10QSB 1 e-6803.txt QUARTERLY REPORT FOR QTR ENDED 03-31-2001 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2001 OR [ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to _______ Commission File Number 1-14556 POORE BROTHERS, INC. ----------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) DELAWARE 86-0786101 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3500 S. LA COMETA DRIVE, GOODYEAR, ARIZONA 85338 ------------------------------------------------ (Address of principal executive offices) (623) 932-6200 --------------------------- (Issuer's telephone number) Check whether the Registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of March 31, 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] TABLE OF CONTENTS PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated balance sheets as of March 31, 2001 and December 31, 2000................................................ 3 Consolidated statements of operations for the three months ended March 31, 2001 and 2000 ................................... 4 Consolidated statements of cash flows for the three months ended March 31, 2001 and 2000 ................................... 5 Notes to consolidated financial statements......................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION............................................ 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS.................................................. 14 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 14 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................... 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 14 ITEM 5. OTHER INFORMATION.................................................. 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................... 14 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2001 2000 ------------ ------------ ASSETS (unaudited) Current assets: Cash .......................................................... $ 163,975 $ 327,553 Accounts receivable, net of allowance of $366,000 in 2001 and $247,000 in 2000 ........................................ 7,513,948 4,936,393 Inventories ................................................... 2,637,212 1,782,551 Other current assets .......................................... 395,931 394,356 ------------ ------------ Total current assets ........................................ 10,711,066 7,440,853 Property and equipment, net ..................................... 13,608,446 12,306,241 Intangible assets, net .......................................... 9,867,605 10,030,631 Other assets .................................................... 220,896 212,737 ------------ ------------ Total assets .................................................... $ 34,408,013 $ 29,990,462 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .............................................. $ 5,309,709 $ 3,031,130 Accrued liabilities ........................................... 2,252,216 1,323,357 Current portion of long-term debt ............................. 2,355,430 2,315,391 ------------ ------------ Total current liabilities ................................... 9,917,355 6,669,878 Long-term debt, net of current portion .......................... 9,811,420 9,025,088 ------------ ------------ Total liabilities ........................................... 19,728,775 15,694,966 ------------ ------------ Commitments and Contingencies Shareholders' equity: Preferred stock, $100 par value; 50,000 shares authorized; no shares issued or outstanding at March 31, 2001 and December 31, 2000 ........................................... -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 15,004,765 and 14,994,765 shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively ....... 150,047 149,947 Additional paid-in capital .................................... 19,692,442 19,677,542 Accumulated deficit ........................................... (5,163,251) (5,531,993) ------------ ------------ Total shareholders' equity .................................. 14,679,238 14,295,496 ------------ ------------ Total liabilities and shareholders' equity ...................... $ 34,408,013 $ 29,990,462 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, -------------------------------- 2001 2000 ------------ ------------ (unaudited) (unaudited) Net revenues ....................................... $ 14,159,187 $ 9,707,837 Cost of revenues ................................... 10,394,415 7,287,932 ------------ ------------ Gross profit .................................. 3,764,772 2,419,905 Selling, general and administrative expenses........ 3,096,437 1,875,019 ------------ ------------ Operating income .............................. 668,335 544,886 Fire related income ................................ 12,612 -- Interest expense, net .............................. (296,205) (280,802) ------------ ------------ Income before income tax provision ............ 384,742 264,084 Income tax provision ............................... (16,000) (6,500) ------------ ------------ Net income .................................... $ 368,742 $ 257,584 ============ ============ Earnings per common share: Basic ............................................ $ 0.02 $ 0.02 ============ ============ Diluted .......................................... $ 0.02 $ 0.02 ============ ============ Weighted average number of common shares: Basic ............................................ 14,999,765 13,260,506 ============ ============ Diluted .......................................... 16,965,390 13,902,146 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 4 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, ----------------------------- 2001 2000 ----------- --------- (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ...................................................... $ 368,742 $ 257,584 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ................................................... 276,071 285,136 Amortization ................................................... 174,506 127,410 Valuation reserves ............................................. 152,066 39,988 Other non-cash charges ......................................... 37,654 61,700 Gain on disposition of assets damaged in fire................... (167,450) -- Change in operating assets and liabilities: Accounts receivable ............................................ (2,696,555) (655,433) Inventories .................................................... (887,728) (171,721) Other assets and liabilities ................................... (58,868) (38,773) Accounts payable and accrued liabilities ....................... 3,207,438 630,543 ----------- --------- Net cash provided by operating activities ................ 405,876 536,434 ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment .............................. (1,835,302) (111,921) Insurance proceeds for assets damaged in fire ................... 700,000 -- ----------- --------- Net cash used in investing activities .................... (1,135,302) (111,921) ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock .......................... 15,000 135,238 Payments made on long-term debt ................................. (640,234) (222,163) Net increase (decrease) in working capital line of credit........ 1,191,082 (288,413) ----------- --------- Net cash used in financing activities .................... 565,848 (375,338) ----------- --------- Net increase in cash .............................................. (163,578) 49,175 Cash at beginning of period ....................................... 327,553 104,364 ----------- --------- Cash at end of period ............................................. $ 163,975 $ 153,539 =========== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest ........................ $ 285,768 $ 252,931 Summary of non-cash investing and financing activities: Common stock issued for sales commissions ..................... -- 50,000
The accompanying notes are an integral part of these consolidated financial statements. 5 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: GENERAL Poore Brothers, Inc. (the "Company"), a Delaware corporation, was organized in February 1995 as a holding company and on May 31, 1995 acquired substantially all of the equity of Poore Brothers Southeast, Inc. ("PB Southeast") in an exchange transaction. The exchange transaction with PB Southeast was accounted for similar to a pooling-of-interests since both entities had common ownership and control immediately prior to the transaction. During 1997, the Company sold its Houston, Texas distribution business and closed its PB Southeast manufacturing operation. In November 1998, the Company acquired the business and certain assets (including the Bob's Texas Style(R) potato chip brand) of Tejas Snacks, L.P. ("Tejas"), a Texas-based potato chip manufacturer. In October 1999, the Company acquired Wabash Foods, LLC ("Wabash") including the Tato Skins(R), O'Boisies(R), and Pizzarias(R) trademarks, and assumed all of Wabash Foods' liabilities. In June 2000, the Company acquired Boulder Natural Foods, Inc. ("Boulder") and the Boulder Potato Company (TM) brand of totally natural potato chips. The Company is engaged in the development, production, marketing and distribution of innovative salted snack food products that are sold primarily through grocery retailers, club stores and vend distributors in the United States. The Company (i) manufactures and sells its own brands of salted 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., (iii) manufactures private label potato chips for grocery retailers in the southwest, and (iv) distributes and merchandises snack food products that are manufactured by others. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Poore Brothers, Inc. and all of its wholly owned subsidiaries. All significant intercompany amounts and transactions have been eliminated. The financial statements have been prepared in accordance with the instructions for Form 10-QSB and, therefore, do not include all the information and footnotes required by accounting principles generally accepted in the United States. In the opinion of management, the consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary in order to make the consolidated financial statements not misleading. A description of the Company's accounting policies and other financial information is included in the audited financial statements filed with the Form 10-KSB for the fiscal year ended December 31, 2000. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results expected for the full year. 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. 6 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2000 ----------- ----------- BASIC EARNINGS PER SHARE: Net income .................................... $ 368,742 $ 257,584 =========== =========== Weighted average number of common shares....... 14,999,765 13,260,506 =========== =========== Earnings per common share ..................... $ 0.02 $ 0.02 =========== =========== DILUTED EARNINGS PER SHARE: Net income .................................... $ 368,742 $ 257,584 =========== =========== Weighted average number of common shares....... 14,999,765 13,260,506 Incremental shares from assumed conversions- Warrants..................................... 643,410 287,392 Stock options................................ 1,322,215 354,248 ----------- ----------- Adjusted weighted average number of common shares................................. 16,965,390 13,902,146 =========== =========== Earnings per common share ..................... $ 0.02 $ 0.02 =========== =========== 2. LONG-TERM DEBT At March 31, 2001, the Company had outstanding 9% Convertible Debentures due July 1, 2002 (the "9% Convertible Debentures") in the principal amount of $466,826 held by Wells Fargo Small Business Investment Company, Inc. ("Wells Fargo SBIC"). The 9% Convertible Debentures are secured by land, buildings, equipment and intangibles. Interest on the 9% Convertible Debentures is paid by the Company on a monthly basis. Monthly principal payments of approximately $5,000 are required to be made by the Company on the Wells Fargo SBIC 9% Convertible Debenture through June 2002 with the remaining balance due 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 of the 9% Convertible Debentures has 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. 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 7 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Company from Wells Fargo Business Credit, Inc. ("Wells Fargo"), to refinance indebtedness effectively assumed by the Company in connection with the acquisition of Wabash Foods in October 1999, and is being used for general working capital needs. The U.S. Bancorp Line of Credit bears interest at an annual rate of prime plus 1% 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 in July 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 in March 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 a $715,000 non-interest bearing note due to U.S. Bancorp on June 30, 2000. Proceeds from the U.S. Bancorp Term Loan C were used in connection with the Boulder acquisition. The U.S. Bancorp Term Loan C bears interest at an annual rate of prime plus 2% and requires monthly principal payments of approximately $12,500, plus interest, until maturity in August 2002. The Company made a payment of $200,000 on the $715,000 non-interest bearing note and refinanced the balance in a term loan (the "U.S. Bancorp Term Loan D"). The U.S. Bancorp Term Loan D bears interest at an annual rate of prime plus 2% and requires monthly principal payments of approximately $21,500, plus interest, until maturity in June 2002. In March 2001, the U.S. Bancorp Credit Agreement was amended to increase the U.S. Bancorp Line of Credit from $3.0 million to $5.0 million, establish a $0.5 million capital expenditure line of credit and modify certain financial covenants. 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 March 31, 2001, the Company had a borrowing base of approximately $4,321,000 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 March 31, 2001, the Company was in compliance with all of the financial covenants. Management believes that the fulfillment of the Company's plans and objectives will enable the Company to attain a sufficient level of profitability to remain in compliance with these financial performance criteria. 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 March 31, 2001, there was an outstanding balance of $3,098,939 on the U.S. Bancorp Line of Credit. On October 7, 1999, pursuant to the terms of the U.S. Bancorp Credit Agreement, the Company issued to U.S. Bancorp a warrant (the "U.S. Bancorp Warrant") to purchase 50,000 shares of Common Stock for an exercise price of $1.00 per share. The U.S. Bancorp warrant is exercisable until October 7, 2004, the date of termination of the U.S. Bancorp Warrant, and provides the holder thereof certain piggyback registration rights. 3. LITIGATION The Company is periodically a party to various lawsuits arising in the ordinary course of business. Management believes, based on discussions with legal counsel, that the resolution of any such lawsuits will not have a material effect on the financial statements taken as a whole. 8 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. BUSINESS SEGMENTS The Company's operations consist of two segments: manufactured products and distributed products. The manufactured products segment produces potato chips and other salted snack food products for sale primarily to snack food distributors. The distributed products segment sells snack food products manufactured by other companies to the Company's Arizona snack food distributors and also merchandises in Texas for a fee, but does not purchase and resell, snack food products for manufacturers. The Company's reportable segments offer different products and services. All of the Company's revenues are attributable to external customers in the United States and all of its assets are located in the United States. The Company does not allocate assets based on its reportable segments. The accounting policies of the segments are the same as those described in the Summary of Accounting Policies included in Note 1 to the audited financial statements filed with the Form 10-KSB for the fiscal year ended December 31, 2000. The Company does not allocate selling, general and administrative expenses, income taxes or unusual items to segments and has no significant non-cash items other than depreciation and amortization.
MANUFACTURED DISTRIBUTED PRODUCTS PRODUCTS CONSOLIDATED -------- -------- ------------ THREE MONTHS ENDED MARCH 31, 2001 Revenues from external customers ................ $12,902,060 $1,257,127 $14,159,187 Depreciation and amortization in segment gross profit.................................... 230,059 -- 230,059 Segment gross profit ............................ 3,653,416 111,356 3,764,772 THREE MONTHS ENDED MARCH 31, 2000 Revenues from external customers ................ $ 8,435,030 $1,272,807 $ 9,707,837 Depreciation and amortization in segment gross profit.................................... 278,254 -- 278,254 Segment gross profit ............................ 2,341,418 78,487 2,419,905
The following table reconciles reportable segment gross profit to the Company's consolidated income (loss) before income taxes and cumulative effect of a change in accounting principle.
THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2000 ----------- ---------- Consolidated segment gross profit ................. $ 3,764,772 $2,419,905 Unallocated amounts: Selling, general and administrative Expenses..... 3,096,437 1,875,019 Fire related income, net ........................ (12,612) -- Interest expense, net ........................... 296,205 280,802 ----------- ---------- Income before income tax provison ................. $ 384,742 $ 264,084 =========== ==========
9 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. IMPACT OF OCTOBER 2000 FIRE AT GOODYEAR, ARIZONA PLANT On October 28, 2000, the Company experienced a fire at the Goodyear, Arizona manufacturing plant, causing a temporary shutdown of manufacturing operations at the facility. The Company resumed full production of private label potato chips in early January of 2001 and resumed full production of batch-fried potato chips in late March of 2001. During the quarter ended March 31, 2001, the Company recorded approximately $1.4 million of incremental expenses incurred as a result of the fire, primarily associated with outsourcing production. These extra expenses were charged to "cost of revenue" and offset by a $1.4 million credit representing estimated future insurance proceeds. During the first quarter, the Company also incurred approximately $1.7 million in building and equipment reconstruction costs in connection with the fire and the Company was advanced a total of $1.7 million by the insurance company. As of March 31, 2001, "Accounts Receivable" in the accompanying Consolidated Balance Sheet reflected approximately $1.3 million in expected future insurance proceeds. In early April 2001, the Company received additional advances from the insurance company in the amount of $1.3 million. "Fire related income, net" on the accompanying Consolidated Statement of Operations for the quarter ended March 31, 2001 includes (i) a gain of $167,000, representing the excess of insurance proceeds over the book value of the building and equipment of $533,000 damaged by the fire, and (ii) expenses not reimbursable by the insurance company of $154,000. 6. INCOME TAXES The income tax provision recorded in the quarters ended March 31, 2001 and 2000 are a provision for state taxes only. For federal tax purposes, the Company has net operating loss carryforwards, which it utilized to reduce its expected federal tax provision, and which begin to expire in varying amounts between 2010 and 2018. Each quarter, the Company evaluates whether it is more likely than not some or all of deferred tax assets will be realized and the adequacy of the valuation allowance. As a result of historical operating losses, partially mitigated by recent profitability, the Company continues to fully reserve its net deferred tax assets as of March 31, 2001. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2000. Net revenues for the three months ended March 31, 2001 were $14,159,000, up $4,451,000 or 46% from $9,708,000 for the three months ended March 31, 2000. Revenues for the manufactured products segment accounted for 91% and 87% of total net revenues in 2001 and 2000, respectively, while revenues from distributed products accounted for 9% and 13% in 2001 and 2000, respectively. Manufactured products segment revenues increased $4,467,000, or 53%, due to increased sales of branded products. Revenues from the distribution and merchandising of products manufactured by others were essentially flat with the same period in the prior year. Gross profit for the three months ended March 31, 2001, was $3,765,000, or 27% of net revenues, as compared to $2,420,000, or 25% of net revenues, for the three months ended March 31, 2000. The $1,345,000 increase, or 56%, in gross profit resulted from the increased sales volume in the manufactured products segment and improved manufacturing capacity utilization. Selling, general and administrative expenses increased to $3,096,000, or 22% of net revenues, for the three months ended March 31, 2000 from $1,875,000, or 19% of net revenues, for the same period in 2000. The increase of $1,221,000, or 65%, was primarily due to increased marketing costs for promotional spending in connection with the T.G.I. Friday's(TM) brand salted snacks launch, sales and administrative personnel costs to support the growth in revenues, and increased amortization of intangibles from the June 2000 acquisition of Boulder Natural Foods, Inc. and the Boulder Potato Company(TM) brand of natural potato chips ("Boulder"). Net interest expense increased to $296,000 for the three months ended March 31, 2001 from a net interest expense of $281,000 for the three months ended March 31, 2000. The increase of $15,000 was due to interest expense associated with the indebtedness incurred in connection with a June 2000 acquisition. The Company has provided $16,000 for state income taxes only. No Federal tax provision was recorded in 2001 due to the availability of net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Net working capital was $0.8 million (a current ratio of 1.1) and $0.8 million (a current ratio of 1.1) at March 31, 2001 and December 31, 2000, respectively. For the three months ended March 31, 2001, the Company generated cash flow of $0.4 million from operating activities, principally from operating results and non-cash charges, invested a net amount of $1.1 million in new equipment, and increased indebtedness by a net $0.6 million. On October 28, 2000, the Company experienced a fire at the Goodyear, Arizona manufacturing plant, causing a temporary shutdown of manufacturing operations at the facility. The Company resumed full production of private label potato chips in early January of 2001 and resumed full production of batch-fried potato chips in late March of 2001. During the quarter ended March 31, 2001, the Company recorded approximately $1.4 million of incremental expenses incurred as a result of the fire, primarily associated with outsourcing production. These extra expenses were charged to "cost of revenue" and offset by a $1.4 million credit representing estimated future insurance proceeds. During the first quarter, the Company also incurred approximately $1.7 million in building and equipment reconstruction costs in connection with the fire and the Company was advanced a total of $1.7 million by the insurance company. As of March 31, 2001, "Accounts Receivable" in the accompanying Consolidated Balance Sheet reflected approximately $1.3 million in expected future insurance proceeds. In early April 2001, the Company received additional advances from the insurance company in the amount of $1.3 million. "Fire related income, net" on the accompanying Consolidated Statement of Operations for the quarter ended March 31, 2001 includes (i) a gain of $167,000, representing the excess of insurance proceeds over the book value of the building and equipment of $533,000 damaged by the fire, and (ii) expenses not reimbursable by the insurance company of $154,000. 11 At March 31, 2001, the Company had outstanding 9% Convertible Debentures due July 1, 2002 (the "9% Convertible Debentures") in the principal amount of $466,826 held by Wells Fargo Small Business Investment Company, Inc. ("Wells Fargo SBIC"). The 9% Convertible Debentures are secured by land, buildings, equipment and intangibles. Interest on the 9% Convertible Debentures is paid by the Company on a monthly basis. Monthly principal payments of approximately $5,000 are required to be made by the Company on the Wells Fargo SBIC 9% Convertible Debenture through June 2002 with the remaining balance due 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 of the 9% Convertible Debentures has 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. On October 7, 1999, the Company signed a $9.15 million Credit Agreement with U.S. Bancorp (the "U.S. Bancorp Credit Agreement") consisting of a $3.0 million working capital line of credit (the "U.S. Bancorp Line of Credit"), a $5.8 million term loan (the "U.S. Bancorp Term Loan A") and a $350,000 term loan (the "U.S. Bancorp Term Loan B"). Borrowings under the U.S. Bancorp Credit Agreement were used to pay off a $2.5 million line of credit and a $0.5 million term loan previously obtained by the Company from Wells Fargo Business Credit, Inc. ("Wells Fargo"), to refinance indebtedness effectively assumed by the Company in connection with the acquisition of Wabash Foods in October 1999, and is being used for general working capital needs. The U.S. Bancorp Line of Credit bears interest at an annual rate of prime plus 1% 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 in July 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 in March 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 a $715,000 non-interest bearing note due to U.S. Bancorp in June 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 in August 2002. The Company made a payment of $200,000 on the $715,000 non-interest bearing note and refinanced the balance in a term loan (the "U.S. Bancorp Term Loan D"). The U.S. Bancorp Term Loan D bears interest at an annual rate of prime plus 2% and requires monthly principal payments of approximately $21,500, plus interest, until maturity in June 2002. In March 2001, the U.S. Bancorp Credit Agreement was amended to increase the U.S. Bancorp Line of Credit from $3.0 million to $5.0 million, establish a $0.5 million capital expenditure line of credit and modify certain financial covenants. 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 March 31, 2001, the Company had a borrowing base of approximately $4,321,000 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 March 31, 2001, the Company was in compliance with all of the financial covenants. Management believes that the fulfillment of the Company's plans and objectives will enable the Company to attain a sufficient level of profitability to remain in compliance with these financial performance criteria. 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 March 31, 2001, there was an outstanding balance of $3,098,939 on the U.S. Bancorp Line of Credit. On October 7, 1999, pursuant to the terms of the U.S. Bancorp Credit Agreement, the Company issued to U.S. Bancorp a warrant (the "U.S. Bancorp Warrant") to purchase 50,000 shares of Common Stock for an exercise price of $1.00 per share. The U.S. Bancorp warrant is exercisable until October 7, 2004, the date of termination of the U.S. Bancorp Warrant, and provides the holder thereof certain piggyback registration rights. 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 12 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 for the next twelve months. The belief is based on current operating plans and certain assumptions, including those relating to the Company's future revenue levels and expenditures, industry and general economic conditions and other conditions. If any of these factors change, the Company may require future debt or equity financings to meet its business requirements. There can be no assurance that any required financings will be available or, if available, on terms attractive to the Company. FORWARD LOOKING STATEMENTS THIS QUARTERLY REPORT ON FORM 10-QSB, INCLUDING ALL DOCUMENTS INCORPORATED BY REFERENCE, INCLUDES "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND SECTION 12E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE "SAFE HARBOR" PROVISIONS THEREOF. THEREFORE, THE COMPANY IS INCLUDING THIS STATEMENT FOR THE EXPRESS PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF THE SAFE HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. IN THIS FORM 10-QSB, THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "ESTIMATES," "PROJECTS," "WILL LIKELY RESULT," "WILL CONTINUE," "FUTURE" AND SIMILAR TERMS AND EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS IN THIS FORM 10-QSB REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING SPECIFICALLY THE COMPANY'S BRIEF OPERATING HISTORY AND SIGNIFICANT HISTORICAL OPERATING LOSSES AND 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 THE COMPANY'S PURSUIT OF STRATEGIC ACQUISITIONS; POTENTIAL DIFFICULTIES RESULTING FROM THE INTEGRATION OF ACQUIRED BUSINESSES WITH THE COMPANY'S BUSINESS, OTHER ACQUISITION-RELATED RISKS, SIGNIFICANT COMPETITION, RISKS RELATED TO THE FOOD PRODUCTS INDUSTRY, VOLATILITY OF THE MARKET PRICE OF THE COMPANY'S COMMON STOCK, THE POSSIBLE DE-LISTING OF THE COMPANY'S COMMON STOCK FROM THE NASDAQ SMALLCAP MARKET AND THOSE OTHER RISKS AND UNCERTAINTIES DISCUSSED HEREIN AND IN THE OTHER FILINGS BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED. IN LIGHT OF THESE RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS FORM 10-QSB WILL IN FACT TRANSPIRE OR PROVE TO BE ACCURATE. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE HEREOF. ALL SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON OUR BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THIS SECTION. 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is periodically a party to various lawsuits arising in the ordinary course of business. Management believes, based on discussions with legal counsel, that the resolution of such lawsuits will not have a material effect on the financial statements taken as a whole. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION On October 28, 2000, the Company experienced a fire at the Goodyear, Arizona manufacturing plant, causing a temporary shutdown of manufacturing operations at the facility. The Company resumed full production of private label potato chips in early January of 2001 and resumed full production of batch-fried potato chips in late March of 2001. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES". ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.1 Second Amendment to Credit Agreement (dated March 2, 2001), by and between the Company and U.S. Bank National Association.* 10.2 License Agreement, dated April 3, 2000, by and between the Company and TGI Friday's Inc. (Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission.)* * Filed herewith. (b) Current Reports on Form 8-K: (1) Current Report on Form 8-K, reporting on the October 28, 2000 fire at the company's Goodyear, Arizona manufacturing plant, including the partial resumption of production (filed with the Commission on January 19, 2001). 14 SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POORE BROTHERS, INC. By: /s/ Eric J. Kufel ------------------------------------------- Dated: May 15, 2001 Eric J. Kufel President and Chief Executive Officer (principal executive officer) By: /s/ Thomas W. Freeze ------------------------------------------- Dated: May 15, 2001 Thomas W. Freeze Senior Vice President, Chief Financial Officer, Treasurer and Secretary (principal financial and accounting officer) 15 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.1 Second Amendment to Credit Agreement (dated March 2, 2001), by and between the Company and U.S. Bank National Association.* 10.2 License Agreement, dated April 3, 2000, by and between the Company and TGI Friday's Inc. (Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission.)* * Filed herewith.