10QSB 1 e-5681.txt QUARTERLY REPORT FOR THE PERIOD ENDED 09/30/2000 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2000 OR [ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number 1-14556 POORE BROTHERS, INC. ----------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 86-0786101 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3500 S. La Cometa Drive, Goodyear, Arizona 85338 ------------------------------------------------ (Address of principal executive offices) (623) 932-6200 --------------------------- (Issuer's telephone number) Check whether the Registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of September 30, 2000, the number of issued and outstanding shares of common stock of the Registrant was 14,117,384. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] ================================================================================ TABLE OF CONTENTS PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated balance sheets as of September 30, 2000 and December 31, 1999............................................ 3 Consolidated statements of operations for the three and nine months ended September 30, 2000 and 1999................ 4 Consolidated statements of cash flows for the nine months ended September 30, 2000 and 1999......................... 5 Notes to consolidated financial statements......................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION............................................ 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS.................................................. 15 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................... 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 15 ITEM 5. OTHER INFORMATION.................................................. 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................... 15 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------ ------------ ASSETS (unaudited) Current assets: Cash ........................................................... $ 227,961 $ 104,364 Accounts receivable, net of allowance of $284,000 and $206,000 in 2000 and 1999 ....................... 3,404,256 3,265,041 Inventories .................................................... 1,500,473 1,221,412 Other current assets ........................................... 598,490 325,146 ------------ ------------ Total current assets ....................................... 5,731,180 4,915,963 Property and equipment, net ...................................... 12,252,308 13,678,133 Intangible assets, net ........................................... 10,193,657 7,198,283 Other assets ..................................................... 224,217 281,601 ------------ ------------ Total assets ..................................................... $ 28,401,362 $ 26,073,980 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ............................................... $ 1,815,695 $ 1,328,720 Accrued liabilities ............................................ 1,133,872 690,931 Current portion of long-term debt .............................. 2,041,065 2,116,226 ------------ ------------ Total current liabilities .................................. 4,990,632 4,135,877 Long-term debt, less current portion ............................. 10,047,644 10,680,840 ------------ ------------ Total liabilities .......................................... 15,038,276 14,816,717 ------------ ------------ Commitments and Contingencies Shareholders' equity: Preferred stock, $100 par value; 50,000 shares authorized; no shares issued or outstanding in 2000 and 1999 .............. -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 14,117,384 and 13,222,044 shares issued and outstanding in 2000 and 1999 .............................................. 141,174 132,220 Additional paid-in capital ..................................... 18,809,558 17,386,827 Accumulated deficit ............................................ (5,587,646) (6,261,784) ------------ ------------ Total shareholders' equity ................................. 13,363,086 11,257,263 ------------ ------------ Total liabilities and shareholders' equity ...................... $ 28,401,362 $ 26,073,980 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) (unaudited) Net revenues ................................... $ 10,713,076 $ 5,514,796 $ 30,960,747 $ 14,435,216 Cost of revenues ............................... 7,966,155 4,083,934 23,059,282 10,747,998 ------------ ------------ ------------ ------------ Gross profit ................................. 2,746,921 1,430,862 7,901,465 3,687,218 Selling, general and administrative expenses ... 2,312,552 1,165,186 6,336,048 3,177,310 ------------ ------------ ------------ ------------ Operating income ............................. 434,369 265,676 1,565,417 509,908 Interest income ................................ -- 7,963 1,016 20,943 Interest expense ............................... (310,038) (162,801) (864,794) (485,236) ------------ ------------ ------------ ------------ Income before income tax provision ........... 124,331 110,838 701,639 45,615 Income tax provision ........................... (10,500) -- (27,500) -- ------------ ------------ ------------ ------------ Income before cumulative effect of a change in accounting principle .............. 113,831 110,838 674,139 45,615 Cumulative effect of a change in accounting principle ..................................... -- -- -- (71,631) ------------ ------------ ------------ ------------ Net income (loss) ............................. $ 113,831 $ 110,838 $ 674,139 $ (26,016) ============ ============ ============ ============ Earnings (loss) per common share: Basic- Income before cumulative effect of a change in accounting principle .............. $ 0.01 $ 0.01 $ 0.05 $ 0.01 Cumulative effect of a change in accounting principle.................................... -- -- -- (0.01) ------------ ------------ ------------ ------------ Net income (loss)............................. $ 0.01 $ 0.01 $ 0.05 $ (0.00) ============ ============ ============ ============ Diluted- Income before cumulative effect of a change in accounting principle ............ $ 0.01 $ 0.01 $ 0.05 $ 0.01 Cumulative effect of a change in accounting principle ................................. -- -- -- (0.01) ------------ ------------ ------------ ------------ Net income (loss)............................. $ 0.01 $ 0.01 $ 0.05 $ (0.00) ============ ============ ============ ============ Weighted average number of common shares: Basic ........................................ 14,103,443 7,832,997 13,641,453 7,832,997 ============ ============ ============ ============ Diluted ...................................... 15,907,222 8,028,843 14,866,827 7,832,997 ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 4 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 2000 1999 ----------- ----------- (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .............................................. $ 674,139 $ (26,016) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of a change in accounting principle......... -- 71,631 Depreciation ................................................. 802,543 447,563 Amortization ................................................. 453,726 213,506 Valuation reserves ........................................... 58,324 77,000 Other non-cash charges ....................................... 197,630 208,374 Change in operating assets and liabilities: Accounts receivable .......................................... (149,754) (677,911) Inventories .................................................. (187,423) (98,656) Other assets and liabilities ................................. (381,723) (205,327) Accounts payable and accrued liabilities ..................... 838,691 89,300 ----------- ----------- Net cash provided by operating activities ............... 2,306,153 99,464 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ............................. (295,020) (185,151) Acquisition and related expenses ............................... (365,542) -- ----------- ----------- Net cash used in investing activities ................... (660,562) (185,151) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock and debt ................ 448,363 -- Payments made on long-term debt ................................ (1,385,078) (461,273) Stock and debt issuance costs .................................. (2,000) -- Net increase (decrease) in working capital line of credit....... (583,279) 432,023 ----------- ----------- Net cash used in financing activities ................... (1,521,994) (29,250) ----------- ----------- Net increase (decrease) in cash .................................. 123,597 (114,937) Cash at beginning of period ...................................... 104,364 270,295 ----------- ----------- Cash at end of period ............................................ $ 227,961 $ 155,358 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the nine months for interest .................. $ 784,206 $ 328,847 Summary of non-cash investing and financing activities: Common stock issued for sales commissions ..................... 50,000 -- Common stock issued for acquisition ........................... 1,235,321 -- Note payable issued for acquisition ........................... 830,000 --
The accompanying notes are an integral part of these consolidated financial statements. 5 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: GENERAL Poore Brothers, Inc. (the "Company"), a Delaware corporation, was organized in February 1995 as a holding company and on May 31, 1995 acquired substantially all of the equity of Poore Brothers Southeast, Inc. ("PB Southeast") in an exchange transaction. The exchange transaction with PB Southeast was accounted for similar to a pooling-of-interests since both entities had common ownership and control immediately prior to the transaction. During 1997, the Company sold its Houston, Texas distribution business and closed its PB Southeast manufacturing operation. In November 1998, the Company acquired the business and certain assets (including the Bob's Texas Style(R) potato chip brand) of Tejas Snacks, L.P. ("Tejas"), a Texas-based potato chip manufacturer. In October 1999, the Company acquired Wabash Foods, LLC ("Wabash") including the Tato Skins(R), O'Boisies(R), and Pizzarias(R) trademarks, and assumed all of Wabash Foods' liabilities. In June 2000, the Company acquired Boulder Natural Foods, Inc. ("Boulder") and the Boulder Potato Company(TM) brand of totally natural potato chips. The Company is engaged in the production, marketing and distribution of specialty salty snack food products that are sold primarily through grocery retail chains in the southwestern United States and through vend distributors across the United States. The Company manufactures and sells salty snack food products, including T.G.I. Friday's(TM) brand snack chips, Poore Brothers(R) and Bob's Texas Style(R) brand batch-fried potato chips, Boulder Chips(TM) brand totally natural potato chips, Tato Skins(R) brand potato snacks, and Pizzarias(R) brand pizza chips, manufactures private label potato chips for grocery store chains, and distributes and merchandises snack food products that are manufactured by others. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Poore Brothers, Inc. and all of its wholly owned subsidiaries. All significant intercompany amounts and transactions have been eliminated. The financial statements have been prepared in accordance with the instructions for Form 10-QSB and, therefore, do not include all the information and footnotes required by accounting principles generally accepted in the United States. In the opinion of management, the consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary in order to make the consolidated financial statements not misleading. A description of the Company's accounting policies and other financial information is included in the audited financial statements filed with the Form 10-KSB for the fiscal year ended December 31, 1999. The results of operations for the nine months ended September 30, 2000 are not necessarily indicative of the results expected for the full year. CHANGE IN ACCOUNTING PRINCIPLE The cumulative effect of a change in accounting principle resulted in a $71,631 charge in the first quarter of 1999 and was related to the Company's expensing of previously capitalized organization costs as required by Statement of Position 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES," which was effective for the Company's fiscal year beginning January 1, 1999. EARNINGS PER SHARE Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Exercises of outstanding stock options or warrants and conversion of convertible debentures are assumed to occur for purposes of calculating diluted earnings per share for periods in which their effect would not be anti-dilutive. 6 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- BASIC EARNINGS PER SHARE: Income before cumulative effect of a change in accounting principle ............................ $ 113,831 $ 110,838 $ 674,139 $ 45,615 =========== =========== =========== =========== Weighted average number of common shares ............ 14,103,443 7,832,997 13,641,453 7,832,997 =========== =========== =========== =========== Earnings per common share ........................... $ 0.01 $ 0.01 $ 0.05 $ 0.01 =========== =========== =========== =========== DILUTED EARNINGS PER SHARE: Income before cumulative effect of a change in accounting principle ........ $ 113,831 $ 110,838 $ 674,139 $ 45,615 =========== =========== =========== =========== Weighted average number of common shares ............ 14,103,443 7,832,997 13,641,453 7,832,997 Incremental shares from assumed conversions- Warrants .......................................... 596,836 96,660 447,333 -- Stock options ..................................... 1,206,943 99,186 778,041 -- ----------- ----------- ----------- ----------- Adjusted weighted average number of common shares.... 15,907,222 8,028,843 14,866,827 7,832,997 =========== =========== =========== =========== Earnings per common share ........................... $ 0.01 $ 0.01 $ 0.05 $ 0.01 =========== =========== =========== ===========
2. LONG-TERM DEBT At September 30, 2000, the Company had outstanding 9% Convertible Debentures due July 1, 2002 (the "9% Convertible Debentures") in the principal amount of $1,354,889 ($495,842 held by Wells Fargo and $859,047 held by Renaissance Capital). The 9% Convertible Debentures are secured by land, buildings, equipment and intangibles. Interest on the 9% Convertible Debentures is paid by the Company on a monthly basis. Monthly principal payments of approximately $5,000 are required to be made by the Company on the Wells Fargo 9% Convertible Debenture through June 2002. In November 1999, Renaissance Capital converted 50% ($859,047) of its Debentures holdings into 859,047 shares of common stock and agreed unconditionally to convert into common stock the remaining $859,047 not later than December 31, 2000. For the period November 1, 1999 through December 31, 2000, Renaissance Capital agreed to waive all mandatory principal redemption payments and to accept 30,000 unregistered shares of the Company's Common Stock and a warrant to purchase 60,000 shares of common stock at $1.50 per share in lieu of cash interest payments. For the period November 1, 1998 through October 31, 1999, Renaissance Capital agreed to waive all mandatory principal redemption payments and to accept 183,263 unregistered shares of the Company's Common Stock in lieu of cash interest payments. 7 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Convertible Debenture Loan Agreement contains covenants requiring the maintenance of certain financial performance criteria, including an interest coverage ratio, minimum working capital of $500,000, a current ratio of 1.1:1 and minimum shareholders' equity. At September 30, 2000, the Company was in compliance with all of the financial ratio requirements. In the event of default, the holders of the 9% Convertible Debentures have the right, upon written notice and after a thirty-day period during which such default may be cured, to demand immediate payment of the then unpaid principal and accrued but unpaid interest under the 9% Convertible Debentures. Management believes that the achievement of the Company's plans and objectives will enable the Company to attain a sufficient level of profitability to remain in compliance with the financial ratios. There can be no assurance, however, that the Company will attain any such profitability and remain in compliance with the financial ratios. Any acceleration under the 9% Convertible Debentures prior to their maturity on July 1, 2002 could have a material adverse effect on the Company. On October 7, 1999, the Company signed a new $9.15 million Credit Agreement with U.S. Bank (the "U.S. Bank Credit Agreement") consisting of a $3.0 million working capital line of credit (the "U.S. Bank Line of Credit"), a $5.8 million term loan (the "U.S. Bank Term Loan A") and a $350,000 term loan (the "U.S. Bank Term Loan B"). Borrowings under the U.S. Bank Credit Agreement were used to pay off the previously existing Wells Fargo Line of Credit and Wells Fargo Term Loan and to refinance existing debt of Wabash Foods, LLC in October 1999, and will also be used for general working capital needs. The U.S. Bank Line of Credit bears interest at an annual rate of prime plus 1% and matures on October 4, 2002. The U.S. Bank Term Loan A bears interest at an annual rate of prime and requires monthly principal payments of approximately $74,000, plus interest, until maturity on July 1, 2006. The U.S. Bank Term Loan B bears interest at an annual rate of prime plus 2.5% and requires monthly principal payments of approximately $29,000, plus interest, until maturity on March 31, 2001. The U.S. Bank Credit Agreement is secured by accounts receivable, inventories, equipment and general intangibles. Borrowings under the line of credit are limited to 80% of eligible receivables and 60% of eligible inventories. At September 30, 2000, the Company had a borrowing base of $2,568,000 and outstanding borrowings of $1,439,000 under the U.S. Bank Line of Credit. The U.S. Bank Credit Agreement requires the Company to be in compliance with certain financial performance criteria, including a minimum cash flow coverage ratio, a minimum debt service coverage ratio, minimum annual operating results, a minimum tangible capital base and a minimum fixed charge coverage ratio. At September 30, 2000, the Company was in compliance with all of the financial covenants. Management believes that the fulfillment of the Company's plans and objectives will enable the Company to attain a sufficient level of profitability to remain in compliance with these financial covenants. There can be no assurance, however, that the Company will attain any such profitability and remain in compliance. Any acceleration under the U.S. Bank Credit Agreement prior to the scheduled maturity of the U.S. Bank Line of Credit or the U.S. Bank Term Loans could have a material adverse effect on the Company. The Company also assumed from Wabash Foods a $715,000 non-interest bearing note payable to U.S. Bank (the "U.S. Bank Term Loan C"); $200,000 has been paid, and the balance has been refinanced and requires monthly payments of approximately $21,000, plus interest at prime plus 2%, until maturity on June 30, 2002. On October 7, 1999, pursuant to the terms of the U.S. Bank Credit Agreement, the Company issued to U.S. Bank a warrant (the "U.S. Bank Warrant") to purchase 50,000 shares of Common Stock for an exercise price of $1.00 per share. The U.S. Bank Warrant is exercisable until October 7, 2004, the date of termination of the U.S. Bank Warrant, and provides the holder thereof certain piggyback registration rights. In connection with the Boulder acquisition (see Note 5), the Company (i) issued a note to the seller in the amount of $830,000 which bears interest at 6.4%, is secured by the Boulder assets acquired, and requires monthly principal and interest payments of approximately $37,000 until maturity on June 15, 2002, (ii) assumed a note to the seller in the amount of $130,000 which bears interest at 6.0% and requires monthly principal and interest payments of approximately $6,000 until maturity on June 15, 2002, and (iii) obtained a term loan from U.S. Bank (the "U.S. Bank Term Loan D") in the amount of $300,000 which bears interest at an annual rate of prime plus 2% and requires monthly principal payments of approximately $12,500, plus interest, until maturity on September 30, 2002. 8 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. LITIGATION The Company is periodically a party to various lawsuits arising in the ordinary course of business. Management believes, based on discussions with legal counsel, that the resolution of any such lawsuits will not have a material effect on the financial statements taken as a whole. 4. BUSINESS SEGMENTS The Company's operations consist of two segments: manufactured products and distributed products. The manufactured products segment produces potato chips and other salted snack food products for sale primarily to snack food distributors. The distributed products segment sells snack food products manufactured by other companies to the Company's Arizona snack food distributors and also merchandises in Texas for a fee, but does not purchase and resell, snack food products for manufacturers. The Company's reportable segments offer different products and services. All of the Company's revenues are attributable to external customers in the United States and all of its assets are located in the United States. The Company does not allocate assets based on its reportable segments. The accounting policies of the segments are the same as those described in the Summary of Accounting Policies included in Note 1 to the audited financial statements filed with the Form 10-KSB for the fiscal year ended December 31, 1999. The Company does not allocate selling, general and administrative expenses, income taxes or unusual items to segments and has no significant non-cash items other than depreciation and amortization.
MANUFACTURED DISTRIBUTED PRODUCTS PRODUCTS CONSOLIDATED ----------- ----------- ----------- THREE MONTHS ENDED SEPTEMBER 30, 2000 Revenues from external customers ......... $ 9,539,900 $ 1,173,176 $10,713,076 Depreciation and amortization in segment gross profit ........................... 247,407 -- 247,407 Segment gross profit ..................... 2,711,824 35,097 2,746,921 THREE MONTHS ENDED SEPTEMBER 30, 1999 Revenues from external customers ......... $ 4,356,556 $ 1,158,240 $ 5,514,796 Depreciation and amortization in segment gross profit ........................... 146,968 -- 146,968 Segment gross profit ..................... 1,351,461 79,401 1,430,862 NINE MONTHS ENDED SEPTEMBER 30, 2000 Revenues from external customers ......... $27,315,146 $ 3,645,601 $30,960,747 Depreciation and amortization in segment gross profit ........................... 767,852 -- 767,852 Segment gross profit ..................... 7,705,774 195,691 7,901,465 NINE MONTHS ENDED SEPTEMBER 30, 1999 Revenues from external customers ......... $11,053,978 $ 3,381,238 $14,435,216 Depreciation and amortization in segment gross profit ........................... 441,657 -- 441,657 Segment gross profit ..................... 3,452,193 235,025 3,687,218
9 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table reconciles reportable segment gross profit to the Company's consolidated income before income taxes and cumulative effect of a change in accounting principle.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Consolidated segment gross profit ................... $2,746,921 $1,430,862 $7,901,465 $3,687,218 Unallocated amounts: Selling, general and administrative expenses ....... 2,312,552 1,165,186 6,336,048 3,177,310 Interest expense, net .............................. 310,038 154,838 863,778 464,293 ---------- ---------- ---------- ---------- Income before income taxes and cumulative effect of a change in accounting principle ................ $ 124,331 $ 110,838 $ 701,639 $ 45,615 ========== ========== ========== ==========
5. ACQUISITION On June 8, 2000, the Company acquired Boulder Natural Foods, Inc., a Colorado corporation, and the business and certain related assets and liabilities of Boulder Potato Company, a totally natural potato chip marketer based in Boulder Colorado. The assets, which were acquired through a newly formed wholly owned subsidiary of the Company, Boulder Natural Foods, Inc., an Arizona corporation, included the Boulder Potato Company(TM) and Boulder Chips(TM) brands, other intangible assets, receivables, inventories and specified liabilities. In consideration for these assets and liabilities, the Company paid a total purchase price of $2,637,000, consisting of: (i) the issuance of 725,252 unregistered shares of Common Stock with a fair value of $1,235,000, (ii) a cash payment of $301,000, (iii) the issuance of a note to the seller in the amount of $830,000 which bears interest at 6.4%, is secured by the Boulder assets acquired, and requires monthly principal and interest payments of approximately $37,000 until maturity on June 15, 2002, and (iv) the assumption by the Company of $271,000 in liabilities, including a note to the seller in the amount of $130,000 which bears interest at 6.0% and requires monthly principal and interest payments of approximately $6,000 until maturity on June 15, 2002. The initial $301,000 cash payment was subsequently financed with the U.S. Bank Term Loan D (see Note 2). In addition, the Company may be required to issue additional unregistered shares of Common Stock to the seller on each of the first, second and third anniversary of the closing of the acquisition. Any such issuances will be dependent upon, and will be calculated based upon, increases in sales of Boulder Potato Company(TM) products as compared to previous periods. The acquisition was accounted for using the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "ACCOUNTING FOR BUSINESS COMBINATIONS." Accordingly, only the results of operations subsequent to the acquisition date have been included in the Company's results. In connection with the acquisition, the Company recorded trademarks of $1,000,000 and goodwill of $1,505,000, which are being amortized on a straight-line basis over 15 and 20 year periods, respectively. Boulder had sales of approximately $0.9 million for the five months ended May 31, 2000. 6. SUBSEQUENT EVENT On October 28, 2000, the Company had a fire at its Goodyear, Arizona manufacturing plant and production is temporarily shut down. The Company believes it has made arrangements to have third party manufacturers produce sufficient volume to meet nearly all of the Company's needs until such time as production resumes at the facility, which the Company estimates will be during the first quarter of 2001. While the fire loss may have a potentially significant adverse impact on fourth quarter results, the Company believes that its property and business interruption insurance and the aggressive actions that the Company is taking will potentially mitigate any such adverse impact. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1999 Net revenues for the three months ended September 30, 2000 were $10,713,000, up $5,198,000 or 94% from $5,515,000 for the three months ended September 30, 1999. Revenues for the manufactured products segment accounted for 89% and 79% of total net revenues in 2000 and 1999, respectively, while revenues from distributed products accounted for 11% and 21% in 2000 and 1999, respectively. Manufactured products segment revenues increased $5,085,000, or 114%, from sales of branded and private label products (including $3,931,000 from branded products acquired in October 1999 and June 2000), and $1,154,000 from branded batch-fried and private label products. Revenues from the distribution and merchandising of products manufactured by others increased $113,000, or 11%. Gross profit for the three months ended September 30, 2000 was $2,747,000, or 26% of net revenues, as compared to $1,431,000, or 26% of net revenues, for the three months ended September 30, 1999. The increase of $1,316,000, or 92%, in gross profit resulted from increased volume in the manufactured products segment. Selling, general and administrative expenses increased to $2,312,000, or 22% of net revenues, for the three months ended September 30, 2000 from $1,165,000, or 21% of net revenues, for the same period in 1999. The increase of $1,147,000, or 98%, compared to the third quarter of 1999 was primarily due to increased sales and marketing costs for advertising, promotional spending, and sales personnel costs in support of revenues from newly acquired brands. General and administrative costs also increased as a result of the acquisitions, including amortization of intangibles. Net interest expense increased to $310,000 for the three months ended September 30, 2000 from a net interest expense of $155,000 for the three months ended September 30, 1999. The increase of $155,000 was due to interest expense associated with the indebtedness incurred in connection with the acquisitions. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999 Net revenues for the nine months ended September 30, 2000 were $30,961,000, up $16,526,000 or 114%, from $14,435,000 for the nine months ended September 30, 1999. Revenues for the manufactured products segment accounted for 88% and 77% of total net revenues in 2000 and 1999, respectively, while revenues from distributed products accounted for 12% and 23% in 2000 and 1999, respectively. Manufactured products segment revenues increased $15,909,000, or 139%, from sales of branded and private label products (including $11,324,000 from branded products acquired in October 1999 and June 2000) and $4,585,000 from branded batch-fried and private label products. Revenues from the distribution and merchandising of products manufactured by others increased $616,000, or 20%. Gross profit for the nine months ended September 30, 2000 was $7,901,000, or 26% of net revenues, as compared to $3,687,000, or 26% of net revenues, for the nine months ended September 30, 1999. The increase of $4,214,000, or 114%, in gross profit resulted from increased volume in the manufactured products segment. Selling, general and administrative expenses increased to $6,336,000, or 20% of net revenues, for the nine months ended September 30, 2000 from $3,177,000, or 22% of net revenues, for the same period in 1999. The increase of $3,159,000, or 99%, compared to the same period of 1999, was primarily due to increased sales and marketing costs for advertising, promotional spending, and sales personnel costs in support of revenues from newly acquired brands. General and administrative costs also increased as a result of the acquisitions, including amortization of intangibles. Net interest expense increased to $864,000 for the nine months ended September 30, 2000 from a net interest expense of $464,000 for the nine months ended September 30, 1999. The increase of $400,000 was due to interest expense associated with the indebtedness incurred in connection with the acquisitions. 11 LIQUIDITY AND CAPITAL RESOURCES Net working capital was $741,000 (a current ratio of 1.1:1) and $780,000 (a current ratio of 1.2:1) at September 30, 2000 and December 31, 1999, respectively. For the nine months ended September 30, 2000, the Company generated cash flow of $2.3 million from operating activities, principally from operating results and non-cash charges, invested $0.3 million in new equipment, used $0.4 million in connection with an acquisition, and used the balance to repay indebtedness. At September 30, 2000, the Company had outstanding 9% Convertible Debentures due July 1, 2002 in the principal amount of $1,354,889 ($495,842 held by Wells Fargo and $859,047 held by Renaissance Capital). The 9% Convertible Debentures are secured by land, building, equipment and intangibles. Interest on the 9% Convertible Debentures is paid by the Company on a monthly basis. Monthly principal payments of approximately $5,000 are required to be made by the Company on the Wells Fargo 9% Convertible Debenture through June 2002. In November 1999, Renaissance Capital converted 50% ($859,047) of its 9% Convertible Debenture holdings into 859,047 shares of Common Stock and agreed unconditionally to convert into Common Stock the remaining $859,047 principal not later than December 31, 2000. For the period November 1, 1999 through December 31, 2000, Renaissance Capital agreed to waive all mandatory principal redemption payments and to accept 30,000 unregistered shares of the Company's Common Stock and a warrant to purchase 60,000 shares of common stock at $1.50 per share in lieu of cash interest payments. The Convertible Debenture Loan Agreement contains covenants requiring the maintenance of certain financial performance criteria including an interest coverage ratio, minimum working capital of $500,000, a current ratio of 1.1:1 and a minimum shareholders' equity. At September 30, 2000, the Company was in compliance with all of the financial ratio requirements. In the event of default, the holders of the 9% Convertible Debentures have the right, upon written notice and after a thirty-day period during which such default may be cured, to demand immediate payment of the then unpaid principal and accrued but unpaid interest under the 9% Convertible Debentures. Management believes that the achievement of the Company's plans and objectives will enable the Company to attain a sufficient level of profitability to remain in compliance with the financial ratios. There can be no assurance, however, that the Company will attain any such profitability and remain in compliance with the financial ratios. Any acceleration under the 9% Convertible Debentures prior to their maturity on July 1, 2002 could have a material adverse effect upon the Company. On October 7, 1999, the Company signed a new $9.15 million Credit Agreement with U.S. Bank (the "U.S. Bank Credit Agreement") consisting of a $3.0 million working capital line of credit (the "U.S. Bank Line of Credit"), a $5.8 million term loan (the "U.S. Bank Term Loan A") and a $350,000 term loan (the "U.S. Bank Term Loan B"). Borrowings under the U.S. Bank Credit Agreement were used to pay off the Wells Fargo Line of Credit and Wells Fargo Term Loan and to refinance existing debt of Wabash Foods, LLC, and will also be used for general working capital needs. The U.S. Bank Line of Credit bears interest at an annual rate of prime plus 1% and matures in October 2002. The U.S. Bank Term Loan A bears interest at an annual rate of prime and requires monthly principal payments of approximately $74,000, plus interest, until maturity on July 1, 2006. The U.S. Bank Term Loan B bears interest at an annual rate of prime plus 2.5% and requires monthly principal payments of approximately $29,000, plus interest, until maturity on March 31, 2001. The U.S. Bank Credit Agreement is secured by accounts receivable, inventories, equipment and general intangibles. Borrowings under the line of credit are limited to 80% of eligible receivables and 60% of eligible inventories. At September 30, 2000, the Company had a borrowing base of $2,568,000 and outstanding borrowings of $1,439,000 under the U.S. Bank Line of Credit. The U.S. Bank Credit Agreement requires the Company to be in compliance with certain financial performance criteria, including a minimum cash flow coverage ratio, a minimum debt service coverage ratio, minimum annual operating results, a minimum tangible capital base and a minimum fixed charge coverage ratio. At September 30, 2000, the Company was in compliance with all of the financial covenants. Management believes that the fulfillment of the Company's plans and objectives will enable the Company to attain a sufficient level of profitability to remain in compliance with these financial covenants. There can be no assurance, however, that the Company will attain any such profitability and remain in compliance. Any acceleration under the U.S. Bank Credit Agreement prior to the scheduled maturity of the U.S. Bank Line of Credit or the U.S. Bank Term Loans could have a material adverse effect upon the Company. The Company also assumed from Wabash Foods a $715,000 non-interest bearing note payable to U.S. Bank; $200,000 has been paid and the balance has been refinanced and requires monthly payments of approximately $21,000, plus interest at prime plus 2%, until maturity on June 30, 2002. On October 7, 1999, pursuant to the terms 12 of the U.S. Bank Credit Agreement, the Company issued to U.S. Bank a warrant (the "U.S. Bank Warrant") to purchase 50,000 shares of Common Stock for an exercise price of $1.00 per share. The U.S. Bank Warrant is exercisable until October 7, 2004, the date of termination of the U.S. Bank Warrant, and provides the holder thereof certain piggyback registration rights. In connection with the Boulder acquisition (see Note 5), the Company (i) issued a note to the seller in the amount of $830,000 which bears interest at 6.4%, is secured by Boulder assets acquired, and requires monthly principal and interest payments of approximately $37,000 commencing July 15, 2000, until maturity on June 15, 2002, (ii) assumed a note to the seller in the amount of $130,000 which bears interest at 6.0% and requires monthly principal and interest payments of approximately $6,000 commencing July 15, 2000, until maturity on June 15, 2002, and (iii) obtained a term loan from U.S. Bank (the "U.S. Bank Term Loan D") in the amount of $300,000 which bears interest at an annual rate of prime plus 2% and requires monthly principal payments of approximately $12,500, plus interest, until maturity on September 30, 2002. In connection with the implementation of the Company's business strategy, the Company may incur additional operating losses in the future and is likely to require future debt or equity financings (particularly in connection with future strategic acquisitions). Expenditures relating to acquisition-related integration costs, market and territory expansion and new product development may adversely affect selling, general and administrative expenses and consequently may adversely affect operating and net income. These types of expenditures are expensed as incurred for accounting purposes, while sales generated from the result of such expansion may benefit future periods. As a result of the 1997 restructuring actions, the November 1998 Tejas Snacks acquisition, the October 1999 Wabash Foods acquisition, and the June 2000 Boulder Potato Company acquisition, management believes that the Company will generate positive cash flow from operations during the next twelve months which, along with its existing working capital and borrowing facilities, should enable the Company to meet its operating cash requirements. This belief is based on current operating plans and certain assumptions, including those relating to the Company's future revenue levels and expenditures, industry and general economic conditions and other conditions. If any of these factors change, the Company may require future debt or equity financings to meet its business requirements. There can be no assurance that any required financings will be available or, if available, on terms attractive to the Company. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS THIS FORM 10-QSB, INCLUDING ALL DOCUMENTS INCORPORATED BY REFERENCE, INCLUDES "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND SECTION 12E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE "SAFE HARBOR" PROVISIONS THEREOF. THEREFORE, THE COMPANY IS INCLUDING THIS STATEMENT FOR THE EXPRESS PURPOSE OF TAKING ADVANTAGE OF THE PROTECTIONS OF THE SAFE HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. IN THIS FORM 10-QSB, THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "ESTIMATES," "PROJECTS," "WILL LIKELY RESULT," "WILL CONTINUE," "FUTURE" AND SIMILAR TERMS AND EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS IN THIS FORM 10-QSB REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING SPECIFICALLY THE COMPANY'S BRIEF OPERATING HISTORY AND SIGNIFICANT OPERATING LOSSES TO DATE, THE PROBABILITY THAT THE COMPANY WILL NEED ADDITIONAL FINANCING IN ORDER TO IMPLEMENT THE COMPANY'S BUSINESS STRATEGY, THE POSSIBLE DIVERSION OF MANAGEMENT RESOURCES FROM THE DAY-TO-DAY OPERATIONS OF THE COMPANY AS A RESULT OF THE COMPANY'S PURSUIT OF STRATEGIC ACQUISITIONS; POTENTIAL DIFFICULTIES RESULTING FROM THE INTEGRATION OF ACQUIRED BUSINESSES WITH THE COMPANY'S BUSINESS, OTHER ACQUISITION-RELATED RISKS, SIGNIFICANT COMPETITION, RISKS RELATED TO THE FOOD PRODUCTS INDUSTRY, VOLATILITY OF THE MARKET PRICE OF THE COMPANY'S COMMON STOCK, THE POSSIBLE DE-LISTING OF THE COMPANY'S COMMON STOCK FROM THE NASDAQ SMALLCAP MARKET AND THOSE OTHER RISKS AND UNCERTAINTIES DISCUSSED HEREIN AND IN THE OTHER FILINGS BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED. IN LIGHT OF THESE RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS FORM 10-QSB WILL IN FACT TRANSPIRE OR PROVE TO BE ACCURATE. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE HEREOF. ALL SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON OUR BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THIS SECTION. 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is periodically a party to various lawsuits arising in the ordinary course of business. Management believes, based on discussions with legal counsel, that the resolution of such lawsuits will not have a material effect on the financial statements taken as a whole. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On September 30, 2000, the Company issued 8,832 unregistered shares of Common Stock in connection with the post-acquisition closing balance sheet settlement adjustment between the Company and Boulder Potato Company (a Colorado corporation) related to the Company's acquisition of the business and certain related assets and liabilities of Boulder Potato Company. The shares were issued in lieu of cash in satisfaction of $15,000 of the total $2,637,000 purchase price. These issuances were made in reliance upon the exemption from registration under the Securities Act set forth in Section 4(2) as they did not involve a public offering. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: EXHIBIT NUMBER DESCRIPTION ------ ----------- 27.1 Financial Data Schedule. * * Filed herewith. (b) Current Reports on Form 8-K: None. 15 SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POORE BROTHERS, INC. By: /s/ Eric J. Kufel ------------------------------------- Dated: November 13, 2000 Eric J. Kufel President and Chief Executive Officer (principal executive officer) By: /s/ Thomas W. Freeze ------------------------------------ Dated: November 13, 2000 Thomas W. Freeze Senior Vice President, Chief Financial Officer, Treasurer and Secretary (principal financial and accountings officer) EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------ ----------- 27.1 Financial Data Schedule.