-----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, U2NBdQFTIjwSxIZXi8yFjCA9r+giT+UQkQwVxClVn0/66Y2JdPWTuS7oNfZt+UTa zRoLr5TbRoZ4f57J1pK/iQ== 0000950147-02-000470.txt : 20020415 0000950147-02-000470.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950147-02-000470 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 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: 1934 Act SEC FILE NUMBER: 001-14556 FILM NUMBER: 02591867 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-8323.txt ANNUAL REPORT FOR YEAR ENDING 12-31-01 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, 2001 [ ] 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 $57,665,888. At March 25, 2002, the aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant was approximately $16,265,269. At March 25, 2002, the number of issued and outstanding shares of common stock of the Registrant was 15,694,185. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] CAUTIONARY STATEMENT REGARDING 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 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 chains, club stores and 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 salty snacks under license from TGI Friday's Inc. (The Company commenced shipments of these products in October 2000), (iii) manufactures private label potato chips for grocery chains, and (iv) distributes snack food products that are manufactured by others. For the fiscal year ended December 31, 2001, revenues totaled $57,665,888. Approximately 92% of revenues were attributable to products manufactured by the Company (86% branded snack food products, 6% private label products) and approximately 8% 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 salty 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 11 flavors, Bob's Texas Style(R) potato chips are currently offered in six flavors, and Boulder Potato Company(TM) potato chips are currently offered in seven flavors. The Company also manufactures potato chips for sale on a private label basis using a continuous frying process. 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 snacks, Pizzarias(R) brand pizza chips, and T.G.I. Friday's(TM) brand salty 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 expire between 2004 and 2006. Tato Skins(R) brand potato snacks, Pizzarias(R) brand pizza chips, and T.G.I. Friday's(TM) brand salty 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 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. A significant element of the Company's growth strategy is to develop, acquire or license innovative salty 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 Company also plans to increase sales of its existing products, increase distribution 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. 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, 3 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 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. In consideration for these assets, the Company issued 523,077 unregistered shares of Common Stock with a fair value at the time of $450,000 and paid approximately $1,180,000 in cash. On October 7, 1999, the Company acquired Wabash Foods, including the Tato Skins(R), O'Boisies(R), and Pizzarias(R) trademarks. The Company acquired all of the membership interests of Wabash Foods from Pate Foods Corporation in exchange for (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(TM), 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 716,420 unregistered shares of Common Stock with a fair value at the time of $1,220,000, (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 $286,000 in liabilities. In addition, the Company may be required to issue additional unregistered shares of Common Stock to the seller on each of the 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. In October 2000, the Company launched its T.G.I. Friday's(TM) brand salty snacks pursuant to a license agreement with TGI Friday's Inc. On December 27, 2001, the Company completed the sale of 586,855 shares of Common Stock at an offering price of $2.13 per share to BFS US Special Opportunities Trust PLC, a fund managed by Renaissance Capital, in a private placement transaction. Pursuant to the Share Purchase Agreement dated December 27, 2001, by and between the Company and the investor, the Company has agreed to file a registration statement with the Securities and Exchange Commission covering the resale of the newly issued shares of Common Stock. The registration statement is required to be filed no later than 120 days after the closing date and is required to be declared effective within 90 days after the filing date. BUSINESS STRATEGY 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. A significant element of the Company's growth strategy is to develop, acquire or license innovative salty 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 Company also plans to increase sales of its existing products, increase distribution 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 salty 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 salty snacks under a license from TGI Friday's Inc. The Company will 4 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. IMPROVE MANUFACTURING CAPACITY UTILIZATION. The Company's Arizona and Indiana facilities are currently operating at approximately seventy percent and forty percent of their respective capacities. The Company believes that additional improvements to manufactured products' gross profit margins are possible with the achievement of the business strategies discussed above. Depending on product mix, the existing manufacturing facilities could produce, in the aggregate, up to $125 million in annual revenue volume and thereby further reduce manufacturing product costs. The Company currently has arrangements with several California and 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 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. 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 11 flavors, Bob's Texas Style(R) potato chips are currently offered in six flavors, and Boulder Potato Company(TM) potato chips are currently offered in seven flavors. The Company currently has agreements with several California and 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 salty 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 salty 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. 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 Arizona facility. The Arizona facility has the capacity to produce approximately 3,500 pounds of potato chips per hour, including 1,400 pounds of batch fried branded potato chips per hour and 2,100 pounds of continuous fried private label potato chips per hour. The Company owns additional batch frying equipment which, if needed, could be installed without significant time or cost, and which would result in increased capacity to produce the batch fried potato chips. The Arizona facility is currently operating at approximately seventy 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 currently operating at approximately forty percent of capacity. On October 28, 2000, the Company experienced a fire at the Arizona facility, 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 5 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 resumed full production in March, 2001. There can be no assurance that the Company will obtain sufficient business to recoup the Company's investments in its manufacturing facilities or to increase the utilization rates of such 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, Missouri, Ohio and 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), 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. During 2001, the Company retained Crossmark, Inc., a leading national sales and marketing agency with employees and offices nationwide. Crossmark represents T.G.I. Friday's(TM) brand salty snacks on behalf of Poore Brothers in the grocery and convenience store channels. The Company's own sales organization sells T.G.I. Friday's(TM) brand salty snacks in the club, mass, drug and vend channels. 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, 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, 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. Outside of Arizona, the Company selects brokers and distributors for 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 and oil. 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 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 6 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, Vending Services of America ("VSA", a national vending distributor) and SAM's Club accounted for 12% and 16%, respectively, of the Company's 2001 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 2001. A decision by any of the Company's major customers to cease or substantially reduce their purchases could have a material adverse effect on the Company's business. MARKET OVERVIEW AND COMPETITION According to the Snack Food Association ("SFA"), the U.S. market for salty snack foods reached $20.7 billion at retail in 2000 (the latest year for which data is available) with potato chips, tortilla chips and potato crisps, accounting for approximately 50% of the market, and corn snacks, popcorn, pretzels, nuts, meat snacks and other products accounting for the balance. Total salty snack sales, in dollar terms, increased every year from 1990 through 2000, ranging from an increase of 8.5% (in 1997) to 0.3% (in 1995), with a 2000 increase of 6.4%. Potato chip, tortilla chips and potato crisps combined sales have similarly increased, with 2000 retail sales of $10.3 billion, a 5.1% increase over 1999 sales of $9.8 billion. The Company's products compete generally against other salty snack foods, including potato chips and tortilla chips. 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 believes that it is complying in all material respects 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 or impose other obligations on the Company. 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, 2001, the Company had 250 full-time employees, including 212 in manufacturing and distribution, 16 in sales and marketing and 22 in administration and finance. The Company's employees are not represented by any collective bargaining organization and the Company has never experienced a work stoppage. The Company believes that its relations with its employees are good. PATENTS AND TRADEMARKS The Company produces Tato Skins(R) brand potato crisps, Pizzarias(R) brand pizza chips, and T.G.I. Friday's(TM) brand salty snacks utilizing a sheeting and frying process that includes patented technology that the Company licenses from 7 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 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. The Company licenses the T.G.I. Friday's(TM) brand salty snacks trademark from TGI Friday's Inc. under a license agreement with a term expiring in 2014. Pursuant to the license agreement, the Company is required to make royalty payments on sales of T.G.I. Friday's(TM) brand salty snack products and is required to achieve certain minimum sales levels by certain dates during the contract term. RISK FACTORS BRIEF OPERATING HISTORY; SIGNIFICANT PRIOR NET LOSSES; ACCUMULATED DEFICIT; SIGNIFICANT FUTURE EXPENSE DUE TO IMPLEMENTATION OF BUSINESS STRATEGY. 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, as well as risk factors described herein. Although the Company has been profitable since fiscal 1999, the Company experienced significant net losses in prior fiscal years. At December 31, 2001, the Company had an accumulated deficit of $4,486,729 and net working capital of $2,014,603. 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. NEED FOR ADDITIONAL FINANCING. A significant element of the Company's business strategy is the development, acquisition and/or licensing of innovative salty 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 substantial 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, in connection with any additional acquisitions completed by the Company, or to provide working capital for general corporate purposes. 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, and risks associated with unanticipated liabilities or contingencies. SUBSTANTIAL LEVERAGE; FINANCIAL COVENANTS PURSUANT TO U.S. BANCORP CREDIT AGREEMENT; POSSIBLE ACCELERATION OF INDEBTEDNESS. At December 31, 2001, 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 8 $7,985,693. 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, 2001, 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). 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." In addition to the indebtedness under the US Bancorp Credit Agreement, the Company has significant secured and unsecured indebtedness pursuant to a number of other agreements with other lenders. At December 31, 2001, the aggregate principal amount of such other indebtedness was $3,019,034. The acceleration of the Company's indebtedness under any such agreements could have a material adverse effect upon the Company. 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 2001, 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 $3.99 per share to a low of $2.25 per share. The last reported sales price of the Common Stock on the Nasdaq SmallCap Market on March 25, 2002 was $2.35 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. If, in the future, the Company's Common Stock fails to be in compliance with the minimum closing bid price requirement for at least thirty consecutive trading days or the Company fails to be in compliance with any other Nasdaq continued listing requirements, then the Common Stock could be de-listed from the Nasdaq SmallCap Market. Upon any such de-listing, trading, if any, in the Common Stock would thereafter be conducted in the over-the-counter market on the so-called "pink sheets" or the "Electronic Bulletin Board" of the National Association of Securities Dealers, Inc. ("NASD"). As a consequence of any such de-listing, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Company's Common Stock. See "VOLATILITY OF MARKET PRICE OF COMMON STOCK." COMPETITION. The market for salty snack foods, such as those sold by the Company, including potato chips, tortilla chips, dips, pretzels and meat snacks, is large and intensely competitive. Competitive factors in the salty snack food 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 whom offer batch fried products similar to those of the Company. Expansion of Company operations into new markets has and will continue to encounter significant competition from national, regional and local competitors that may be greater than that encountered by the Company in its existing markets. In addition, such competitors may challenge the Company's position in its existing markets. While the Company believes that its 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 9 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 generate revenues in new markets will depend upon customer acceptance of the Company's products. There can be no assurance that the Company's products will achieve a significant degree of market acceptance, that acceptance, if achieved, will be sustained for any significant period or that product life cycles will be sufficient to permit the Company to recover start-up and other associated costs. In addition, there can be no assurance that the Company will succeed in the development of any new products or that any new products developed by the Company will achieve market acceptance or generate meaningful revenue for the Company. UNCERTAINTIES AND RISKS OF FOOD PRODUCT INDUSTRY. The food product industry in which the Company is engaged is subject to numerous uncertainties and risks outside of the Company's control. Profitability in the food product industry is subject to adverse changes in general business and economic conditions, oversupply of certain food products at the wholesale and retail levels, seasonality, the risk that a food product may be banned or its use limited or declared unhealthful, the risk that product tampering may occur that may require a recall of one or more of the Company's products, and the risk that sales of a food product may decline due to perceived health concerns, changes in consumer tastes or other reasons beyond the control of the Company. FLUCTUATIONS IN PRICES OF SUPPLIES; DEPENDENCE UPON AVAILABILITY OF SUPPLIES AND PERFORMANCE OF SUPPLIERS. The Company's manufacturing costs are subject to fluctuations in the prices of potatoes, potato flakes, wheat flour, corn and oil, as well as other ingredients of the Company's products. Potatoes, potato flakes, wheat flour and corn are widely available year-round. The Company uses a variety of oils in the production of its products. The Company is dependent on its suppliers to provide the Company with products and ingredients in adequate supply and on a timely basis. Although the Company believes that its requirements for products and ingredients are readily available, and that its business success is not dependent on any single supplier, the failure of certain suppliers to meet the Company's performance specifications, quality standards or delivery schedules could have a material adverse effect on the Company's operations. In particular, a sudden scarcity, a substantial price increase, or an unavailability of product ingredients could materially adversely affect the Company's operations. There can be no assurance that alternative ingredients would be available when needed and on commercially attractive terms, if at all. LACK OF PROPRIETARY MANUFACTURING METHODS FOR CERTAIN PRODUCTS; FUTURE EXPIRATION OF PATENTED TECHNOLOGY LICENSED BY THE COMPANY. The taste and quality of Poore Brothers(R), 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 KEY SNACK FOOD BRANDS; DEPENDENCE UPON T.G.I. FRIDAY'S(TM) LICENSE AGREEMENT. The Company derives a substantial portion of its revenue from a limited number of snack food brands. For the year ended December 31, 2001, approximately 59% of the Company's revenues were attributable to the T.G.I. Friday's(TM) brand products and the Poore Brothers(R) brand products. A decrease in the popularity of a particular snack food brand during any year could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that any of the Company's snack food brands will retain their historical levels of popularity or increase in popularity. Decreased sales from any one of the key snack food brands without a corresponding increase in sales from other existing or newly introduced products would have a material adverse effect on the Company's financial condition and results of operations. Furthermore, the T.G.I. Friday's(TM) brand products are manufactured and sold by the Company pursuant to a license agreement by and between the Company and TGI Friday's Inc. which expires in 2014. Pursuant to the license agreement, the Company is subject to various requirements and conditions (including, without limitation, minimum sales targets). The failure of the Company to comply with certain of such requirements and conditions could result in the early termination of the license agreement by TGI Friday's Inc. Any such early termination would have a material adverse effect on the Company's financial condition and results of operations. 10 DEPENDENCE UPON MAJOR CUSTOMERS. Two customers of the Company, Vending Services of America ("VSA", a national vending distributor) and SAM's Club, accounted for 12% and 16%, respectively, of the Company's 2001 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 2001. 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, and Thomas W. Freeze, Senior Vice President and Chief Financial Officer. 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. SIGNIFICANT SHAREHOLDERS; POSSIBLE CHANGE IN CONTROL. As a result of the Wabash Foods acquisition, Capital Foods, LLC ("Capital Foods") (an affiliate of the former owner of Wabash Foods) became the single largest shareholder of the Company, currently holding approximately 29% of the outstanding shares of Common Stock (without giving effect to the possible exercise of warrants to purchase 325,000 shares of Common Stock also held by Capital Foods). Accordingly, Capital Foods is in a position to exercise substantial influence on the business and affairs of the Company. In addition, Renaissance Capital Group, Inc. manages three funds, Renaissance Capital Growth & Income Fund III, Inc., Renaissance U.S. Growth & Income Trust PLC, and BFS US Special Opportunities Trust PLC, which are currently the beneficial owners of approximately 13%, 6% and 5%, respectively, of the outstanding shares of Common Stock of the Company. Capital Foods, Renaissance Capital Growth & Income Fund III, Inc., Renaissance U.S. Growth & Income Trust PLC, and BFS US Special Opportunities Trust PLC are hereinafter referred to collectively as the "Significant Shareholders". Although the Company is not aware of any plans or proposals on the part of any Significant Shareholder to recommend or undertake any material change in the management or business of the Company, there is no assurance that a Significant Shareholder 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 the Significant Shareholders to transfer any or all of their respective shares of Common Stock at any time. One or more of such transfers could have the effect of transferring effective control of the Company, including to one or more parties not currently known to the Company. OBLIGATION TO REGISTER CERTAIN ISSUED AND OUTSTANDING SHARES OF COMMON STOCK FOR RESALE; SHARES AVAILABLE FOR FUTURE SALE. On December 27, 2001, the Company completed the sale of 586,855 shares of Common Stock, $0.01 par value, to BFS US Special Opportunities Trust PLC, a fund managed by Renaissance Capital Group, Inc., in a private placement transaction. The net proceeds of the transaction were utilized by the Company to reduce the Company's outstanding indebtedness. Pursuant to the Share Purchase Agreement dated December 27, 2001, by and between the Company and the investor, the Company has agreed to file a registration statement (the "BFS Registration Statement") with the Securities and Exchange Commission covering the resale of the newly issued shares of Common Stock. The registration statement is required to be filed no later than 120 days after the closing date and is required to be declared effective within 90 days after the filing date. The Company will be required to pay all expenses relating 11 to the registration (other than underwriting discounts, selling commissions and stock transfer taxes applicable to the shares, and any other fees and expenses incurred by the holder(s) of the shares (including, without limitation, legal fees and expenses) in connection with the registration). Approximately 7,374,156 shares of outstanding Common Stock and 956,156 shares of Common Stock issuable upon exercise of warrants issued by the Company are subject to "piggyback" registration rights granted by the Company, pursuant to which such shares of Common Stock may be registered under the Securities Act and, as a result, become freely tradable in the future. All or a portion of such shares may, at the election of the holders thereof, be included in the BFS Registration Statement and, upon the effectiveness thereof, may be sold in the public markets. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that these sales could occur, could adversely affect prevailing market prices for the Common Stock and could impair the ability of the Company to raise additional capital through the sale of its equity securities or through debt financing. 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. 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 facility was completed in June 1997. In August 1997, the Company completed the transition of all of its Arizona operations into the facility. The site will enable the Company to expand the facility in the future to a total building size of approximately 120,000 square feet. The facility is financed by a mortgage with Morgan Guaranty Trust Company of New York that matures in June 2012. The Company leases a 140,000 square foot facility located in Bluffton, Indiana, approximately 20 miles south of Ft. Wayne, Indiana. Prior to the Keebler Company's acquisition of the facility in 1980, the plant contained three pretzel lines with 40,000 square feet of processing space and 40,000 square feet of warehousing space. In 1985, the Keebler Company completed a 60,000 square foot fryer room addition and installed the three fryer lines that still operate in the facility. The Company has entered into a lease expiring in April 2018 with respect to the facility with two five-year renewal options. Current lease payments are $20,000 per month. The lease payments are subject to an annual CPI-based increase. The Company is responsible for all insurance costs, utilities and real estate taxes in connection with its facilities. 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. 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. 12 SALES PRICES ----------------- PERIOD OF QUOTATION HIGH LOW ------------------- ---- --- 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 Fiscal 2001: First Quarter $3.19 $2.31 Second Quarter $3.34 $2.54 Third Quarter $3.99 $2.25 Fourth Quarter $3.12 $2.28 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, 2002, there were 15,694,185 shares of Common Stock outstanding. As of such date, the shares of Common Stock were held of record by approximately 3,700 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. On December 27, 2001, the Company completed the sale of 586,855 shares of Common Stock, at an offering price of $2.13 per share, to BFS US Special Opportunities Trust PLC, a fund managed by Renaissance Capital Group, Inc., in a private placement transaction. The offering was made pursuant to Securities and Exchange Commission Rule 506 promulgated under the Securities Act, based upon certain representations made by the investor to the Company with respect to the investor's qualification as an "accredited investor" as such term is defined in Securities and Exchange Commission Rule 501 promulgated under the Securities Act. The net proceeds of the transaction were utilized by the Company to reduce the Company's outstanding indebtedness. Pursuant to the Share Purchase Agreement dated December 27, 2001, by and between the Company and the investor, the Company has agreed to file a registration statement with the Securities and Exchange Commission covering the resale of the newly issued shares of Common Stock. The registration statement is required to be filed no later than 120 days after the closing date and is required to be declared effective within 90 days after the filing date. 13 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000 For fiscal 2001, net revenues reached a record $57,700,000, up 38% compared to fiscal 2000 net revenues of $41,700,000. Revenue growth for the year was driven by a 45% increase in manufactured products segment revenues to $52.9 million, or 92% of total revenues, and was attributable to the rollout of T.G.I. Friday's(TM) brand salted snacks into nearly all distribution channels. The distributed products segment revenues declined 8% to $4.8 million due to lower promotional activity and the sale of the Company's Texas merchandising operation in early November. Gross profit for the year ended December 31, 2001, was $14,707,000 or 26% of net revenues, as compared to $10,392,000, or 25% of net revenues, for fiscal 2000. The $4,315,000 increase, or 42%, in gross profit resulted from the increased volume of manufactured products. Selling, general and administrative expenses increased to $12,578,000 or 22% of net revenues for the year ended December 31, 2001, from $8,447,000, or 20% of net revenues for fiscal 2000. This represents a $4,131,000 increase, or 49%, compared to fiscal 2000, primarily due to an increase of $3,052,000 in sales, advertising and promotional spending in support of the increased sales volume primarily in connection with support of T.G.I. Friday's(TM) brand products. Net interest expense decreased to $1,045,000 for the year ended December 31, 2001 from $1,177,000 for fiscal 2000. This decrease was principally due to lower interest rates on certain of the Company's indebtedness. The Company's net income for the year ended December 31, 2001 was $1,045,000, and the net income for the year ended December 31, 2000 was $730,000. 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, 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. Sales of products manufactured by the Company accounted for 88% and 80% of the net revenues in fiscal 2000 and fiscal 1999, respectively, while sales of products manufactured by others accounted for 12% and 20% in fiscal 2000 and fiscal 1999, respectively. Manufactured products segment revenues increased $18,007,000, or 97%, from sales of branded and private label product, including $13,120,000 in connection with the Wabash Foods acquisition in October 1999 and the Boulder Natural Foods acquisition in June 2000. 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 revenues, 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. 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 fiscal 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 fiscal 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. LIQUIDITY AND CAPITAL RESOURCES Net working capital was $2,015,000 (a current ratio of 1.3:1) and $771,000 (a current ratio of 1.1:1) at December 31, 2001 and 2000, respectively. For the fiscal year ended December 31, 2001, the Company generated cash flow of $2,093,000 from operating activities, principally from operating results and non-cash charges, invested $1,956,000 in new equipment, and made $2,404,000 in payments on long-term debt. 14 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 provided the Company with production volume to satisfy nearly all of the Company's customers' needs during the shutdown. The Company continued to season and package the bulk product received from third party manufacturers. Full production at the Arizona facility resumed in March, 2001. On October 7, 1999, the Company signed a new $9.15 million Credit Agreement with U.S. Bancorp (the "U.S. Bancorp Credit Agreement") consisting of a $3.0 million working capital line of credit (the "U.S. Bancorp Line of Credit"), a $5.8 million term loan (the "U.S. Bancorp Term Loan A") and a $350,000 term loan (the "U.S. Bancorp Term Loan B"). Borrowings under the U.S. Bancorp Credit Agreement were used to pay off indebtedness under the Company's previously existing Wells Fargo Credit Agreement, to refinance indebtedness assumed by the Company in connection with the Wabash Foods acquisition, and for future general working capital needs. The U.S. Bancorp Line of Credit bears interest at an annual rate of prime plus 1%. The U.S. Bancorp Term Loan A bears interest at an annual rate of prime and requires monthly principal payments of approximately $74,000 commencing February 1, 2000, plus interest, until maturity on July 1, 2006. The U.S. Bancorp Term Loan B had an annual interest rate of prime plus 2.5%, required monthly principal payments of approximately $29,000, plus interest, and matured in March 2001. 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 its termination on October 7, 2004 and provides the holder thereof certain piggyback registration rights. 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 April 2001, the U.S. Bancorp Credit Agreement was amended to increase the U.S. Bancorp Line of Credit from $3.0 million to $5.0 million, establish a $0.5 million capital expenditure line of credit (the "CapEx Term Loan"), extend the U.S. Bancorp Line of Credit maturity date from October 2002 to October 31, 2003, and modify certain financial covenants. The Company borrowed $241,430 under the CapEx Term Loan in December 2001. The CapEx Term Loan bears interest at an annual rate of prime plus 1% and requires monthly principal payments of approximately $10,000, plus interest, until maturity on October 31, 2003 when the balance is due. The U.S. Bancorp Credit Agreement is secured by accounts receivable, inventories, equipment and general intangibles. Borrowings under the line of credit are limited to 80% of eligible receivables and up to 60% of eligible inventories. At December 31, 2001, the Company had a borrowing base of $4,297,000 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, 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 covenants. There can be no assurance, however, that the Company will attain any such profitability and remain in compliance. Any acceleration under the U.S. Bancorp Credit Agreement prior to the scheduled maturity of the U.S. Bancorp Line of Credit or the U.S. Bancorp Term Loans could have a material adverse effect upon the Company. As of December 31, 2001, there was an outstanding balance of $3,438,269 on the U.S. Bancorp Line of Credit, $4,089,743 on the U.S. Bancorp Term Loan A, $128,751 on the U.S. Bancorp Term Loan C, $87,500 on the U.S. Bancorp Term Loan D, and $241,430 on the CapEx Term Loan. The Company's Goodyear, Arizona manufacturing, distribution and headquarters facility is subject to a $1.9 million mortgage loan from Morgan Guaranty Trust Company of New York, 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 three to seven-year terms, bear interest at rates from 8.2% to 11.3%, require monthly payments and expire at various times through 2008 and are collateralized by the related equipment. At December 31, 2001, the Company had outstanding a 9% Convertible Debenture due July 1, 2002 in the principal amount of $427,656 held by Wells Fargo Small Business Investment Company, Inc. ("Wells Fargo SBIC"). The 9% Convertible Debenture is secured by land, building, equipment and intangibles. Interest on the 9% Convertible Debenture 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. In November 1999, 15 Renaissance Capital converted 50% ($859,047) of its Debenture holdings into 859,047 shares of Common Stock and agreed unconditionally to convert into Common Stock the remaining $859,047 not later than December 31, 2000. In December 2000, Renaissance Capital converted the remaining 859,047 shares of its 9% Convertible Debentures into 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 SBIC representing the right to purchase 25,000 and 7,143 shares of the Company's Common Stock, respectively, at an exercise price of $1.00 per share. Each warrant became exercisable upon issuance and expires on July 1, 2002. As a result of an event of default, the holders of the 9% Convertible Debentures have the right, upon written notice and after a thirty-day period during which such default may be cured, to demand immediate payment of the then unpaid principal and accrued but unpaid interest under the Debentures. The Company is currently in compliance with all the financial ratios, including a minimum working capital, a minimum shareholders' equity and a minimum current ratio at the end of any fiscal quarter. Management believes that the achievement of the Company's plans and objectives will enable the Company to attain a sufficient level of profitability to remain in compliance with the financial ratios. There can be no assurance, however, that the Company will attain any such profitability and remain in compliance with the financial ratios. On December 27, 2001, the Company completed the sale of 586,855 shares of Common Stock at an offering price of $2.13 per share to BFS US Special Opportunities Trust PLC, a fund managed by Renaissance Capital, in a private placement transaction. The net proceeds of the transaction were utilized by the Company for general corporate purposes and to reduce the Company's outstanding indebtedness. Pursuant to the Share Purchase Agreement dated December 27, 2001, by and between the Company and the investor, the Company has agreed to file a registration statement with the Securities and Exchange Commission covering the resale of the newly issued shares of Common Stock. The registration statement is required to be filed no later than 120 days after the closing date and is required to be declared effective within 90 days after the filing date. At December 31, 2001, the Company had net operating loss carryforwards available for federal income taxes of approximately $4.7 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 Statements of Financial Accounting Standards ("SFAS") No. 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 2002. 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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES In December 2001, the Securities and Exchange Commission issued an advisory requesting that all registrants describe their three to five most "critical accounting policies". The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the Company's financial condition and results and requires management's most difficult, subjective or 16 complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company believes that the following accounting policies fit this definition: ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. INVENTORIES. The Company's inventories are stated at the lower of cost (first-in, first-out) or market. The Company identifies slow moving or obsolete inventories and estimates appropriate loss provisions related thereto. Historically, these loss provisions have not been significant; however, if actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. GOODWILL AND TRADEMARKS. Goodwill is recorded at cost and amortized using the straight-line method over a twenty-year period. Goodwill is continually reviewed for impairment. Trademarks are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The carrying value of goodwill and trademarks would be impaired if the best estimate of future undiscounted cash flows over their remaining amortization period is less than their carrying value. The Company believes at this time that the carrying values and useful lives continue to be appropriate. INCOME TAXES. The Company has been profitable since 1999; however, it experienced significant net losses in prior fiscal years resulting in a net operating loss ("NOL") carryforward for federal income tax purposes of approximately $4.7 million at December 31, 2001. Generally accepted accounting principles require that the Company record a valuation allowance against the deferred tax asset associated with this NOL if it is "more likely than not" that the Company will not be able to utilize it to offset future taxes. Due to the size of the NOL carryforward, the Company has not recognized this net deferred tax asset and currently provides for income taxes only to the extent that it expects to pay cash taxes (primarily state taxes) for current income. It is possible, however, that the Company could be profitable in the future at levels which cause the Company to conclude that it is more likely than not that all or a portion of the NOL carryforward would be realized. Upon reaching such a conclusion, the Company would immediately record the estimated net realizable value of the deferred tax asset at that time and would then provide for income taxes at a rate equal to the combined federal and state effective rates, which would approximate 40% under current tax rates, rather than the 7.5% rate currently being used. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause the provision for income taxes to vary significantly from period to period, although the cash tax payments would remain unaffected until the benefit of the NOL is utilized. The above listing is not intended to be a comprehensive list of all of the Company's accounting policies. In many cases the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management's judgment in their application. See the Company's audited financial statements and notes thereto which begin on page 25 of this Annual Report on Form 10-KSB which contain accounting policies and other disclosures required by auditing standards generally accepted in the United States. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141, "BUSINESS COMBINATIONS" and SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS". SFAS No. 141 requires companies to apply the purchase method of accounting for all business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interests method. SFAS No. 142 changes the method by which companies recognize intangible assets in purchase business combinations and generally requires identifiable intangible assets to be recognized separately from goodwill. In addition, it eliminates the amortization of all existing and newly acquired goodwill on a prospective basis and requires companies to assess goodwill for impairment, at least annually, based on the fair value of the reporting unit. Upon adoption on January 1, 2002, the Company believes there will not be any material adverse effect on its financial position or results of operations. Goodwill amortization expense was approximately $321,000 and $299,000 for 2001 and 2000 respectively. In August 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS". SFAS No. 144 supersedes SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" and the accounting and reporting provisions of APB Opinion No. 30, "REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS". SFAS No. 144 modifies the method by which companies account for certain asset impairment losses. Upon adoption on January 17 1, 2002, the Company believes there will not be any material adverse effect on its financial position or results of operations. In 2001, the Emerging Issues Task Force (EITF) issued EITF Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products," (EITF Issue No. 01-09) which codified and expanded its consensus opinions in EITF Issue No. 00-14, "Accounting for Certain Sales Incentives," and EITF Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products." EITF Issue No. 01-09 also discusses aspects of EITF Issue No. 00-22, "Accounting for Points and Certain Other Time-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future." EITF Issue No. 01-09 addresses the accounting for certain consideration given by a vendor to a customer and provides guidance on the recognition, measurement and income statement classification for sales incentives. In general, the guidance requires that consideration from a vendor to a retailer be recorded as a reduction in revenue unless certain criteria are met. The Company will adopt the provisions of the EITF Issue No. 01-09 effective first quarter 2002 and as a result, costs previously recorded as expense will be reclassified and reflected as reductions in revenue. The Company is also required to reclassify amounts in prior periods in order to conform to the revised presentation of these costs if practicable. Upon adoption on January 1, 2002, the Company believes there will not be any material adverse effect on its financial position or results of operations based on these reclassifications. 18 ITEM 7. FINANCIAL STATEMENTS PAGE ---- REPORTS Report of independent public accountants with respect to financial statements for the years ended December 31, 2001 and 2000 25 FINANCIAL STATEMENTS Consolidated balance sheets as of December 31, 2001 and 2000 26 Consolidated statements of operations for the years ended December 31, 2001 and 2000 27 Consolidated statements of shareholders' equity for the years ended December 31, 2001 and 2000 28 Consolidated statements of cash flows for the years ended December 31, 2001 and 2000 29 Notes to consolidated financial statements 30 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 35 President, Chief Executive Officer, Director Glen E. Flook 43 Senior Vice President-Operations Thomas W. Freeze 50 Senior Vice President, Chief Financial Officer, Treasurer, Secretary, and Director Mark S. Howells 48 Chairman, Director Thomas E. Cain 47 Director James W. Myers 67 Director Robert C. Pearson 66 Director Aaron M. Shenkman 61 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. 19 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 President and Chairman of 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 MS.Howells & Co., a registered securities broker-dealer. Mr. Howells is also the President of Audesi Capital Management LLC, a registered investment adviser formed in 2001. THOMAS E. CAIN. Mr. Cain has served as a Director since September 2000. Mr. Cain has been Chief Executive Officer of Focus Capital Group LLC since December 2001. From 1999 to 2001, Mr. Cain was Chairman of Frontstep distribution.com and 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. 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. Renaissance Capital Group is the investment manager of Renaissance Capital Growth & Income Fund III, Inc., the former owner of a 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 Advance Power Technology, Inc. (a publicly traded semiconductor manufacturer), and CaminoSoft Corp. (a distributor of consumables for laser printers). 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 2002 Annual Meeting of Shareholders to be filed by the Company with the Securities and Exchange Commission on or about April 17, 2002. 20 ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K The following documents are filed as part of this Annual Report on Form 10-KSB: (a) The following exhibits as required by Item 601 of Regulation S-B: EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3.1 -- Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on February 23, 1995. (1) 3.2 -- Certificate of Amendment to the Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on March 3, 1995. (1) 3.3 -- Certificate of Amendment to the Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on October 7, 1999. (Incorporated by reference to the Company's definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on September 15, 1999.) 3.4 -- By-Laws of the Company. (1) 4.1 -- Specimen Certificate for shares of Common Stock. (1) 4.2 -- Convertible Debenture Loan Agreement dated May 31, 1995 by and among the Company (and certain of its subsidiaries), Renaissance Capital and Wells Fargo. (1) 4.3 -- 9.00% Convertible Debenture dated May 31, 1995, issued by the Company to Renaissance Capital. (1) 4.4 -- 9.00% Convertible Debenture dated May 31, 1995, issued by the Company to Wells Fargo. (1) 4.5 -- Form of Warrant issued as of February 1998 to Renaissance Capital and Wells Fargo. (3) 4.6 -- Warrant dated November 4, 1998, issued by the Company to Norwest Business Credit, Inc. (4) 4.7 -- 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.) 4.8 -- 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) 4.9 -- 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) 4.10 -- Form of Term Note C and Term Note D issued by the Company to U.S. Bancorp as of June 30, 2000. (6) 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 -- Agreement dated August 29, 1996, by and between the Company and Westminster Capital, Inc. ("Westminster"), as amended. (1) 10.6 -- Amendment No. 1 dated October 14, 1996, to Warrant dated September 11, 1996, issued by the Company to Westminster. (1) 10.7 -- 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) 10.8 -- 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) 10.9 -- Non-Qualified Stock Option Agreement dated as of October 22, 1996, by and between the Company and Mark S. Howells. (1) 10.10 -- Letter Agreement dated as of November 5, 1996, by and between the Company and Jeffrey J. Puglisi. (1) 10.11 -- Letter Agreement dated as of November 5, 1996, by and between the Company and David J. Brennan. (1) 10.12 -- Stock Option Agreement dated October 22, 1996, by and between the Company and David J. Brennan. (1) 10.13 -- 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) 21 10.14 -- Letter Agreement dated December 4, 1996, by and between the Company and Jeffrey J. Puglisi, relating to stock options. (1) 10.15 -- Letter Agreement dated December 4, 1996, by and between the Company and Mark S. Howells, relating to stock options. (1) 10.16 -- Letter Agreement dated December 4, 1996, by and between the Company and Parris H. Holmes, Jr., relating to stock options. (1) 10.17 -- Letter Agreement dated December 4, 1996, by and between the Company and David J. Brennan, relating to stock options. (1) 10.18 -- Employment Agreement dated January 24, 1997, by and between the Company and Eric J. Kufel. (2) 10.19 -- Employment Agreement dated February 14, 1997, by and between the Company and Glen E. Flook. (2) 10.20 -- 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.) 10.21 -- Fixed Rate Note dated June 4, 1997, by and between La Cometa Properties, Inc. and Morgan Guaranty Trust Company of New York. (3) 10.22 -- 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) 10.23 -- Guaranty Agreement dated June 4, 1997, by and between the Company and Morgan Guaranty Trust Company of New York. (3) 10.24 -- Equipment Lease Agreement dated June 9, 1997, by and between PB Arizona and FINOVA Capital Corporation. (3) 10.25 -- 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.) 10.26 -- 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.) 10.27 -- Poore Brothers, Inc. 1995 Stock Option Plan, as amended. (5) 10.28 -- Credit Agreement, dated as of October 3, 1999, by and between the Company and U.S. Bancorp Republic Commercial Finance, Inc. (5) 10.29 -- Security Agreement, dated as of October 3, 1999, by and between the Company and U.S. Bancorp Republic Commercial Finance, Inc. (5) 10.30 -- Commercial Lease, dated May 1, 1998, by and between Wabash Foods, LLC and American Pacific Financial Corporation. (5) 10.31 -- Agreement for the 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) 10.32 -- Secured Promissory Note and Security Agreement dated as of June 8, 2000, by and between Boulder Potato Company and the Company. (6) 10.33 -- Registration Rights Agreement dated as of June 8, 2000, by and between Boulder Potato Company and the Company. (6) 10.34 -- Escrow Agreement dated as of June 8, 2000, by and among the Company, the shareholders of Boulder Potato Company, and Boulder Potato Company. (6) 10.35 -- Employment Agreement dated June 8, 2000, by and between Mark C. Maggio and the Company. (6) 10.36 -- Employment Agreement dated June 8, 2000, by and between John M. Maggio and the Company. (6) 10.37 -- Employment Agreement dated August 31, 2000, by and between John M. Silvestri and the Company. (6) 10.38 -- 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. (6) 10.39 -- Second Amendment to Credit Agreement (dated March 2, 2001), by and between the Company and U.S. Bank National Association. (Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the three-month period ended March 31, 2001.) 10.40 -- 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.) (Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the three-month period ended March 31, 2001.) 10.41 -- Third Amendment to Credit Agreement (dated March 30, 2001), by and between the Company and U.S. Bank National Association. (Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the three-month period ended June 30, 2001.) 22 10.42 -- First Amendment to License Agreement, dated as of July 11, 2001, by and between the Company and TGI Friday's Inc. (certain portions of this exhibit have been omitted pursuant to a confidentiality treatment request filed with the Securities and Exchange Commission). (Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the three-month period ended September 30, 2001.) 10.43 -- Share Purchase Agreement, dated December 27, 2001, by and between the Company and BFS US Special Opportunities Trust PLC. (Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 10, 2002.) 21.1 -- List of Subsidiaries of the Company. (7) 23.1 -- Consent of Arthur Andersen, LLP. (7) 99.1 -- Registrant's Letter Regarding Arthur Andersen LLP. - ---------- (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 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). (2) Current Report on Form 8-K, reporting a change in the Company's fiscal year (filed with the Commission on November 9, 2001). 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 28, 2002 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 March 28, 2002 - ------------------------- (Principal Executive Officer) Eric J. Kufel /s/ Thomas W. Freeze Senior Vice President, Chief Financial Officer, March 28, 2002 - ------------------------- Treasurer, Secretary, and Director Thomas W. Freeze (Principal Financial Officer and Principal Accounting Officer) /s/ Mark S. Howells Chairman, Director March 28, 2002 - ------------------------- Mark S. Howells /s/ Thomas E. Cain Director March 28, 2002 - ------------------------- Thomas E. Cain /s/ James W. Myers Director March 28, 2002 - ------------------------- James W. Myers /s/ Robert C. Pearson Director March 28, 2002 - ------------------------- Robert C. Pearson /s/ Aaron M. Shenkman Director March 28, 2002 - ------------------------- Aaron M. Shenkman
24 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, 2001 and 2000, 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, 2001 and 2000, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Phoenix, Arizona, February 11, 2002 25 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------------ 2001 2000 ------------ ------------ ASSETS Current assets: Cash ...................................................................... $ 894,198 $ 327,553 Accounts receivable, net of allowance of $219,000 in 2001 and $247,000 in 2000 .................................................... 4,982,793 5,196,415 Inventories ............................................................... 1,887,872 1,782,551 Other current assets ...................................................... 430,914 394,356 ------------ ------------ Total current assets ................................................... 8,195,777 7,700,875 Property and equipment, net ................................................. 13,730,273 12,306,241 Intangible assets, net ...................................................... 9,561,933 10,030,631 Other assets, net ........................................................... 200,077 212,737 ------------ ------------ Total assets ........................................................... $ 31,688,060 $ 30,250,484 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .......................................................... $ 2,430,857 $ 3,031,130 Accrued liabilities ....................................................... 1,406,845 1,583,379 Current portion of long-term debt ......................................... 2,343,472 2,315,391 ------------ ------------ Total current liabilities .............................................. 6,181,174 6,929,900 Long-term debt, less current portion ........................................ 8,661,255 9,025,088 ------------ ------------ Total liabilities ...................................................... 14,842,429 15,954,988 ------------ ------------ Commitments and contingencies Shareholders' equity: Preferred stock, $100 par value; 50,000 shares authorized; no shares issued or outstanding at December 31, 2001 and 2000, respectively .............. -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 15,687,518 and 14,994,765 shares issued and outstanding at December 31, 2001 and 2000, respectively .................................................. 156,875 149,947 Additional paid-in capital ................................................ 21,175,485 19,677,542 Accumulated deficit ....................................................... (4,486,729) (5,531,993) ------------ ------------ Total shareholders' equity ............................................. 16,845,631 14,295,496 ------------ ------------ Total liabilities and shareholders' equity ............................. $ 31,688,060 $ 30,250,484 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 26 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, ------------------------------- 2001 2000 ------------ ------------ Net revenues .................................. $ 57,665,888 $ 41,743,007 Cost of revenues .............................. 42,958,822 31,350,941 ------------ ------------ Gross profit ............................. 14,707,066 10,392,066 Selling, general and administrative expenses... 12,577,699 8,446,808 ------------ ------------ Operating income ......................... 2,129,367 1,945,258 ------------ ------------ Fire related income, net ...................... 4,014 -- Interest expense, net ......................... (1,045,117) (1,177,467) ------------ ------------ Total interest expense and other ......... (1,041,103) (1,177,467) ------------ ------------ Income before income tax provision ....... 1,088,264 767,791 Income tax provision .......................... (43,000) (38,000) ------------ ------------ Net income ................................. $ 1,045,264 $ 729,791 ============ ============ Earnings per common share: Basic ..................................... $ 0.07 $ 0.05 ============ ============ Diluted ................................... $ 0.06 $ 0.05 ============ ============ Weighted average number of common shares: Basic ..................................... 15,050,509 13,769,614 ============ ============ Diluted ................................... 17,198,648 15,129,593 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 27 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL --------------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL ------ ------ ------- ------- ----- 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 Exercise of common stock options ... 76,000 760 97,810 -- 98,570 Issuance of warrants ............... -- -- 16,800 -- 16,800 Issuance of common stock ........... 616,753 6,168 1,383,333 -- 1,389,501 Net income ......................... -- -- -- 1,045,264 1,045,264 ----------- ----------- ----------- ----------- ----------- Balance, December 31, 2001 ........... 15,687,518 $ 156,875 $21,175,485 $(4,486,729) $16,845,631 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 28 POORE BROTHERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ---------------------------- 2001 2000 ----------- ----------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income ..................................................... $ 1,045,264 $ 729,791 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................... 1,237,260 1,089,004 Amortization ............................................... 694,067 648,938 Valuation reserves ......................................... 53,558 102,325 Other non-cash charges ..................................... 349,723 252,148 Gain on disposition of fixed assets due to fire ............ (167,450) -- Change in operating assets and liabilities, net of effect of business acquired: Accounts receivable ........................................ 240,981 (1,974,013) Inventories ................................................ (186,238) (481,401) Other assets and liabilities ............................... (396,916) (252,812) Accounts payable and accrued liabilities ................... (776,807) 2,503,632 ----------- ----------- Net cash provided by operating activities ......... 2,093,442 2,617,612 ----------- ----------- CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of equipment .......................................... (2,655,535) (635,415) Proceeds from disposition of fixed assets due to fire .......... 700,000 -- Acquisition related expenses ................................... -- (365,542) ----------- ----------- Net cash used in investing activities ............. (1,955,535) (1,000,957) ----------- ----------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from issuance of common stock ......................... 1,313,571 175,238 Stock and debt issuance costs .................................. (10,774) (11,164) Proceeds from issuance of debt ................................. -- 610,329 Payments made on long-term debt ................................ (2,404,470) (2,053,149) Net increase (decrease) in working capital line of credit ...... 1,530,410 (114,720) ----------- ----------- Net cash provided by (used in) financing activities 428,738 (1,393,466) ----------- ----------- Net increase in cash ............................................. 566,645 223,189 Cash at beginning of year ........................................ 327,553 104,364 ----------- ----------- Cash at end of year .............................................. $ 894,198 $ 327,553 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest ......................... $ 1,055,248 $ 1,047,380 Summary of noncash investing and financing activities: Common Stock issued for acquisitions ......................... 185,274 1,235,321 Common Stock or warrant issued for sales commissions ......... 16,800 50,000 Conversion of Convertible Debenture into Common Stock ........ -- 859,047 Note payable issued for purchase of equipment ................ 538,308 -- Note payable issued for acquisition .......................... -- 830,000
The accompanying notes are an integral part of these consolidated financial statements. 29 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 Principles 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. See Note 2. On October 7, 1999, the Company acquired a 100% equity interest in Wabash Foods, LLC ("Wabash"), an Indiana-based snack food manufacturer of Tato Skins(R), O'Boisies(R), and Pizzarias(R). See Note 2. On June 8, 2000, the Company acquired Boulder Natural Foods, Inc., a Colorado-based totally natural potato chip marketer, and the business and certain related assets and liabilities of Boulder Potato Company (collectively referred to as "Boulder"), based in Boulder, Colorado. See Note 2. Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the current year presentation. 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 through grocery retail chains, club stores 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., (c) manufactures private label potato chips for grocery retail chains, and (d) distributes 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. 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 Company also plans to increase sales of its existing products, increase distribution revenues and continue to improve its manufacturing capacity utilization. Although certain of the Company's subsidiaries have operated for several years, the Company as a whole has a relatively brief operating history. The Company had significant operating losses prior to fiscal 1999. Successful future operations are subject to certain risks, uncertainties, expenses and difficulties frequently encountered in the establishment and growth of a new business in the snack food industry. The market for salty snack foods, such as potato chips, tortilla chips, popcorn and pretzels, is large and intensely competitive. The industry is dominated by one significant competitor and includes many other competitors with greater financial and other resources than the Company. 30 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) 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. 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, 2001 and 2000, 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 Goodwill is recorded at cost and amortized using the straight-line method over a twenty-year period. The Company assesses the recoverability of goodwill at each balance sheet date by determining whether amortization of the assets over their original estimated useful life can be recovered through estimated future undiscounted cash flows. Total goodwill was $6,561,648 and $6,376,374 at December 31, 2001 and 2000, respectively, including $126,702 from the November 1998 Tejas acquisition (see Note 2), $1,327,227 from the October 1999 Wabash acquisition (see Note 2), and $1,690,539 from the June 2000 Boulder acquisition (see Note 2). Accumulated amortization was $1,206,747 and $886,108 at December 31, 2001 and 2000, 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 $792,968 and $459,635 at December 31, 2001 and 2000, respectively. 31 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) REVENUE RECOGNITION Revenues and related cost of revenues are recognized upon shipment of products. ADVERTISING COSTS The Company expenses production costs of advertising the first time the advertising takes place, except for cooperative advertising costs which are expensed when the related sales are recognized. Costs associated with obtaining shelf space (i.e., "slotting fees") are expensed in the year in which such costs are incurred by the Company. Advertising expenses were approximately $261,000 and $394,000 in 2001 and 2000, respectively. Accrued advertising and promotion was $388,000 and $324,000 in 2001 and 2000, 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 COMMON SHARE Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Exercises of outstanding stock options or warrants and conversion of convertible debentures are assumed to occur for purposes of calculating diluted earnings per share for periods in which their effect would not be anti-dilutive.
YEARS ENDED DECEMBER 31, --------------------------- 2001 2000 ----------- ----------- BASIC EARNINGS PER COMMON SHARE: Net income ......................................... $ 1,045,264 $ 729,791 =========== =========== Weighted average number of common shares ........... 15,050,509 13,769,614 =========== =========== Earnings per common share .......................... $ 0.07 $ 0.05 =========== =========== DILUTED EARNINGS PER COMMON SHARE: Net income ......................................... $ 1,045,264 $ 729,791 =========== =========== Weighted average number of common shares ........... 15,050,509 13,769,614 Incremental shares from assumed conversions - Warrants ......................................... 690,428 475,943 Stock options .................................... 1,457,711 884,036 ----------- ----------- Adjusted weighted average number of common shares... 17,198,648 15,129,593 =========== =========== Earnings per common share .......................... $ 0.06 $ 0.05 =========== ===========
Options and warrants to purchase 653,077 and 985,527 shares of Common Stock were outstanding at December 31, 2001 and December 31, 2000, respectively, 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. For the years ended December 31, 2000 and 2001 conversion of the convertible debentures was not assumed, as the effect of the conversion would be anti-dilutive. 32 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141, "BUSINESS COMBINATIONS" and SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS". SFAS No. 141 requires companies to apply the purchase method of accounting for all business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interests method. SFAS No. 142 changes the method by which companies recognize intangible assets in purchase business combinations and generally requires identifiable intangible assets to be recognized separately from goodwill. In addition, it eliminates the amortization of all existing and newly acquired goodwill on a prospective basis and requires companies to assess goodwill for impairment, at least annually, based on the fair value of the reporting unit. Upon adoption on January 1, 2002, the Company believes there will not be any material adverse impact on its financial position or results of operations. Goodwill amortization expense was approximately $321,000 and $299,000 for 2001 and 2000 respectively. In August 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS". SFAS No. 144 supersedes SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" and the accounting and reporting provisions of APB Opinion No. 30, "REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS". SFAS No. 144 modifies the method by which companies account for certain asset impairment losses. Upon adoption on January 1, 2002, the Company believes there will not be any material adverse impact on its financial position or results of operations. In 2001, the Emerging Issues Task Force (EITF) issued EITF Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products," (EITF Issue No. 01-09) which codified and expanded its consensus opinions in EITF Issue No. 00-14, "Accounting for Certain Sales Incentives," and EITF Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products." EITF Issue No. 01-09 also discusses aspects of EITF Issue No. 00-22, "Accounting for Points and Certain Other Time-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future." EITF Issue No. 01-09 addresses the accounting for certain consideration given by a vendor to a customer and provides guidance on the recognition, measurement and income statement classification for sales incentives. In general, the guidance requires that consideration from a vendor to a retailer be recorded as a reduction in revenue unless certain criteria are met. The Company will adopt the provisions of the EITF Issue No. 01-09 effective January 1, 2002 and as a result, costs previously recorded as expense will be reclassified and reflected as reductions in revenue. The Company is also required to reclassify amounts in prior periods in order to conform to the revised presentation of these costs if practicable. The Company believes there will not be any material adverse effect on its financial condition or results of operations based on these reclassifications. 2. ACQUISITIONS: On June 8, 2000, the Company acquired Boulder Natural Foods, Inc. (a Colorado corporation) and the business and certain related assets and liabilities of Boulder Potato Company, a totally natural potato chip marketer based in Boulder Colorado. The assets, which were acquired through a newly formed wholly owned subsidiary of the Company, Boulder Natural Foods, Inc., an Arizona corporation, included the Boulder Potato Company(TM) and Boulder Chips(TM) brands, other intangible assets, receivables, inventories and specified liabilities. In consideration for these assets and liabilities, the Company paid a total purchase price of $2,637,000, consisting of: (i) the issuance of 725,252 unregistered shares of Common Stock with a fair value at the time of $1,235,000, (ii) a cash payment of $301,000, (iii) the issuance of a note to the seller in the amount of $830,000 which bears interest at 6.4%, is secured by the Boulder assets acquired, and requires monthly principal and interest payments of approximately $37,000 until maturity on June 15, 2002, and (iv) the assumption by the Company of $271,000 in liabilities, including a note to the seller in the amount of $130,000 which bears interest at 6.0% and requires monthly principal and interest payments of approximately $6,000 until maturity on June 15, 2002. The initial $301,000 cash payment was subsequently financed with the U.S. Bank Term Loan D (see Note 6). 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 anniversaries 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. In fiscal 2001, the Company was required to 33 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. ACQUISITIONS: (CONTINUED) issue 57,898 shares pursuant to this provision. 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 has recorded trademarks of $1,000,000 and goodwill of $1,690,539, which are being amortized on a straight-line basis over 15 and 20 year periods, respectively. Boulder had sales of approximately $0.9 million for the five months ended May 31, 2000. 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 at the time 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 at the time 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 became exercisable upon issuance. As a result, the Company acquired all the assets of Wabash, including the Tato Skins(R), O'Boisies(R), and Pizzarias(R) trademarks. The acquisition was accounted for using the purchase method of accounting in accordance with APB Opinion No. 16. Accordingly, only the results of operations subsequent to the acquisition date have been included in the Company's results. In connection with the acquisition, the Company recorded goodwill of $1,327,227, which is being amortized on a straight-line basis over a 20-year period. 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 Wells Fargo Line of Credit Agreement to satisfy the cash portion of the consideration. Tejas had sales of approximately $2.8 million for the nine months ended September 30, 1998. In connection with the acquisition, the Company transferred production of the Bob's Texas Style(R) brand potato chips to its Arizona facility. The acquisition was accounted for using the purchase method of accounting in accordance with APB Opinion No. 16. Accordingly, only the results of operations subsequent to the acquisition date have been included in the Company's results. In connection with the acquisition, the Company recorded goodwill of $126,702, which is being amortized on a straight-line basis over a 20-year period. In 2001, the Company cancelled and retired 28,000 shares of Common Stock issued in connection with the Tejas acquisition. The cancellation was made pursuant to the terms of the escrow agreement in settlement of post acquisition liabilities. 3. CONCENTRATIONS OF CREDIT RISK: The Company's cash is placed with major banks. The Company, in the normal course of business, maintains balances in excess of Federal insurance limits. 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 2001 and 2000, substantially all of the Company's customers were distributors or retailers whose sales were concentrated in the grocery industry, throughout the United States. The Company investigates a customer's credit worthiness before extending credit. At December 31, 2001, one customer accounted for approximately 21% of accounts receivable in the accompanying Consolidated Balance Sheets. The Company acquires trade accounts receivable of Arizona-based retailers from its distributors in settlement of their obligations to the Company. 34 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 4. INVENTORIES: Inventories consisted of the following: DECEMBER 31, ------------------------------ 2001 2000 ---------- ---------- Finished goods ............... $ 588,376 $ 468,007 Raw materials ................ 1,299,496 1,314,544 ---------- ---------- $1,887,872 $1,782,551 ========== ========== 5. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
DECEMBER 31, ------------------------------ 2001 2000 ------------ ------------ Buildings and improvements ................... $ 5,137,005 $ 3,462,912 Equipment .................................... 11,085,794 10,731,075 Land ......................................... 272,006 272,006 Vehicles ..................................... 40,178 35,116 Furniture and office equipment ............... 1,109,325 649,731 ------------ ------------ 17,644,308 15,150,840 Less accumulated depreciation and amortization (3,914,035) (2,844,599) ------------ ------------ $ 13,730,273 $ 12,306,241 ============ ============
Depreciation expense was $1,237,260 and $1,089,004 in 2001 and 2000, respectively. Included in equipment are assets held under capital leases with an original cost of $1,193,110 at December 31, 2001 and 2000, and accumulated amortization of $993,106 and $796,749 at December 31, 2001 and 2000, respectively. 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 assist the Company in meeting anticipated customers' needs during the shutdown. The Company continued to season and package the bulk product received from third party manufacturers. In fiscal 2000, 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 revenues" 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 with the balance due reflected in accounts receivable in the accompanying Consolidated Balance Sheets. 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 fiscal 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 revenues" and offset by a $1.4 million credit representing insurance proceeds. The Company also incurred approximately $2.3 million in building and equipment reconstruction costs in connection with the fire. During fiscal 2001, the Company was advanced a total of $3.2 million by the insurance company. "Fire related income, net" on the accompanying Consolidated Statement of Operations for fiscal 2001 includes (i) a gain of $167,000, representing the excess of insurance proceeds over the book value for the building and equipment of $533,000 damaged by the fire, and (ii) expenses not reimbursed by the insurance company of approximately $163,000. The Company does not have any receivables from the insurance company reflected in the accompanying Consolidated Balance Sheets as of December 31, 2001. In the event that facts and circumstances indicate that the cost of the property and equipment may be impaired, an evaluation of recoverability would be performed. This evaluation would include the comparison of the future estimated undiscounted cash flows associated with the assets to the carrying amount of these assets to determine if a writedown is required. There have been no impairments realized at either December 31, 2001 or 2000. 35 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. LONG-TERM DEBT: Long-term debt consisted of the following:
DECEMBER 31, ---------------------------- 2001 2000 ------------ ------------ Convertible Debentures due in monthly installments through July 1, 2002; interest at 9%; collateralized by land, buildings, equipment and intangibles .................................................................. $ 427,656 $ 481,115 Working capital line of credit due October 31, 2003; interest at prime rate plus 1% (5.75% at December 31, 2001); collateralized by accounts receivable, inventories, equipment and general intangibles ................... 3,438,269 1,907,859 Term loan due in monthly installments through July 1, 2006; interest at prime rate (4.75% at December 31, 2001); collateralized by accounts receivable, inventories, equipment and general intangibles ............................... 4,089,743 4,982,051 Term loan paid in 2001 ......................................................... -- 87,500 Mortgage loan due in monthly installments through July 2012; interest at 9.03%; collateralized by land and building ................................... 1,882,282 1,912,705 Term loan due in monthly installments through June 30, 2002; interest at prime plus 2% (6.75% at December 31, 2001); collateralized by accounts receivable, inventories, equipment and general intangibles ................... 128,751 386,250 Term loan due in monthly installments through June 15, 2002; interest at 6.4%; collateralized by certain assets of Boulder ............................ 217,499 632,214 Term loan due in monthly installments through June 15, 2002; interest at 6% .... 33,968 98,928 Term loan due in monthly installments through August 31, 2002; interest at prime plus 2% (6.75% at December 31, 2001); collateralized by accounts receivable, inventory, equipment and intangibles ............................. 87,500 237,500 Capital lease obligations due in monthly installments through 2002; interest rates ranging from 8.2% to 11.3%; collateralized by equipment ................ 457,629 614,357 Term loan due in monthly installments through October 31, 2003; interest at prime plus 1% (5.75% at December 31, 2001); collateralized by equipment .................................................................... 241,430 -- ------------ ------------ 11,004,727 11,340,479 Less current portion ........................................................... (2,343,472) (2,315,391) ------------ ------------ $ 8,661,255 $ 9,025,088 ============ ============
Annual maturities of long-term debt at December 31, 2001 are as follows: YEAR ---- 2002.................................................. $ 2,343,472 2003.................................................. 4,543,545 2004.................................................. 932,155 2005.................................................. 935,906 2006.................................................. 568,213 Thereafter............................................ 1,681,436 ------------ $ 11,004,727 ============ 36 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. LONG-TERM DEBT: (CONTINUED) The Company's Goodyear, Arizona manufacturing, distribution and headquarters facility is subject to a $1.9 million mortgage loan from Morgan Guaranty Trust Company of New York, 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 three to seven year terms, bear interest at rates from 8.2% to 11.3%, require monthly payments and expire at various times through 2008 and are collateralized by the related equipment. At December 31, 2001, the Company had outstanding a 9% Convertible Debenture due July 1, 2002 in the principal amount of $427,656 held by Wells Fargo Small Business Investment Company, Inc. ("Wells Fargo SBIC"). The 9% Convertible Debenture is secured by land, building, equipment and intangibles. Interest on the 9% Convertible Debenture 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. In November 1999, Renaissance Capital converted 50% ($859,047) of its 9% Convertible Debenture holdings into 859,047 shares of Common Stock and agreed unconditionally to convert into Common Stock the remaining $859,047 not later than December 31, 2000. In December 2000, Renaissance Capital converted the remaining 859,047 shares of its 9% Convertible Debentures into 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 SBIC 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 Convertible Debentures. The Company is currently in compliance with all the financial ratios, including a minimum working capital, a minimum shareholders' equity and a minimum current ratio at the end of any fiscal quarter. Management believes that the achievement of the Company's plans and objectives will enable the Company to attain a sufficient level of profitability to remain in compliance with the financial ratios. There can be no assurance, however, that the Company will attain any such profitability and remain in compliance with the financial ratios. On October 7, 1999, the Company signed a new $9.15 million Credit Agreement with U.S. Bancorp (the "U.S. Bancorp Credit Agreement") consisting of a $3.0 million working capital line of credit (the "U.S. Bancorp Line of Credit"), a $5.8 million term loan (the "U.S. Bancorp Term Loan A") and a $350,000 term loan (the "U.S. Bancorp Term Loan B"). Borrowings under the U.S. Bancorp Credit Agreement were used to pay off indebtedness under the Company's previously existing Wells Fargo Credit Agreement, to refinance indebtedness assumed by the Company in connection with the Wabash Foods acquisition, and for future general working capital needs. The U.S. Bancorp Line of Credit bears interest at an annual rate of prime plus 1%. The U.S. Bancorp Term Loan A bears interest at an annual rate of prime and requires monthly principal payments of approximately $74,000 commencing February 1, 2000, plus interest, until maturity on July 1, 2006. The U.S. Bancorp Term Loan B had an annual interest rate of prime plus 2.5%, required monthly principal payments of approximately $29,000, plus interest, and matured in March 2001. 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 its termination on October 7, 2004 and provides the holder thereof certain piggyback registration rights. 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 37 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. LONG-TERM DEBT: (CONTINUED) 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 April 2001, the U.S. Bancorp Credit Agreement was amended to increase the U.S. Bancorp Line of Credit from $3.0 million to $5.0 million, establish a $0.5 million capital expenditure line of credit (the "CapEx Term Loan"), extend the U.S. Bancorp Line of Credit maturity date from October 2002 to October 31, 2003, and modify certain financial covenants. The Company borrowed $241,430 under the CapEx Term Loan in December 2001. The CapEx Term Loan bears interest at an annual rate of prime plus 1% and requires monthly principal payments of approximately $10,000, plus interest, until maturity on October 31, 2003 when the balance is due. The U.S. Bancorp Credit Agreement is secured by accounts receivable, inventories, equipment and general intangibles. Borrowings under the line of credit are limited to 80% of eligible receivables and up to 60% of eligible inventories. At December 31, 2001, the Company had a borrowing base of $4,297,000 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, 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 covenants. There can be no assurance, however, that the Company will attain any such profitability and remain in compliance. Any acceleration under the U.S. Bancorp Credit Agreement prior to the scheduled maturity of the U.S. Bancorp Line of Credit or the U.S. Bancorp Term Loans could have a material adverse effect upon the Company. On November 4, 1998, pursuant to the terms of the Wells Fargo Credit Agreement, the Company issued to Wells Fargo a warrant (the "Wells Fargo Warrant") to purchase 50,000 shares of Common Stock for an exercise price of $0.93375 per share. The Wells Fargo Warrant is exercisable until November 3, 2003, the date of termination of the Wells Fargo Warrant, and provides the holder thereof certain demand and piggyback registration rights. 7. COMMITMENTS AND CONTINGENCIES: Rental expense under operating leases was $506,900 and $309,000 for each of fiscal 2001 and 2000, respectively. Minimum future rental commitments under non-cancelable leases as of December 31, 2001 are as follows: CAPITAL OPERATING YEAR LEASES LEASES TOTAL ---------- ---------- ---------- 2002 ............................ $ 437,418 $ 940,398 $1,377,816 2003 ............................ 46,484 932,135 978,619 2004 ............................ -- 903,565 903,565 2005 ............................ -- 879,848 879,848 2006 ............................ -- 862,156 862,156 Thereafter ...................... -- 3,906,596 3,906,596 ---------- ---------- ---------- Total ........................... 483,902 $8,424,698 $8,908,600 ========== ========== Less amount representing interest (26,273) ---------- Present value ................... $ 457,629 ========== 38 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. SHAREHOLDERS' EQUITY: COMMON STOCK In November 1999, Renaissance Capital converted 50% ($859,047) of its 9% Convertible Debenture (see Note 6) holdings into 859,047 shares of Common Stock and agreed unconditionally to convert into Common Stock the remaining $859,047 not later than December 31, 2000. In December 2000, Renaissance Capital converted the remaining 859,047 shares of its 9% Convertible Debentures into Common Stock. The Company's outstanding 9% Convertible Debentures are convertible into 427,656 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 fiscal years 2000, 1999, and 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). In fiscal 2001, the Company issued an additional 57,898 shares in connection with the Boulder acquisition and cancelled 28,000 shares in connection with the Tejas acquisition (see Note 2). On December 27, 2001, the Company completed the sale of 586,855 shares of Common Stock at an offering price of $2.13 per share to BFS US Special Opportunities Trust PLC, a fund managed by Renaissance Capital Group, Inc., in a private placement transaction. The net proceeds of the transaction were utilized by the Company to reduce the Company's outstanding indebtedness. Pursuant to the Share Purchase Agreement dated December 27, 2001, by and between the Company and the investor, the Company has agreed to file a registration statement with the Securities and Exchange Commission covering the resale of the newly issued shares of Common Stock. The registration statement is required to be filed no later than 120 days after the closing date and is required to be declared effective within 90 days after the filing date. PREFERRED STOCK The Company has authorized 50,000 shares of $100 par value Preferred Stock, none of which was outstanding at December 31, 2001 and 2000. The Company may issue such shares of Preferred Stock in the future without shareholder approval. WARRANTS During 2000 and 2001 warrant activity was as follows: WEIGHTED WARRANTS AVERAGE OUTSTANDING EXERCISE PRICE ----------- -------------- Balance, December 31, 1999 ......... 1,413,298 $1.62 Issued ........................... 85,000 1.09 ---------- Balance, December 31, 2000 ......... 1,498,298 1.59 Issued ........................... 10,000 3.62 Cancelled ........................ (225,000) 4.38 ---------- Balance, December 31, 2001 ......... 1,283,298 1.11 ========== At December 31, 2001, outstanding warrants had exercise prices ranging from $0.88 to $3.62 and a weighted average remaining term of 2.6 years. Warrants that were exercisable at December 31, 2001 totaled 1,135,221 with a weighted average exercise price per share of $1.14. 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 39 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. SHAREHOLDERS' EQUITY: (CONTINUED) certain anti-dilution and piggyback registration rights. The warrant was exercisable as to 50% of the shares when the Company's pro forma annual sales reached $30 million, which it did when the Company completed the Wabash acquisition in October 1999. The fair value of the warrant was included in the cost of the acquisition. The remaining 50% of the warrant is exercisable when the Company's pro forma annual sales reach $100 million. Certain other warrants have been issued in connection with financings (see Note 6). STOCK OPTIONS The Company's 1995 Stock Option Plan (the "Plan"), as amended in May 2001, provides for the issuance of options to purchase 2,500,000 shares of Common Stock. The options granted pursuant to the Plan expire over a five-year period and generally vest over three years. In addition to options granted under the Plan, the Company also issued non-qualified options to purchase Common Stock to certain Directors and officers which were exercisable on issuance and expire either five or ten years from date of grant. All options are issued at an exercise price of 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, 2001, outstanding options had exercise prices ranging from $.59 to $3.63 per share. During 2000 and 2001, stock option activity was as follows:
PLAN OPTIONS NON-PLAN OPTIONS ----------------------------- ------------------------------- OPTIONS WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE OUTSTANDING EXERCISE PRICE OUTSTANDING EXERCISE PRICE ----------- -------------- ----------- -------------- 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 Granted ............. 480,000 3.03 50,000 3.02 Canceled ............ (143,333) 1.63 -- -- Exercised ........... (26,000) 1.71 (50,000) 1.08 --------- --------- Balance, December 31, 2001 2,010,317 1.97 1,645,000 1.54 ========= =========
At December 31, 2001, outstanding Plan options had exercise prices ranging from $0.59 to $3.63 and a weighted average remaining term of 2.7 years. Plan options that were exercisable at December 31, 2001 totaled 1,299,982 with a weighted average exercise price per share of $1.56. Outstanding Non-Plan options had exercise prices ranging from $1.18 to $3.50 and a weighted average remaining term of 3.4 years. Non-Plan options that were exercisable at December 31, 2001 totaled 1,044,999 with a weighted average exercise price per share of $1.39. In October 1995, the FASB issued SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION", which defines a fair value based method of accounting for employee stock options or similar equity instruments. However, it also allows an entity to continue to account for these plans according to APB No. 25 "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", provided pro forma disclosures of net income and earnings per share are made as if the fair value based method of accounting defined by SFAS No. 123 had been applied. The Company has elected to continue to measure compensation expense related to employee (including Directors) stock purchase options using APB No. 25. Had compensation cost for the Company's stock options been determined based on the fair value at the date of grant for awards in 1995 through 2001 consistent with the provisions of SFAS No. 123, the Company's net income and net income per share would have been changed to the pro forma amounts indicated below: 40 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. SHAREHOLDERS' EQUITY: (CONTINUED) YEARS ENDED DECEMBER 31, ----------------------- 2001 2000 ---------- -------- Net income - as reported ....................... $1,045,264 $729,791 Net income - pro forma ......................... 194,963 28,491 Basic earnings per common share - as reported... 0.07 0.05 Basic earnings per common share - pro forma..... 0.01 0.00 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 58% and 110%; risk-free interest rate of 3.4% and 6.1%; and expected lives of 3 years for 2001 and 2000, respectively. Under this method, the weighted average fair value of the options granted was $1.59 and $1.23 per share in 2001 and 2000, respectively. 9. INCOME TAXES: The Company accounts for income taxes using a balance sheet approach whereby deferred tax assets and liabilities are determined based on the differences in financial reporting and income tax basis of assets and liabilities. The differences are measured using the income tax rate in effect during the year of measurement. There was no current or deferred benefit for income taxes for the years ended December 31, 2001 and 2000. 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, ------------------------ 2001 2000 --------- --------- Provision at statutory rate ................ $ 370,010 $ 261,049 State income tax, net ...................... 56,742 38,390 Nondeductible expenses ..................... 18,722 15,600 Net operating loss utilized and benefited... (402,473) (277,039) --------- --------- $ 43,000 $ 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, ---------------------------- 2001 2000 ----------- ----------- Net operating loss carryforward ......... $ 1,855,000 $ 1,880,000 Bad debt expense ........................ 86,000 96,000 Accrued liabilities ..................... 73,000 118,000 Other ................................... 254,000 33,000 ----------- ----------- 2,268,000 2,127,000 Depreciation and amortization ........... (865,000) (421,000) Deferred tax asset valuation allowance... (1,403,000) (1,706,000) ----------- ----------- Net deferred tax assets ............ $ -- $ -- =========== =========== 41 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 9. INCOME TAXES: (CONTINUED) 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, 2001 and 2000. At December 31, 2001, the Company had a net operating loss carryforward ("NOLC") for federal income tax purposes of approximately $4.7 million. The use of the NOLC in future periods may be limited based on IRS rules. 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, 2001, one national warehouse club customer and one national vending distributor of the Company accounted for $9,353,000 or 16% and $6,886,000 or 12%, respectively, of the Company's consolidated net revenues. 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%, or the Company's consolidated net revenues. The Company's operations consist of two segments: manufactured products and distributed products. The manufactured products segment produces potato chips, potato crisps, and tortilla chips for sale primarily to snack food distributors and retailers. The distributed products segment sells snack food products manufactured by other companies to the Company's Arizona snack food distributors. The Company's reportable segments offer different products and services. All of the Company's revenues are attributable to external customers in the United States and all of its assets are located in the United States. The Company does not allocate assets based on its reportable segments. The accounting policies of the segments are the same as those described in the Summary of 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 -------- -------- ------------ 2001 ---- Revenues from external customers ........ $52,877,739 $ 4,788,149 $57,665,888 Depreciation and amortization included in segment gross profit ............... 859,776 -- 859,776 Segment gross profit .................... 14,472,941 234,125 14,707,066 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
42 POORE BROTHERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS: (CONTINUED) The following table reconciles reportable segment gross profit to the Company's consolidated income before income tax provision: 2001 2000 ----------- ----------- Segment gross profit .......................... $14,707,066 $10,392,066 Unallocated amounts: Selling, general and administrative expenses 12,577,699 8,446,808 Fire related income, net ................... 4,014 -- Interest expense, net ...................... 1,045,117 1,177,467 ----------- ----------- Income before income tax provision ............ $ 1,088,264 $ 767,791 =========== =========== 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. 43 EXHIBIT INDEX 21.1 -- List of subsidiaries of Poore Brothers, Inc. 23.1 -- Consent of Arthur Andersen LLP. 99.1 -- Registrant's Letter Regarding Arthur Andersen LLP. EX-21.1 3 ex21-1.txt LIST OF SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES OF POORE BROTHERS, INC. Name of Subsidiary State of Incorporation/Formation ------------------ -------------------------------- La Cometa Properties, Inc. Arizona Tejas PB Distributing, Inc. Arizona Poore Brothers - Bluffton, LLC Delaware Boulder Natural Foods, Inc. Arizona BN Foods, Inc. Colorado EX-23.1 4 ex23-1.txt CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF ARTHUR ANDERSEN LLP 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 Phoenix, Arizona March 26, 2002 EX-99.1 5 ex99-1.txt REGISTRANT'S LETTER RE: ARTHUR ANDERSEN LLP EXHIBIT 99.1 REGISTRANT'S LETTER REGARDING ARTHUR ANDERSEN LLP Securities and Exchange Commission Washington, D.C. Arthur Andersen LLP ("Andersen") has represented to Poore Brothers, Inc. that its audit was subject to Andersen's quality control system for the U.S. accounting and audit practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, that there was appropriate continuity of Andersen personnel working on the audit, and availability of national office consultation. The availability of personnel at foreign affiliates of Andersen was not relevant to this audit. -----END PRIVACY-ENHANCED MESSAGE-----