purposes of determining any interest rate hereunder or under the Notes which is based on the Reference Rate, such interest rate shall change as and when the Reference Rate changes. "REVOLVING COMMITMENT": The obligation of the Lender to make Advances to the Borrower on the Revolving Loan in an aggregate principal amount outstanding at any time not to exceed the Revolving Commitment Amount upon the terms and subject to the conditions and limitations of this Agreement. "REVOLVING COMMITMENT AMOUNT": As defined in Section 2.1. "REVOLVING LOAN": As defined in Section 2.1(a). "REVOLVING MATURITY DATE": As defined in Section 2.1(a). "REVOLVING NOTE": As defined in Section 2.3. "SECURITY AGREEMENT": That Security Agreement executed by each of the Borrowers in form and substance satisfactory to the Lender. "SUBORDINATION AGREEMENTS": Those Subordination Agreements to be executed by Renaissance Capital Growth & Income Fund III, Inc. and the Borrowers and by Wells Fargo Small Business Investment Company, Inc. and the Borrowers in form and substance satisfactory to the Lender. "SUBSIDIARY": Any corporation or other entity of which securities or other ownership interests having ordinary voting power for the election of a majority of the board of directors or other Persons performing similar functions are owned by the Borrower either directly or through one or more Subsidiaries. "TANGIBLE CAPITAL BASE": As defined in Section 6.9. "TERM LOAN A": As defined in Section 2.1(b). "TERM LOAN B": As defined in Section 2.1(c). "TERM LOAN A COMMITMENT": The obligation of the Lender to make a term loan to the Borrower in the Term Loan A Commitment Amount upon the terms and subject to the conditions and limitations of this Agreement. "TERM LOAN B COMMITMENT": The obligation of the Lender to make a term loan to the Borrower in the Term Loan B Commitment Amount upon the terms and subject to the conditions and limitations of this Agreement. "TERM LOAN A COMMITMENT AMOUNT": As defined in Section 2.1(b). "TERM LOAN B COMMITMENT AMOUNT": As defined in Section 2.1(c). "TERM NOTE A": As defined in Section 2.3. "TERM NOTE B": As defined in Section 2.3. "TERM NOTES": Term Note A and Term Note B. SECTION I.2 ACCOUNTING TERMS AND CALCULATIONS. Except as may be expressly provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP. 4 SECTION I.3 OTHER DEFINITIONAL TERMS, TERMS OF CONSTRUCTION. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections, Exhibits, Schedules and the like references are to Sections, Exhibits, Schedules and the like of this Agreement unless otherwise expressly provided. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." Unless the context in which used herein otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or." All incorporations by reference of covenants, terms, definitions or other provisions from other agreements are incorporated into this Agreement as if such provisions were fully set forth herein, and include all necessary definitions and related provisions from such other agreements. All covenants, terms, definitions and other provisions from other agreements incorporated into this Agreement by reference shall survive any termination of such other agreements until the obligations of the Borrower under this Agreement and the Notes are irrevocably paid in full and the Revolving Commitment is terminated. ARTICLE II TERMS OF LENDING SECTION II.1 THE COMMITMENTS. On the terms and subject to the conditions hereof, the Lender agrees to make the following lending facilities available to the Borrower: II.1 (a) Revolving Credit. A revolving loan (the "Revolving Loan") to the Borrower available as advances ("Advances") at any time and from time to time from the Closing Date to October 3, 2002 (the "Revolving Maturity Date"), during which period the Borrower may borrow, repay and reborrow in accordance with the provisions hereof, provided, that the unpaid principal amount of revolving Advances shall not at any time exceed $3,000,000 (the "Revolving Commitment Amount"); and provided, further, that no revolving Advance will be made if, after giving effect thereto, the unpaid principal amount of the Revolving Note would exceed the Borrowing Base. II.1 (b) Term Loan A. A term loan ("Term Loan A") from the Lender to the Borrower on the Closing Date in the amount of $5,800,000 (the "Term Loan A Commitment Amount"). Term Loan A is a replacement of debt previously owed to the Lender by Wabash. The membership interests of Wabash was acquired by PBI. 5 II.1 (c) Term Loan B. A term loan ("Term Loan B") from the Lender to the Borrower on the Closing Date in the amount of $350,000 (the "Term Loan B Commitment Amount"). The total amount available under the Revolving Loan and the Term Loans is the "Facility Amount". Notwithstanding any provision hereof, this Agreement and the Revolving Commitment shall terminate and the Lender shall have no obligation hereunder if the Term Loans hereunder have not been made by October 15, 1999, provided, however, that the obligations of the Borrower under Section 8.2 shall survive any such termination. SECTION II.2 PROCEDURE FOR ADVANCES AND THE TERM LOAN. Any request by the Borrower for an Advance on the Revolving Loan shall be in writing or by telephone and must be given so as to be received by the Lender not later than 10:30 (local time of the Lender) on the requested Advance date. Each request for an Advance shall be irrevocable and shall be deemed a representation by the Borrower that on the requested Advance date and after giving effect to such Advance the applicable conditions specified in Article III have been and will continue to be satisfied. Each request for an Advance shall specify (i) the requested Advance date (which must be a Business Day) and (ii) the amount of such Advance. Unless the Lender determines that any applicable condition specified in Article III has not been satisfied, the Lender will make available to the Borrower at the Lender's principal office in immediately available funds not later than 2:00 PM (local time of the Lender) on the requested Advance date the amount of the requested Advance. Notice of intention to borrow the Term Loans shall be subject to the same time limits and other requirements of this Section. SECTION II.3 THE NOTES. The Advances on the Revolving Loan shall be evidenced by a single promissory note of the Borrower (the "Revolving Note"), substantially in the form of Exhibit 2.3 (a) hereto, in the amount of the Revolving Commitment Amount originally in effect. Term Loan A shall be evidenced by a promissory note ("Term Note A"), substantially in the form of Exhibit 2.3 (b) hereto, in an amount equal to the Term Loan A Commitment Amount. Term Loan B shall be evidenced by a promissory note ("Term Note B"), substantially in the form of Exhibit 2.3 (c) hereto, in an amount equal to the Term Loan B Commitment Amount. The Lender shall enter in its ledgers and records the payments made on the Revolving Note, Term Loan A and Term Loan B and the amount of each Advance made and the payments made thereon, and the Lender is authorized by the Borrower to enter on a schedule attached to the Notes a record of such Advances and payments. SECTION II.4 INTEREST RATES, INTEREST PAYMENTS AND DEFAULT INTEREST. Interest shall accrue and be payable on the unpaid balance of the Revolving Note at a floating rate per annum equal to the sum of the Reference Rate plus 1% (the latter being the "Applicable Revolving Margin"); provided, however, that upon the happening of any Event of Default, then, at the option of the Lender, the Revolving Note shall thereafter bear interest at a floating rate equal to the sum of (a) the Reference Rate, plus (b) the Applicable Revolving Margin, plus (c) 2%. Interest shall accrue and be payable on the unpaid balance of Term Note A at a floating rate per annum equal to the Reference Rate; provided, however, that upon the happening of any Event of Default, then, at the option of the Lender, Term Note A shall thereafter bear interest at a floating rate equal to the sum of (a) the Reference Rate, plus (b) 2%. Interest shall accrue and be payable on the unpaid balance of Term Note B at a floating rate equal to the Reference Rate plus 2.5% (the latter being the "Applicable Term B Margin"); provided, however, that upon the happening of any Event of Default, then, at the option of the Lender, Term Note B shall thereafter bear interest at a floating rate equal to the sum of (a) the Reference Rate, plus (b) the Applicable Term B Margin, plus (c) 2%. Interest shall be payable monthly in arrears on the last day of each month and upon final payment of the respective Notes. SECTION II.5 BORROWING BASE AND MANDATORY PREPAYMENT. The Borrowing Base shall be equal to the sum of (1) the lesser of (x) 60% of the lower of cost (determined on a first-in, first-out basis) or market value of Eligible Inventory that consists of finished goods and 50% of the lower of cost (determined on a first-in, first-out basis) or market value of Eligible Inventory that consists of raw materials, or (y) $1,500,000, plus (2) 80% of the face value of Eligible Accounts, minus, 100% of all Producer Payables and the total of all outstanding checks issued in full or partial payment of any Producer Payables which have not been mailed or otherwise delivered, provided however, that in the event that dilution of Accounts increases above 7.0% as determined by the Lender in its absolute and sole discretion and/or turndays decrease by greater than 25%, the Lender may, in its absolute and sole discretion reduce the Accounts Advance Rate. The Borrower shall deliver borrowing base certificates in the form attached hereto (a "Borrowing Base Certificate") to the Lender. Each such certificate shall state the amount of Eligible Inventory, Eligible Accounts. Any limitations on advances or required prepayments relating to the Borrowing Base shall be based on the latest borrowing base certificate the Borrower shall have delivered to the Lender. 6 SECTION II.6 REPAYMENT AND PREPAYMENT. II.6 (a) REPAYMENT OF THE REVOLVING NOTE. Principal of the Revolving Note shall be payable in full on the Revolving Maturity Date. The Borrower may repay the Revolving Note, in whole or in part, at any time, without premium or penalty. Amounts prepaid on the Revolving Note under this Section may be reborrowed upon the terms and subject to the conditions and limitations of this Agreement. II.6 (b) REPAYMENT OF TERM NOTE A. Principal of Term Note A is payable as provided in Term Note A. Any prepayment must be accompanied by accrued and unpaid interest on the amount prepaid. Amounts so prepaid cannot be reborrowed. II.6 (c) REPAYMENT OF TERM NOTE B. Principal of Term Note B is payable as provided in Term Note B. Any prepayment must be accompanied by accrued and unpaid interest on the amount prepaid. Amounts so prepaid cannot be reborrowed. SECTION II.7 ANNUAL FEE. The Borrower shall pay to the Lender an annual fee in an amount equal to $15,000 (the "Annual Fee"). The Annual Fee shall be payable in advance on the Closing Date and on each Anniversary Date of this Agreement and all Annual Fees are fully earned when due and are non-refundable. SECTION II.8 WABASH SALE FEE. The Borrowers shall pay to the Lender a success fee in an amount equal to $715,000 (the "Wabash Sale Fee"). The Wabash Sale Fee shall be payable on June 30, 2000. If payment of the Wabash Sale Fee is not made on or before June 30, 2000, the amount of the Wabash Sale Fee shall increase by $200 per day until such time as the Wabash Sale Fee is paid. The Wabash Sale Fee is fully earned upon execution of this Agreement and is non-refundable. SECTION II.9 WIRE TRANSFER FEE. Borrower shall pay a wire transfer charge of $20 per wire transfer of any Advance. SECTION II.10 TERMINATION FEE. In the event that the Revolving Loan, Term Loan A or Term Loan B is prepaid prior to the third Anniversary Date of this Agreement, the Borrower will pay to the Lender a prepayment charge, as additional compensation for the Lender's costs of entering into this Agreement, in the amount of (i) 3% of the Facility Amount if the notice of termination occurs prior to the first Anniversary Date of this Agreement; (ii) 2% of the Facility Amount if the notice of termination occurs after the first Anniversary Date, but prior to the second Anniversary Date of this Agreement; and (iii) 1% of the maximum aggregate amount of the Facility Amount if the notice of termination occurs after the second Anniversary Date, but before the third Anniversary Date of this Agreement. SECTION II.11 EQUIPMENT LOAN ASSUMPTION FEE. The Borrower shall pay to the Lender an equipment loan assumption fee in the amount of $43,500 (the "Equipment Loan Assumption Fee"). The Equipment Loan Assumption Fee shall be payable on the Closing Date. The Equipment Loan Assumption Fee is fully earned when due and is non-refundable. SECTION II.12 COMPUTATION. Interest on the Notes shall be computed on the basis of actual days elapsed and a year of 360 days. ARTICLE III CONDITIONS PRECEDENT SECTION III.1 CONDITIONS OF INITIAL REVOLVING ADVANCE AND TERM LOAN. The obligation of the Lender to make the initial Advance on the Revolving Loan and the Term Loan hereunder shall be subject to the prior or simultaneous fulfillment of each of the following conditions: III.1 (a) DOCUMENTS. The Lender shall have received the following: (i) The Notes executed by duly authorized officers of each of the Borrowers and dated the Closing Date. (ii) A copy of the corporate resolutions of each of the Borrowers authorizing the execution, delivery and performance of this Agreement and the Notes and containing an incumbency certificate showing the names and titles, and bearing the signatures of, the officers of each Borrower authorized to execute this Agreement and the Notes, certified as of the Closing Date by the Secretary or an Assistant Secretary of each of the Borrower. 7 (iii) A copy of the Articles of Incorporation of each of the Borrowers or Articles of Organization in the case of Wabash with all amendments thereto, certified by the appropriate governmental official of the jurisdiction of its incorporation as of a recent date acceptable to Lender and its counsel. (iv) A certificate of good standing for each Borrower in the jurisdiction of its incorporation, certified by the appropriate governmental officials as of a recent date acceptable to Lender and its counsel. (v) A copy of the bylaws of the Borrowers, or the Operating Agreement in the case of Wabash, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Borrower, or a Manager in the case of Wabash. (vi) The opinion of counsel to each of the Borrowers covering such matters as the Lender may request. (vii) The Security Agreement duly executed by each of the Borrowers. (viii) The initial Borrowing Base Certificate required under Section 2.5. (ix) A Warrant Agreement for 50,000 shares of PBI stock with customary piggy-back registration rights exercisable on or before July 1, 2004. (x) The Landlord's Waivers duly executed by La Cometa Properties, Inc. and American Pacific Financial Corporation and the Borrower. (xi) The Subordination Agreements duly executed by Renaissance Capital Growth and Income Fund III, Inc. and Wells Fargo Small Business Investment Company, Inc. (xii) Assignment of Accounts Agreements duly executed by each of the Borrowers and U.S. Bank National Association. (xiii) Evidence of insurance required to be maintained under Section 5.3 naming the Lender as lender loss payee in form and substance satisfactory to the Lender. III.1 (b) OTHER MATTERS. All organizational and legal proceedings relating to the Borrower and all instruments and agreements in connection with the transactions contemplated by this Agreement shall be satisfactory in scope, form and substance to the Lender and its counsel, and the Lender shall have received all information and copies of all documents, including records of corporate proceedings, which it may reasonably have requested in connection therewith, such documents where appropriate to be certified by proper Borrower or governmental authorities. III.1 (c) FEES AND EXPENSES. The Lender shall have received all fees and other amounts due and payable by the Borrower on or prior to the Closing Date, including the reasonable fees and expenses of counsel to the Lender payable pursuant to Section 8.2. III.1 (d) PERFECTION. The Security Agreement (or financing statements with respect thereto) shall have been appropriately filed to the satisfaction of the Lender and the priority and perfection of the Lien created thereby shall have been established to the satisfaction of the Lender. SECTION III.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The Lender shall not have any obligation to make the Term Loans or any Advance on the Revolving Loan (including Advances after the initial Advance) hereunder unless all representations and warranties of the Borrower made in this Agreement remain true and correct and no Default or Event of Default exists. 8 ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lender: SECTION IV.1 ORGANIZATION, STANDING, ETC. The Borrowers are corporations (except Wabash which is a limited liability company) duly incorporated and validly existing and in good standing under the laws of the jurisdiction of their incorporation and have all requisite corporate power and authority to carry on their business as now conducted, to enter into this Agreement and to issue the Notes and to perform their obligations hereunder and thereunder. This Agreement and the Notes have been duly authorized by all necessary corporate action and when executed and delivered will be the legal and binding obligations of each of the Borrowers. The execution and delivery of this Agreement and the Notes will not violate the Borrowers' Articles of Incorporation or bylaws or any law applicable to the Borrower. No governmental consent or exemption is required in connection with the Borrowers' execution and delivery of this Agreement and the Notes. SECTION IV.2 FINANCIAL STATEMENTS AND NO MATERIAL ADVERSE CHANGE. The Borrowers' audited financial statements as at December 31, 1998 and its unaudited financial statements as at June 30, 1999, as heretofore furnished to the Lender, have been prepared in accordance with GAAP. The Borrower has no material obligation or liability not disclosed in such financial statements, and there has been no material adverse change in the condition of the Borrower since the dates of such financial statements. SECTION IV.3 LITIGATION. There are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower which, if determined adversely to the Borrower, would have, a material adverse effect on the condition of the Borrower. The Borrower is not in violation of any law or regulation (including environmental laws and regulations and laws relating to employee benefit plans) where such violation could reasonably be expected to impose a material liability on the Borrower. SECTION IV.4 TAXES. The Borrower has filed all federal, state and local tax returns required to be filed and has paid or made provision for the payment of all taxes due and payable pursuant to such returns and pursuant to any assessments made against it or any of its property (other than taxes, fees or charges the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Borrower). SECTION IV.5 SUBSIDIARIES. All Borrowers except PBI are Subsidiaries of PBI. No Borrower has any other subsidiary, except for Poore Brothers Texas which is being liquidated, no other Borrower has any subsidiary. SECTION IV.6 YEAR 2000 The Borrower has reviewed and assessed its business operations and computer systems and applications to address the "year 2000 problem" (that is, that computer applications and equipment used by the Borrower, directly or indirectly through third parties, may be unable to properly perform date-sensitive functions before, during and after January 1, 2000). The Borrower reasonably believes that the year 2000 problem will not result in a material adverse change in the Borrower's business condition (financial or otherwise), operations, properties or prospects or ability to repay the Lender. The Borrower is in the process of implementing a plan to remediate year 2000 problems and will complete implementation of such plan with respect to any material year 2000 problems, and testing thereof, by September 30, 1999. The Borrower agrees that this representation will be true and correct on and shall be deemed made by the Borrower on each date the Borrower requests any Advance under this Agreement or the Notes or delivers any information to the Lender. The Borrower will promptly deliver to the Lender such information relating to this representation and covenant as the Lender requests from time to time. ARTICLE V AFFIRMATIVE COVENANTS Until the Revolving Commitment shall have expired or been terminated and the Notes and all of the Borrower's other obligations to the Lender under this Agreement shall have been paid in full, unless the Lender shall otherwise consent in writing: SECTION V.1 FINANCIAL STATEMENTS AND REPORTS. The Borrower will furnish to the Lender: 9 V.1 (a) As soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, consolidated financial statements of the Borrower, prepared in accordance with GAAP, consisting of at least statements of income, cash flow and changes in stockholders' equity, and a balance sheet as at the end of such year, setting forth in each case in comparative form corresponding figures from the previous annual audit, certified without qualification by independent certified public accountants selected by the Borrower and acceptable to the Lender. The Lender acknowledges that any of the "Big Five" certified public accounting firms are acceptable to it. V.1 (b) As soon as available and in any event within 30 days after the end of each month, unaudited consolidated financial statements for the Borrower, prepared in accordance with GAAP, for such month and for the period from the beginning of such fiscal year to the end of such month, substantially similar to the annual audited statements. V.1 (c) As soon as practicable and in any event within 30 days after the end of each fiscal quarter, a compliance certificate substantially in the form of Exhibit 5.1(c) hereto and a statement signed by the chief financial officer of the Borrower stating that as at the end of such fiscal quarter there did not exist any Default or Event of Default or, if such Default or Event of Default existed, specifying the nature and period of existence thereof and what action the Borrower proposes to take with respect thereto. V.1 (d) Immediately upon any officer of the Borrower becoming aware of any Default or Event of Default, a notice describing the nature thereof and what action the Borrower proposes to take with respect thereto. V.1 (e) Concurrently with each request for an Advance, and in any event not less than weekly, a Borrowing Base Certificate. V.1 (f) As soon as practicable and in any event within fifteen days of the end of each month, (i) a listing of all accounts, together with an aging of all accounts and a reconciliation of such accounts against the listing submitted pursuant hereto for the immediately preceding month, (ii) a list of all inventory, setting forth the fair market value and cost of such inventory and (iii) a listing of all accounts payable, together with an aging of all accounts payable all in form and substance reasonably satisfactory to the Lender; and (iv) a listing of all Producer Payables and a listing of all checks outstanding in full or partial payment of any Producer Payable which have not been mailed or otherwise delivered. V.1 (g) As soon as practicable and in any event within fifteen days of the end of each quarter, a customer listing including the contact person, addresses and phone numbers of each account debtor. V.1 (h) Within five days after the due date, proof of payment or deposit, when due, of all withholding and F.I.C.A. taxes owing by the Borrower from time to time, in form and substance reasonably satisfactory to the Lender by a payroll service reasonably satisfactory to the Lender and whose services the Borrower shall at all times retain. V.1 (i) From time to time, such other information regarding the business, operation and financial condition of the Borrower as the Lender may reasonably request. SECTION V.2 CORPORATE EXISTENCE. The Borrower will maintain its corporate existence in good standing under the laws of its jurisdiction of incorporation and its qualification to transact business in each jurisdiction where failure so to qualify would permanently preclude the Borrower from enforcing its rights with respect to any material asset or would expose the Borrower to any material liability. SECTION V.3 INSURANCE. The Borrower will maintain with financially sound and reputable insurance companies such insurance as may be required by law and such other insurance in such amounts and against such hazards as is customary in the case of reputable corporations engaged in the same or similar business and similarly situated. SECTION V.4 PAYMENT OF TAXES AND CLAIMS. The Borrower will file all tax returns and reports which are required by law to be filed by it and will pay before they become delinquent, all taxes, assessments and governmental charges and levies imposed upon it or its property and all claims or demands of any kind (including those of suppliers, mechanics, carriers, warehousemen, landlords and other like Persons) which, if unpaid, might result in the creation of a Lien upon its property. 10 SECTION V.5 INSPECTION. The Borrower will permit any Person designated by the Lender to visit and inspect any of the properties, books and financial records of the Borrower, to examine and to make copies of the books of accounts and other financial records of the Borrower, and to discuss the affairs, finances and accounts of the Borrower with its officers at such reasonable times and intervals as the Lender may designate. The Borrower shall also allow the Lender and its agents to conduct periodic collateral audits of the Borrower's assets at such intervals as the Lender may choose, and the Borrower shall pay to Lender a fee in the amount of $750 per day per collateral audit, plus out-of-pocket costs and expenses incurred in connection with such collateral audits, (provided that so long as no Event of Default has occurred and is continuing, the Borrower shall not be required to pay for more than 4 collateral audits in any calendar year). SECTION V.6 MAINTENANCE OF PROPERTIES. The Borrower will maintain its properties in good condition, repair and working order, and supplied with all necessary equipment, and make all necessary repairs, renewals, replacements, betterments and improvements thereto, all as may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times. SECTION V.7 BOOKS AND RECORDS. The Borrower will keep adequate and proper records and books of account in which full and correct entries will be made of its dealings, business and affairs. SECTION V.8 COMPLIANCE. The Borrower will comply in all material respects with all laws, rules and regulations to which it may be subject. SECTION V.9 NOTICE OF LITIGATION. The Borrower will give prompt written notice to the Lender of the commencement of any action, suit or proceeding affecting the Borrower alleging a claim for damages in excess of $50,000. SECTION V.10 PLANS. The Borrower will maintain any employee benefit plans in compliance with all material requirements of applicable laws and regulations. SECTION V.11 SPECIAL AGREEMENTS REGARDING ACCOUNTS. 5.11(a) Collection of Accounts and all other amounts due to the Borrower shall be subject to the provisions of sections 5 and 6 of the Security Agreements concerning the Lockbox and Collateral Account (as those terms are defined in the Security Agreements). The Borrower shall provide to the Lender, not less than weekly, a Collection Report of all Accounts collected. All collections received in the Collateral Account and reported to Lender on a Collection Report on a form furnished by Lender before 10:00 a.m. (CST/CDT) on any Business Day that is a Monday through Thursday and 2:00 p.m. Fridays (CST/CDT), shall be applied to the payment of the Advances (in such order of application as the Lender may determine) on the day so received; provided however, that for purposes of determining the interest due and payable on the unpaid balance of the Advances and Term Loans under Section 2.3, all collections received in the Collateral Account shall be applied to the unpaid balance of the Advances upon receipt of the daily Collection Report from Borrowers evidencing deposits actually made and after allowing two (2) Business Days for collection. 5.11(b) Subject to the rights granted to the Lender in section 5 of the Security Agreements, all ledger sheets or cards, invoices, shipping records, correspondence, and other writings relating to accounts shall, until delivered to the Lender or removed by the Lender from the Borrower's premises, be kept on the Borrower's premises without cost to the Lender in appropriate containers in safe places. Borrower has the right to be provided with copies of all removed materials after a reasonable time. 5.11(c) Upon the Lender's demand for payment or the occurrence of an Event of Default, the Lender may remove from the Borrower's premises all books and records, correspondence, documents and files relating to accounts; and the Lender may without cost or expense to the Lender use such of the Borrower's personnel, supplies, space and equipment at the Borrowers' place of business as the Lender may desire for the handling of collections. The Borrowers will pay any and all out of pocket expenses and cost of collection (including reasonable attorney fees) incurred by the Lender in the Lender's handling of or effort to enforce collections. 5.11(d) The Borrower warrants that, except as may be disclosed in the lists of Accounts furnished to the Lender: each customer billing statement correctly states the subject matter and terms of sale; the merchandise conforms thereto and is in all respects acceptable to the customer; the date of the billing statement is not prior to the date of shipment; the Account is not subject to any dispute, defense, offset or counterclaim; the account debtor is not a subsidiary or affiliated company; and the Borrowers have no reason to believe the Account will not be paid in the regular course of business. The Borrowers will notify the Lender promptly of any event, circumstance or communication with respect to any Account that is inconsistent with the foregoing representation. 11 ARTICLE VI NEGATIVE COVENANTS Until the Revolving Commitment shall have expired or been terminated and the Notes and all of the Borrower's other obligations to the Lender under this Agreement shall have been paid in full, unless the Lender shall otherwise consent in writing: SECTION VI.1 MERGER. Unless prior consent of the Lender is obtained, the Borrower will not merge or consolidate or enter into any analogous reorganization or transaction with any Person or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution) or permit any Subsidiary to do any of the foregoing; provided, however, any Subsidiary may be merged with or liquidated into the Borrower or any wholly-owned Subsidiary (if the Borrower or such wholly-owned Subsidiary is the surviving corporation). SECTION VI.2 SALE OF ASSETS. The Borrower will not, and will not permit any Subsidiary to, sell, transfer, lease or otherwise convey all or any substantial part of its assets except for sales and leases of inventory in the ordinary course of business, and except for sales of equipment having a fair market value not to exceed $50,000 in the aggregate per calendar year where the proceeds of such equipment are used to reduce the amount of the Advances. SECTION VI.3 DIVIDENDS. The Borrower will not pay any dividends or otherwise make any distributions on, or redemptions of, any of its outstanding stock. SECTION VI.4 CAPITAL EXPENDITURES. The Borrowers will not make expenditures for fixed or capital assets in an amount exceeding $335,000 on a consolidated basis in any fiscal year. SECTION VI.5 INVESTMENTS. The Borrower will not, and will not permit any Subsidiary to, make any loans, advances or extensions of credit to any other Person (except for trade and customer accounts receivable for inventory sold or services rendered in the ordinary course of business and payable in accordance with customary trade terms) or purchase or acquire any stock or other debt or equity securities of or any interest in any other Person or any integral part of any business or the assets comprising such business or part thereof, except for: VI.5 (a) Investments in readily marketable direct obligations issued or unconditionally guaranteed by the United States government or any agency thereof and supported by the full faith and credit of the United States. VI.5 (b) Certificates of deposit or bankers' acceptances issued by any commercial Bank organized under the laws of the United States or any State thereof which has (i) combined capital and surplus of at least $100,000,000, and (ii) a credit rating with respect to its unsecured indebtedness from a nationally recognized rating service that is satisfactory to the Lender. VI.5 (c) Commercial paper given the highest rating by a nationally recognized rating service. VI.5 (d) Repurchase agreements relating to securities of the kind described in subsection (a) of this Section. VI.5 (e) Other readily marketable investments in debt securities which are reasonably acceptable to the Lender. VI.5 (f) Advances to officers and employees or investments by the Borrower at any time to any affiliated corporation or partnership who are not a party to this Agreement, not in excess of $50,000 in the aggregate. Any investments under clauses (a), (b), (c) or (d) above must mature within one year of the acquisition thereof by the Borrower. 12 SECTION VI.6 INDEBTEDNESS. The Borrower will not, and will not permit any Subsidiary to, borrow any money or issue any bonds, debentures or other debt securities or otherwise become obligated on any interest-bearing indebtedness except for the Term Loan and Advances under this Agreement. SECTION VI.7 LIENS. The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or suffer to exist any Lien, or enter into any arrangement for the acquisition of any property through conditional sale, lease-purchase or other title retention agreements except: VI.7 (a) Liens granted to the Lender. VI.7 (b) Liens existing on the date of this Agreement and disclosed on Exhibit 6.7 hereto. VI.7 (c) Deposits or pledges to secure payment of workers' compensation, unemployment insurance, old age pensions or other social security obligations arising in the ordinary course of business of the Borrower. VI.7 (d) Liens for taxes, fees, assessments and governmental charges not delinquent. VI.7 (e) Liens of carriers, warehousemen, mechanics and materialmen, and other like Liens arising in the ordinary course of business, for sums not due. VI.7 (f) Liens incurred or deposits or pledges made or given in connection with, or to secure payment of, indemnity, performance or other similar bonds. VI.7 (g) Encumbrances in the nature of zoning restrictions, easements and rights or restrictions of record on the use of real property and landlord's Liens under leases on the premises rented, which do not materially detract from the value of such property or impair the use thereof in the business of the Borrower. SECTION VI.8 CONTINGENT OBLIGATIONS. The Borrower will not, and will not permit any Subsidiary to, guarantee or otherwise become liable on the indebtedness of any other Person. SECTION VI.9 TANGIBLE CAPITAL BASE. The Borrower will not permit its Tangible Capital Base (the excess of its assets, excluding intangible assets plus subordinated debt (including debt subordinated pursuant to the Subordination Agreements), over its liabilities, on a consolidated basis) at any time to be less than (i) $3,000,000 at fiscal year end 1999 and thereafter; (ii) $3,500,000 at fiscal year end 2000 and (iii) $4,000,000 at fiscal year end 2001. SECTION VI.10 CASH FLOW COVERAGE RATIO. The Borrower will not permit the ratio of its EBITDA to its consolidated interest expense, as of (i) the fiscal quarter ending March 31, 2000 to be less than 2.25 to 1 for fiscal quarter ending on that date; (ii) the fiscal quarter ending June 30, 2000 to be less than 2.25 to 1 for the two consecutive fiscal quarters ending on that date; (iii) the fiscal quarter ending September 20, 2000 to be less than 2.25 to 1 for the three consecutive fiscal quarters ending on that date; and (iv) the fiscal quarter ending on December 31, 2000 and as of the last day of every fiscal quarter thereafter to be less than 2.25 to 1.0 for the four consecutive fiscal quarters ending on that date. SECTION VI.11 FIXED CHARGE COVERAGE RATIO. The Borrower will not permit the Fixed Charge Coverage Ratio, as of (i) the fiscal quarter ending March 31, 2000 to be less than 1.0 to 1.0 for the fiscal quarter ending on that date; (ii) the fiscal quarter ending June 30, 2000 to be less than 1.0 to 1.0 for the two consecutive fiscal quarters ending on that date; (iii) the fiscal quarter ending September 30, 2000 to be less than 1.0 to 1.0 for the three consecutive fiscal quarters ending on that date; and (iv) the fiscal quarter ending on December 31, 2000 and as of the last day of every fiscal quarter thereafter to be less than 1.0 to 1.0 for the four consecutive fiscal quarters ending on that date. SECTION VI.12 DEBT SERVICE COVERAGE RATIO. The Borrower will not permit the Debt Service Coverage Ratio, as of the (i) the fiscal quarter ending March 31, 2000 to be less than 1.0 to 1.0 for the fiscal quarter ending on that date; (ii) the fiscal quarter ending June 30, 2000 to be less than 1.0 to 1.0 for the two consecutive quarters ending on that date; (iii) the fiscal quarter ending 13 September 30, 2000 to be less than 1.0 to 1.0 for the three consecutive fiscal quarters ending on that date; and (iv) the fiscal quarter ending on December 31, 2000 and as of the last day of every fiscal quarter thereafter to be less than 1.0 to 1.0 for the four consecutive fiscal quarters ending on that date. This ratio shall exclude the Wabash Sale Fee. SECTION VI.13 ANNUAL NET PROFIT. The Borrower will not allow its net profit to be less than $25,000 for the fourth quarter ending December 31, 1999; and will not allow its Annual Net Profit to be less than $500,000 for each of fiscal year end 2000 and 2001. ARTICLE VII EVENTS OF DEFAULT AND REMEDIES SECTION VII.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an Event of Default: VII.1 (a) The Borrower shall fail to make when due, whether by acceleration or otherwise, any payment of principal of or interest on the Notes or any other obligations of the Borrower to the Lender pursuant to this Agreement. VII.1 (b) The principal balance of the Revolving Note at any time exceeds the Borrowing Base. VII.1 (c) Any representation or warranty made by or on behalf of the Borrower in this Agreement or by or on behalf of the Borrower in any certificate, statement, report or document herewith or hereafter furnished to the Lender pursuant to this Agreement shall prove to have been false or misleading in any material respect on the date as of which the facts set forth are stated or certified. VII.1 (d) The Borrower shall fail to comply with Sections 5.2 or 5.3 or any Section of Article VI. VII.1 (e) The Borrower shall fail to comply with any other agreement, covenant, condition, provision or term contained in this Agreement (other than those hereinabove set forth in this Section 7.1) and such failure to comply shall continue for 5 calendar days after whichever of the following dates is the earliest: (i) the date the Borrower gives notice of such failure to the Lender, (ii) the date the Borrower should have given notice of such failure to the Lender pursuant to Section 5.1, or (iii) the date the Lender gives notice of such failure to the Borrower. VII.1 (f) The Borrower or any Subsidiary shall become insolvent or shall generally not pay its debts as they mature or shall apply for, shall consent to, or shall acquiesce in the appointment of a custodian, trustee or receiver of the Borrower or such Subsidiary or for a substantial part of the property thereof or, in the absence of such application, consent or acquiescence, a custodian, trustee or receiver shall be appointed for the Borrower or such Subsidiary or for a substantial part of the property thereof and shall not be discharged within 45 days, or the Borrower shall make an assignment for the benefit of creditors. VII.1 (g) Any bankruptcy, reorganization, debt arrangement or other proceedings under any bankruptcy or insolvency law shall be instituted by or against the Borrower or any Subsidiary and, if instituted against the Borrower or any Subsidiary, shall have been consented to or acquiesced in by the Borrower or such Subsidiary or shall remain undismissed for 60 days, or an order for relief shall have been entered against the Borrower or such Subsidiary. VII.1 (h) Any dissolution or liquidation proceeding shall be instituted by or against the Borrower or any Subsidiary and, if instituted against the Borrower or such Subsidiary, shall be consented to or acquiesced in by the Borrower or such Subsidiary or shall remain for 45 days undismissed. VII.1 (i) A judgment or judgments for the payment of the uninsured portion of money in excess of the sum of $50,000 in the aggregate shall be rendered against the Borrower or any Subsidiary and either (i) the judgment creditor executes on such judgment or (ii) such judgment remains unpaid or undischarged for more than 60 days from the date of entry thereof or such longer period during which execution of such judgment shall be stayed during an appeal from such judgment. VII.1 (j) The maturity of any material Indebtedness of the Borrower or any Subsidiary (other than indebtedness under this Agreement) shall be accelerated, or the Borrower or any Subsidiary shall fail to pay any such material indebtedness when due (after the lapse of any applicable grace period) 14 or any event shall occur or condition shall exist and shall continue for more than the period of grace, if any, applicable thereto and shall have the effect of causing, or permitting the holder of any such indebtedness to cause, such material indebtedness to become due prior to its stated maturity or to realize upon any collateral given as security therefor. For purposes of this Section, indebtedness of the Borrower shall be deemed "material" if it exceeds $50,000 as to any item of indebtedness or in the aggregate for all items of indebtedness with respect to which any of the events described in this Section has occurred. VII.1 (k) Any execution or attachment shall be issued whereby any substantial part of the property of the Borrower or any Subsidiary shall be taken or attempted to be taken and the same shall not have been vacated or stayed within 30 days after the issuance thereof. VII.1 (l) Any default shall occur under any other Loan Document. SECTION VII.2 REMEDIES. If (a) any Event of Default described in Sections 7.1 (f), (g) or (h) shall occur with respect to the Borrower, the Revolving Commitment shall automatically terminate and the Notes and all other obligations of the Borrower to the Lender under this Agreement shall automatically become immediately due and payable, or (b) any other Event of Default shall occur and be continuing, then the Lender may (i) declare the Revolving Commitment terminated, whereupon the Commitment shall terminate, and (ii) declare the Notes and all other obligations of the Borrower to the Lender under this Agreement to be forthwith due and payable, whereupon the same shall immediately become due and payable, in each case without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, anything in this Agreement or in the Notes to the contrary notwithstanding. Upon the occurrence of any of the events described in clauses (a) or (b) of the preceding sentence the Lender may exercise all rights and remedies under this Agreement, the Notes and any related agreements and under any applicable law. SECTION VII.3 OFFSET. In addition to the remedies set forth in Section 7.2, upon the occurrence of any Event of Default and thereafter while the same be continuing, the Borrower hereby irrevocably authorizes the Lender to set off all sums owing by the Borrower to the Lender against all deposits and credits of the Borrower with, and any and all claims of the Borrower against, the Lender. ARTICLE VIII MISCELLANEOUS SECTION VIII.1 MODIFICATIONS. Notwithstanding any provisions to the contrary herein, any term of this Agreement may be amended with the written consent of the Borrower; provided that no amendment, modification or waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such amendment, modifications, waiver or consent shall be effective only in the specific instance and for the purpose for which given. SECTION VIII.2 COSTS AND EXPENSES. Whether or not the transactions contemplated hereby are consummated, the Borrower agrees to reimburse the Lender upon demand for all reasonable out-of-pocket expenses paid or incurred by the Lender (including filing and recording costs and fees and expenses of Dorsey & Whitney LLP, counsel to the Lender) in connection with the negotiation, preparation, approval, review, execution, delivery, amendment, modification, interpretation, collection and enforcement of this Agreement and the Notes. The obligations of the Borrower under this Section shall survive any termination of this Agreement. SECTION VIII.3 WAIVERS, ETC. No failure on the part of the Lender or the holder of either Note to exercise and no delay in exercising any power or right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The rights and remedies of the Lender hereunder are cumulative and not exclusive of any right or remedy the Lender otherwise has. SECTION VIII.4 NOTICES. Except when telephonic notice is expressly authorized by this Agreement, any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, telegram, telex, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telegram, telex or facsimile transmission, from the first Business Day after the date of sending if sent by overnight courier, 15 or from four days after the date of mailing if mailed; provided, however, that any notice to the Lender under Article II hereof shall be deemed to have been given only when received by the Lender. SECTION 8.5 CONFIDENTIALITY OF INFORMATION. The Lender shall use reasonable efforts to assure that information about the Borrower and its operations, affairs and financial condition, not generally disclosed to the public or to trade and other creditors, which is furnished to the Lender pursuant to the provisions hereof is used only for the purposes of this Agreement and any other relationship between Lender and the Borrower and shall be divulged to any Person other than the Affiliates of the Lender and their respective officers, directors employees and agents, except: (a) to their attorneys and accountants, (b) in connection with the enforcement of the rights of the Lender hereunder and under the Loan Documents or otherwise in connection with applicable litigation, (c) in connection with assignments and participations and the solicitation of prospective assignees and participants referred to in Section 8.6, and (d) as may otherwise be required or requested by any regulatory authority having jurisdiction over Lender or by any applicable law, rule, regulation or judicial process, the opinion of Lender's counsel concerning the making of such disclosure to be binding on the parties hereto. SECTION 8.6 SUCCESSORS AND ASSIGNS; DISPOSITION OF LOANS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign its rights or delegate its obligations hereunder without the prior written consent of the Lender. The Lender may at any time sell, assign, transfer, grant participations in, or otherwise dispose of any portion of the Revolving Commitment and the Term Loan and/or Advances to banks or other financial institutions. The Lender may disclose any information regarding the Borrower in the Lender's possession to any prospective buyer or participant. SECTION 8.7 GOVERNING LAW AND CONSTRUCTION. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF. SECTION 8.8 CONSENT TO JURISDICTION. AT THE OPTION OF THE LENDER, THIS AGREEMENT AND THE NOTES MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE BORROWER CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE BORROWER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE LENDER AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. SECTION 8.9 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTE AND ANY OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. SECTION 8.10 CAPTIONS. The captions or headings herein and any table of contents hereto are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Agreement. SECTION 8.11 ENTIRE AGREEMENT. This Agreement and the other Loan Documents embody the entire agreement and understanding between the Borrower and the Lender with respect to the subject matter hereof and thereof. This Agreement supersedes all prior agreements and understandings relating to the subject matter hereof. SECTION 8.12 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and either of the parties hereto may execute this Agreement by signing any such counterpart. [The remainder of this page is left intentionally blank] 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. POORE BROTHERS, INC. By ------------------------------------ Print Name Title Borrower's Address: 3500 South La Cometa Drive Goodyear, Arizona 85338 POORE BROTHERS ARIZONA, INC. By ------------------------------------ Print Name Title Borrower's Address: 3500 South La Cometa Drive Goodyear, Arizona 85338 POORE BROTHERS DISTRIBUTING, INC. By ------------------------------------ Print Name Title Borrower's Address: 3500 South La Cometa Drive Goodyear, Arizona 85338 TEJAS PB DISTRIBUTING, INC. By ------------------------------------ Print Name Title Borrower's Address: 3500 South La Cometa Drive Goodyear, Arizona 85338 WABASH FOODS, LLC By ------------------------------------ Print Name Title Borrower's Address: 705 West Dustman Road Bluffton, IN 46714 U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC. By ------------------------------------ Print Name Title Lender's Address: U.S. Bancorp Republic Commercial Finance, Inc. 2338 Central Avenue, N.E. Suite 200 Minneapolis, Minnesota 55438 Fax (612) 782-1801 17 EXHIBIT 2.3 (a) TO CREDIT AGREEMENT REVOLVING NOTE $3,000,000 October 3, 1999 Minneapolis, Minnesota FOR VALUE RECEIVED, POORE BROTHERS, INC., a corporation organized under the laws of the State of Delaware ("PBI"), POORE BROTHERS ARIZONA, INC., an Arizona corporation ("PBAI"), POORE BROTHERS DISTRIBUTING, INC., an Arizona corporation ("PBDI"), TEJAS PB DISTRIBUTING, INC., an Arizona corporation ("Tejas") and WABASH FOODS, LLC, a Delaware limited liability company ("Wabash"), (PBI, PBAI, PBDI, Tejas and Wabash each a Borrower and collectively the "Borrower" or the "Borrowers"), hereby jointly and severally promise to pay to the order of U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC. (the "Lender") at its main office in Minneapolis, Minnesota, in lawful money of the United States of America in immediately available funds on the Revolving Maturity Date (as such term and each other capitalized term used herein are defined in the Credit Agreement hereinafter referred to) the principal amount of THREE MILLION DOLLARS AND NO CENTS ($3,000,000) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender under the Credit Agreement, and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding at the rates and times set forth in the Credit Agreement. This note is the Revolving Note referred to in the Credit Agreement dated as of October 3, 1999 (as the same may be hereafter from time to time amended, restated or modified, the "Credit Agreement") between the undersigned and the Lender. This note is secured, it is subject to certain permissive and mandatory prepayments and its maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement. In the event of default hereunder, the undersigned agrees to pay all costs and expenses of collection, including reasonable attorneys' fees. The undersigned waives demand, presentment, notice of nonpayment, protest, notice of protest and notice of dishonor. 1 THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF. POORE BROTHERS, INC. By ------------------------------------ Title POORE BROTHERS ARIZONA, INC. By ------------------------------------ Title POORE BROTHERS DISTRIBUTING, INC. By ------------------------------------ Title TEJAS PB DISTRIBUTING, INC. By ------------------------------------ Title WABASH FOODS, LLC By ------------------------------------ Title 2 EXHIBIT 2.3 (b) TO CREDIT AGREEMENT TERM NOTE A $5,800,000 October 3, 1999 Minneapolis, Minnesota FOR VALUE RECEIVED, POORE BROTHERS, INC., a corporation organized under the laws of the State of Delaware ("PBI"), POORE BROTHERS ARIZONA, INC., an Arizona corporation ("PBAI"), POORE BROTHERS DISTRIBUTING, INC., an Arizona corporation ("PBDI"), TEJAS PB DISTRIBUTING, INC., an Arizona corporation ("Tejas") and WABASH FOODS, LLC, a Delaware limited liability company ("Wabash"), (PBI, PBAI, PBDI, Tejas and Wabash each a Borrower and collectively the "Borrower" or the "Borrowers"), hereby jointly and severally promise to pay to the order of U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC. (the "Lender") at its main office in Minneapolis, Minnesota, in lawful money of the United States of America in immediately available funds, the principal amount of FIVE MILLION EIGHT HUNDRED THOUSAND DOLLARS AND NO CENTS ($5,800,000), and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding at the rates and times set forth in the Credit Agreement. The principal hereof is payable in seventy-eight monthly installments, each payment in the amount of $74,359, commencing on February 1, 2000 and the first day of each month thereafter until July 1, 2006 when the remaining principal balance and all accrued interest shall be payable. This note is the Term Note A referred to in the Credit Agreement dated as of October 3, 1999 (as the same may hereafter be from time to time amended, restated or otherwise modified, the "Credit Agreement") between the undersigned and the Lender. This note is secured and its maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement. In the event of default hereunder, the undersigned agrees to pay all costs and expenses of collection, including reasonable attorneys' fees. The undersigned waives demand, presentment, notice of nonpayment, protest, notice of protest and notice of dishonor. 1 THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF. POORE BROTHERS, INC. By ------------------------------------ Title POORE BROTHERS ARIZONA, INC. By ------------------------------------ Title POORE BROTHERS DISTRIBUTING, INC. By ------------------------------------ Title TEJAS PB DISTRIBUTING, INC. By ------------------------------------ Title WABASH FOODS, LLC By ------------------------------------ Title EXHIBIT 2.3 (c) TO CREDIT AGREEMENT TERM NOTE B $350,000 October 3, 1999 Minneapolis, Minnesota FOR VALUE RECEIVED, POORE BROTHERS, INC., a corporation organized under the laws of the State of Delaware ("PBI"), POORE BROTHERS ARIZONA, INC., an Arizona corporation ("PBAI"), POORE BROTHERS DISTRIBUTING, INC., an Arizona corporation ("PBDI"), TEJAS PB DISTRIBUTING, INC., an Arizona corporation ("Tejas") and WABASH FOODS, LLC, a Delaware limited liability company ("Wabash"), (PBI, PBAI, PBDI, Tejas and Wabash each a Borrower and collectively the "Borrower" or the "Borrowers"), hereby jointly and severally promise to pay to the order of U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC. (the "Lender") at its main office in Minneapolis, Minnesota, in lawful money of the United States of America in immediately available funds, the principal amount of THREE HUNDRED FIFTY THOUSAND DOLLARS AND NO CENTS ($350,000), and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding at the rates and times set forth in the Credit Agreement. The principal hereof is payable in twelve monthly installments, each payment in the amount of $29,166.67, commencing on April 30, 2000 and the last day of each month thereafter until March 31, 2001 when the remaining principal balance and all accrued interest shall be payable. This note is the Term Note B referred to in the Credit Agreement dated as of October 3, 1999 (as the same may hereafter be from time to time amended, restated or otherwise modified, the "Credit Agreement") between the undersigned and the Lender. This note is secured and its maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement. In the event of default hereunder, the undersigned agrees to pay all costs and expenses of collection, including reasonable attorneys' fees. The undersigned waives demand, presentment, notice of nonpayment, protest, notice of protest and notice of dishonor. 1 THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF. POORE BROTHERS, INC. By ------------------------------------ Title POORE BROTHERS ARIZONA, INC. By ------------------------------------ Title POORE BROTHERS DISTRIBUTING, INC. By ------------------------------------ Title TEJAS PB DISTRIBUTING, INC. By ------------------------------------ Title WABASH FOODS, LLC By ------------------------------------ Title 2 EX-10.50 6 SECURITY AGREEMENT DATED 10/3/99 SECURITY AGREEMENT THIS SECURITY AGREEMENT, dated as of October 3, 1999, is made and given by POORE BROTHERS, INC., a Delaware corporation ("PBI") POORE BROTHERS ARIZONA, INC., an Arizona corporation ("PBAI"), POORE BROTHERS DISTRIBUTING, INC., an Arizona corporation ("PBDI"), TEJAS PB DISTRIBUTING, INC., an Arizona corporation ("Tejas"), and WABASH FOODS, LLC, a Delaware limited liability company ("Wabash") (PBI, PBAI, PBDI, Tejas and Wabash each a "Grantor" and collectively, the "Grantors") to U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC. a Minnesota corporation (the "Secured Party"). RECITALS A. The Grantors and the Secured Party have entered into a Credit Agreement dated as of the date of this Agreement (as the same may hereafter be amended, supplemented, extended, restated, or otherwise modified from time to time, the "Credit Agreement") pursuant to which the Secured Party has agreed to extend to the Grantors certain credit accommodations on the terms and conditions set forth in the Credit Agreement. B. It is a condition precedent to the extension of any credit accommodations pursuant to the terms of the Credit Agreement that this Agreement be executed and delivered by the Grantors. C. The Grantors find it advantageous, desirable and in their best interests to comply with the requirement that it execute and deliver this Security Agreement to the Secured Party. NOW, THEREFORE, in consideration of the premises and in order to induce the Secured Party to enter into the Credit Agreement and to extend credit accommodations to the Grantors thereunder, the Grantors hereby agree with the Secured Party for the Secured Party's benefit as follows: SECTION 1. DEFINED TERMS. 1(a) As used in this Agreement, the following terms shall have the meanings indicated: "ACCOUNTS" shall mean each and every right to payment of Grantors, whether such right to payment arises out of a sale or lease of goods by Grantors, or other disposition of goods or other property of Grantors, out of a rendering of services by Grantors, out of a loan by Grantors, out of damage to or loss of goods in the possession of a railroad or other carrier 1 or any other bailee, out of overpayment of taxes or other liabilities of Grantors, or which otherwise arises under any contract or agreement, or from any other cause, whether such right to payment now exists or hereafter arises and whether such right to payment is or is not yet earned by performance and howsoever such right to payment may be evidenced, together with all other rights and interest (including all liens and security interests) which Grantors may at any time have by law or agreement against any account debtor (as defined in the Uniform Commercial Code in effect in the State of Minnesota) or other obligor obligated to make any such payment or against any of the property of such account debtor or other obligor; specifically (but without limitation), the term includes all present and future instruments, documents, chattel papers, accounts and contract rights of Grantors. "ACCOUNT DEBTOR" shall mean a Person who is obligated on or under any Account, Chattel Paper, Instrument or General Intangible. "CHATTEL PAPER" shall mean a writing or writings which evidence both a monetary obligation and a security interest in or lease of specific goods; when a transaction is evidenced by both a security agreement or a lease and by an Instrument or a series of Instruments, the group of writings taken together constitutes Chattel Paper. "COLLATERAL" shall mean all personal property and rights in personal property now owned or hereafter at any time acquired by the Grantors in or upon which a Security Interest is granted to the Secured Party by the Grantors under this Agreement. "DOCUMENT" shall mean any bill of lading, dock warrant, dock receipt, warehouse receipt or order for the delivery of goods, together with any other document or receipt which in the regular course of business or financing is treated as adequately evidencing that the Person in possession of it is entitled to receive, hold and dispose of the document and the goods it covers. "EQUIPMENT" shall mean all machinery, equipment, furniture, furnishings and fixtures, including all accessions, accessories and attachments thereto, and any guaranties, warranties, indemnities and other agreements of manufacturers, vendors and others with respect to such Equipment. "EVENT OF DEFAULT" shall have the meaning given to such term in Section 20 hereof. "FINANCING STATEMENT" shall have the meaning given to such term in Section 4 hereof. "GENERAL INTANGIBLES" shall mean any personal property (other than goods, Accounts, Chattel Paper, Documents, Instruments and money) including choses in action, causes of action, contract rights, corporate and other business records, inventions, designs, patents, patent applications, service marks, trademarks, trademark applications, tradenames, trade secrets, engineering drawings, good will, registrations, copyrights, 2 licenses, franchises, customer lists, tax refund claims, royalties, licensing and product rights, rights to the retrieval from third parties of electronically processed and recorded data and all rights to payment resulting from an order of any court. "INSTRUMENT" shall mean a draft, check, certificate of deposit, note, bill of exchange, security or any other writing which evidences a right to the payment of money and is not itself a security agreement or lease and is of a type which is transferred in the ordinary course of business by delivery with any necessary endorsement or assignment. "INVENTORY" shall mean any and all of the Grantors' goods, including, without limitation, goods in transit, wherever located which are or may at any time be leased by the Grantors to a lessee, held for sale or lease, furnished under any contract of service or held as raw materials, work in process, or supplies or materials used or consumed in the Grantors' business, or which are held for use in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, and all goods, the sale or other disposition of which has given rise to a Receivable, which are returned to and/or repossessed and/or stopped in transit by the Grantors or the Secured Party, or at any time hereafter in the possession or under the control of the Grantors or the Secured Party, or any agent or bailee of either thereof, and all documents of title or other documents representing the same. "LIEN" shall mean any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of the lessors under capitalized leases), in, of or on any assets or properties of the Person referred to. "OBLIGATIONS" shall mean (a) all indebtedness, liabilities and obligations of the Grantors to the Secured Party of every kind, nature or description under the Credit Agreement, including the Grantors' obligation on any promissory note or notes under the Credit Agreement and any note or notes hereafter issued in substitution or replacement thereof, (b) all liabilities of the Grantors under this Agreement, and (c) any and all other liabilities and obligations of the Grantors to the Secured Party of every kind, nature and description, whether direct or indirect or hereafter acquired by the Secured Party from any Person, absolute or contingent, regardless of how such liabilities arise or by what agreement or instrument they may be evidenced, and in all of the foregoing cases whether due or to become due, and whether now existing or hereafter arising or incurred. "PERSON" shall mean any individual, corporation, partnership, limited partnership, limited liability company, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity. "SECURITY INTEREST" shall have the meaning given such term in Section 2 hereof. 3 1(b) All other terms used in this Agreement which are not specifically defined herein shall have the meaning assigned to such terms in the Uniform Commercial Code in effect in the State of Minnesota as of the date of this Agreement to the extent such other terms are defined therein. 1(c) Unless the context of this Agreement otherwise clearly requires, references to the plural include the singular, the singular, the plural and "or" has the inclusive meaning represented by the phrase "and/or." The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation." The words "hereof," "herein," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections are references to Sections in this Security Agreement unless otherwise provided. SECTION 2. GRANT OF SECURITY INTEREST. As security for the payment and performance of all of the Obligations, the Grantors hereby grant to the Secured Party a security interest (the "Security Interest") in all of the Grantors' right, title, and interest in and to the following, whether now or hereafter owned, existing, arising or acquired and wherever located: 2(a) All Accounts. 2(b) All Chattel Paper. 2(c) All Documents. 2(d) All Equipment. 2(e) All General Intangibles. 2(f) All Instruments. 2(g) All Inventory. 2(h) To the extent not otherwise included in the foregoing, (i) all other rights to the payment of money, including rents and other sums payable to the Grantors under leases, rental agreements and other Chattel Paper and insurance proceeds; (ii) all books, correspondence, credit files, records, invoices, bills of lading, and other documents relating to any of the foregoing, including, without limitation, all tapes, cards, disks, computer software, computer runs, and other papers and documents in the possession or control of the Grantors or any computer bureau from time to time acting for the Grantors; (iii) all rights in, to and under all policies insuring the life of any officer, director, stockholder or employee of the Grantors, the proceeds of which are payable to the Grantors; and (iv) all accessions and additions to, parts and appurtenances of, substitutions for and replacements of any of the foregoing. 4 2(i) To the extent not otherwise included, all proceeds and products of any and all of the foregoing. SECTION 3. GRANTORS REMAIN LIABLE. Anything herein to the contrary notwithstanding, (a) the Grantors shall remain liable under the Accounts, Chattel Paper, General Intangibles and other items included in the Collateral to the extent set forth therein to perform all of their duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Secured Party of any of the rights hereunder shall not release the Grantors from any of their duties or obligations under any items included in the Collateral, and (c) the Secured Party shall have no obligation or liability under Accounts, Chattel Paper, General Intangibles and other items included in the Collateral by reason of this Agreement, nor shall the Secured Party be obligated to perform any of the obligations or duties of the Grantors thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 4. TITLE TO COLLATERAL. The Grantors have (or will have at the time it acquires rights in Collateral hereafter acquired or arising) and will maintain so long as the Security Interest may remain outstanding, title to each item of Collateral (including the proceeds and products thereof), free and clear of all Liens except the Security Interest and except Liens permitted by the Credit Agreement. The Grantors will defend the Collateral against all claims or demands of all Persons (other than the Secured Party) claiming the Collateral or any interest therein. As of the date of execution of this Security Agreement, no effective financing statement or other similar document used to perfect and preserve a security interest under the laws of any jurisdiction (a "Financing Statement") covering all or any part of the Collateral is on file in any recording office, except such as may have been filed (a) in favor of the Secured Party relating to this Agreement, or (b) to perfect Liens permitted by the Credit Agreement. SECTION 5. LOCK BOX, COLLATERAL ACCOUNT. Each Grantor will direct each of its Account Debtors or other obligors to make payments due under any Collateral directly to a special lock box to be established and maintained by Secured Party (the "Lockbox"). The Grantors hereby authorize and direct Secured Party to deposit into a special collateral account to be established and maintained by Secured Party (the "Collateral Account") all checks, drafts and cash payments received in said Lockbox. All deposits from the Lockbox to the Collateral Account shall constitute proceeds of Collateral and shall not constitute payment of any Obligation. The Grantors agree that it will promptly deliver to Secured Party, for deposit into said Collateral Account, all payments on Accounts and Chattel Paper received by it. All such payments shall be delivered to Secured Party in the form received (except for the Grantors' endorsement where necessary). Until so delivered, all payments on Accounts and Chattel Paper received by the Grantors shall be held in trust by the Grantors for and as the property of Secured Party and shall not be commingled with any funds or property of the Grantors. SECTION 6. COLLECTION RIGHTS OF SECURED PARTY. Notwithstanding Secured Party's rights under Section 5 with respect to any and all Instruments, Chattel Paper, Accounts and other rights to payment constituting Collateral (including proceeds), Secured Party may, at any time (after the occurrence of an Event of Default) notify any Account Debtor, or any other person obligated to pay any 5 amount due, that such Chattel Paper, Account, or other right to payment has been assigned or transferred to Secured Party for security and shall be paid directly to Secured Party. If Secured Party so requests at any time, the Grantors will so notify such Account Debtors and other obligors in writing and will indicate on all invoices to such Account Debtors or other obligors that the amount due is payable directly to Secured Party. At any time after Secured Party or the Grantors give such notice to an account debtor or other obligor, Secured Party may (but need not), in its own name or in the Grantors' name, demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such chattel paper, account, or other right to payment, or grant any extension to, make any compromise or settlement with or otherwise agree to waive, notify, amend or change the obligations (including collateral obligations) of any such account debtor or other obligor. The Grantors hereby irrevocably make, constitute and appoint the Secured Party or any person whom the Secured Party may designate, the Grantors' true and lawful attorney with power to receive, open and dispose of all mail addressed to the Grantors; to endorse the Grantors' name on any notes, acceptances, checks, drafts, money orders or other means of payment that may come into the Secured Party's possession as payment of or upon Accounts, Chattel Paper or other Collateral; to endorse the Grantors' name on any invoice, freight or express bill or bill of lading relating to any Collateral; to sign the Borrower's name to drafts against Account Debtors, to assignments and verification of accounts and notices thereof to Account Debtors, and to documents of title covering any Collateral, and to do all other things necessary or proper to carry out the intent of this Agreement. SECTION 7. DISPOSITION OF COLLATERAL. The Grantors will not sell, transfer, lease or otherwise dispose of, or discount or factor with or without recourse, any Collateral, except for sales and leases of items of Inventory in the ordinary course of business, and except for sales of Equipment having a fair market value not to exceed $50,000 in the aggregate per calendar year where the proceeds of such Equipment are used to reduce the amount of the obligations. SECTION 8. NAMES, OFFICES, LOCATIONS. The Grantors does business solely under their own name and the trade names and styles, if any, set forth on Schedule II hereto. Except as noted on said Schedule, no such trade names or styles and no trademarks or other similar marks owned by the Grantors are registered with any governmental unit. The chief place of business and chief executive office and the office where they keep their books and records concerning the Accounts and General Intangibles and the originals of all Chattel Paper, Documents and Instruments are located at their addresses set forth on the signature page hereof. All items of Equipment and Inventory existing on the date of this Agreement are located at the places specified on Schedule I hereto. The Grantors will immediately notify the Secured Party of any additional state in which any item of Inventory or Equipment is hereafter located. The Grantors will from time to time at the request of the Secured Party provide the Secured Party with current lists as to the locations of the Equipment and Inventory. The Grantors will not permit any Inventory, Equipment, Chattel Paper or Documents or any records pertaining to Accounts and General Intangibles to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interest. The Grantors will not change their name or the location of their chief place of business and chief executive office unless the Secured Party has been given at least 30 days' prior written 6 notice thereof and the Grantors have executed and delivered to the Secured Party such Financing Statements and other instruments required or appropriate to continue the perfection of the Security Interest. SECTION 9. RIGHTS TO PAYMENT. Except as the Grantors may otherwise advise the Secured Party in writing, each Account, Chattel Paper, Document, General Intangible and Instrument constituting or evidencing Collateral is (or, in the case of all future Collateral, will be when arising or issued) the valid, genuine and legally enforceable obligation of the Account Debtor or other obligor named therein or in the Grantors' records pertaining thereto as being obligated to pay or perform such obligation. The Grantors will perform and comply in all material respects with all their obligations under any items included in the Collateral and exercise promptly and diligently their rights thereunder. SECTION 10. FURTHER ASSURANCES. 10(a) The Grantors agree that from time to time, at their expense, it will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or that the Secured Party may reasonably request, in order to perfect and protect the Security Interest granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral (but any failure to request or assure that the Grantors execute and deliver such instrument or documents or to take such action shall not affect or impair the validity, sufficiency or enforceability of this Agreement and the Security Interest, regardless of whether any such item was or was not executed and delivered or action taken in a similar context or on a prior occasion). Without limiting the generality of the foregoing, the Grantors will, promptly and from time to time at the request of the Secured Party: (i) mark, or permit the Secured Party to mark, conspicuously its books, records, and accounts showing or dealing with the Collateral, and each item of Chattel Paper included in the Collateral, with a legend, in form and substance satisfactory to the Secured Party, indicating that each such item of Collateral and each such item of Chattel Paper is subject to the Security Interest granted hereby; (ii) deliver and pledge to the Secured Party, all Instruments and Documents, duly indorsed or accompanied by duly executed instruments of transfer or assignment, with full recourse to the Grantors, all in form and substance satisfactory to the Secured Party; (iii) execute and file such Financing Statements or continuation statements in respect thereof, or amendments thereto, and such other instruments or notices (including fixture filings with any necessary legal descriptions as to any goods included in the Collateral which the Secured Party determines might be deemed to be fixtures, and instruments and notices with respect to vehicle titles), as may be necessary or desirable, or as the Secured Party may request, in order to perfect, preserve, and enhance the Security Interest granted or purported to be granted hereby; and (iv) obtain waivers, in form satisfactory to the Secured Party, of any claim to any Collateral from any landlords or mortgagees of any property where any Inventory or Equipment is located. 7 10(b) The Grantors hereby authorize the Secured Party to file one or more Financing Statements or continuation statements in respect thereof, and amendments thereto, relating to all or any part of the Collateral without the signature of the Grantors where permitted by law. A photocopy or other reproduction of this Agreement or any Financing Statement covering the Collateral or any part thereof shall be sufficient as a Financing Statement where permitted by law. 10(c) The Grantors will furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may reasonably request, all in reasonable detail and in form and substance reasonably satisfactory to the Secured Party. SECTION 11. TAXES AND CLAIMS. The Grantors will promptly pay all taxes and other governmental charges levied or assessed upon or against any Collateral or upon or against the creation, perfection or continuance of the Security Interest, as well as all other claims of any kind (including claims for labor, material and supplies) against or with respect to the Collateral, except to the extent (a) such taxes, charges or claims are being contested in good faith by appropriate proceedings, (b) such proceedings do not involve any material danger of the sale, forfeiture or loss of any of the Collateral or any interest therein and (c) such taxes, charges or claims are adequately reserved against on the Grantors' books in accordance with generally accepted accounting principles. SECTION 12. BOOKS AND RECORDS. The Grantors will keep and maintain at their own cost and expense satisfactory and complete records of the Collateral, including a record of all payments received and credits granted with respect to all Accounts, Chattel Paper and other items included in the Collateral. SECTION 13. INSPECTION, REPORTS, VERIFICATIONS. The Grantors will at all reasonable times permit the Secured Party or its representatives to examine or inspect any Collateral, any evidence of Collateral and the Grantors' books and records concerning the Collateral, wherever located. The Grantors will from time to time when requested by the Secured Party furnish to the Secured Party a report on its Accounts, Chattel Paper, General Intangibles and Instruments, naming the Account Debtors or other obligors thereon, the amount due and the aging thereof. The Secured Party or its designee is authorized to contact Account Debtors and other Persons obligated on any such Collateral from time to time to verify the existence, amount and/or terms of such Collateral. SECTION 14. NOTICE OF LOSS. The Grantors will promptly notify the Secured Party of any loss of or material damage to any material item of Collateral or of any substantial adverse change, known to Grantors, in any material item of Collateral or the prospect of payment or performance thereof. SECTION 15. INSURANCE. The Grantors will keep the Equipment and Inventory insured against "all risks" for the full replacement cost thereof subject to a deductible in an amount, and with an insurance company or 8 companies, satisfactory to the Secured Party, the policies to protect the Secured Party as its interests may appear with Lender to be named as Loss Payee ("Accord 27"), with such policies or certificates with respect thereto to be delivered to the Secured Party at its request. Each such policy or the certificate with respect thereto shall provide that such policy shall not be cancelled or allowed to lapse unless at least 30 days prior written notice is given to the Secured Party. SECTION 16. LAWFUL USE; FAIR LABOR STANDARDS ACT. The Grantors will use and keep the Collateral, and will require that others use and keep the Collateral, only for lawful purposes, without material violation of any federal, state or local law, statute or ordinance. All Inventory of the Grantors as of the date of this Agreement that was produced by the Grantors or with respect to which the Grantors performed any manufacturing or assembly process was produced by the Grantors (or such manufacturing or assembly process was conducted) in compliance in all material respects with all requirements of the Fair Labor Standards Act, and all Inventory produced, manufactured or assembled by the Grantors after the date of this Agreement will be so produced, manufactured or assembled, as the case may be. SECTION 17. ACTION BY THE SECURED PARTY. If the Grantors at any time fail to perform or observe any of the foregoing agreements, the Secured Party shall have (and the Grantors hereby grant to the Secured Party) the right, power and authority (but not the duty) to perform or observe such agreement on behalf and in the name, place and stead of the Grantors (or, at the Secured Party's option, in the Secured Party's name) and to take any and all other actions which the Secured Party may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of Liens, the procurement and maintenance of insurance, the execution of assignments, security agreements and Financing Statements, and the indorsement of Instruments); and the Grantors shall thereupon pay to the Secured Party on demand the amount of all monies expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Secured Party in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Secured Party, together with interest thereon from the date expended or incurred at the highest lawful rate then applicable to any of the Obligations, and all such monies expended, costs and expenses and interest thereon shall be part of the Obligations secured by the Security Interest. SECTION 18. INSURANCE CLAIMS. As additional security for the payment and performance of the Obligations, the Grantors hereby assign to the Secured Party any and all monies (including proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of the Grantors with respect to, any and all policies of insurance now or at any time hereafter covering the Collateral or any evidence thereof or any business records or valuable papers pertaining thereto. At any time, whether before or after the occurrence of any Event of Default, the Secured Party may (but need not), in the Secured Party's name or in Grantors' name, execute and deliver 9 proofs of claim, receive all such monies, indorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy, except for amounts in the aggregate of less than $50,000 which the Secured Party may (but need not), in the Secured Party's name or in Grantor's name, execute and deliver proofs of claim, receive all such monies, indorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy, only after the occurrence of an Event of Default. Notwithstanding any of the foregoing, so long as no Event of Default exists the Grantors shall be entitled to all insurance proceeds with respect to Equipment or Inventory provided that such proceeds are applied to the cost of replacement Equipment or Inventory. SECTION 19. THE SECURED PARTY'S DUTIES. The powers conferred on the Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. The Secured Party shall be deemed to have exercised reasonable care in the safekeeping of any Collateral in its possession if such Collateral is accorded treatment substantially equal to the safekeeping which the Secured Party accords its own property of like kind. Except for the safekeeping of any Collateral in its possession and the accounting for monies and for other properties actually received by it hereunder, the Secured Party shall have no duty, as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Secured Party has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against any Persons or any other rights pertaining to any Collateral. The Secured Party will take action in the nature of exchanges, conversions, redemptions, tenders and the like requested in writing by the Grantors with respect to the Collateral in the Secured Party's possession if the Secured Party in its reasonable judgment determines that such action will not impair the Security Interest or the value of the Collateral, but a failure of the Secured Party to comply with any such request shall not of itself be deemed a failure to exercise reasonable care. SECTION 20. EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an Event of Default under this Agreement: 20(a) The Grantors shall fail to make payment when due, whether upon demand, or at a scheduled due date, or otherwise, any principal of or interest on their obligations under the Credit Agreement or any other obligations of any Grantor to the Secured Party. 20(b) Any representation or warranty made by or on behalf of any Grantor in this Agreement or the Credit Agreement or by or on behalf of any Grantor in any certificate, statement, report or document herewith or hereafter furnished to the Secured Party pursuant to this Agreement or the Credit Agreement shall prove to have been false or misleading in any material respect on the date as of which the facts set forth are stated or certified. 20(c) The Grantors shall fail to comply with Sections 5.2 or 5.3 or any Section of Article VI of the Credit Agreement. 10 20(d) The Grantors shall fail to comply with any other agreement, covenant, condition, provision or term contained in this Agreement or the Credit Agreement (other than those hereinabove set forth in this Section 20) and such failure to comply shall continue for 30 calendar days after whichever of the following dates is the earliest: (i) the date any Grantor gives notice of such failure to the Secured Party, or (ii) the date the Secured Party gives notice of such failure to the Grantors. 20(e) Any Grantor shall apply for or consent to, or shall acquiesce in the appointment of a custodian, trustee or receiver of any Grantor or for a substantial part of the property thereof or, in the absence of such application, consent or acquiescence, a custodian, trustee or receiver shall be appointed for any Grantor or for a substantial part of the property thereof and shall not be discharged within 45 days, or any Grantor shall make an assignment for the benefit of creditors. 20(f) Any bankruptcy, reorganization, debt arrangement or other proceedings under any bankruptcy or insolvency law shall be instituted by or against any Grantor and, if instituted against any Grantor, shall have been consented to or acquiesced in by the Grantors or shall remain undismissed for 60 days, or an order for relief shall have been entered against any Grantor. 20(g) Any dissolution or liquidation proceeding shall be instituted by or against any Grantor and, if instituted against any Grantor, shall be consented to or acquiesced in by any Grantor or shall remain for 45 days undismissed. 20(h) A judgment or judgments for the payment of money in excess of the sum of $50,000 in the aggregate shall be rendered against any Grantor and either (i) the judgment creditor executes on such judgment or (ii) such judgment remains unpaid or undischarged for more than 60 days from the date of entry thereof or such longer period during which execution of such judgment shall be stayed during an appeal from such judgment. 20(i) Any execution or attachment shall be issued whereby any substantial part of the property of any Grantor shall be taken or attempted to be taken and the same shall not have been vacated or stayed within 30 days after the issuance thereof. 20(j) Any default or event of default (however denominated or defined) shall occur with respect to any indebtedness of the Grantors (other than the Obligations) permitted under the Credit Agreement. THE FOREGOING EVENTS OF DEFAULT, AND THE REMEDIES UPON EVENT OF DEFAULT AS SET FORTH BELOW IN SECTION 21, ARE IN ADDITION TO AND SUPPLEMENT THE RIGHTS OF THE SECURED PARTY UNDER THE CREDIT AGREEMENT. 11 SECTION 21. REMEDIES ON DEFAULT. Upon the occurrence of an Event of Default and at any time thereafter: 21(a) The Secured Party may exercise and enforce any and all rights and remedies available upon default to a secured party under the Uniform Commercial Code. 21(b) The Secured Party shall have the right to enter upon and into and take possession of all or such part or parts of the properties of the Grantors, including lands, plants, buildings, Equipment, Inventory and other property as may be necessary or appropriate in the judgment of the Secured Party to permit or enable the Secured Party to manufacture, produce, process, store or sell or complete the manufacture, production, processing, storing or sale of all or any part of the Collateral, as the Secured Party may elect, and to use and operate said properties for said purposes and for such length of time as the Secured Party may deem necessary or appropriate for said purposes without the payment of any compensation to Grantors therefor. The Secured Party may require the Grantors to, and the Grantors hereby agree that they will, at their expense and upon request of the Secured Party forthwith, assemble all or part of the Collateral as directed by the Secured Party and make it available to the Secured Party at a place or places to be designated by the Secured Party. 21(c) Any sale of Collateral may be in one or more parcels at public or private sale, at any of the Secured Party's offices or elsewhere, for cash, on credit, or for future delivery, and upon such other terms as the Secured Party may reasonably believe are commercially reasonable. The Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given, and the Secured Party may adjourn any public or private sale from time to time by announcement made at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. 21(d) The Secured Party is hereby granted a license or other right to use, without charge, all of the Grantors' property, including, without limitation, all of the Grantors' labels, trademarks, copyrights, patents and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale and selling any Collateral, and the Grantors' rights under all licenses and all franchise agreements shall inure to the Secured Party's benefit until the Obligations are paid in full. 21(e) If notice to the Grantors of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given in the manner specified for the giving of notice in Section 25 hereof at least ten calendar days prior to the date of intended disposition or other action, and the Secured Party may exercise or enforce any and all other rights or remedies available by law or agreement against the Collateral, against the Grantors, or against any other Person or property. 12 SECTION 22. APPLICATION OF PROCEEDS. All cash proceeds received by the Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Secured Party, be held by the Secured Party as collateral for, or then or at any time thereafter be applied in whole or in part by the Secured Party against, all or any part of the Obligations (including, without limitation, any expenses of the Secured Party payable pursuant to Section 23 hereof). SECTION 23. COSTS AND EXPENSES; INDEMNITY. The Grantors will pay or reimburse the Secured Party on demand for all out-of-pocket expenses (including in each case all filing and recording fees and taxes and all reasonable fees and expenses of counsel and of any experts and agents) incurred by the Secured Party in connection with the creation, perfection, protection, satisfaction, foreclosure or enforcement of the Security Interest and the preparation, administration, continuance, amendment or enforcement of this Agreement, and all such costs and expenses shall be part of the Obligations secured by the Security Interest. The Grantors shall indemnify and hold the Secured Party harmless from and against any and all claims, losses and liabilities (including reasonable attorneys' fees) growing out of or resulting from this Agreement and the Security Interest hereby created (including enforcement of this Agreement) or the Secured Party's actions pursuant hereto, except claims, losses or liabilities resulting from the Secured Party's gross negligence or willful misconduct as determined by a final judgment of a court of competent jurisdiction. Any liability of the Grantors to indemnify and hold the Secured Party harmless pursuant to the preceding sentence shall be part of the Obligations secured by the Security Interest. The obligations of the Grantors under this Section shall survive any termination of this Agreement. SECTION 24. WAIVERS; REMEDIES; MARSHALLING. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by the Secured Party. A waiver so signed shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any rights and remedies available to the Secured Party. All rights and remedies of the Secured Party shall be cumulative and may be exercised singly in any order or sequence, or concurrently, at the Secured Party's option, and the exercise or enforcement of any such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. The Grantors hereby waive all requirements of law, if any, relating to the marshalling of assets which would be applicable in connection with the enforcement by the Secured Party of its remedies hereunder, absent this waiver. SECTION 25. NOTICES. Any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, telegram, telex, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telegram, telex or facsimile transmission, from the first business day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed. 13 SECTION 26. GRANTORS' ACKNOWLEDGMENTS. The Grantors hereby acknowledge that (a) they has been advised by (or has had full opportunity to avail themselves of the advice of) counsel in the negotiation, execution and delivery of this Agreement, (b) the Secured Party has no fiduciary relationship to the Grantors, the relationship being solely that of debtor and creditor, and (c) no joint venture exists between the Grantors and the Secured Party. SECTION 27. CONTINUING SECURITY INTEREST; ASSIGNMENTS UNDER CREDIT AGREEMENT. This Agreement shall (a) create a continuing security interest in the Collateral and shall remain in full force and effect until payment in full of the Obligations, (b) be binding upon the Grantors, their successors and assigns, and (c) inure to the benefit of, and be enforceable by, the Secured Party and its successors, transferees, and assigns. Without limiting the generality of the foregoing clause (c), the Secured Party may assign or otherwise transfer all or any portion of its rights and obligations under the Credit Agreement to any other Persons to the extent and in the manner provided in the Credit Agreement and may similarly transfer all or any portion of its rights under this Security Agreement to such Persons. SECTION 28. TERMINATION OF SECURITY INTEREST. Upon payment in full of the Obligations, the Security Interest granted hereby shall terminate. Upon any such termination, the Secured Party will return to the Grantors such of the Collateral then in the possession of the Secured Party as shall not have been sold or otherwise applied pursuant to the terms hereof and execute and deliver to the Grantors such documents as the Grantors shall reasonably request to evidence such termination. Any reversion or return of Collateral upon termination of this Agreement and any instruments of transfer or termination shall be at the expense of the Grantors and shall be without warranty by, or recourse on, the Secured Party. As used in this Section, "Grantors" includes any assigns of Grantors, any Person holding a subordinate security interest in any of the Collateral or whoever else may be lawfully entitled to any part of the Collateral. SECTION 29. CONFIDENTIALITY OF INFORMATION. The Secured Party shall use reasonable efforts to assure that information about the Grantor and its operations, affairs and financial condition, not generally disclosed to the public or to trade and other creditors, which is furnished to the Secured Party pursuant to the provisions hereof is used only for the purposes of this Agreement and any other relationship between Secured Party and the Grantor and shall be divulged to any Person other than the Affiliates of the Secured Party and their respective officers, directors employees and agents, except: (a) to their attorneys and accountants, (b) in connection with the enforcement of the rights of the Secured Party hereunder and under the Loan Documents or otherwise in connection with applicable litigation, (c) in connection with assignments and participations and the solicitation of prospective assignees and participants referred to in Section 8.6 of the Credit Agreement, and (d) as may otherwise be required or requested by any regulatory authority having jurisdiction over Secured Party or by any applicable law, rule, regulation or judicial process, the opinion of Secured Party's counsel concerning the making of such disclosure to be binding on the parties hereto. 14 SECTION 30. GOVERNING LAW AND CONSTRUCTION. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE MANDATORILY GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF MINNESOTA. Whenever possible, each provision of this Agreement and any other statement, instrument or transaction contemplated hereby or relating hereto shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Agreement or any other statement, instrument or transaction contemplated hereby or relating hereto shall be held to be prohibited or invalid under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement or any other statement, instrument or transaction contemplated hereby or relating hereto. SECTION 31. CONSENT TO JURISDICTION. AT THE OPTION OF THE SECURED PARTY, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY; AND THE GRANTOR CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE GRANTOR COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE SECURED PARTY AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. SECTION 32. WAIVER OF NOTICE AND HEARING. THE GRANTOR HEREBY WAIVES ALL RIGHTS TO A JUDICIAL HEARING OF ANY KIND PRIOR TO THE EXERCISE BY THE SECURED PARTY OF ITS RIGHTS TO POSSESSION OF THE COLLATERAL WITHOUT JUDICIAL PROCESS OR OF ITS RIGHTS TO REPLEVY, ATTACH, OR LEVY UPON THE COLLATERAL WITHOUT PRIOR NOTICE OR HEARING. THE GRANTOR ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY COUNSEL OF ITS CHOICE WITH RESPECT TO THIS PROVISION AND THIS AGREEMENT. SECTION 33. WAIVER OF JURY TRIAL. EACH OF THE GRANTOR AND THE SECURED PARTY, BY ITS ACCEPTANCE OF THIS AGREEMENT, IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 15 SECTION 34. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. SECTION 35. GENERAL. All representations and warranties contained in this Agreement or in any other agreement between the Grantors and the Secured Party shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. The Grantors waive notice of the acceptance of this Agreement by the Secured Party. Captions in this Agreement are for reference and convenience only and shall not affect the interpretation or meaning of any provision of this Agreement. [The remainder of this page is left intentionally blank] 16 IN WITNESS WHEREOF, the Grantors have caused this Security Agreement to be duly executed and delivered by their officer thereunto duly authorized as of the date first above written. POORE BROTHERS, INC. By ------------------------------------ Title 3500 South La Cometa Drive Goodyear, AZ 85338 POORE BROTHERS ARIZONA, INC. By ------------------------------------ Title 3500 South La Cometa Drive Goodyear, AZ 85338 POORE BROTHERS DISTRIBUTING, INC. By ------------------------------------ Title 3500 South La Cometa Drive Goodyear, AZ 85338 TEJAS PB DISTRIBUTING, INC. By ------------------------------------ Title 3500 South La Cometa Drive Goodyear, AZ 85338 WABASH FOODS, LLC By ------------------------------------ Title 3500 South La Cometa Drive Goodyear, AZ 85338 Grantors' Tax ID # 86-0786101 Address for Secured Party : U.S. Bancorp Republic Commercial Finance, Inc. 2338 Central Avenue NE, Suite 200 Minneapolis, MN 55418 Fax: (612) 782-1801 16 EX-10.51 7 COMMERCIAL LEASE COMMERCIAL LEASE WABASH FOODS, LLC 1. PARTIES. This Lease, dated, for reference purposes only, is made by and between American Pacific Financial Corporation, (herein called "Landlord" and, Wabash Foods, LLC, a Delaware Limited Liability Company, (herein called "Tenant"). 2. PREMISES. Landlord does hereby lease to Tenant and Tenant hereby leases from Landlord that certain space (herein called "Premises", containing approximately 135,000 square feet of floor area and non-exclusive use of all common areas. The location and dimensions of said Premises is 705 W. Dustman Road. Said Premises are located in the City of Bluffton, County of Wells, State of Indiana. 3. USE. Tenant shall use the Premises for a snack food manufacturing and shall not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord. 4. TERM. The term of this Lease shall be for twenty years, commencing on May 1, 1998 (the "Commencement Date") and, unless sooner terminated as hereinafter provided, ending on April 30, 2018, (the Expiration Date"). Tenant shall have the option to extend this lease for two additional five (5) year periods. The lease rate for the first year shall be fifteen thousand and no/100 dollars ($15,000.00) per month. The lease rate for the second year shall be seventeen thousand five hundred and no/100 dollars ($17,500.00 plus the percentage difference between the CPI (consumer price index) for Indiana, adjusted annually from the Commencement date. The lease rate for the third year and extended period shall be twenty thousand and no/100 dollars ($20,000.00) per month plus the percentage difference between the CPI (consumer price index) for Indiana, adjusted annually from the Commencement date to the extension date and annually thereafter. 5. MINIMUM RENT. 5.A. For the first year, Tenant agrees to pay to Landlord as Minimum Rent, without notice or demand, the monthly sum of fifteen thousand and no/100 dollars ($15,000.00). For the second year, Tenant agrees to pay to Landlord as Minimum Rent, without notice or demand, the monthly sum of seventeen thousand five hundred and no/100 dollars ($17,500.00) plus the percentage difference between the CPI (consumer price index) for Indiana, adjusted annually from the Commencement. For the remainder of the lease, Tenant agrees to pay to Landlord as Minimum Rent, without notice or demand, the monthly sum of twenty thousand and no/100 dollars ($20,000.00) plus the percentage difference between the CPI (consumer price index) for Indiana, adjusted annually from the Commencement date to the extension date and annually thereafter. The appropriate sum for each month, shall be paid, in advance, on or before the first day of each and every successive calendar month thereafter during the term hereof. Rent for any period during the term hereof which is for less than one (1) month shall be a prorated portion of the monthly installment herein, based upon a thirty (30) day month. Said rental shall be paid to Landlord, without deduction or offset, in lawful money of the United States of America, at such place as Landlord may from time to time designate in writing. 6. ADDITIONAL CHARGES. 6.A. In addition to the Minimum Rent provided in Article 5, and commencing upon Landlord's delivery to Tenant of the Premises, Tenant shall pay to Landlord Tenant's Share of Operating Expenses. "Tenant's Share of Operating Expenses" shall be the proportion derived by dividing the rentable floor area of the Premises by the total rentable floor area. 6.B. As used in this Lease, "Operating Expenses" shall mean any and all costs, charges, expenses and disbursements of every kind and nature which Landlord shall pay or become obligated to pay because of or in connection with the ownership, operating, management, maintenance and repair of the Snack Plant, computed on the cash basis (except as to taxes, as to which the accrual basis shall be used), including, but not limited to, the cost or charges for the following items: electricity, water, fuel, trash removal, sweeping, snow removal, premiums for fire, extended coverage liability, rental value and any other insurance that Landlord deems necessary, interior and exterior maintenance and repairs (ordinary and extraordinary, structural and nonstructural), including repairs, replacements, resurfacing and restriping as may be applicable, of sidewalks, driveways, parking areas, landscaping, and other areas used in common by tenants of the Snack Plant, management fees (if Landlord manages the Snack Plant itself, an amount shall be included for management fees not exceeding the amount typically charged by independent management companies in the Bluffton area for buildings of comparable size and quality), and all general and special real estate taxes, special assessments, special district of improvement district assessments, water taxes, sewer taxes, gross rents taxes and all other taxes, charges, rates, levies and assessments of whatever mature levied, assessed or collected by any governmental or quasi-governmental 1 authority (whether now existing or hereafter created) upon or with respect to the Snack Plant or landlord's ownership or operation thereof, and all taxes or charges imposed in lieu of (or in lieu of any increases in) any such taxes. 6.C. Landlord shall, prior to the beginning of each calendar year (or upon Landlord's delivery of the Premises to Tenant as to the year in which such delivery occurs, furnish Tenant with a bona fide estimate of the Operating Expenses for such calendar year and Tenant's Share of Operating Expenses for such year; provided, however, that such estimate shall not constitute any representation or assurance by Landlord of the amount that the actual Operating Expenses for such year will be. Thereafter, Tenant shall pay to Landlord, on the first day of each month, together with payments of Minimum Rent, one- twelfth (1/12th) of Landlord's estimate of Tenant's Share of Operating Expenses for that calendar year. Landlord may revise such estimate at any time to more accurately reflect estimated Operating Expenses and an appropriate adjustment of payments thereafter due from Tenant shall be made. Landlord shall each year provide Tenant's a statement of the actual Operating Expenses for the prior calendar year and a calculation of Tenant's Share of Operating Expenses for such year, but Landlord's failure to provide such statement by any particular date shall not constitute a waiver by Landlord of its right to receive payment for Tenant's Share of Operating Expenses for such year or for any succeeding year. If Tenant's Share of Operating Expenses for such year is greater than the estimated amounts previously paid by Tenant for such year, Tenant shall pay to Landlord the full amount of such excess within ten (10) days after Landlord's rendering of the statement of such amount. If Tenant's Share of Operating Expenses for such year is less than the estimated amounts previously paid by Tenant for such year, Tenant shall receive a refund of the overpayment. 6.D. Tenant shall give Landlord written notice of any dispute or disagreement (with Tenant's reason therefore state) concerning Operating Expenses or Tenant's share thereof for any calendar year, within thirty (30) days after receipt of notice from Landlord of the matter giving rise to the dispute, failing which Tenant shall have waived its right to dispute such matter. If tenant timely disputes any determination or calculation concerning Operating Expenses or Tenant's share thereof, a certified public accounting firm acceptable to Landlord and Tenant shall be final and conclusive. Tenant shall pay the fees and expenses of the accountants unless the final determination discloses an error which favors Landlord by more than five percent of the amount previously determined by Landlord. If such determination reveals that the amount previously determined by Landlord was incorrect, a correction shall be made and either Landlord shall promptly return to Tenant any overpayment or Tenant shall promptly pay to Landlord any underpayment which was based on such incorrect amount. Notwithstanding the tendency of any dispute hereunder, Tenant shall make payments based upon Landlord's determination or calculation until such determination or calculation has been established hereunder to be incorrect. 7. USES PROHIBITED. Tenant shall not do or permit anything to be done in or about the premises nor bring or keep anything therein which will in any way increase the existing rate of or affect any fire or other insurance upon the Building or any of its contents, or cause a cancellation of any insurance policy covering said Building or as, part thereof or any of its contents. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights or other tenants or occupants of the Building or injure or annoy them or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, or about the Premises. Tenant shall not commit or allow to be committed any waste in or upon the Premises. 8. COMPLIANCE WITH LAW. Tenant shall not use the Premises, or permit anything to be done in or about the Premises, which will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force and with the requirements of any board of fire underwriters or other similar bodies now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises, excluding structural changes not reacted to or affected by Tenant's improvements or, acts. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any law, statute, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between the Landlord and Tenant. 9. ALTERATIONS AND ADDITIONS. Tenant shall not make or allow to be made any alterations, additions or improvements to or of the Premises or any part thereof without the written consent of Landlord first having been obtained, and any alterations, additions or improvements to or of said Premises, including, but not limited to, wall covering, paneling and built-in cabinet work, but excepting movable furniture and trade fixtures, shall at once become a part of the realty and belong to the Landlord and shall be surrendered with the Premises. In the event Landlord consents to the making of any alterations, additions or improvements to the premises by Tenant, the same shall be made by Tenant at Tenant's sole cost and expense. Upon the expiration or sooner termination of the term hereof, Tenant shall, upon written demand by Landlord, given at least thirty (30) days prior to the end of the term, at Tenant's sole cost and expense, forthwith and with all due diligence, remove any alterations, 2 additions, or improvements made by Tenant, designated by Landlord to be removed, and Tenant shall, forthwith and with all due diligence at its sole cost and expense, repair and damage to the Premises caused by such removal. 10. REPAIRS. 10.A. By entry hereunder, Tenant shall be deemed to have accepted the Premises as being in good, sanitary order, condition and repair. Tenant shall, at Tenant's sole cost and expense, keep the Premises and every part thereof in good condition and repair (except as hereinafter provided with respect to Landlord's obligations) including without limitation, the maintenance, replacement and repair of any storefront, doors, window casements, glazing, plumbing, pipes, electrical wiring and conduits. Tenant shall, upon the expiration or sooner termination of this Lease hereof, surrender the Premises to the Landlord in good condition, broom clean, ordinary wear and tear and damage from causes beyond the reasonable control of the Tenant excepted. Any damage to adjacent premises caused by Tenant's use of the Premises shall be repaired at the sole cost and expense of Tenant. 10.B. Notwithstanding the provisions of Article ll.A hereinabove, Landlord shall repair and maintain the structural portions of the Building, including the exterior walls and roof, unless such maintenance and repairs are caused in part or in whole by the act, neglect, fault or omission of any duty by the Tenant, its agents, servants, employees, invitees, or any damage caused by breaking and entering, in which case Tenant shall pay to Landlord the reasonable cost of such maintenance and repairs. Landlord shall, at Tenant's expense, provide routine maintenance, including periodic cleaning and changing of filters for the air conditioning/heating unit for the Premises and Landlord may enter into a maintenance service agreement for such unit, Landlord also shall, at Tenant's expense, provide any repairs required for such unit, within a reasonable time after Landlord has received written notice from Tenant of the need for such repairs. Tenant shall pay Landlord, promptly upon billing, for all costs of maintenance and repair of such unit. No failure of such unit shall entitle Tenant to any damages or abatement of rent or in any way modify any of Tenant's obligations under this lease. Landlord shall not be liable for any failure to make any repairs or to perform any maintenance required by this Article ll.B. unless such failure shall persist for an unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. Except as provided in Article 25 hereof, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Premises or in or to fixtures, appurtenances and equipment therein. Tenant waives the right to make repairs at Landlord's expense under any law, judicial decision, statute or ordinance now or hereinafter in effect. 11. LIENS. Tenant shall keep the Premises and the property in which the Premises are situated free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant. Landlord may require, at Landlord's sole option, that Tenant shall provide to Landlord, at Tenant's sole cost and expense, a lien and completion bond in an amount equal to one and one-half (1 1/2) times the estimated cost of any improvements, additions, or alterations in the Premises which the Tenant desires to make, to insure Landlord against any liability for mechanics' and material men's liens and to insure completion of the work. 12. ASSIGNMENT AND SUBLETTING. Tenant shall not either voluntarily, or by operation of law, assign, transfer, mortgage, pledge, hypothecate or encumber this Lease or any interest therein, and shall not sublet the Premises or any part thereof, or any right or privilege appurtent thereto, or allow any other person (the employees, agents, servants and invitees of Tenant excepted) to occupy or use the Premises, or any portion thereof, without the written consent of Landlord first had and obtained, which consent shall not be unreasonably withheld. In no event shall any subtenant, assignee, or other transferee use, or be allowed to use, the Premises for any purpose other than the specific purpose set forth in Article 3 above, and Landlord shall be deemed to have acted reasonably in refusing to consent to any sublease, assignment or transfer involving any change in the purpose for which the Premises are or will be used. A consent to one assignment, subletting, occupation or use by any other person shall not be deemed to be a consent to any subsequent assignment, subletting, occupation or use by another person. Consent to any assignment, subletting, occupation or use shall in no way relieve Tenant of any liability under this Lease and Tenant shall remain fully liable for the payment of the rent under this Lease and the performance of the terms and provisions of this Lease and Landlord shall not be required to pursue first any remedies for default it may have against any subtenant, assignee or other transferee. Any assignment or subletting without such consent shall be void, and shall constitute a default under the terms of this lease. If Landlord Shall consent to a sublease or assignment, Tenant shall pay Landlord reasonable fees, not to exceed, incurred in connection with the processing of documents necessary to giving of such consent. 13. HOLD HARMLESS. Tenant Shall indemnify and hold harmless Landlord against and from any and all claims arising from Tenant's use of the Premises or from the conduct of its business or from an activity, work, or other things done, permitted or suffered by the Tenant in or about the Premises, and shall further indemnify and hold harmless Landlord against and from any and all claims arising from any breach or default in the performance of any obligation of Tenant's part to be performed under the terms of this Lease, or arising from any act or negligence of the Tenant, or any officer, agent, employee, guest, or invitee of 3 Tenant, and from all costs, attorney's fees, and liabilities incurred in or about the defense of Any such claim or any action or proceeding brought thereon and in case any action or proceeding be brought against Landlord by reason of such claim, Tenant upon notice from Landlord shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. Tenant as a material part of the consideration to Landlord hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises, from any cause other than Landlord's negligence, and Tenant hereby waives all claims in respect thereof against Landlord. Landlord or its agents shall not be liable for any loss or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Building or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or from any other place resulting from dampness or any other cause whatsoever, unless caused by or due to the negligence of Landlord, its agents servants or employees. Landlord or its agents shall not be liable for interference with the light, air, or for any latent defect in the Premises. Tenant shall give prompt notice to Landlord in case of casualty or accidents in the Premises. 14. SUBROGATION. As long as their respective insurers so permit, Landlord and Tenant hereby mutually waive their respective rights of recovery against each other for any loss insured by fire, extended coverage and other property insurance policies existing for the benefit of the respective parties. Each party shall apply to their insurers to obtain said waivers. Each party shall obtain any special endorsements, if required by their insurer to evidence compliance with the aforementioned waiver. 15. LIABILITY INSURANCE. Tenant shall, Tenant's expense, obtain and keep in force during the term of this Lease a policy of comprehensive public liability insurance insuring Landlord and Tenant against any liability arising out of the ownership, use occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be in the amount of not less than $500,000 combined single limit for death, personal injury and property damage. The limit of any such insurance shall not, however, limit the liability of the Tenant hereunder. Tenant may provide this insurance under a blanket policy, provided that said insurance shall have a Landlord's protective liability endorsement attached thereto. If Tenant shall fail to procure and maintain said insurance, Landlord may, but shall not be required to, procure and maintain same, but at the expense of Tenant. Insurance required hereunder shall be in companies rated A+AAA or better in "Best's Insurance Guide". Tenant shall deliver to Landlord, prior to right of entry, copies of policies of liability insurance required herein or certificates evidencing the existence and amounts of such insurance with loss payable clauses satisfactory to Landlord. No policy shall be cancelable or subject to reduction of coverage. All such policies shall be written as primary policies not contributing with and not in excess of coverage which Landlord may carry. 16. UTILITIES. Tenant shall pay for all water, gas, heat, light, power, sewer charges, telephone service and all other services and utilities supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Tenant, Tenant shall pay a reasonable proportion to be determined by Landlord of all charges jointly metered with other Premises. If separately metered, all utility meters for the Premises shall be placed in Tenant's name on the Commencement date . 17. PERSONAL PROPERTY TAXES. Tenant shall pay or cause to be paid, before delinquency any and all taxes levied or assessed and which become payable during the term hereof upon all Tenant's leasehold improvements, equipment, furniture, fixtures and other personal property located in the Premises. In the event any or all of the Tenant's leasehold improvements, equipment, furniture, fixtures and other personal property shall be assessed and taxed with the real property, Tenant shall pay to Landlord its share of such taxes within ten (10) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's property. 18. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the rules and regulations that Landlord shall from time to time promulgate and/or modify. The rules and regulations shall be binding upon the Tenant upon delivery of a copy of them to Tenant. Landlord shall not be responsible to Tenant for the nonperformance of any said rules and regulations by any other tenants or occupants. 19. HOLDING OVER. If Tenant remains in possession of the Premises or any part thereof after the expiration of the term hereof with the express written consent of Landlord, such occupancy shall be a tenancy from month to month at a rental in, the amount of one and one-half (1 1/2) times the last Monthly Minimum Rent, plus all other charges payable hereunder, and upon all the terms hereof applicable to a month to month tenancy . 20. ENTRY BY LANDLORD. Landlord reserves, and shall at any and all times have the right to enter the Premises to inspect the same, to submit said Premises to prospective purchasers or tenants, to post notices of non-responsibility, to repair the Premises and any portion of the Building of which the Premises are a part that Landlord may deem necessary or desirable, without abatement of rent, and may for that purpose erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, always providing that the entrance to the Premises shall not be blocked thereby, and 4 further providing that the business of the Tenant shall not be interfered with unreasonably. Tenant hereby waives any claim for damages or for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, excluding Tenant's vaults, safes and files, and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency, in order to obtain entry to the Premises without liability to Tenant except for any failure to exercise due care for Tenant's property and entry to the Premises obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises or any portion thereof. 21. TENANT'S DEFAULT. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant. 21.A. The vacating or abandonment of the Premises by Tenant. 21.B. The failure by Tenant to make any payment of rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof by Landlord to Tenant. 21.C. The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by the Tenant, other than described in Article 22.B. above, where such failure shall continue for a period of thirty (30) days after written notice hereof by Landlord to Tenant; provided, however, that if the nature of Tenant's default is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. 21.D. The making by Tenant of any general assignment or general arrangement for the benefit of creditors; or the filing by or against Tenant of a petition to have Tenant judged as bankrupt, or petition or reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); or the appointment of a trustee or a receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged in thirty (30) days. 22. REMEDIES. If Tenant shall default under this Lease, Landlord shall have the following rights and remedies, in addition to all other remedies at law or equity, and none of the following, whether or not exercised by Landlord, still preclude the exercise of any other right or remedy whether herein set forth or existing at law or equity: 22.A. Landlord shall have the right to terminate this Lease by giving Tenant written notice at any time, whereupon this Lease shall terminate on the date specified in such notice and Tenant shall immediately surrender possession of the Premises to Landlord. No act by or on behalf of Landlord, such as entry of the Premises to perform maintenance and repairs are efforts to relet the Premises, other than giving Tenant written notice of termination, shall terminate this lease. If this Lease is terminated, Landlord shall be entitled to recover forthwith from Tenant as damages an amount equal to the total of: (1) all rent and other sums due and unpaid at the time of termination, plus interest hereon at the rate specified in Article 23.D; and (2) the amount of rent and all other sums that would have been payable hereunder if the Lease had not been terminated, less the net proceeds, if any, of any reletting of the Premises, after deducting all Landlord's expenses in connection with such reletting, including, but not limited to, all repossession costs, brokerage commissions, tenant inducements, legal expenses, attorney's fees, and alteration, remodeling and repair costs, which damages Tenant shall pay to Landlord on the days on which the rent and other sums would have been payable if the Lease had not terminated, or, alternatively, at Landlord's option, an amount equal to the present value (discounted at the rate of 6% per annum) of the amount by which the rent and other sums payable for the remainder of the stated Lease term after the termination date exceeds the amount of such loss for the same period that Tenant proves could be all of Landlord's expenses incurred in reletting (or attempting to relet) the Premises; including, but without limitation, the expenses enumerated above; and (3) all of Landlord's expenses incurred in repossessing the Premises and all other amounts necessary to compensate Landlord fully for- all damage caused by Tenant's default. 22.B. Landlord may, without demand or notice, re-enter and take possession of the Premises or any part thereof, and repossess the same as of Landlord's former estate and expel Tenant and those claiming through or under Tenant, and remove the effects of any and all such persons (forcibly, if necessary) without being deemed guilty of any manner of trespass and without prejudice to any remedies for arrears of rent or preceding breach of covenants. If Landlord elects to so re-enter or if Landlord takes possession pursuant to legal proceedings or pursuant to any notice provided for by law, Landlord may, from time to time, without terminating this Lease, relet the Premises or any part thereof for such term or terms and at such rental or rentals, and upon such other conditions as 5 Landlord may in its absolute discretion deem advisable, with the right to make alterations and repairs to the Premises. No such re-entry, repossession or reletting of the Premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of termination is given to Tenant by Landlord. No such re-entry, repossession or reletting of the Premises shall relieve Tenant of its liability and obligation under this Lease, all of which shall survive such re-entry, repossession or reletting. Upon the occurrence of such re-enters or repossession, Landlord shall be entitled to the amount of the monthly rent, and all other sums, which would be payable hereunder if such re-entry or repossession had not occurred, less the net proceeds, if any, of any reletting of the Premises after deducting all of Landlord's expenses in connection with such reletting, including, but not limited to, the expenses enumerated in 23.A. above. Tenant shall pay such amounts to Landlord on the days on which the rent and other sums due hereunder would have been payable hereunder if possession had not been retaken. If this Lease is terminated as a result of Landlord's actions in retaking possession of the Premises or otherwise, Landlord shall be entitled to recover damages from Tenant as provided in 23.A. above. 22.C. Landlord shall have the right to recover from Tenant the rents and damages provided for above by suit or suits brought from time to time without Landlord being required to wait until the expiration of the lease term, or if this Lease is terminated, the date on which such expiration would hove occurred. Landlord may, but shall not be obligated to, cure, at any time, without notice, any default by Tenant under this Lease; whenever Landlord so elects, all costs and expenses incurred by Landlord in curing a default, including, without limitation, reasonable attorney's fees, together with interest on the amount of costs and expenses so incurred at the rate specified in Article 23.D. shall be paid by Tenant to Landlord on demand, and shall be recoverable as additional rent. No such payment or expenditure by Landlord shall be deemed a waiver of Tenant's default nor shall it affect any other remedy of Landlord by reason of such default. As used in this Lease, the term "re-enter", "take possession", "repossess" and "repossession" are not restricted to their technical legal meaning. In no event shall Tenant be entitled to receive the excess, if any, of net rent collected by Landlord as a result of any reletting of the Premises over the sums payable by Tenant hereunder. 22.D. If any rent or other sums due from Tenant are not received by Landlord within ten (10) days after due, such sums shall bear interest at the rate of 2% per month from the due date until paid. In addition, if any rent or other sums due from Tenant is not received by Landlord within ten (10) days after due, Tenant shall pay to Landlord a late charge equal to 10% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of late payment by Tenant, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting costs, and late charges which may be imposed upon Landlord under any mortgage or deed of trust covered the Premises, Acceptance of any late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any other rights and remedies. 22.E. If it should be unnecessary for Landlord to employ an attorney to enforce any of the provisions of this Lease, to collect any unpaid sum, or to recover possession of the Premises, Tenant agrees to pay all of Landlord's attorney's fees and costs reasonably incurred, whether or not suit is filed. If Landlord shall prevail in any action or proceeding brought as either party against the other under this Lease, Tenant agrees to pay all of Landlord's attorney fees and costs reasonably incurred. 23. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event later than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligation; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for performance then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. In no event shall Tenant have the right to terminate this Lease as a result of Landlord's default and Tenant's remedies shall be limited to damages and/or an injunction. 24. RECONSTRUCTION. In the event the Premises are damaged by fire or other perils covered by extended coverage insurance, Landlord agrees to forthwith repair same, and this Lease shall remain in full force and effect, except that Tenant shall be entitled to a proportionate reduction of the Minimum Rent from the date of damage and while such repairs are being made, such proportionate reduction to be based upon the extent to which the damage and making of such repairs shall reasonably interfere with the business carried on by the Tenant in the Premises. If the damage is due to the fault or neglect of Tenant or its employees, there shall be no abatement of rent. In the event the Premises are damaged as a result of any cause other than the perils covered by fire and extended coverage insurance, then Landlord shall forthwith repair same, provided the extent of the destruction be less than ten (10%) percent of the then full replacement cost of the Premises. In the event the destruction of the Premises is to an extent of ten (10%) percent or more of the replacement cost then Landlord shall have the option: (1) to repair or restore such damage, this Lease continuing in full force and effect, but the Minimum Rent to be proportionately reduced as hereinabove in this Article provided; or (2) give notice to Tenant at 6 any time within sixty (60) days after such damage, terminating this Lease as of the date specified in such notice, which date shall be no more than thirty (30) days after giving of such notice. In the event of giving such notice, this lease shall expire and all interest of the Tenant in the Premises shall terminate on the date so specified in such notice and the Minimum Rent, reduced by a proportionate reduction, based upon the extent, if any, to which such damage interfered with the business carried on by the Tenant in the Premises, shall be paid up to date of said such termination. Notwithstanding anything to the contrary contained in this Article, Landlord shall not have any obligation whatsoever to repair, reconstruct or restore the Premises when the damage resulting from any casualty covered under this article occurs during the last twenty-four months of the term of this Lease or any extension thereof. Landlord shall not be required to repair any injury or damage by fire or other cause, or to make any repairs or replacements of any leasehold improvements, fixtures, or other personal property of Tenant. 25. EMINENT DOMAIN. If more than twenty-five (25%) percent of the Premises shall be taken or appropriated by the public or qwasi-public authority under the power of eminent domain, either party hereto shall have the right, at its option, within sixty (60) days after said taking, to terminate this lease upon thirty (30) days written notice. If either less than or more than twenty-five (25%) percent of the Premises are taken (and neither party elects to terminate as herein provided), the Minimum Rent thereafter to be paid shall be equitably reduced. If any part of the Snack Plant other than the Premises may be so taken or appropriated, Landlord shall within 60 days of said taking have the right at its option to terminate this Lease upon written notice to Tenant. In the event of any taking or appropriation whatsoever, Landlord shall be entitled to any and all awards and/or settlements which may be given and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease. 26. TENANT 'S STATEMENT. Tenant shall at any time and from time to time upon no less than three days prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing (R) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease us so modified is in full force and effect), and the date to which the rental and other charges are paid in advance, if any, and (b) acknowledging that there are not, to Tenant's knowledge, may incurred defaults on the part of the Landlord hereunder, or specifying such defaults if any are claimed, and (c) setting forth the date of commencement of rents and expiration of the term hereof. Any such statement may be relied upon by any prospective purchaser or encumbrances of all or any portion of the real property of which the Premises are a part. 27. PARKING AND COMMON AREAS. Landlord covenants that upon completion of the Snack Plant an area approximately equal to the common and parking areas as shown on the attached Exhibit "A" shall be at all times available for the non-exclusive use of Tenant during the full term of this Lease or any extension of the term hereof, provided that the condemnation of other taking by any public authority, or sale in lieu of condemnation, of any or all such common and parking areas shall not constitute a violation of this covenant. Landlord reserves the right to change the entrances, exits, traffic lanes and boundaries and locations of such parking area or areas, provided, however, that anything to the contrary notwithstanding contained in the Article 28, said parking area or areas shall at all times be substantially equal or equivalent to that shown on attached Exhibit "A". 27.A. Prior to the date of Tenant's opening for business in the Premises, Landlord shall cause said common and parking area or areas to be graded, surfaced, marked and landscaped at no expense to Tenant. 27.B. The Landlord shall keep said automobile perking and common areas in a neat, clean and orderly condition, and shall repair any damage to the facilities thereof, but all expenses in connection with said automobile parking and common areas shall be charged and prorated in the manner as set forth in Article 7 hereof. 27.C. Tenant, for the use and benefit of Tenant, its agents employees, customers, licensees and subtenants, shall have the non-exclusive right in common with Landlord, and other present and future owners, tenants and their agents, employees, customers, licensees and subtenants, to use said common and parking areas during the entire term of this Lease, and any extension thereof, for ingress and egress, and automobile parking. 27.D. The Tenant, in the use of said common and parking areas, agrees to comply with such reasonable rules, regulations and charges for parking as the Landlord may adopt from time to time for the orderly and proper operations of said common and parking area. Such rules may include but shall not be limited to the following: (1) The restricting of employee parking to a limited, designated area or areas; and (2) The regulations of the removal, storage and disposal of Tenant's refuse and other rubbish at the sole cost and expense of Tenant. 7 28. AUTHORITY OF PARTIES. 28.A. Corporate Authority. If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the board of directors of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. 28.B. Limited Partnerships. If the Landlord herein is a limited partnership, it is understood and agreed that any claims by Tenant on Landlord shall be limited to the assets of the limited partnership and furthermore, Tenant expressly waives any and all rights to proceed against the individual partners, or the officers, directors or shareholders of any corporate partner, except to the extent of their interest in said limited partnership. 29. SIGNS. On or before the date Tenant opens the Premises for business, Tenant shall erect one sign on the front of the Premises, such sign to be in accordance with a design to be prepared by Tenant and approved in writing by Landlord. Such sign must conform to the sign criteria attached hereto and incorporated herein. Except for such sign, Tenant shall not affix, attach, install, paint or otherwise place any signs, advertising placards, names, insignia, trademarks or other material upon the exterior walls of the Premises without the express prior written approval of Landlord in each instance. Anything in this Lease to the contrary notwithstanding, Tenant shall never affix any sign or other material to the roof. Landlord may, at any time and at Tenant's expense, remove any unapproved or unauthorized sign or other material, and Landlord's failure to do so at any particular time shall never constitute a waiver of Landlord's right to do so at a later time. 30. HOURS OF BUSINESS. Subject to the provisions of Article 25 hereof, Tenant shall continuously during the entire term hereof conduct and carry on Tenant's business in the premises and shall keep the Premises open for business and cause Tenant's business to be conducted therein during the usual business hours of each and every business day as is customary for business of like character in the city in which the Premises are located to be open for business; provided, however, that this provision shall not apply if the Premises should be closed and the business of Tenant temporarily discontinued therein on account of strikes, lockouts or similar causes beyond the reasonable control of Tenant or closed for not more than three (3) days out of respect to the memory of any deceased officer or employee of Tenant, or the relative or any such officer or employee. Tenant shall keep the Premises adequately stocked with merchandise, and with sufficient sales personnel to care for the patronage, and to conduct said business in accordance with solid business practice. 31. GENERAL PROVISIONS. (i) Plats and Riders. Clauses, plats, riders and addendums, if any, affixed to this Lease are a part hereof. (ii) Waiver. The Waiver by Landlord of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or conditions or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding default by Tenant or any term, covenant or condition of this Lease, other than the failure of the Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding default at the time of the acceptance of such rent. (iii) Joint Obligation. If there be more than one Tenant the obligations hereunder imposed shall be joint and several. (iv) Marginal Headings. The Marginal headings and article titles to the articles of this Lease are not a part of this Lease and shall have no effect upon the construction of interpretation of any part hereof. (v) Time. Time is of the essence of this Lease and each and all of its provisions in which performance is a factor. (vi) Successors and Assignees. The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto. (vii) Recordation. Tenant shall not record this Lease. Tenant shall execute a short form memorandum hereof at the request of Landlord. (viii) Quiet Possession. Upon Tenant paying the rent reserved hereunder and observing and performing all of the covenants, conditions and provisions of Tenant shall have quiet possession of the Premises for the entire term hereof, subject to all the provisions of this Lease. 8 (ix) Lender's Approval. This Lease is subject to the approval of the lender furnishing the loan for the Snack Plant. If such lender disapproves this Lease within ten (10) days after the execution hereof, Landlord may cancel this Lease, without any liability whatsoever, by written notice of cancellation given to Tenant within five (5) days thereafter. (x) Prior Agreements. This lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in the Lease, and no prior agreements or understanding pertaining to any such matters shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on any party until fully executed by both parties hereto. (xi) Inability to Perform. This Lease and the obligations of the Tenant hereunder shall not be affected or impaired because the Landlord is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of strike, labor troubles, acts of God, or any other cause beyond the reasonable control of the Landlord. (xii) Partial Invalidity. Any provision of this Lease which shall prove to be invalid, void, or illegal shall in no way affect, impair or invalidate any other provision hereof and such other provision shall remain in full force and effect. (xiii) Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, whenever possible, be cumulative with all other remedies at law or in equity. (xiv) Choice of Law. This Lease shall be governed by the laws of the State in which the Premises are located. (xv) Sale of Premises by Landlord. In the event of any sale of the Premises by Landlord, Landlord shall be and is hereby entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease arising out of any act, occurrence or omission occurring after the consummation of such sale; and the purchaser, at such sale or any subsequent sale of the Premises shall be deemed, without any further agreement between the parties and any such purchaser to have assumed and agreed to carry out any and all of the covenants and obligations of the Landlord under this Lease. (xvi) Subordination; Attornment. This Lease, including the covenant of quiet enjoyment, is and shall be subject and subordinate to all ground and underlying leases, all mortgages, deeds of trust or other encumbrances, and any and all conditions, renewals, extensions, modifications, consolidations and replacements of any or all of the foregoing, now or hereafter affecting such leases or Premises of the real property of which the Premises are a part (except to the extent any such instrument shall expressly provide that this Lease is superior thereto). This clause shall be self-operative and no further instrument of subordination shall be required in order to effectuate it. Nevertheless, Tenant shall, within five (5) days after request therefore, execute and deliver any certificate or other assurance in confirmation of such subordination requested by any lessor, mortgagee or by Landlord. In the event any proceedings are brought for default under any ground or underlying lease or for the foreclosure of, or in the event of the exercise of the power of sale under, any mortgage, deed of trust or other encumbrance to which this Lease is subject and subordinate, Tenant shall, upon request of the party succeeding to the interest of Landlord as a result of such proceedings, automatically attorn to and become the Tenant of such successor in interest without change in the terms of this Lease. Tenant shall, within five (5) days after request therefore, execute and deliver any instruments confirming such attornment requested by Landlord or such successor in interest. Tenant hereby irrevocably appoints Landlord, its successors and assigns as Tenant's attorney-in-fact to execute and deliver any certificates or other assurances of subordination and/or attornment required by this Article, for and on behalf of Tenant, if Tenant fails to do so as provided herein. The provisions of this Article to the contrary notwithstanding, and so long as Tenant is not in default hereunder, this Lease shall remain in full force and effect for the full term thereof. (xvii) Notices. All notices and demands which may or are to be required or permitted to be given by either party on the other hereunder shall be in writing. All notices and demands by the Landlord to the Tenant shall be sent by United States Mail, postage prepaid, addressed to the Tenant at the Premises, and to the address hereinbelow, or to such other place as Tenant may from time to time designate in a notice to the Landlord. All notices and demands by the Tenant to the Landlord shall be sent by United States Mail postage prepaid, addressed to the Landlord at the address set forth herein, and to such other person or place as the Landlord may from time to time designate in a notice to the Tenant. To LANDLORD at: 225 W. Hospitality, San Bernardino, CA 92408 To TENANT at: 705 W. Dustman Road, Bluffton, Indiana 9 31. BROKERS. Tenant warrants that it has had no dealings with any real estate broker or agents in connection with the negotiation of this Lease. LANDLORD: American Pacific Financial Corporation BY: ------------------------------------- Bradley J. Crandall, Vice President TENANT: Wabash Foods, LLC BY: ------------------------------------- Larry R. Polhill, Manager 10 EX-21.1 8 SUBSIDIARIES LIST OF SUBSIDIARIES OF POORE BROTHERS, INC. Name of Subsidiary State of Incorporation/Formation ------------------ -------------------------------- Poore Brothers of Arizona, Inc. Arizona Poore Brothers Distributing, Inc. Arizona Poore Brothers of Texas, Inc. Texas La Cometa Properties, Inc. Arizona Tejas PB Distributing, Inc. Arizona Wabash Foods, LLC Delaware EX-27.1 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 U.S. DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 104,364 0 3,471,394 206,353 1,221,412 325,146 15,586,846 1,908,713 26,073,980 4,135,877 10,680,840 0 0 132,220 11,125,043 26,073,980 23,275,543 23,275,543 17,568,425 17,568,425 4,763,896 0 749,750 193,472 0 193,472 0 (47,601) (71,631) 74,240 0.01 0.01
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