-----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, VrzvfrXrvh9qCMJHjw+4w6ZSlbOYcKebxx0aikA+YaKKeZ6I02KonfT0LRXis3eZ c947iUHyx9l6UlzyBXBr+A== 0000950147-01-500661.txt : 20010409 0000950147-01-500661.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950147-01-500661 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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: 1590184 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 e-6585.txt ANNUAL REPORT FOR THE YEAR ENDED 12/31/00 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, 2000 [ ] 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 Identification No.) incorporation or organization) 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 $41,743,007. At March 25, 2001, the aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant was approximately $35,805,320. At March 25, 2001, the number of issued and outstanding shares of common stock of the Registrant was 15,004,765. 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 relatively brief operating history, significant historical operating losses and the possibility of future operating losses, the possibility that the Company will need additional financing due to future operating losses or in order to implement the Company's business strategy, the possible diversion of management resources from the day-to-day operations of the Company as a result of recently completed strategic acquisitions and the pursuit of additional strategic acquisitions, potential difficulties resulting from the integration of acquired businesses with the Company's business, other acquisition-related risks, significant competition, risks related to the food products industry, volatility of the market price of the Company's common stock, 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. 2 ITEM 1. DESCRIPTION OF BUSINESS BUSINESS Poore Brothers, Inc. and its subsidiaries (collectively, the "Company") are engaged in the development, production, marketing and distribution of innovative 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 (i) manufactures and sells its own brands of salty snack food products including Poore Brothers(R), Bob's Texas Style(R), and Boulder Potato Company(TM) brand batch-fried potato chips, Tato Skins(R) brand potato snacks and Pizzarias(R) brand pizza chips, (ii) manufactures and sells T.G.I. Friday's(TM) brand salted snacks under license from TGI Friday's Inc. (shipments by Company commenced in October 2000), (iii) manufactures private label potato chips for grocery retail chains, and (iv) distributes and merchandises snack food products that are manufactured by others. For the year ended December 31, 2000, revenues totaled $41,743,007. Approximately 88% of revenues were attributable to products manufactured by the Company (74% branded snack food products, 14% private label products) and approximately 12% of revenues were attributable to the distribution by the Company of snack food products manufactured by other companies. The Company sells most of its products to retailers and vend operators through independent distributors, except for T.G.I. Friday's(TM) brand salted snacks which the Company generally sells directly to retailers. Poore Brothers(R), Bob's Texas Style(R) and Boulder Potato Company(TM) brand potato chips are manufactured with a batch-frying process that the Company believes produces potato chips with enhanced crispness and flavor. Poore Brothers(R) potato chips are currently offered in ten flavors, Bob's Texas Style(R) potato chips are currently offered in seven flavors, and Boulder Potato Company(TM) potato chips are currently offered in six 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." The Company produces Tato Skins(R) brand potato crisps, Pizzarias(R) brand pizza chips, and T.G.I. Friday's(TM) brand salted snacks 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, Pizzarias(R) brand pizza chips, and T.G.I. Friday's(TM) brand salted snacks are offered in several different flavors and formulations. These products are manufactured at the Company's leased facility in Bluffton, Indiana. The Company acquired the Bluffton, Indiana manufacturing operation in October 1999 as part of its acquisition of Wabash Foods, LLC ("Wabash Foods"). See "PRODUCTS" and "PATENTS AND TRADEMARKS". The Company's business objective is to be a leading developer, manufacturer, marketer and distributor of innovative branded salted 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 primarily in the market niches not served by the dominant national competition. The Company plans to achieve growth in manufactured product revenues by developing, acquiring and/or licensing 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. 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 characterized by a significant number of market entrants and intense competition. The Company had significant operating losses prior to fiscal 1999. The Company incurred a net loss of $874,091 for the fiscal year ended December 31, 1998, and net income of $74,250 and $729,791 for the fiscal years ended December 31, 1999 and 2000, respectively. At December 31, 2000, the Company had an accumulated deficit of $5,531,993 and net working capital of $770,975. See "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION." Even if the Company is successful in developing, acquiring and/or licensing new brands, and increasing distribution and sales volume of the Company's existing products, it may be expected to incur substantial additional expenses, including advertising and promotional costs, "slotting" expenses (i.e., the cost of obtaining shelf space in certain grocery stores), and integration costs of any future acquisitions. 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. 3 NEED FOR ADDITIONAL FINANCING. A significant element of the Company's business strategy is the development, acquisition and/or licensing of innovative salted snack food brands, for the purpose of expanding, complementing and/or diversifying the Company's business. In connection with each of the Company's previous brand acquisitions (Bob's Texas Style(R) in November 1998, Tato Skins(R) and Pizzarias(R) in October 1999, and Boulder Potato Company(TM) in June 2000), the Company borrowed funds or assumed additional indebtedness in order to satisfy a portion of the consideration required to be paid by the Company. See "BUSINESS -- COMPANY HISTORY" and "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES." The Company may, in the future, require additional third party financing (debt or equity) as a result of any future operating losses, in connection with the expansion of the Company's business through non-acquisition means, or in connection with any additional acquisitions completed by the Company. 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. ACQUISITION-RELATED RISKS. In recent years, a significant element of the Company's business strategy has been the pursuit of selected strategic acquisition opportunities for the purpose of expanding, complementing and/or diversifying the Company's business. Strategic acquisitions are likely to continue to comprise an element of the Company's business strategy for the foreseeable future. However, no assurance can be given that the Company will be able to continue 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 acquisitions, 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. See "Business - Company History". Moreover, there can be no assurance that the Company will be able to 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 U.S. BANCORP CREDIT AGREEMENT; POSSIBLE ACCELERATION OF INDEBTEDNESS. At December 31, 2000, the Company had outstanding indebtedness under a credit agreement with U.S. Bancorp (the "U.S. Bancorp Credit Agreement") in the aggregate principal amount of $7,601,161. The indebtedness under 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 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, U.S. Bancorp 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 U.S. Bancorp Credit Agreement. At December 31, 2000, the Company was in compliance with all financial covenants under 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), except the annual capital expenditures limit for the year 2000, which noncompliance was waived by U.S Bancorp. There can be no assurance that the Company will be in compliance with the financial covenants in the future. Any acceleration of the borrowings under the U.S. Bancorp Credit Agreement prior to the applicable maturity dates 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 2000, 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 $3.00 per share to a low of $1.19 per share. The last reported sales price of the Common Stock on the Nasdaq SmallCap Market on March 23, 2001 was $2.50 per share. There can be no assurance as to the future market price of the Common Stock. See "COMPLIANCE WITH 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 4 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 salted 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 salted snack food 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 taste and quality. 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 who 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 innovative 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 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. 5 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), Bob's Texas Style(R), and Boulder Potato Company(TM) 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 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 T.G.I. Friday's(TM) 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 T.G.I. Friday's(TM) brand products by the Company. DEPENDENCE UPON MAJOR CUSTOMERS. Two customers of the Company, Fry's Food Stores (a grocery chain that is a subsidiary of Kroger, Inc.) and Vending Services of America (a national vending distributor), accounted for 11% and 15%, respectively, of the Company's 2000 net revenues, with the remainder of the Company's net revenues 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 revenues for 2000. 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 executive officers, including Eric J. Kufel, President and Chief Executive Officer, Glen E. Flook, Senior Vice President-Operations, Thomas W. Freeze, Senior Vice President and Chief Financial Officer, and John M. Silvestri, Senior Vice President-Sales & Marketing. The inability of the Company's executive 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 executive officers of the Company is on an "at-will" basis. The Company has non-compete agreements with all of its executive officers. 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 6 Company, currently holding approximately 29% 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. In addition, Renaissance Capital Group, Inc. manages two funds, Renaissance Capital Growth & Income Fund III, Inc. and Renaissance U.S. Growth & Income Trust PLC, which beneficially own approximately 14% and 6%, respectively, of the outstanding shares of Common Stock of 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. 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, including 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 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 November 1994, PB Southeast entered into a Purchase Agreement (the "Purchase Agreement") with PB Foods and its shareholders 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 Poore Brothers Distributing; and (iii) an 80% equity interest in Poore Brothers of Texas. 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 Poore Brothers of Texas. The aggregate purchase price paid by the Company in connection with these transactions was $4,057,163. 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 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. The initial public offering was underwritten by Paradise Valley Securities, Inc. (the "Underwriter"). The net 7 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 (a) the sale in June 1997 of an unprofitable distribution business in Houston, Texas and (b) the consolidation of the Company's operations into a newly constructed manufacturing, distribution and headquarters facility in Goodyear, Arizona and, as a result, the closing of an unprofitable manufacturing facility in LaVergne, Tennessee in September 1997. On November 4, 1998, the Company acquired the business and certain assets of Tejas Snacks, L.P., a Texas-based potato chip manufacturer, including Bob's Texas Style(R) potato chips brand, inventories and certain capital equipment for a total purchase price of $1,700,000, consisting of: (i) the issuance of 523,077 unregistered shares of Common Stock with a fair value of $450,000, and (ii) a cash payment of approximately $1,250,000. On October 7, 1999, the Company acquired Wabash Foods, including the Tato Skins(R) and Pizzarias(R) trademarks. The Company acquired all of the membership interests of Wabash Foods from Pate Foods Corporation for a total purchase price of $12,763,000, consisting of: (i) the issuance of 4,400,000 unregistered shares of Common Stock, (ii) the issuance of a five-year warrant to purchase 400,000 unregistered shares of Common Stock at an exercise price of $1.00 per share, and (iii) the effective assumption of $8,073,000 in liabilities. On June 8, 2000, the Company acquired Boulder Natural Foods, Inc. and the business and certain related assets and liabilities of Boulder Potato Company, a Colorado-based potato chip marketer and distributor. The assets included the Boulder Potato Company(TM) potato chip brand, accounts receivable, inventories, certain other intangible assets 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 promissory note to the seller in the amount of $830,000, and (iv) the assumption of $271,000 in liabilities. 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. BUSINESS STRATEGY The Company's business objective is to be a leading developer, manufacturer, marketer and distributor of innovative branded and private label salted 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 revenues by developing, acquiring or licensing 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: DEVELOP, ACQUIRE OR LICENSE INNOVATIVE SNACK FOOD BRANDS. A significant element of the Company's growth strategy is to develop, acquire or license innovative salted 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. The acquisitions of the Bob's Texas Style(R), Tato Skins(R) and Boulder Potato Company(TM) brands in November 1998, October 1999 and June 2000, respectively, were three such strategic acquisitions. In addition, in October 2000 the Company launched the T.G.I. Friday's(TM) brand salted snacks under a license from TGI Friday's Inc. The Company will continue to seek to develop, acquire or license additional brands with strong, differentiated snack food product opportunities. BUILD BRANDED SNACK FOOD REVENUES. The Company plans to build the market share of its branded products through continued trade advertising and promotion activity in selected markets and channels. Marketing efforts include, among other things, joint advertising with distributors, supermarkets and other manufacturers, in-store advertisements and in-store displays. The Company also participates 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 Boulder Potato Company(TM) brand with new packaging for the retail grocery channel. IMPROVE MANUFACTURING CAPACITY UTILIZATION. The Company's Arizona and Indiana facilities are currently operating at approximately eighty percent and twenty percent of their respective capacity. The Company believes that additional improvements to manufactured products' gross profit margins are possible with the achievement of the business strategies discussed above. 8 Depending on product mix, the existing manufacturing facilities could produce, in the aggregate, up to $125 million in annual revenue 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 grew its private label revenues by 53% in 2000 and 60% in 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), Bob's Texas Style(R), and Boulder Potato Company(TM) brand potato chips are marketed by the Company as premium products based on their distinctive combination of cooking method and variety of distinctive flavors. Poore Brothers(R) potato chips are currently offered in ten flavors, Bob's Texas Style(R) potato chips are currently offered in seven flavors, and Boulder Potato Company(TM) potato chips are currently offered in six flavors. 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 T.G.I. Friday's(TM) brand salted snacks 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, Pizzarias(R) brand pizza chips, and T.G.I. Friday's(TM) brand salted snacks are offered in several different flavors and formulations. DISTRIBUTED SNACK FOOD PRODUCTS. The Company purchases and resells throughout Arizona snack food products manufactured by others. Such products include pretzels, tortilla chips, dips, and meat snacks. 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), Bob's Texas Style(R) and Boulder Potato Company(TM) 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, 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. The Company believes that although the batch frying process produces less volume, it 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 and, in connection therewith, discontinued manufacturing operations at a facility in LaVergne, Tennessee. In 1999, the Company purchased and installed additional batch frying equipment in the Goodyear facility. 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 Arizona facility is operating currently at approximately eighty percent of capacity. The Company's manufacturing facility in Bluffton, Indiana includes three fryer lines that can produce an aggregate of approximately 9,000 pounds per hour of Tato Skins(R), Pizzarias(R) and T.G.I. Friday's(TM) brand products. The Indiana facility is operating currently at approximately twenty percent of capacity. On October 28, 2000, the Company experienced a fire at the Goodyear, Arizona manufacturing plant, causing a temporary shutdown of manufacturing operations at the facility. There was extensive damage to the roof and equipment utilities in the potato chip processing area. Third party manufacturers agreed to provide the Company with production volume to satisfy nearly all of the Company's anticipated customers' needs during the shutdown. The Company continued to season and package the bulk product received from third party manufacturers. The Company estimates full production will resume in March of 9 2001. The Company believes that its property and business interruption insurance and the actions taken by the Company to ensure product supply should help to mitigate the potential adverse impact from the fire on results of operations. 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." MARKETING AND DISTRIBUTION The Company's potato chip products are distributed primarily 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, 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 Boulder Potato Company(TM) brand potato chip products have achieved significant market presence in Colorado and in natural food stores across the country. The Company's Poore Brothers(R), Tato Skins(R), Pizzarias(R), and T.G.I. Friday's(TM) brand snack food products have achieved significant market presence in the vending channel nationwide through an independent network of brokers and distributors, particularly in the mid-west 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 has retained Marketing Specialists Corporation, a leading national sales and marketing agency with over 6,000 employees and 65 offices nationwide. Marketing Specialists will introduce T.G.I. Friday'sTM brand salted snacks on behalf of Poore Brothers in the grocery, convenience store and drug store channels. In addition, the Company has commenced initial shipments of T.G.I. Friday's(TM) brand salted snacks to club stores across the country and expects to commence initial shipments to selected mass merchandisers' stores during 2001. The Company's Arizona distribution business operates throughout Arizona, with 45 independently operated service routes. Each route is operated by an independent distributor who merchandises as many as 125 items at major grocery store chains in Arizona, such as Albertson's, ABCO, Basha's, Fry's, and Safeway 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, and meat snacks. 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. 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 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 typifies 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 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 10 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 Two customers of the Company, Fry's Food Stores (a grocery chain that is a subsidiary of Kroger, Inc.) and Vending Services of America (a national vending distributor), accounted for 11% and 15%, respectively, of the Company's 2000 net revenues. The remainder of the Company's revenues were derived from sales to a limited number of additional customers, either grocery chains, club stores or regional distributors, none of which individually accounted for more than 10% of the Company's sales in 2000. 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 salted snack foods reached $19.4 billion at retail in 1999 (the latest year for which data is available) with potato chips, tortilla chips, pretzels and potato crisps, accounting for approximately 62% of the market, and corn snacks, popcorn, nuts, meat snacks and other products accounting for the balance. Total salted snack sales, in dollar terms, increased every year from 1990 through 1999, ranging from an increase of 8.5% (in 1997) to 0.3% (in 1995), with a 1999 increase of 6.2%. Potato chip, tortilla chips, pretzels and potato crisps combined sales have similarly increased, with 1999 retail sales of $12.0 billion, a 2.4% increase over 1998 sales of $11.7 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 innovative 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 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, 2000, the Company had 190 full-time employees, including 155 in manufacturing and distribution, 14 in sales and marketing and 21 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. 11 PATENTS AND TRADEMARKS The Company produces Tato Skins(R) brand potato crisps, Pizzarias(R) brand pizza chips, and T.G.I. Friday's(TM) brand salted snacks 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), Boulder Potato Company(TM), Tato Skins(R), O'Boisies(R), Pizzarias(R), Braids(R) and Knots(R). The Company licenses the T.G.I. Friday's(TM) brand salted snacks trademark from TGI Friday's Inc. under a multi-year agreement in which the Company is required to make royalty payments on sales of T.G.I. Friday's(TM) brand salted snack products and is required to achieve certain minimum sales levels during the contract term. 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. On October 28, 2000, the Company experienced a fire at the Goodyear, Arizona plant, causing a temporary shutdown of manufacturing operations at the facility. There was extensive damage to the roof and equipment utilities in the potato chip processing area. Third party manufacturers agreed to provide the Company with production volume to satisfy nearly all of the Company's anticipated customers' needs during the shutdown. The Company continued to season and package the bulk product received from third party manufacturers. The Company estimates full production will resume in March of 2001. The Company believes that its property and business interruption insurance and the actions taken by the Company to ensure product supply should help to mitigate the potential adverse impact from the fire on results of operations. 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 are $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. 12 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 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 Fiscal 2000: First Quarter $2.06 $1.19 Second Quarter $1.94 $1.31 Third Quarter $3.00 $1.63 Fourth Quarter $2.75 $1.94 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 25, 2001, there were 15,004,765 shares of Common Stock outstanding. As of such date, the shares of Common Stock were held of record by approximately 3,250 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. 13 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 Net revenues for the year ended December 31, 2000 were $41,743,000, up $18,468,000, or 79%, from $23,275,000 for 1999. Revenues from products manufactured by the Company accounted for 88% and 80% of the revenues in 2000 and 1999, respectively, while revenues from products manufactured by others accounted for 12% and 20% in 2000 and 1999, respectively. Manufactured products segment revenues, from sales of branded and private label product, increased $18,007,000, or 97%, including $13,120,000 in connection with the Wabash Foods acquisition in October 1999 and the Boulder Natural Foods acquisition in June 2000, and the remaining $4,887,000 (representing a 23% increase) in connection with increased sales of the Poore Brothers(R) and Bob's Texas Style(R) potato chip brands and private label products. Revenues from the distribution and merchandising of products manufactured by others increased $460,000, or 10%, due to increased sales of distributed product lines. Gross profit for the year ended December 31, 2000, was $10,392,000, or 25% of net sales, as compared to $5,707,000, or 25% of net sales, for 1999. The $4,685,000 increase, or 82%, in gross profit resulted from the increased volume of manufactured products. On October 28, 2000, the Company experienced a fire at the Goodyear, Arizona manufacturing plant, causing a temporary shutdown of manufacturing operations at the facility. See "LIQUIDITY AND CAPITAL RESOURCES." Selling, general and administrative expenses increased to $8,447,000, or 20% of net revenues for the year ended December 31, 2000, from $4,764,000, or 20% of net revenues for 1999. This represented a $3,683,000 increase, or 77%, compared to 1999, primarily due to an increase of $2,524,000 in sales, advertising and promotional spending in support of the 79% increase in sales volume and $577,000 of administrative costs associated with the Wabash and Boulder acquisition operations. Net interest expense increased to $1,177,000 for the year ended December 31, 2000 from $750,000 for 1999. This increase was due to lower interest income of $30,000 on investments and increased interest expense of $398,000 on indebtedness related to the Wabash and Boulder 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, 2000 was $730,000, and the net income for the year ended December 31, 1999 was $74,000. 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, 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. 14 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. LIQUIDITY AND CAPITAL RESOURCES Net working capital was approximately $771,000 (a current ratio of 1.1:1) and $780,000 (a current ratio of 1.2:1) at December 31, 2000 and 1999, respectively. For the fiscal year ended December 31, 2000, the Company generated cash flow of $2,618,000 from operating activities, principally from operating results and non-cash charges, invested $635,000 in new equipment, and made $2,053,000 in payments on long-term debt. On October 28, 2000, the Company experienced a fire at the Goodyear, Arizona manufacturing plant, causing a temporary shutdown of manufacturing operations at the facility. There was extensive damage to the roof and equipment utilities in the potato chip processing area. Third party manufacturers agreed to provide the Company with production volume to satisfy nearly all of the Company's anticipated customers' needs during the shutdown. The Company continued to season and package the bulk product received from third party manufacturers. The Company estimates full production will resume in March of 2001. The Company believes that its property and business interruption insurance and the actions taken by the Company to ensure product supply should help to mitigate the potential adverse impact from the fire on results of operations and capital resources. The Company identified and recorded approximately $1.4 million of incremental expenses incurred as a result of the fire, primarily associated with outsourcing production. These extra expenses were charged to "cost of revenue" and offset by a $1.4 million credit representing estimated future insurance proceeds. As of December 31, 2000, the Company had been advanced $0.5 million of the $1.4 million by its insurance company as partial reimbursement. On October 7, 1999, the Company signed a $9.15 million Credit Agreement with U.S. Bancorp (the "U.S. Bancorp Credit Agreement") consisting of a $3.0 million working capital line of credit (the "U.S. Bancorp Line of Credit"), a $5.8 million term loan (the "U.S. Bancorp Term Loan A") and a $350,000 term loan (the "U.S. Bancorp Term Loan B"). Borrowings under the U.S. Bancorp Credit Agreement were used to pay off a $2.5 million line of credit and a $0.5 million term loan previously obtained by the Company from Wells Fargo Business Credit, Inc. ("Wells Fargo"), to refinance indebtedness effectively assumed by the Company in connection with the acquisition of Wabash Foods in October 1999, and 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, 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, plus interest, until maturity on March 31, 2001. In June 2000, the U.S Bancorp Credit Agreement was amended to include an additional $300,000 term loan (the "U.S. Bancorp Term Loan C") and to refinance the $715,000 non-interest bearing note due to U.S. Bancorp on June 30, 2000. Proceeds from the U.S. Bancorp Term Loan C were used in connection with the Boulder acquisition. The U.S. Bancorp Term Loan C bears interest at an annual rate of prime plus 2% and requires monthly principal payments of approximately $12,500, plus interest, until maturity on August 1, 2002. The Company made a payment of $200,000 on the $715,000 and refinanced the balance in a term loan (the "U.S. Bancorp Term Loan D"). The U.S. Bancorp Term Loan D bears interest at an annual rate of prime plus 2% and requires monthly principal payments of approximately $21,500, plus interest, until maturity on June 30, 2002. The U.S. Bancorp Credit Agreement is secured by accounts receivable, inventories, equipment and intangibles. Borrowings under the U.S. Bancorp Line of Credit are limited to 80% of eligible receivables and 60% of eligible inventories, and at December 31, 2000, the Company had a borrowing base of approximately $2,934,000 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, 2000, the Company was in compliance with all of the financial covenants, except the annual capital expenditures limit of $335,000. U.S. Bancorp has waived the non-compliance for 2000. 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. 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, 2000, there was an outstanding balance of $1,907,859 on the U.S. Bancorp Line of Credit, $4,982,051 on the U.S. Bancorp Term Loan A, $87,500 on the U.S. Bancorp Term Loan B, $237,500 on the U.S. Bancorp Term Loan C, and $386,250 on the U.S. Bancorp Term Loan D. 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 15 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. 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 12.4%, require monthly payments, expire at various times through 2007 and are collateralized by the related equipment. At December 31, 2000, the Company had an outstanding 9% Convertible Debentures due July 1, 2002 ("9% Convertible Debentures") in the principal amount of $481,115 held by Wells Fargo. The 9% Convertible Debentures, which were issued in 1995 pursuant to a Debenture Loan Agreement (the "Debenture Loan Agreement"), 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 9% Convertible Debentures through June 2002 with the remaining balance due on July 1, 2002. In November 1999, Renaissance Capital, a former holder of 9% Convertible Debentures, converted 50% ($859,047 principal amount) of its 9% Convertible Debentures holdings into 859,047 shares of Common Stock and, in December 2000, Renaissance Capital converted the remaining 50% ($859,047 principal amount) of its 9% Convertible Debentures holdings into 859,047 shares of Common Stock. For the period November 1, 1999 through December 31, 2000, Renaissance Capital waived all mandatory principal redemption payments and accepted 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 (including the failure of the Company to comply with certain financial ratios), the holder(s) 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. The Company is currently in compliance with the required financial ratios. At December 31, 2000, the Company had net operating loss carryforwards available for federal income taxes of approximately $4.8 million. 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. 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 2001. 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. 16 ITEM 7. FINANCIAL STATEMENTS PAGE ---- REPORTS Report of independent public accountants with respect to financial statements for the years ended December 31, 2000 and 1999 23 FINANCIAL STATEMENTS Consolidated balance sheets as of December 31, 2000 and 1999 24 Consolidated statements of operations for the years ended December 31, 2000 and 1999 25 Consolidated statements of shareholders' equity for the years ended December 31, 2000 and 1999 26 Consolidated statements of cash flows for the years ended December 31, 2000 and 1999 27 Notes to consolidated financial statements 28 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 34 President, Chief Executive Officer, Director Glen E. Flook 42 Senior Vice President-Operations Thomas W. Freeze 49 Senior Vice President, Chief Financial Officer, Treasurer, Secretary, and Director John M. Silvestri 45 Senior Vice President-Sales & Marketing Mark S. Howells 47 Chairman, Director Thomas E. Cain 46 Director James W. Myers 66 Director Robert C. Pearson 65 Director Aaron M. Shenkman 60 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 Senior Vice President-Operations since May 2000 and as Vice President-Manufacturing from March 1997 to May 2000. 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 Senior Vice President since May 2000, as Chief Financial Officer, Secretary and Treasurer since April 1997, and as a Director since October 1999. From April 1997 to May 2000, Mr. Freeze served as a Vice President of the Company. 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. 17 JOHN M. SILVESTRI. Mr. Silvestri has been Senior Vice President-Sales & Marketing since September 2000. From August 1998 to August 2000, Mr. Silvestri served as Regional Vice President of Brach's Confections, Inc. From 1983 to August 1998, Mr. Silvestri served in various sales and marketing capacities for M&M/Mars Inc., including most recently from July 1996 to July 1998 as National Sales Manager. Prior to his positions at M&M/Mars Inc., Mr. Silvestri served in several sales positions for Procter & Gamble. 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. From 1988 to May 2000, Mr. Howells served as the Chief Executive Officer of Puglisi Howells & Co. (formerly Arizona Securities Group, Inc.), a registered securities broker-dealer. Since May 2000, Mr. Howells has devoted a majority of his time to serving as the President and Chairman of M.S. Howells & Co., a registered securities broker-dealer. Mr. Howells is also the founder and President of Audesi Capital Management LLC, a registered investment adviser formed in 2001, and founder and Chief Executive Officer of TheHEDGE.COM LLC, operator of an internet web site devoted to providing services to hedge fund managers and accredited investors. THOMAS E. CAIN. Mr. Cain has served as a Director since September 2000. Mr. Cain has been Chairman of Frontstep distribution.com since 1999. From 1991 to 1999, Mr. Cain was President and Chief Executive Officer of Distribution Architects International, Inc., a distribution and logistics software developer and marketer. Mr. Cain has extensive experience in software development, e-commerce and supply chain management. 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 and Sedona Worldwide, Inc. a publicly traded distributor of personal care products. 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 former owner of 9% Convertible Debentures and currently a shareholder of the Company. See "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - LIQUIDITY AND CAPITAL Resources". 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 CaminoSoft Corp. (a publicly traded distributor of consumables for laser printers) and Advanced Power Technology, Inc. (a publicly traded semiconductor manufacturer). 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 2001 Annual Meeting of Shareholders to be filed by the Company with the Commission on or about April 17, 2001. 18 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.) 3.4 -- 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 (and certain of its subsidiaries), 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) 4.11 -- Form of Term Note C and Term Note D issued by the Company to U.S. Bancorp as of June 30, 2000. (7) 10.1 -- 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) 10.2 -- 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) 10.3 -- Non-Qualified Stock Option Agreement dated August 1, 1995, by and between the Company and Parris H. Holmes, Jr. (1) 10.4 -- Form of Security Agreements dated May 31, 1995, by and among Renaissance Capital, Wells Fargo and the Company (and certain of its subsidiaries). (1) 10.5 -- Equipment Lease Agreement dated December 12, 1995, by and between PB Arizona and FINOVA Capital Corporation. (1) 10.6 -- Guaranty dated December 12, 1995, issued by the Company to FINOVA Capital Corporation. (1) 10.7 -- Agreement dated August 29, 1996, by and between the Company and Westminster Capital, Inc. ("Westminster"), as amended. (1) 10.8 -- Amendment No. 1 dated October 14, 1996, to Warrant dated September 11, 1996, issued by the Company to Westminster. (1) 10.9 -- 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) 10.10 -- 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) 10.11 -- Non-Qualified Stock Option Agreement dated as of October 22, 1996, by and between the Company and Mark S. Howells. (1) 10.12 -- Letter Agreement dated as of November 5, 1996, by and between the Company and Jeffrey J. Puglisi. (1) 10.13 -- Letter Agreement dated as of November 5, 1996, by and between the Company and David J. Brennan. (1) 10.14 -- Stock Option Agreement dated October 22, 1996, by and between the Company and David J. Brennan. (1)
19
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.15 -- 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) 10.16 -- Letter Agreement dated December 4, 1996, by and between the Company and Jeffrey J. Puglisi, relating to stock options. (1) 10.17 -- Letter Agreement dated December 4, 1996, by and between the Company and Mark S. Howells, relating to stock options. (1) 10.18 -- Letter Agreement dated December 4, 1996, by and between the Company and Parris H. Holmes, Jr., relating to stock options. (1) 10.19 -- Letter Agreement dated December 4, 1996, by and between the Company and David J. Brennan, relating to stock options. (1) 10.20 -- 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.) 10.21 -- Employment Agreement dated January 24, 1997, by and between the Company and Eric J. Kufel. (2) 10.22 -- First Amendment to Employment Agreement dated February 2, 1997, by and between the Company and David J. Brennan. (2) 10.23 -- Employment Agreement dated February 14, 1997, by and between the Company and Glen E. Flook. (2) 10.24 -- 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.) 10.25 -- Fixed Rate Note dated June 4, 1997, by and between La Cometa Properties, Inc. and Morgan Guaranty Trust Company of New York. (3) 10.26 -- 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) 10.27 -- Guaranty Agreement dated June 4, 1997, by and between the Company and Morgan Guaranty Trust Company of New York. (3) 10.28 -- Equipment Lease Agreement dated June 9, 1997, by and between PB Arizona and FINOVA Capital Corporation. (3) 10.29 -- Letter Agreement dated August 18, 1998, by and between the Company and Everen. (4) 10.30 -- 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.) 10.31 -- 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.) 10.32 -- 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.) 10.33 -- Poore Brothers, Inc. 1995 Stock Option Plan, as amended. (5) 10.34 -- Credit Agreement, dated as of October 3, 1999, by and between the Company and U.S. Bancorp Republic Commercial Finance, Inc. (5) 10.35 -- Security Agreement, dated as of October 3, 1999, by and between the Company and U.S. Bancorp Republic Commercial Finance, Inc. (5) 10.36 -- Commercial Lease, dated May 1, 1998, by and between Wabash Foods, LLC and American Pacific Financial Corporation. (5) 10.37 -- Agreement for Purchase and Sale of Assets of Boulder Potato Company dated as of June 8, 2000, by and among the Company, the shareholders of Boulder Potato Company, and Boulder Potato Company. (6) 10.38 -- Secured Promissory Note and Security Agreement dated as of June 8, 2000, by and between Boulder Potato Company and the Company. (6) 10.39 -- Registration Rights Agreement dated as of June 8, 2000, by and between Boulder Potato Company and the Company. (6) 10.40 -- Escrow Agreement dated as of June 8, 2000, by and among the Company, the shareholders of Boulder Potato Company, and Boulder Potato Company. (6) 10.41 -- Employment Agreement dated June 8, 2000, by and between Mark C. Maggio and the Company. (6) 10.42 -- Employment Agreement dated June 8, 2000, by and between John F. Maggio and the Company. (6) 10.43 -- Employment Agreement dated August 31, 2000, by and between John M. Silvestri and the Company. (7)
20
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.44 -- First Amendment, dated as of June 30, 2000, to Credit Agreement, dated as of October 3, 1999, by and between the Company and U.S. Bancorp. (7) 21.1 -- List of Subsidiaries of the Company. (7) 23.1 -- Consent of Arthur Andersen LLP. (7)
- ---------- (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) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999. (6) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the three-month period ended June 30, 2000. (7) Filed herewith. (b) Reports on Form 8-K. (1) Current Report on Form 8-K, reporting the October 28, 2000 fire at the Company's Goodyear, Arizona manufacturing plant (filed with the Commission on October 30, 2000). (2) Current Report on Form 8-K, reporting on the October 28, 2000 fire at the Company's Goodyear, Arizona manufacturing plant (filed with the Commission on November 6, 2000). 21 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: April 2, 2001 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, and Director April 2, 2001 - ----------------------- (Principal Executive Officer) Eric J. Kufel /s/ Thomas W. Freeze Senior Vice President, Chief Financial Officer, April 2, 2001 - ----------------------- Treasurer, Secretary, and Director (Principal Thomas W. Freeze Financial Officer and Principal Accounting Officer) /s/ Mark S. Howells Chairman, Director April 2, 2001 - ----------------------- Mark S. Howells /s/ Thomas E. Cain Director April 2, 2001 - ----------------------- Thomas E. Cain /s/ James W. Myers Director April 2, 2001 - ----------------------- James W. Myers /s/ Robert C. Pearson Director April 2, 2001 - ----------------------- Robert C. Pearson /s/ Aaron M. Shenkman Director April 2, 2001 - ----------------------- Aaron M. Shenkman
22 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, 2000 and 1999, 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, 2000 and 1999, 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. /s/ ARTHUR ANDERSEN LLP Phoenix, Arizona February 14, 2001 23 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------------ 2000 1999 ----------- ----------- ASSETS Current assets: Cash ........................................................................... $ 327,553 $ 104,364 Accounts receivable, net of allowance of $247,000 in 2000 and $206,000 in 1999 ......................................................... 4,936,393 3,265,041 Inventories .................................................................... 1,782,551 1,221,412 Other current assets ........................................................... 394,356 325,146 ----------- ----------- Total current assets ....................................................... 7,440,853 4,915,963 Property and equipment, net ...................................................... 12,306,241 13,678,133 Intangible assets, net ........................................................... 10,030,631 7,198,283 Other assets, net ................................................................ 212,737 281,601 ----------- ----------- Total assets ............................................................... $29,990,462 $26,073,980 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ............................................................... $ 3,031,130 $ 1,328,720 Accrued liabilities ............................................................ 1,323,357 690,931 Current portion of long-term debt .............................................. 2,315,391 2,116,226 ----------- ----------- Total current liabilities .................................................. 6,669,878 4,135,877 Long-term debt, less current portion ............................................. 9,025,088 10,680,840 ----------- ----------- Total liabilities .......................................................... 15,694,966 14,816,717 ----------- ----------- Commitments and contingencies Shareholders' equity: Preferred stock, $100 par value; 50,000 shares authorized; no shares issued or outstanding at December 31, 2000 and 1999, respectively..................... -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 14,994,765 and 13,222,044 shares issued and outstanding at December 31, 2000 and 1999, respectively .................................................................. 149,947 132,220 Additional paid-in capital ..................................................... 19,677,542 17,386,827 Accumulated deficit ............................................................ (5,531,993) (6,261,784) ----------- ----------- Total shareholders' equity ................................................. 14,295,496 11,257,263 ----------- ----------- Total liabilities and shareholders' equity ................................. $29,990,462 $26,073,980 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 24 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------- 2000 1999 ------------ ------------ Net revenues .................................................. $ 41,743,007 $ 23,275,543 Cost of revenues .............................................. 31,350,941 17,568,425 ------------ ------------ Gross profit ............................................. 10,392,066 5,707,118 Selling, general and administrative expenses .................. 8,446,808 4,763,896 ------------ ------------ Operating income ......................................... 1,945,258 943,222 ------------ ------------ Interest income ............................................... 1,015 30,866 Interest expense .............................................. (1,178,482) (780,616) ------------ ------------ (1,177,467) (749,750) ------------ ------------ Income before income tax provision ....................... 767,791 193,472 Income tax provision .......................................... (38,000) -- ------------ ------------ Income before extraordinary loss and cumulative effect of a change in accounting principle ........................ 729,791 193,472 Extraordinary loss on extinguishment of debt .................. -- (47,601) Cumulative effect of a change in accounting principle ......... -- (71,631) ------------ ------------ Net income ................................................ $ 729,791 $ 74,240 ============ ============ Earnings per common share: Basic- Income before extraordinary loss and cumulative effect of a change in accounting principle ...................... $ 0.05 $ 0.02 Extraordinary loss on extinguishment of debt .............. -- (0.00) Cumulative effect of a change in accounting principle ..... -- (0.01) ------------ ------------ Net income per common share ............................... $ 0.05 $ 0.01 ============ ============ Diluted- Income before extraordinary loss and cumulative effect of a change in accounting principle....................... $ 0.05 $ 0.02 Extraordinary loss on extinguishment of debt .............. -- (0.00) Cumulative effect of a change in accounting principle ..... -- (0.01) ------------ ------------ Net income per common share ............................... $ 0.05 $ 0.01 ============ ============ Weighted average number of common shares: Basic ....................................................... 13,769,614 8,988,110 ============ ============ Diluted ..................................................... 15,129,593 9,134,414 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 25 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL ---------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL ---------- -------- ----------- ----------- ----------- 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 Exercise of common stock options...... 153,334 1,533 173,705 -- 175,238 Issuance of common stock ............. 1,619,387 16,194 2,117,010 -- 2,133,204 Net income ........................... -- -- -- 729,791 729,791 ---------- -------- ----------- ----------- ----------- Balance, December 31, 2000 ................ 14,994,765 $149,947 $19,677,542 $(5,531,993) $14,295,496 ========== ======== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 26 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 ----------- ----------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income ......................................................... $ 729,791 $ 74,240 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ..................................................... 1,089,004 725,068 Amortization ..................................................... 648,938 337,430 Valuation reserves ............................................... 102,325 168,784 Extraordinary loss on extinguishment of debt ..................... -- 47,601 Cumulative effect of a change in accounting principle ............ -- 71,631 Other non-cash charges ........................................... 252,148 418,247 Change in operating assets and liabilities, net of effect of business acquired: Accounts receivable ............................................. (1,713,991) (803,681) Inventories ..................................................... (481,401) (21,608) Other assets and liabilities .................................... (252,812) (239,749) Accounts payable and accrued liabilities ........................ 2,243,610 (542,125) ----------- ----------- Net cash provided by operating activities ................... 2,617,612 235,838 ----------- ----------- CASH FLOWS USED IN INVESTING ACTIVITIES: Proceeds from sale of equipment and property ....................... -- 14,125 Purchase of equipment .............................................. (635,415) (423,008) Acquisition and related expenses ................................... (365,542) (482,872) ----------- ----------- Net cash used in investing activities ....................... (1,000,957) (891,755) ----------- ----------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from issuance of common stock ............................. 175,238 125,000 Stock and debt issuance costs ...................................... (11,164) (97,693) Proceeds from issuance of debt ..................................... 610,329 350,000 Payments made on long-term debt .................................... (2,053,149) (757,219) Net increase (decrease) in working capital line of credit .......... (114,720) 869,898 ----------- ----------- Net cash provided by (used in) financing activities.......... (1,393,466) 489,986 ----------- ----------- Net increase (decrease) in cash ..................................... 223,189 (165,931) Cash at beginning of year ........................................... 104,364 270,295 ----------- ----------- Cash at end of year ................................................. $ 327,553 $ 104,364 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest ............................. $ 1,047,380 $ 541,096 Summary of non-cash investing and financing activities: Financing warrants issued ......................................... -- 36,249 Common Stock issued for acquisitions .............................. 1,235,321 4,400,000 Note payable issued for acquisition ............................... 830,000 -- Common Stock warrants issued for acquisitions ..................... -- 423,566 Common Stock and warrant issued in lieu of interest paymenmts...... -- 90,447 Common Stock issued for sales commissions ......................... 50,000 -- Conversion of Convertible Debenture into Common Stock ............. 859,047 859,047
The accompanying notes are an integral part of these consolidated financial statements. 27 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 COMBINATIONS." 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. 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) and Pizzarias(R). On June 8, 2000, the Company acquired a 100% equity interest in Boulder Natural Foods, Inc. and the business and certain related assets and liabilities of Boulder Potato Company ("Boulder"), a Colorado-based natural potato chip marketer. See Note 2. BUSINESS OBJECTIVES, RISKS AND PLANS The Company is engaged in the development, production, marketing and distribution of innovative 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 (a) manufactures and sells its own brands of salty snack food products including Poore Brothers(R), Bob's Texas Style(R), and Boulder Potato Company(TM) brand batch-fried potato chips, Tato Skins(R) brand potato snacks and Pizzarias(R) brand pizza chips, (b) manufactures and sells T.G.I. Friday's(TM) brand salted snacks under license from TGI Friday's Inc. (shipments by Company commenced in October 2000), (c) manufactures private label potato chips for grocery retail chains, and (d) distributes and merchandises snack food products that are manufactured by others. The Company's business objective is to be a leading developer, manufacturer, marketer and distributor of innovative branded 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 primarily in the market niches not served by the dominant national competition. The Company plans to achieve growth in manufactured product revenues by developing, acquiring and/or licensing 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. 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 business in the snack food industry. The market for salted 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, Wabash, and Boulder, 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 2001, which, along with its existing working capital and borrowing facilities, should enable the Company to meet its operating cash requirements through 2001. 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. 28 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 accounting principles generally accepted in the United States 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, 2000 and 1999, 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 judgment 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 Opinion 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 could be recovered through estimated future undiscounted cash flows. Total goodwill was $6,376,374 and $3,941,009 at December 31, 2000 and 1999, respectively, including $126,702 from the November 1998 Tejas acquisition, $1,327,227 from the October 1999 Wabash acquisition, and $1,505,265 from the June 2000 Boulder acquisition (see Note 2). Accumulated amortization was $886,108 and $587,431 at December 31, 2000 and 1999, 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, $2,500,000 of the Wabash purchase price to trademarks, and $1,000,000 of the Boulder purchase price to trademarks. Accumulated amortization was $459,635 and $155,295 at December 31, 2000 and 1999, respectively. 29 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) REVENUE RECOGNITION The Company recognizes revenues and related cost of revenues when the persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable. Generally, all of these conditions are met at the time the Company ships products to customers. 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 revenues are recognized. Costs associated with obtaining shelf space (i.e., "slotting fees") are expensed in the year in which the Company incurs such costs. Advertising expenses were approximately $394,000 and $265,000 in 2000 and 1999, 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 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, ---------------------------- 2000 1999 ----------- ---------- BASIC EARNINGS PER COMMON SHARE: Income before extraordinary loss and cumulative effect of a change in accounting principle ..................... $ 729,791 $ 193,472 =========== ========== Weighted average number of common shares .................. 13,769,614 8,988,110 =========== ========== Earnings per common share ................................. $ 0.05 $ 0.02 =========== ========== DILUTED EARNINGS PER COMMON SHARE: Income before extraordinary loss and cumulative effect of a change in accounting principle ..................... $ 729,791 $ 193,472 =========== ========== Weighted average number of common shares .................. 13,769,614 8,988,110 Incremental shares from assumed conversions - Warrants ................................................ 475,943 95,497 Stock options ........................................... 884,036 50,807 ----------- ---------- Adjusted weighted average number of common shares ......... 15,129,593 9,134,414 =========== ========== Earnings per common share ................................. $ 0.05 $ 0.02 =========== ==========
Options and warrants to purchase 985,527 shares of Common Stock were outstanding at December 31, 2000, 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. 30 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("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 as of January 1, 2001, the Company expects there will be no impact on its financial condition or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS," which addresses certain criteria for revenue recognition. SAB 101, as amended by SAB 101A and SAB 101B, outlines the criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company has implemented the applicable provisions of SAB 101. The impact of adopting the provisions of SAB 101 was not material to the accompanying financial statements. In July 2000, the Emerging Issues Task Force (EITF) reached a final consensus on Issue No. 00-10, "ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS." When adopted, EITF No. 00-10 requires that all amounts billed to customers in sale transactions related shipping and handling be classified as revenue. The Company adopted EITF No. 00-10 during the quarter ended September 30, 2000. The impact of adopting the provisions of EITF 00-10 was not material to the accompanying financial statements for any period presented. 2. ACQUISITIONS: On June 8, 2000, the Company acquired a 100% equity interest in Boulder Natural Foods, Inc. (a Colorado corporation) and the business and certain related assets and liabilities of Boulder Potato Company, a 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, and (iv) the assumption by the Company of $271,000 in liabilities, including a note to the seller in the amount of $130,000. 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 APB 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 goodwill of $1,505,265, which is being amortized on a straight-line basis over twenty years. Boulder had revenue of approximately $0.9 million for the five months ended May 31, 2000. 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, including the Tato Skins(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 twenty years. 31 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. ACQUISITIONS: (CONTINUED) Unaudited pro forma information has been provided below for the year ended December 31, 1999 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 period presented nor does it project the Company's results of operations for any future period. 1999 ----------- Net revenues $32,594,488 Income (loss) before extraordinary loss and cumulative effect of a change in accounting principle $ 2,431 Earnings (loss) per common share - diluted $ 0.00 Weighted average number of common shares - diluted 12,509,756 On November 5, 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 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 revenues 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. 3. CONCENTRATIONS OF CREDIT RISK: The Company's cash is held by major banks. The Company, in the normal course of business, periodically maintains balances in excess of Federal insurance limits. The Company had no amounts in excess of the insurance limit at December 31, 2000 or at December 31, 1999. 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 2000 and 1999, substantially all of the Company's customers were distributors whose sales were concentrated to grocery distributors and retailers in the southwest or to vend operators throughout the 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, -------------------------- 2000 1999 ----------- ----------- Finished goods .............................. $ 468,007 $ 330,568 Raw materials ............................... 1,617,599 1,268,987 Reserve for excess and obsolete inventory.... (303,055) (378,143) ----------- ----------- $ 1,782,551 $ 1,221,412 =========== =========== 32 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 5. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
DECEMBER 31, ----------------------------- 2000 1999 ------------ ------------ Buildings and improvements .......................... $ 3,462,912 $ 3,438,492 Equipment ........................................... 10,731,075 11,496,139 Land ................................................ 272,006 272,006 Vehicles ............................................ 35,116 79,927 Furniture and office equipment ...................... 649,731 300,282 ------------ ------------ 15,150,840 15,586,846 Less accumulated depreciation and amortization ...... (2,844,599) (1,908,713) ------------ ------------ $ 12,306,241 $ 13,678,133 ============ ============
Depreciation expense was $1,089,004 and $725,068 in 2000 and 1999, respectively. Included in equipment are assets held under capital leases with an original cost of $1,193,110 and $1,295,828 at December 31, 2000 and 1999, respectively, and accumulated amortization of $796,749 and $617,590 at December 31, 2000 and 1999, 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 write down is required to reduce the carrying amount to the assets' net realizable value. On October 28, 2000, the Company experienced a fire at the Goodyear, Arizona manufacturing plant, causing a temporary shutdown of manufacturing operations at the facility. There was extensive damage to the roof and equipment utilities in the potato chip processing area. Third party manufacturers agreed to provide the Company with production volume to satisfy nearly all of the Company's anticipated customers' needs during the shutdown. The Company continued to season and package the bulk product received from third party manufacturers. The Company estimates full production will resume in March of 2001. The Company believes that its property and business interruption insurance and the actions taken by the Company to ensure product supply should help to mitigate the potential adverse impact from the fire on results of operations. The Company identified and recorded approximately $1.4 million of incremental expenses incurred as a result of the fire, primarily associated with outsourcing production. These extra expenses were charged to "cost of revenue" and offset by a $1.4 million credit representing estimated future insurance proceeds. As of December 31, 2000, the Company had been advanced $0.5 million of the $1.4 million by its insurance company as partial reimbursement. 33 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. LONG-TERM DEBT: Long-term debt consisted of the following:
DECEMBER 31, -------------------------------- 2000 1999 ------------ ------------ Convertible Debentures due in monthly installments through July 1, 2002; interest at 9%; collateralized by land, buildings, equipment and intangibles .................................................................. $ 481,115 $ 1,370,067 Working capital line of credit due October 4, 2002; interest at prime rate plus 1% (10.5% at December 31, 2000); collateralized by accounts receivable, inventories, equipment and intangibles ........................... 1,907,859 2,022,579 Term loan due in monthly installments through July 1, 2006; interest at prime rate (9.5% at December 31, 2000); collateralized by accounts receivable, inventories, equipment and intangibles ....................................... 4,982,051 5,800,000 Term loan due in monthly installments through March 31, 2001; interest at prime rate plus 2.5% (12% at December 31, 2000); collateralized by accounts receivable, inventories, equipment and intangibles .................. 87,500 350,000 Mortgage loan due in monthly installments through July 2012; interest at 9.03%; collateralized by land and building ................................... 1,912,705 1,940,509 Non-interest bearing note payable due in full on June 30, 2000 ................. -- 715,000 Term loan due in monthly installments through June 30, 2002; interest at prime plus 2% (11.5% at December 31, 2000); collateralized by accounts receivable, inventories, equipment and intangibles ........................... 386,250 -- Term loan due in monthly installments through June 15, 2002; interest at 6.4%; collateralized by certain assets of Boulder ............................ 632,214 -- Term loan due in monthly installments through June 15, 2002; interest at 6%..... 98,928 -- Term loan due in monthly installments through August 31, 2002; interest at prime plus 2% (11.5% at December 31, 2000); collateralized by accounts receivable, inventory, equipment and intangibles ............................. 237,500 -- Capital lease obligations due in monthly installments through 2002; interest rates ranging from 8.2% to 12.4%; collateralized by equipment ................ 614,357 598,911 ------------ ------------ 11,340,479 12,797,066 Less current portion ........................................................... (2,315,391) (2,116,226) ------------ ------------ $ 9,025,088 $ 10,680,840 ============ ============
Annual maturities of long-term debt are as follows: YEAR DECEMBER 31, 2000 ---- ----------------- 2001 ....................................... $ 2,315,391 2002 ....................................... 3,978,655 2003 ....................................... 928,727 2004 ....................................... 932,155 2005 ....................................... 935,906 Thereafter ................................. 2,249,645 ----------- $11,340,479 =========== 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 12.4%, require monthly payments, expire at various times through 2007 and are collateralized by the related equipment. 34 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. LONG-TERM DEBT: (CONTINUED) At December 31, 2000, the Company had outstanding 9% Convertible Debentures due July 1, 2002 in the principal amount of $481,115 held by Wells Fargo Small Business Investment Company, Inc. ("Wells Fargo"). The 9% Convertible Debentures, which were issued in 1995 pursuant to a Debenture Loan Agreement, 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 with the remaining balance due on July 1, 2002. In November 1999, Renaissance Capital, a former holder of the 9% Convertible Debentures, converted 50% ($859,047 principal amount) of its Debenture holdings into 859,047 shares of Common Stock and in December 2000, Renaissance Capital converted the remaining 50% ($859,047 principal amount) of its 9% Convertible Debentures holdings into 859,047 shares of Common Stock. 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 required financial ratios. On October 7, 1999, the Company signed a $9.15 million Credit Agreement with U.S. Bancorp (the "U.S. Bancorp Credit Agreement") consisting of a $3.0 million working capital line of credit (the "U.S. Bancorp Line of Credit"), a $5.8 million term loan (the "U.S. Bancorp Term Loan A") and a $350,000 term loan (the "U.S. Bancorp Term Loan B"). Borrowings under the U.S. Bancorp Credit Agreement were used to pay off a $2.5 million line of credit and a $0.5 million term loan previously obtained by the Company from Wells Fargo Business Credit, Inc., to refinance indebtedness effectively assumed by the Company in connection with the acquisition of Wabash Foods in October 1999, and will 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, 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, plus interest, until maturity on March 31, 2001. In June 2000, the U.S. Bancorp Credit Agreement was amended to include an additional $300,000 term loan (the "U.S. Bancorp Term Loan C") and to refinance the $715,000 non-interest bearing note due to U.S. Bancorp on June 30, 2000. Proceeds from the U.S. Bancorp Term Loan C were used in connection with the Boulder acquisition. The U.S. Bancorp Term Loan C bears interest at an annual rate of prime plus 2% and requires monthly principal payments of approximately $12,500, plus interest, until maturity on August 1, 2002. The Company made a payment of $200,000 on the $715,000 and refinanced the balance in a term loan (the "U.S. Bancorp Term Loan D"). The U.S. Bancorp Term Loan D bears interest at an annual rate of prime plus 2% and requires monthly principal payments of approximately $21,500, plus interest, until maturity on June 30, 2002. The U.S. Bancorp Credit Agreement is secured by accounts receivable, inventories, equipment and intangibles. Borrowings under the line of credit are limited to 80% of eligible receivables and 60% of eligible inventories. At December 31, 2000, the Company had a borrowing base of $2,934,000 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, 2000, the Company was in compliance with all of the financial covenants, except the annual capital expenditures limit of $335,000. U.S. Bancorp has waived the non-compliance for 2000. 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 in the future. 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. 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 35 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. LONG-TERM DEBT: (CONTINUED) Common Stock for an exercise price of $1.00 per share. The U.S. Bancorp Warrant is exercisable until October 7, 2004, the date of termination of the U.S. Bancorp Warrant, and provides the holder thereof certain piggyback registration rights. In connection with the Boulder acquisition, the Company issued a note to the seller in the amount of $830,000. The note bears interest at 6.4%, is secured by certain Boulder assets acquired, and requires monthly principal and interest payments of approximately $37,000 commencing July 2000 until maturity on June 15, 2002. The Company also assumed a $130,000 note to the seller's shareholders which bears interest at 6% and requires monthly principal and interest payments of approximately $6,000 commencing July 2000 until maturity on June 15, 2002. On November 4, 1998, the Company signed a new $2.5 million Credit Agreement with Wells Fargo Business Credit, Inc. (hereinafter "WFBCI" and formerly Norwest Business Credit, Inc.) which included a $2.0 million working capital line of credit (the "WFBCI Line of Credit") and a $0.5 million term loan (the "WFBCI Term Loan"). Borrowings under the WFBCI Credit Agreement were used to pay off borrowings under the Company's previous line of credit, to finance a portion of the consideration paid by the Company in connection with the Tejas acquisition, and for general working capital needs. The WFBCI Line of Credit had an annual rate of interest of prime plus 1.5% and a maturity date of November 2001 while the WFBCI 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 WFBCI Line of Credit was secured by receivables, inventories, equipment and general intangibles. Borrowings under the Wells Fargo BCI Line of Credit were based on 85% of eligible receivables and 60% of eligible inventories. The WFBCI 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. On November 4, 1998, pursuant to the terms of the WFBCI Credit Agreement, the Company issued to WFBCI a warrant (the "WFBCI Warrant") to purchase 50,000 shares of Common Stock for an exercise price of $0.93375 per share. The WFBCI Warrant is exercisable until November 3, 2003, the date of termination of the WFBCI Warrant, and provides the holder thereof certain demand and piggyback registration rights. The Company's Line of Credit and Term Loan with WFBCI were paid in full on October 7, 1999 in connection with the Wabash Foods, LLC acquisition and related U.S. Bancorp financing. 7. COMMITMENTS AND CONTINGENCIES: Rental expense under operating leases was $309,000 and $97,300 for each of the years 2000 and 1999. Minimum future rental commitments under non-cancelable leases as of December 31, 2000 are as follows: CAPITAL OPERATING YEAR LEASES LEASES TOTAL ---- --------- ---------- ---------- 2001 ................................ $ 394,361 $ 431,670 $ 826,031 2002 ................................ 280,696 424,950 705,646 2003 ................................ -- 420,050 420,050 2004 ................................ -- 414,359 414,359 2005 ................................ -- 403,452 403,452 Thereafter .......................... -- 3,989,831 3,989,831 --------- ---------- ---------- Total ............................... 657,057 $6,084,312 $6,759,369 ========== ========== Less amount representing interest.... (60,700) --------- Present value ....................... $ 614,357 ========= 36 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 principal) of its 9% Convertible Debentures (see Note 6) holdings into 859,047 shares of Common Stock and in December 2000 converted the remaining 50% ($859,047 of principal) of its 9% Convertible Debentures into 859,047 shares of Common Stock. The Company's outstanding 9% Convertible Debentures are convertible into 481,115 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 June 2000, October 1999, and November 1998, the Company issued 725,252, 4,400,000, and 523,077 unregistered shares of Common Stock in connection with the acquisitions of Boulder, 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, 2000 and 1999. The Company may issue such shares of Preferred Stock in the future without shareholder approval. WARRANTS During 1999 and 2000, warrant activity was as follows: WARRANTS WEIGHTED AVERAGE OUTSTANDING EXERCISE PRICE ----------- -------------- Balance, December 31, 1998 ......... 903,298 $1.93 Issued ........................ 510,000 1.06 --------- Balance, December 31, 1999 ......... 1,413,298 1.62 Issued ........................ 85,000 1.09 --------- Balance, December 31, 2000 ......... 1,498,298 1.59 ========= At December 31, 2000, outstanding warrants had exercise prices ranging from $0.88 to $4.38 and a weighted average remaining term of 3.2 years. Warrants that were exercisable at December 31, 2000 totaled 1,350,221 with a weighted average exercise price per share of $1.66. 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 occurred 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). 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 37 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. SHAREHOLDERS' EQUITY: (CONTINUED) to certain Directors and officers, which have various vesting terms (0 to 3 years) and various expiration terms (5 or 10 years). 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, 2000, outstanding options have exercise prices ranging from $.59 to $3.50 per share. During 1999 and 2000, 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, 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 Granted........................ 336,000 2.13 1,050,000 1.64 Canceled....................... (91,666) 1.84 -- -- Exercised...................... (28,334) 1.41 (125,000) 1.08 --------- --------- Balance, December 31, 2000....... 1,699,650 1.64 1,645,000 1.48 ========= =========
At December 31, 2000, outstanding Plan options had exercise prices ranging from $0.59 to $3.50 and a weighted average remaining term of 2.8 years. Plan options that were exercisable at December 31, 2000 totaled 975,415 with a weighted average exercise price per share of $1.60. At December 31, 2000, outstanding Non-Plan options had exercise prices ranging from $1.18 to $2.61 and a weighted average remaining term of 4.3 years. Non-Plan options that were exercisable at December 31, 2000 totaled 595,000 with a weighted average exercise price per share of $1.19. 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 Opinion 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 Opinion 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 2000 consistent with the provisions of SFAS No. 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, ------------------------ 2000 1999 --------- ---------- Net income (loss) - as reported..................................... $ 729,791 $ 74,240 Net income (loss) - pro forma ...................................... 28,491 (237,887) Basic net income (loss) per share of common stock - as reported .... 0.05 0.01 Basic net income (loss) per share of common stock - pro forma ...... 0.00 (0.03)
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 110% and 90%; risk-free interest rate of 6.10% and 5.41%; and expected lives of 3 years for 2000 and 1999, respectively. Under this method, the weighted average fair value of the options granted was $1.23 and $0.79 per share in 2000 and 1999, respectively. 38 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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, 2000 and 1999. 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, ------------------------ 2000 1999 --------- -------- Provision at statutory rate ................. $ 261,049 $ 25,242 State income tax, net ....................... 38,390 3,712 Nondeductible expenses ...................... 15,600 15,600 Net operating loss utilized and benefited.... (277,039) (44,554) --------- -------- $ 38,000 $ -- ========= ======== 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, --------------------------- 2000 1999 ----------- ----------- Net operating loss carryforward ............ $ 1,880,000 $ 2,083,000 Bad debt expense ........................... 96,000 80,000 Accrued liabilities ........................ 118,000 17,000 Other ...................................... 33,000 26,000 ----------- ----------- 2,127,000 2,206,000 Depreciation/amortization .................. (421,000) -- Deferred tax asset valuation allowance...... (1,706,000) (2,206,000) ----------- ----------- Net deferred tax asset ................ $ -- $ -- =========== =========== 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, 2000 and 1999. At December 31, 2000, the Company had a net operating loss carryforward ("NOLC") for federal income tax purposes of approximately $4.8 million. The Company's NOLC will begin to expire in varying amounts between 2010 and 2018. 10. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS: For the year ended December 31, 2000, one Arizona grocery chain customer accounted for $4,673,000, or 11%, and one national vending distributor customer accounted for $6,376,000, or 15%, of the Company's consolidated net revenues. For the year ended December 31, 1999, one Arizona grocery chain customer accounted for $3,284,000, or 14%, of the Company's consolidated net revenues. The Company's operations consist of two segments: manufactured products and distributed products. The manufactured products segment produced 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. 39 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS: (CONTINUED) 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 -------- -------- ------------ YEAR ENDED DECEMBER 31, 2000 Revenues from external customers ............ $36,543,102 $5,199,905 $41,743,007 Depreciation and amortization included in segment gross profit ...................... 953,010 -- 953,010 Segment gross profit ........................ 10,193,148 198,918 10,392,066 YEAR ENDED DECEMBER 31, 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
The following table reconciles reportable segment gross profit to the Company's consolidated income before extraordinary loss and cumulative effect of a change in accounting principle:
YEARS ENDED DECEMBER 31, --------------------------- 2000 1999 ----------- ---------- Segment gross profit ................................... $10,392,066 $5,707,118 Unallocated amounts: Selling, general and administrative expenses ........ 8,446,808 4,763,896 Interest expense, net ............................... 1,177,467 749,750 ----------- ---------- Income before taxes, extraordinary loss and cumulative effect of a change in accounting principle .......... $ 767,791 $ 193,472 =========== ==========
11. 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. 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. 40 EXHIBIT INDEX 4.11 -- Form of Term Note C and Term Note D issued by the Company to U.S. Bancorp as of June 30, 2000. 10.43 -- Employment Agreement dated August 31, 2000, by and between John M. Silvestri and the Company. 10.44 -- First Amendment, dated as of June 30, 2000, to Credit Agreement, dated as of October 3, 1999, by and between the Company and U.S. Bancorp. 21.1 -- List of subsidiaries of Poore Brothers, Inc. 23.1 -- Consent of Arthur Andersen LLP. 41 EX-4.11 2 ex4-11.txt FORM OF TERM NOTE C AND TERM NOTE D Exhibit 4.11 TERM NOTE C $515,000 As of June 30, 2000 Minneapolis, Minnesota FOR VALUE RECEIVED, 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"), WABASH FOODS, LLC, a Delaware limited liability company ("WABASH"), BOULDER NATURAL FOODS, INC., an Arizona corporation ("BOULDER") and BN FOODS, INC., a Colorado corporation ("BNF"), (PBI, PBAI, PBDI, Tejas, Wabash, Boulder and BNF each a "BORROWER" and collectively the "BORROWER" or the "BORROWERS"), hereby jointly and severally promise to pay to the order of U.S. BANK NATIONAL ASSOCIATION, a national banking association (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 HUNDRED FIFTEEN THOUSAND DOLLARS AND NO CENTS ($515,000.00), 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 twenty-four monthly installments, each payment in the amount of $21,458, commencing on August 31, 2000 and the last day of each month thereafter until July 31, 2002 when the remaining principal balance and all accrued interest shall be payable. This note is the Term Note C referred to in the Credit Agreement dated as of October 3, 1999, as amended by the First Amendment to Credit Agreement bearing even date herewith (as the same may hereafter be from time to time further 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 --------------------------------- Its ------------------------------- POORE BROTHERS ARIZONA, INC. By --------------------------------- Its ------------------------------- POORE BROTHERS DISTRIBUTING, INC. By --------------------------------- Its ------------------------------- TEJAS PB DISTRIBUTING, INC. By --------------------------------- Its ------------------------------- WABASH FOODS, LLC By --------------------------------- Its ------------------------------- BOULDER NATURAL FOODS, INC. By --------------------------------- Its ------------------------------- BN FOODS, INC. By --------------------------------- Its ------------------------------- TERM NOTE D $300,000 As of June 30, 2000 Minneapolis, Minnesota FOR VALUE RECEIVED, 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"), WABASH FOODS, LLC, a Delaware limited liability company ("WABASH"), BOULDER NATURAL FOODS, INC., an Arizona corporation ("BOULDER") and BN FOODS, INC., a Colorado corporation ("BNF"), (PBI, PBAI, PBDI, Tejas, Wabash, Boulder and BNF each a "BORROWER" and collectively the "BORROWER" or the "BORROWERS"), hereby jointly and severally promise to pay to the order of U.S. BANK NATIONAL ASSOCIATION, a national banking association (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 THOUSAND DOLLARS AND NO CENTS ($300,000.00), 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 twenty-four monthly installments, each payment in the amount of $12,500, commencing on August 31, 2000 and the last day of each month thereafter until July 31, 2002 when the remaining principal balance and all accrued interest shall be payable. This note is the Term Note D referred to in the Credit Agreement dated as of October 3, 1999, as amended by the First Amendment to Credit Agreement bearing even date herewith (as the same may hereafter be from time to time further 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 --------------------------------- Its ------------------------------- POORE BROTHERS ARIZONA, INC. By --------------------------------- Its ------------------------------- POORE BROTHERS DISTRIBUTING, INC. By --------------------------------- Its ------------------------------- TEJAS PB DISTRIBUTING, INC. By --------------------------------- Its ------------------------------- WABASH FOODS, LLC By --------------------------------- Its ------------------------------- BOULDER NATURAL FOODS, INC. By --------------------------------- Its ------------------------------- BN FOODS, INC. By --------------------------------- Its ------------------------------- EX-10.43 3 ex10-43.txt EMPLOYMENT AGREEMENT - JOHN M. SILVESTRI Exhibit 10.43 EMPLOYMENT AGREEMENT This employment agreement ("Agreement") is made and entered into effective as of the 31st day of August 2000 ("Effective Dates"), by and between POORE BROTHERS, INC. ("Company"), a Delaware corporation, and JOHN M. SILVESTRI ("Employee"), a married man. In consideration of the mutual promises and covenants contained herein, and other good and valuable consideration, the receipt of which is acknowledged, Company and Employee agree as provided in this Agreement. 1. EMPLOYMENT. Company hereby employs Employee, and Employee accepts employment by Company, upon the terms and conditions contained in this Agreement. 2. TERM. Employee's employment by Company shall commence on August 31, 2000, and shall continue until either Company or Employee gives to the other party written notice of termination. Employee shall be an employee at will and if Employee's employment is terminated, Employee's status as officer of Company shall also be terminated. Either Company or Employee may terminate Employee's employment by Company with or without cause upon written notice of termination to the other party. 3. TITLE. During the period of Employee's employment by Company, Employee shall be the Senior Vice President of Sales & Marketing of Company and shall have all rights, powers and authority inherent in such position, including, without limitation, the authority to direct the day-to-day sales operations of Company, as may be designated by the Company's Board of Directors from time to time. 4. COMPENSATION. During the period of Employee's employment by Company, Employee shall receive from Company an annual salary of $157,200, which shall be payable proportionately on Company's regular payroll payment dates for its employees. Employee's annual salary shall be subject to change at the discretion of Company's Compensation Committee of the Board of Directors. 5. BONUSES. During and for the period of Employee's employment by Company, Employee shall receive such bonuses, whether incentive, merit or otherwise and whether cash, stock or otherwise, as Company's Compensation Committee shall determine from time to time. 6. FRINGE BENEFITS. During the period of Employee's employment by Company, Employee shall be entitled to participate in all of Company's qualified retirement plans and welfare benefit plans (e.g., group health insurance) on the same basis as Company's other employees. In addition, during the period of Employee's employment by Company, Employee shall be entitled to participate in all non-qualified deferred compensation and similar compensation, bonus and stock plans offered, sponsored or established by Company on substantially the same basis as any other employee of Company. Employee shall be entitled to four (4) weeks vacation (prorated for partial calendar years) during each year of his employment with Company. 7. TELEPHONE, CREDIT CARD AND ALLOWANCES. During the period of Employee's employment by Company, Company shall furnish to Employee the following: (a) Company shall furnish to Employee a mobile or cellular telephone for Employee's use and shall pay all charges in connection therewith (except Employee shall reimburse Company for the charges each month that are in excess of $200 of charges in such month which are not accounted for by Employee as charges for the purposes of Company). The telephone to be furnished to Employee shall be agreed upon by Company and Employee from time to time. (b) Company shall furnish to Employee a Company credit card for Employee to use solely for purposes of Company. (c) Company shall pay Employee an automobile allowance of $650 per month. In no event shall Company be responsible for any automobile related expenses, including but not limited to gasoline, insurance (however Employee shall maintain insurance coverage reasonably satisfactory to Company), oil, tires, warranty and routine service and other maintenance and repairs for the 1 automobile. Employee acknowledges that he may recognize taxable income in connection with Company's providing an auto allowance. (d) Company shall also pay to Employee a $105,900.00 non-accountable expense allowance, before taxes, to defray Employee's reasonable costs of moving and relocation. This allowance shall be paid within three (3) business days of the Effective Date if Employee commences employment with Company in Goodyear, Arizona on or before said date; provided, that if this Agreement is terminated by Employee prior to Employee's completion of twelve (12) months of employment or Employee's immediate family fails to move permanently to Arizona within 90 days of the Effective Date, Employee shall repay to Company within three (3) months the $105,900.00 allowance paid by Company. Employee acknowledges that he may recognize taxable income in connection with Company's providing a non-accountable expense allowance. 8. OPTIONS. Company hereby grants to Employee the right and option to purchase 100,000 shares of Company's $0.01 par value voting common stock ("Common Stock"), in accordance with Company's 1995 Stock Option Plan ("ISO Plan"), at a price per share equal to the average closing price ("last sale") per share of Company's Common Stock for the five (5) consecutive day trading period ending on the Effective Date. These options will vest in equal 33,333 (33,334 shares in the final year) share increments on the first, second and third anniversaries of the Effective Date. Employee acknowledges receipt of a copy of the ISO Plan and agrees to the terms set forth therein. Employee further recognizes that the ISO Plan is subject to change from time to time by the Board of Directors of Company. All of the terms and conditions of the options described herein shall otherwise be governed by the terms of the ISO Plan including, without limitation, exercise dates and times, payment of option prices, revisions of the options, expiration and the like, all of the terms and conditions of which ISO Plan are incorporated by reference into this portion of this Agreement as if fully rewritten herein. Company hereby grants to Employee the right and option to purchase 100,000 shares of Company's Common Stock, in accordance with Company's Non-statutory Stock Options ("NSO Plan"), at a price per share equal to the average closing price ("last sale") per share of Company's Common Stock for the five (5) consecutive day trading period ending on the Effective Date. These options will vest in equal 33,333 (33,334 shares in the final year) share increments on the first, second and third anniversaries of the Effective Date. Employee acknowledges receipt of a copy of the NSO Plan and agrees to the terms set forth therein. Employee further recognizes that the NSO Plan is subject to change from time to time by the Board of Directors of Company. All of the terms and conditions of the options described herein shall otherwise be governed by the terms of the NSO Plan including, without limitation, exercise dates and times, payment of option prices, revisions of the options, expiration and the like, all of the terms and conditions of which NSO Plan are incorporated by reference into this portion of this Agreement as if fully rewritten herein. Nothwithstanding the foregoing, any unvested portion of the options granted to Employee hereunder shall become exercisable upon a "change in control" (as defined below) of Company. As used in this paragraph, the term "change of control" shall mean the change of hands, within any consecutive one (1) month period, of more than thirty (30) percent of the voting stock of Company, with the concomitant result that the new owner or owners of such stock exercise their voting rights to "control" the identities of the members of the Company's Board of Directors, as the term "control" is defined, or to which reference is made, in the regulations promulgated under the Securities Exchange Act of 1934, as amended. 9. CONFIDENTIALITY. (a) During the period of Employee's employment by Company and for a one year period thereafter, Employee shall hold in confidence and shall not disclose or publish, except in the performance of his duties under this Agreement, any Confidential Information (as defined below) that is presented or disclosed to him in connection with his employment by Company. (b) Subject to the provisions of Section 9(c) below, for purposes of this Agreement the term "Confidential Information" shall mean information or material that is proprietary to and owned by Company. Such Confidential Information shall include, without limitation, Company's recipes for specialty potato chips, manufacturing processes, customer lists, supplier lists and pricing information. (c) Notwithstanding the foregoing, the term Confidential Information shall not include any information or material that: (i) is in, or has passed into, the public domain; 2 (ii) is lawfully received by Employee from a third party; (iii) is required to be disclosed by Employee by law or pursuant to an order determination issued by a court or any federal, state or municipal regulatory or administrative agency; or (iv) was in the possession of, or known by, Employee prior to his Employment by Company. (d) Employee acknowledges that the Confidential Information of Company is unique in character and that Company would not have an adequate remedy at law for a material breach or threatened material breach by Employee of his covenants under this Section 9. Employee therefore agrees that, in the event of any such material breach or threat thereof, Company may obtain a temporary and/or permanent injunction or restraining order to enjoin Employee from such material breach or threat thereof, in addition to any other rights or remedies available to Company at law or in equity. (e) Notwithstanding the foregoing, Employee may disclose Confidential Information to his attorneys and other advisors on a need to know basis provided the recipient is directed and required to maintain the disclosed Confidential Information in confidence. 10. NONCOMPETE. During the period of Employee's employment by Company, Employee shall not, directly or indirectly, whether as principal, consultant, employee, agent, officer, director, trustee or otherwise, engage in the business of manufacturing specialty potato chips, salted snack foods or popcorn or engage in the business of selling or distributing specialty potato chips, salted snack foods or popcorn. In addition, Employee shall not, for a period of one year beginning on the date of termination of his employment, directly or indirectly, whether as principal, consultant, employee, agent, officer, director, trustee or otherwise, engage in the United States in the business of manufacturing specialty potato chips, salted snack foods or popcorn or engage in the United States in the business of selling or distributing specialty potato chips, salted snack foods or popcorn. Employee acknowledges that the foregoing limitations are minimum limitations which are necessary to protect the legitimate interests of Company because of Employee's sensitive executive position with Company. Therefore, if a breach of the foregoing shall occur, in addition to any action for damages which Company may have, Company shall have the right to obtain an injunction as a matter of right prohibiting Employee's competition in violation of the foregoing. In the event that the time period of non-competition is deemed to be unreasonable, Employee acknowledges that 11 months shall be deemed reasonable. In the event 11 months is deemed unreasonable, then 10 months is deemed reasonable, and so on, until the foregoing covenant is enforceable to the fullest extent permitted by law. Similarly, in the event the entire United States is deemed unreasonable, states shall be eliminated one by one beginning with Maine, continuing down the east coast of the United States and in roughly in north to south linear fashion across the United States until the geographical limit set forth above is deemed reasonable to the fullest extent permitted by law. 11. SEVERANCE. Although Employee is an employee at will, and Employee's status as employee and officer of Company may be terminated at any time for any reason or for no reason at all, Company agrees that, if Employee is terminated by Company (as opposed to Employee resigning) without "cause" (to which reference is made below), Employee shall be entitled to receive four months' salary ("Severance Compensation"), which Severance Compensation shall be paid as regular compensation would be paid over said four-month period after Employee's employment is terminated. Employee shall further be entitled to retain all vested options and Employer shall pay reasonable (in Employer's reasonable determination) out-placement fees not to exceed $5,000.00 regarding Employee's future employment during the four-month period following the termination. Employee's right to receive such Severance Compensation shall be conditioned upon Employee executing such documents (including reasonable mutual releases which also must be executed by Employee's spouse, if any) in such forms as may be prescribed by Company from time to time. Employee acknowledges if Employee's employment is terminated by Company for "cause," Employee shall be due no Severance Compensation or out-placement assistance and may further be liable to Company for damages caused by the existence of such cause, to the extent permitted by law and this Agreement. When used herein, the term "cause" shall mean and refer to any of the following: (i) Employee's continued insubordination or failure to follow Company directives after notice from Company or its Board; (ii) Employee conducting himself in a manner which is not reasonably calculated to be in the best interests of Company or which brings disrepute or disdain upon Company and/or its reputation and/or products, after Employee has received notice from Company or the Board of such conduct and has continued to persist in such conduct; 3 (iii) Any acts of gross negligence, willful malfeasance, theft, fraud or dishonesty of Employee or the bankruptcy or insolvency of Employee; (iv) The death or disability of Employee, Employee acknowledging that such events are covered by Company's general benefit package; or (v) Employee's breach of any other term of this Agreement, which breach persists after ten (10) days written notice to Employee of such breach. 12. INDEMNIFICATION. (a) Company shall indemnify and hold Employee harmless and defend Employee for, from and against all claims, liabilities, obligations, fines, penalties and other matters and all costs and expenses relating thereto that Company and/or such subsidiary or affiliated entity is permitted by applicable law, except as any of the foregoing arises out of or relates to Employee's negligence, willful malfeasance and/or breach of this Agreement. (b) Company represents and warrant to Employee that neither its articles of incorporation nor its bylaws nor any resolutions of its shareholders or board of directors restricts or limits Companies rights or obligations to indemnify Employee as provided in subsection (a) of this Section 12, except to the extent such restrictions or limitations are required by applicable law. 13. ADDITIONAL PROVISIONS. (a) This Agreement shall not be assigned by either Company or Employee without the other party's prior written consent; otherwise, this Agreement shall be binding upon, and shall inure to the benefit of, the heirs, personal representatives, successors and assigns of Company and Employee respectively. (b) This Agreement and the rights and obligations of Company and Employee shall be governed by, and shall be construed in accordance with, the laws of the State of Arizona without the application of any laws of conflicts of laws that would require or permit the application of the laws of any other jurisdiction. (c) Time is of the essence of this Agreement and each provision hereof. (d) This Agreement sets forth the entire understanding of Company and Employee with respect to the matters set forth herein and cannot be amended or modified except by an instrument in writing signed by the party against whom enforcement is sought. (e) This Agreement is the result of negotiations between Company and Employee, and Company and Employee hereby waive the application of any rule of law that otherwise would be applicable in connection with the interpretation and construction of this Agreement that ambiguous or conflicting terms or provisions are to be interpreted or construed against the party who (or whose attorney) prepared the executed Agreement or any earlier draft of the same. (f) If any provision or any portion of any provision of this Agreement shall be deemed to be invalid, illegal or unenforceable, the same shall not alter the remaining portion of such provision or any other provision of this Agreement, as each provision of this Agreement and portion thereof shall be deemed severable. (g) Except as may be otherwise required by law, any notice required or permitted to be given under this Agreement shall be given in writing and shall be given either by (i) personal delivery, or (ii) overnight courier service, or (iii) facsimile transmission, or (iv) United States certified or registered mail, in each case with postage prepaid to the following address or to such other address as Company or Employee may designate by notice given to the other party pursuant to this section. Notice shall be effective on (v) the day notice is personally delivered, if notice is given by personal delivery, or (vi) the first business day after the date of delivery to the overnight delivery service, if notice is given by such a delivery service, (vii) the day notice is received, if notice is given by facsimile, or (viii) the fourth business day after notice is deposited in the United States mail, if notice is given by United States certified or registered mail. Company: Poore Brothers, Inc. 3500 South La Cometa Drive Goodyear, Arizona 85338 Fax No. (623) 925-2363 4 Employee: John M. Silvestri ------------------------------- ------------------------------- Fax No. -- -------------------- (h) If any action, suit or proceeding is brought in connection with this Agreement, or on account of any breach of this Agreement, or to enforce or interpret any of the terms, covenants and conditions of this Agreement, the prevailing party shall be entitled to recover from the other party or parties, the prevailing party's reasonable attorneys' fees and costs, and the amount thereof shall be determined by the court (not by a jury) or the arbitrator and shall be made a part of any judgment or award rendered. POORE BROTHERS, INC. ("Company") By ------------------------------------ Its ------------------------------------ JOHN M. SILVESTRI ("Employee") ---------------------------------------- 5 EX-10.44 4 ex10-44.txt FIRST AMENDMENT TO CREDIT AGR DATED 6/30/00 Exhibit 10.44 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is made and entered into as of June 30, 2000 by and between 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"), WABASH FOODS, LLC, a Delaware limited liability company ("WABASH"), BOULDER NATURAL FOODS, INC., an Arizona corporation ("BOULDER"), and BN FOODS, INC., a Colorado corporation ("BNF") (PBI, PBAI, PBDI, Tejas, Wabash, Boulder and BNF each a "BORROWER" and collectively the "BORROWER" or the "BORROWERS"), and U.S. BANK NATIONAL ASSOCIATION, a national banking association, successor in interest to U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC., a Minnesota corporation (the "LENDER"). RECITALS: A. PBI, PBAI, PBDI, Tejas, Wabash and the Lender entered into a certain Credit Agreement dated as of October 3, 1999 (the "CREDIT AGREEMENT"). All capitalized terms not otherwise defined herein shall have the meanings given to them in the Credit Agreement. B. Boulder became a party to, and a "Borrower" under, the Credit Agreement pursuant to the terms and conditions of that certain Joinder Agreement dated as of June 7, 2000 by and between Boulder, Lender, PBI, PBAI, PBDI, Tejas and Wabash. C. BNF became a party to, and a "Borrower" under, the Credit Agreement pursuant to the terms and conditions of that certain Joinder Agreement dated as of June 30, 2000 by and between BNF, Lender, PBI, PBAI, PBDI, Tejas, Wabash and Boulder. D. The Borrowers have requested the Lender to amend the Credit Agreement (i) to convert into a new term loan a portion of the fees owed by the Borrowers to the Lender under the Credit Agreement, and (ii) to document the extension of a new term loan by the Lender to the Borrowers. The Lender has agreed to do so upon the terms and subject to the conditions herein set forth. AGREEMENTS: NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, and for One Dollar and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. DELIVERY OF DOCUMENTS. At or prior to the execution of this Amendment, Borrowers shall have delivered or caused to be delivered to the Lender the following documents each dated such date and in form and substance satisfactory to the Lender and duly executed by all appropriate parties: (a) This Amendment. (b) Term Note C (defined below). (c) Term Note D (defined below). (d) Payment of $200,000 to the Lender as partial payment of the Wabash Sale Fee. (e) Acknowledgment and Consent of Subordinated Lender from Renaissance Capital Growth and Income Fund III, Inc. and Wells Fargo Small Business Investment Company, Inc. in the form attached hereto. (f) Such other documents or instruments as the Lender may reasonably require, including, without limitation, any financing statements, notices or other instruments, required by Lender to evidence or perfect more effectively the security interest of Lender in the Collateral (as that term is defined in the Security Agreement). 1 2. AMENDMENTS. Section 2.1. DEFINED TERMS. (a) The following definitions are hereby added to Section 1.1 of the Credit Agreement: "TERM LOAN C": As defined in Section 2.1(d). "TERM LOAN D": As defined in Section 2.1(e). "TERM LOAN C COMMITMENT": The obligation of the Lender to make a term loan to the Borrower in the Term Loan C Commitment Amount upon the terms and subject to the conditions and limitations of this Agreement. "TERM LOAN D COMMITMENT": The obligation of the Lender to make a term loan to the Borrower in the Term Loan D Commitment Amount upon the terms and subject to the conditions and limitations of this Agreement. "TERM LOAN C COMMITMENT AMOUNT": As defined in Section 2.1(d). "TERM LOAN D COMMITMENT AMOUNT": As defined in Section 2.1(e). "TERM NOTE C": As defined in Section 2.3. "TERM NOTE D": As defined in Section 2.3. (b) The following terms defined in Section 1.1 of the Credit Agreement are hereby amended in their entirety to read as follows: "COMMITMENTS": The Revolving Commitment, the Term Loan A Commitment, the Term Loan B Commitment, the Term Loan C Commitment and the Term Loan D Commitment. "TERM NOTES: Term Note A, Term Note B, Term Note C and Term Note D. Section 2.2. NEW TERM LOANS. (a) A new Section 2.1(d) and a new Section 2.1(e) are hereby added to the Credit Agreement to read as follows: 2.1(d) TERM LOAN C. A term loan ("Term Loan C") from the Lender to the Borrower on June 30, 2000 in the amount of $515,000.00 (the "Term Loan C Commitment Amount"). 2.1(e) TERM LOAN D. A term loan ("Term Loan D") from the Lender to the Borrower on June 30, 2000 in the amount of $300,000.00 (the "Term Loan D Commitment Amount"). (b) Section 2.3 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: 2.3 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 2 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. Term Loan C shall be evidenced by a promissory note ("Term Note C"), substantially in the form of Exhibit 2.3(d) hereto, in an amount equal to the Term Loan C Commitment Amount. Term Loan D shall be evidenced by a promissory note ("Term Note D"), substantially in the form of Exhibit 2.3(e) hereto, in an amount equal to the Term Loan D Commitment Amount. The Lender shall enter in its ledgers and records the payments made on the Revolving Note, Term Loan A, Term Loan B, Term Loan C and Term Loan D 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. (c) Section 2.4 of the Credit Agreement is hereby amended to add the following new sentences immediately before the last sentence of such Section 2.4: "Interest shall accrue and be payable on the unpaid balance of Term Note C at a floating rate equal to the Reference Rate plus 2.0% (the latter being the "Applicable Term C Margin"); PROVIDED, HOWEVER, that upon the happening of any Event of Default, then, at the option of the Lender, Term Note C shall thereafter bear interest at a floating rate equal to the sum of (a) the Reference Rate, plus (b) the Applicable Term C Margin, plus (c) 2%. Interest shall accrue and be payable on the unpaid balance of Term Note D at a floating rate equal to the Reference Rate plus 2.0% (the latter being the "Applicable Term D Margin"); PROVIDED, HOWEVER, that upon the happening of any Event of Default, then, at the option of the Lender, Term Note D shall thereafter bear interest at a floating rate equal to the sum of (a) the Reference Rate, plus (b) the Applicable Term D Margin, plus (c) 2%." (d) A new Section 2.6(d) and a new Section 2.6(e) are hereby added to the Credit Agreement to read as follows: 2.6(d) REPAYMENT OF TERM LOAN C. Principal of Term Note C is payable as provided in Term Note C. Any prepayment must be accompanied by accrued and unpaid interest on the amount prepaid. Amounts so prepaid cannot be reborrowed. 2.6(e) REPAYMENT OF TERM LOAN D. Principal of Term Note D is payable as provided in Term Note D. Any prepayment must be accompanied by accrued and unpaid interest on the amount prepaid. Amounts so prepaid cannot be reborrowed. Section 2.3. NEW EXHIBITS. Exhibit 2.3(d) and Exhibit 2.3(e) attached hereto are hereby incorporated by reference into and are made a part of the Credit Agreement as Exhibit 2.3(d) and Exhibit 2.3(e), respectively, attached thereto. 3 CONTINUING OBLIGATION; REPRESENTATIONS. To induce the Lender to enter into this Amendment, the Borrowers represent and warrant to the Lender as follows: Section 3.1 CONTINUING OBLIGATION. Borrowers acknowledge and agree that they remain obligated for the payment of indebtedness evidenced and secured by the Credit Agreement and the other Loan Documents, and agree to be bound by and to perform all of the covenants and agreements set forth in said documents and instruments, as the same may be amended by this Amendment. Section 3.2 REAFFIRMATION OF REPRESENTATIONS. Borrowers hereby restate and reaffirm all representations, warranties and covenants contained in the Credit Agreement and the Loan Documents, the same as if such covenants, representations and warranties were made by Borrowers on the date hereof. Section 3.3 INTELLECTUAL PROPERTY. Borrowers represent and warrant that Borrowers possess or have the right to use all of the patents, trademarks, trade names, service marks and copyrights, and applications therefor, and all technology, know-how, processes, methods and designs used in or necessary for the conduct of their business, without known conflict with the rights of others. 3 All such licenses, patents, trademarks, trade names, service marks and copyrights, and applications therefor, existing on the date hereof are listed on EXHIBIT A attached hereto. 4. ACKNOWLEDGMENT OF SECURITY INTEREST. The Borrowers acknowledge that the Term Note C and Term Note D constitute an "Obligation" as that term is defined in Section 1(a) of the Security Agreement and that the Collateral described in the Security Agreement therefore secures the payment of the Term Note C and Term Note D in accordance with the terms of the Security Agreement. 5. FEES AND EXPENSES. The Borrowers agree to pay or reimburse the Lender for all reasonable out-of-pocket expenses (including, without limitation, reasonable attorneys' fees, and out-of-pocket disbursements of Lender's legal counsel) incurred by the Lender in connection with this Amendment and related documents. 6. EXECUTION IN COUNTERPARTS. This Amendment may be executed in two or more counterparts each of which shall be an original and all of which shall constitute but one and the same instrument. 7. REFERENCES. All references to the Credit Agreement in any document or instrument are hereby amended and shall refer to the Credit Agreement as amended by this Amendment. Except as amended hereby, the provisions of the Credit Agreement shall remain unmodified and in full force and effect. [Remainder of page intentionally left blank; Signature pages follow] 4 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Credit Agreement be executed as of the day and year first above written. BORROWERS: POORE BROTHERS, INC., a Delaware corporation By ---------------------------------------- Its -------------------------------------- POORE BROTHERS ARIZONA, INC., an Arizona corporation By ---------------------------------------- Its -------------------------------------- POORE BROTHERS DISTRIBUTING, INC., an Arizona corporation By ---------------------------------------- Its -------------------------------------- TEJAS PB DISTRIBUTING, INC., an Arizona corporation By ---------------------------------------- Its -------------------------------------- WABASH FOODS, LLC, a Delaware limited liability company By ---------------------------------------- Its -------------------------------------- BOULDER NATURAL FOODS, INC., an Arizona corporation By ---------------------------------------- Its -------------------------------------- BN FOODS, INC., a Colorado corporation By ---------------------------------------- Its -------------------------------------- LENDER: U.S. BANK NATIONAL ASSOCIATION, a national banking association By ---------------------------------------- Its -------------------------------------- 5 ACKNOWLEDGMENT AND CONSENT OF SUBORDINATED LENDER RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC., a Texas corporation ("RENAISSANCE") and WELLS FARGO SMALL BUSINESS INVESTMENT COMPANY, INC., a California corporation ("WELLS FARGO") hereby acknowledge and agree that Term Note C, Term Note D and any other loans, advances or other financial accommodations now or hereafter made by the Lender to any one or more of the Borrowers (collectively, the "ADDITIONAL CREDIT") shall constitute "Senior Debt" as that term is defined in (i) as to Renaissance, that certain Subordination Agreement (Debt and Security) dated October 3, 1999 by and between Renaissance and U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC., a Minnesota corporation, predecessor in interest to U.S. BANK NATIONAL ASSOCIATION, a national banking association (the "RENAISSANCE SUBORDINATION AGREEMENT"), and (ii) as to Wells Fargo, that certain Subordination Agreement (Debt and Security) dated October 3, 1999 by and between Wells Fargo and U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC, a Minnesota corporation, predecessor in interest to U.S. BANK NATIONAL ASSOCIATION, a national banking association (the "WELLS FARGO SUBORDINATION AGREEMENT"). Accordingly, Renaissance and Wells Fargo each hereby expressly acknowledge and agree that any obligation now or hereafter owed by any one or more of the Borrowers to either of Renaissance or Wells Fargo is and shall be subordinate to the Additional Credit in accordance with the terms and conditions set forth in the Renaissance Subordination Agreement or the Wells Fargo Subordination Agreement, as the case may be. RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. By ---------------------------------------- Its -------------------------------------- WELLS FARGO SMALL BUSINESS INVESTMENT COMPANY, INC. By ---------------------------------------- Its -------------------------------------- 6 EXHIBIT A INTELLECTUAL PROPERTY See attached. EX-21.1 5 ex21-1.txt SUBSIDIARIES Exhibit 21.1 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 La Cometa Properties, Inc. Arizona Tejas PB Distributing, Inc. Arizona Poore Brothers-Bluffton, LLC (formerly Wabash Foods, LLC) Delaware Boulder Natural Foods, Inc. Arizona BN Foods, Inc. Colorado EX-23.1 6 ex23-1.txt CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.1 CONSENT OF ARTHUR ANDERSEN LLP Poore Brothers, Inc. As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-KSB, into the Company's previously filed Registration Statements Nos. 333-48692 and 333-26117. /s/ ARTHUR ANDERSEN LLP March 29, 2001 Phoenix, Arizona -----END PRIVACY-ENHANCED MESSAGE-----