UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
(Mark One)
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 2003
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES For the transition period from to Commission File Number: 1-14556 POORE BROTHERS, INC. (Exact name of registrant as specified in its charter) Delaware 86-0786101 (State or other jurisdiction of (I.R.S. Employer Identification No.) 3500 South La Cometa Drive Goodyear, Arizona 85338 (Address of principal executive offices)(Zip Code) Registrant’s telephone number, including area code: (623) 932-6200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class Name of exchange on which registered Common Stock, $.01 par value Nasdaq Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ý No o Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý The aggregate market value of the voting stock (Common Stock, $.01 par value) held by non-affiliates of the Registrant was The number of issued and outstanding shares of Common Stock, $.01 par value, as of March DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on May EXCHANGE ACT REPORTS Under “SEC Filings” on the “Investors” page of the Company’s website located at www.poorebrothers.com, the following filings are made available as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statement 2 TABLE OF CONTENTS 3 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K, 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 21E 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-K, 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-K 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 4 Item Description of Business Poore Brothers, Inc. (the “Company”) is engaged in the development, production, marketing and distribution of innovative Percent of Total Revenues Percent of Total Revenues 2003 2002 2001 2004 2003 2002 Branded products 91 % 89 % 84 % 94 % 91 % 90 % Private label products 4 % 5 % 7 % 3 % 3 % 3 % Total manufactured products segment revenues 94 % 93 % 91 % 97 % 94 % 93 % Distributed products segment revenues 6 % 7 % 9 % 3 % 6 % 7 % Total revenues 100 % 100 % 100 % 100 % 100 % 100 % The Company produces T.G.I. Friday’s® brand salted Poore Brothers®, Bob’s Texas Style® and Boulder Potato Company® brand potato chips are manufactured with a batch-frying process that the Company believes produces potato chips with enhanced crispness and flavor. Poore Brothers® potato chips are currently offered in ten flavors, Bob’s Texas Style® The Company’s business objective is to expand, complement or diversify the Company’s existing business. The Company also plans to increase sales of its existing brands and continue to improve profit margins through increased operating efficiencies and 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. 5 Company History The Company, a Delaware corporation, was formed in 1995 as a holding company to acquire a potato chip manufacturing and distribution business which had been founded by Donald and James Poore in 1986. In December 1996, the Company completed an initial public offering of its Common Stock. In November 1998, the Company acquired the business and certain assets (including the Bob’s Texas Style® potato chip brand) of Tejas Snacks, L.P. (“Tejas”), a Texas-based potato chip manufacturer. In October 1999, the Company acquired Wabash Foods, LLC (“Wabash”) including the Tato Skins®, O’Boisies®, and Pizzarias® trademarks, the Bluffton, Indiana manufacturing operation and assumed all of Wabash Foods’ liabilities. In June 2000, the Company acquired Boulder Natural Foods, Inc. (“Boulder”) and the Boulder Potato Company® brand of totally natural potato chips. As part of the Boulder acquisition, the Company was required to issue additional unregistered shares of Common Stock to the seller on each of the first three anniversaries of the closing of the acquisition. The issuance of such shares was dependent upon increases in sales of Boulder product as compared to previous periods. In 2003, 2002 and 2001, the Company was required to issue 93,728 shares valued at $420,566, 88,864 shares valued at $210,786 and 57,898 shares valued at In October 2000, the Company launched its T.G.I. Friday’s® brand salted snacks pursuant to a license agreement with TGI Friday’s Inc., which expires in 2014. 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. In June 2003, the Company launched its Crunch Toons® brand potato snacks, initially featuring In September 2004, the Company The Company has recently developed a more aggressive strategic plan to achieve a new long-term vision of being a $200 million marketer of Intensely DifferentTM food brands. The Company’s business strategy is to continue building a diverse portfolio of national niche food brands with annualized revenues of $20 million to $50 million Develop, Acquire or License Innovative 6 Leverage Infrastructure and Capacity. The Company’s Indiana and Arizona facilities are currently operating at approximately The Company also utilizes contract manufacturers’ excess capacity to produce items that the Company does not have the equipment or know-how to manufacture. Improve Profit Margins. The Company plans to increase gross profit margins through increased revenues, improved operating efficiencies, Manufactured Snack Food Products. The Company produces T.G.I. Friday’s® brand Potato Skins salted snacks Poore Brothers®, Bob’s Texas Style®, and Boulder Potato Company® brand potato chips are produced utilizing a batch-frying process and are marketed by the Company as premium products based on their distinctive combination of cooking method and variety of distinctive flavors. Poore Brothers® potato chips are currently offered in ten flavors, Bob’s Texas Style® Distributed Snack Food Products. The Company purchases and resells throughout Arizona snack food products manufactured by others. Such products include pretzels, popcorn, dips, and meat snacks. Effective February 1, 2004, the Company 7 Manufacturing The Company’s manufacturing facility in Bluffton, Indiana includes three fryer lines that can produce an aggregate of up to approximately 9,000 pounds per hour of T.G.I. Friday’s® The Company believes that a key element of the success to date of the Poore Brothers®, Bob’s Texas Style® and Boulder Potato Company® 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 chips per hour. The Company owns additional 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. The Company’s T.G.I. Friday’s® brand snack food products have achieved significant market presence The Company’s potato chip brands are distributed to grocery and other retailers primarily by a select group of independent distributors. Poore Brothers® brand potato chip products have achieved significant market presence in The Company’s distribution throughout Arizona includes 51 independently operated service routes. Each route is operated by an independent distributor who purchases from the Company and merchandises as many as 72 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® brand products, the Company distributes throughout Arizona a wide variety of snack food items manufactured by other companies, including pretzels, popcorn, dips, and meat snacks. The Company commenced selling internationally to Canadian customers during the fourth quarter of 2004 and is seeking opportunities to selectively expand its growth in other countries. 8 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, consumer marketing or other promotional costs as a necessary condition of entering into competition or maintaining market share in particular markets or channels. 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 has traditionally been focused on trade advertising and trade promotions designed to attract new consumers to the products at a reduced retail price, except in 2003, when the Company conducted national television advertising and coupon programs in connection with the launch of the Crunch Toons® brand. 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 commitments with any supplier. Although the Company believes that its required products and ingredients are readily available, and that its business success is not dependent on any single supplier, the failure of certain suppliers to meet the Company’s performance specifications, quality standards or delivery schedules could have a material adverse effect on the Company’s operations. In particular, a sudden scarcity, a substantial price increase, or an unavailability of product ingredients could materially adversely affect the Company’s operations. There can be no assurance that alternative ingredients would be available when needed and on commercially attractive terms, if at all. Two customers of the Company, Wal*Mart (including its SAM’s Clubs) and Vistar, formerly Vending Services of America, a national vending distributor According to the Snack Food Association (“SFA”), the U.S. market for salted snack foods reached The Company expects to test-market new Cinnabon® branded products, such as bars and cookies, in the first half of 2005. 9 According to the Snack Food Association (“SFA”), the U.S. market for bakery foods reached $34.7 billion at retail in 2003 (the latest year for which data is available) with snack bars and cookies & crackers, accounting for nearly 40% of the market, and bread, baked sweet goods, refrigerated & frozen baked goods and other products accounting for the balance. The Company’s products compete generally against other 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. While products produced at the Company’s Bluffton, Indiana facility involve the use of certain licensed technology and unique manufacturing processes, the taste and quality of products produced at the Company’s Goodyear, Arizona facility is largely due to two elements of the Company’s manufacturing process: its use of 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 Food & Drug Administration (“FDA”). In May 1994, regulations issued under the Nutrition Labeling and Education Act of 1990 (“NLEA”), which requires specified nutritional information to be disclosed on all packaged foods, 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. As a direct result of the September 11, 2001 terrorism attack, the FDA issued the Bioterrorism Act of 2002 (“the Act”) to protect the U.S. food supply. While there are four parts to the Act, only two of the provisions impact the Company. One requirement for the Company was registration with the FDA as a U.S. Food Manufacturing Company, which the Company completed prior to the required date of December 12, 2003. The second of the Act’s provisions pertaining to the Company relates to record retention. The Company is required to retain records pertaining to its raw materials’ immediate previous sources (“one back”) as well as its finished goods’ subsequent recipients (“one up”) for twelve months. On July 11, 2003, the FDA published its final rule on Trans Fat Labeling requiring that food labels declare trans fats on or before January 1, 2006. This rule requires that trans fat be declared on a separate line in the standard Nutrition Facts below total fat and saturated fat and be calculated to the nearest 0.5 grams, unless it is less than 0.5 grams in which case it may be expressed as 0 grams. Currently, the Company has plans in place to comply with the FDA’s rule on Trans Fat Labeling by the January 1, 2006 deadline. 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. 10 As of December Patents, Trademarks and The Company produces T.G.I. Friday’s® brand salted snacks and Tato Skins® brand potato crisps utilizing a sheeting and frying process that includes patented technology that the Company licenses from Miles Willard Technologies, LLC, an Idaho limited liability company (“Miles Willard”). Pursuant to the license agreement between the Company and Miles Willard, the Company has an exclusive right to use the patented technology within North America until the patents expire between 2004 and The Company The Company licenses the T.G.I. Friday’s® brand salted 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® brand salted snack products and is required to achieve certain minimum sales levels by certain dates during the contract term. The Company owns the following trademarks in the United States: Poore Brothers®, An Intensely Different Taste®, Texas Style®, Boulder Potato Company®, Tato Skins®, O’Boisies®, Pizzarias®, Braids® 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. Any termination of the Company’s license agreements, whether at the expiration of its term or prior thereto, could have a material adverse effect on the Company’s financial condition and results of operations. The following factors could affect operating results and should be considered in evaluating the Company. strategy. 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 11 Need for Additional Financing. A significant element of the Company’s business strategy is the development, acquisition and/or licensing of innovative Acquisition-Related Risks. 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 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.” 12 Competition. The market for The snack food industry is Promotional and Shelf Space Costs. Successful marketing of food products generally depends upon obtaining adequate retail shelf space for product display, particularly in supermarkets. Frequently, food manufacturers and distributors, such as the Company, incur additional costs in order to obtain additional shelf space. Whether or not the Company incurs such costs in a particular market is dependent upon a number of factors, including demand for the Company’s products, relative availability of shelf space and general competitive conditions. The Company may incur significant shelf space or other promotional costs as a necessary condition of entering into competition or maintaining market share 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. Risks from International Expansion. The Company plans to expand sales to Canadian customers that it commenced in 2004 and is exploring other international market opportunities for its brands. Such expansion may require significant management attention and financial resources and may not produce desired levels of revenue. International business is subject to inherent risks, including longer accounts receivable collection cycles, difficulties in managing operations across disparate geographical areas, difficulties enforcing agreements and intellectual property rights, fluctuations in local economic, market and political conditions, compliance requirements with U.S. and foreign export regulations, potential adverse tax consequences and currency exchange rate fluctuations. 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 13 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 The taste and quality of Poore Brothers®, Bob’s Texas Style®, and Boulder Potato Company® brand potato chips is largely due to two elements of the Company’s manufacturing process: its use of Dependence Upon Key Snack Food Brands; Dependence Upon T.G.I. Friday’s® and Cinnabon® License Furthermore, the T.G.I. Friday’s® 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 termination of the license agreement, The Company may introduce one or more new product lines in the future that will be manufactured and sold pursuant to additional license agreements by and between the Company and one or more third parties. Pursuant to any such license agreements, the Company will likely be subject to various requirements and conditions (including minimum sales targets or royalty payments). The failure of the Company to comply with certain of such requirements and conditions could result in the early termination of such additional license agreements. Depending upon the success of any such new product lines, a termination of the applicable license agreements, whether at the expiration of their respective terms or prior thereto, could have a material adverse effect on the Company’s financial condition and results of operations. Dependence Upon Major Customers. Two customers of the Company, Wal*Mart (including its SAM’s Clubs), and Vistar, formerly Vending Services of America, a national vending distributor Reliance on Key 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. 14 The Company does not believe that complying with the NLEA regulations materially increases the Company’s manufacturing costs. As a direct result of the September 11, 2001 terrorism attack, the FDA issued the Bioterrorism Act of 2002 (“the Act”) to protect the U.S. food supply. While there are four parts to the Act, only two of the provisions impact the Company. One requirement for the Company was registration with the FDA as a U.S. Food Manufacturing Company, which the Company completed prior to the required date of December 12, 2003. The second of the Act’s provisions pertaining to the Company relates to record retention. The Company is required to retain records pertaining to its raw materials’ immediate previous sources (“one back”) as well as its finished goods’ subsequent recipients (“one up”) for twelve months. On July 11, 2003, the FDA published its final rule on Trans Fat Labeling requiring that food labels declare trans fats on or before January 1, 2006. This rule requires that trans fat be declared on a separate line in the standard Nutrition Facts below total fat and saturated fat and be calculated to the nearest 0.5 grams, unless it is less than 0.5 grams in which case it may be expressed as 0 grams. Currently, the Company has plans in place to comply with the FDA’s rule on Trans Fat Labeling by the January 1, 2006 deadline. 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. 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 23% of the outstanding shares of Common Stock 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. Possibility the Company Will be Required to Register Shares of Certain Stockholders 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 (“BFS”), 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. In connection with such transaction, the Company granted demand and piggyback registration rights to BFS. Pursuant to the demand registration rights, the Company may be required, upon demand of BFS, to file a registration statement (the “BFS Registration Statement”) with the Securities and Exchange Commission covering the resale of the shares of Common Stock issued to BFS in the transaction. The Company will be required to pay all expenses relating to any such 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. 15 Approximately 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 The Company leases a 140,000 square foot facility located on 15 acres of land in Bluffton, Indiana, approximately 20 miles south of Ft. Wayne, Indiana. The Company has entered into a lease expiring in April 2018 with respect to the facility and the lease has two five-year renewal options. Current lease payments are approximately $22,000 per month. The lease payments are subject to an annual CPI-based increase. The Company produces its T.G.I. Friday’s® brand The Company also leases one-half of a 200,000 square foot facility in Bluffton, Indiana which is used as a distribution center. The Company has entered into a lease expiring in November 2006 with respect to the facility and the lease has two three-year renewal options. Current lease payments are approximately 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. 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 The Company is periodically a party to various lawsuits arising in the ordinary course of business. Management believes, based on discussions with legal counsel, that the resolution of such lawsuits, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position or results of operations. Item None. Item The Company’s Common Stock is traded on the Nasdaq SmallCap Market tier of the Nasdaq Stock Market under the symbol “SNAK”. There were approximately 4,000 shareholders of record on March The following table sets forth the range of high and low sale prices of the Company’s Common Stock as reported on the Nasdaq SmallCap Market for each quarter of the fiscal years ended December Sales Prices Period of Quotation High Low Fiscal 2002: First Quarter $ 2.72 $ 2.20 Second Quarter $ 3.40 $ 2.35 Third Quarter $ 2.97 $ 2.20 Fourth Quarter $ 3.02 $ 1.49 Fiscal 2003: First Quarter $ 2.55 $ 1.90 Second Quarter $ 4.15 $ 1.99 Third Quarter $ 5.60 $ 3.91 Fourth Quarter $ 5.28 $ 3.30 Sales Prices Period of Quotation High Low Fiscal 2003: First Quarter $ 2.55 $ 1.90 Second Quarter $ 4.15 $ 1.99 Third Quarter $ 5.60 $ 3.91 Fourth Quarter $ 5.28 $ 3.30 Fiscal 2004: First Quarter $ 4.05 $ 2.83 Second Quarter $ 3.45 $ 2.38 Third Quarter $ 2.89 $ 2.07 Fourth Quarter $ 3.34 $ 2.53 Item FIVE YEAR FINANCIAL SUMMARY (In millions except share and per share data) 2003 2002 2001 2000 1999 2004 2003 2002 2001 2000 Statements of Earnings Data Net revenues $ 66.4 $ 59.3 $ 53.9 $ 39.1 $ 21.5 $ 68.7 $ 66.4 $ 59.3 $ 53.9 $ 39.1 Gross profit 13.3 11.3 10.9 7.7 4.0 14.3 13.3 11.3 10.9 7.7 Operating income 0.0 2.7 2.1 1.9 0.9 3.7 0.0 2.7 2.1 1.9 Net income 1.1 2.6 1.0 0.7 0.1 2.1 1.1 2.6 1.0 0.7 Net income per share - diluted $ 0.06 $ 0.15 $ 0.06 $ 0.05 $ 0.01 Net income per share – diluted $ 0.11 $ 0.06 $ 0.15 $ 0.06 $ 0.05 Weighted average common shares 18,476,486 17,826,953 17,198,648 15,129,593 9,134,414 18,947,533 18,476,486 17,826,953 17,198,648 15,129,593 Balance Sheet Data Net working capital $ 7.9 $ 2.0 $ 2.0 $ 0.8 $ 0.8 $ 11.7 $ 7.9 $ 2.0 $ 2.0 $ 0.8 Total assets 36.6 31.8 31.7 30.3 26.1 40.1 36.6 31.8 31.7 30.3 Long-term debt 3.1 4.1 8.7 9.0 10.7 1.7 3.1 4.1 8.7 9.0 Shareholders’ equity 25.1 20.7 16.8 14.3 11.3 28.8 25.1 20.7 16.8 14.3 17 Item Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the other sections of this Annual Report on Form 10-K, including “Item 1: Business”; “Item 6: Selected Financial Data”; and “Item 8: Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in the “Risk Factors” section. Accordingly, the Company’s actual future results may differ materially from historical results or those currently anticipated. Poore Brothers, Inc. (the “Company”) is engaged in the development, production, marketing and distribution of innovative Fiscal rate was 12%. The introduction of the Crunch Toons® brand during fiscal 2003 Net Revenue Comparison ($ in 2004 2003 % Change T.G.I. Friday’s® $ 49.1 $ 40.5 +21 % Potato Chips and Other 19.3 20.5 -6 Subtotal 68.4 61.0 +12 Discontinued Products 0.3 5.4 -94 Total $ 68.7 $ 66.4 +3 % The market for snack foods, such as potato chips, tortilla chips, meat snacks and cookies, is large and intensely competitive. The industry is dominated by several significant competitors and include many other competitors with greater financial and other resources than the Company. However, the Company’s 18 Company continues to add new products to stimulate consumer purchases. In addition, the Company needs to diversify and expand into other food categories in an effort to reduce its reliance on a single brand. The Company has been profitable for six straight years. This has been accomplished through sales growth, operating efficiency gains and tight controls over spending. The Company generally has kept spending in line with revenue growth, except with respect to our national advertising for Crunch Toons® in 2003. In late 2004 the Company developed a more aggressive strategic plan to achieve a new vision of being a $200 million marketer of Intensely Different™ food brands. Our plans include continuing to identify new licensing opportunities, such as Cinnabon®, to broaden our product offering and to complement the growth of our existing T.G.I. Friday’s® products through the introduction of new products in snacks In connection with the implementation of the Company’s new business strategy, the Company Results of Operations The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and capital resources of the Company. This discussion should be read in conjunction with Item 8: “Financial Statements and Supplementary Data” and the “Cautionary Statement on Forward-Looking Statements” on page 4. 2004 2003 Difference (dollars in millions) $ % of Rev $ % of Rev $ % Net revenues $ 68.7 100.0 % $ 66.4 100.0 % $ 2.3 3.5 % Cost of revenues 52.7 76.7 52.1 78.4 0.6 1.3 Write-down of equipment/brand discontinuance 1.7 2.5 1.0 1.5 0.7 67.3 Gross profit 14.3 20.8 13.3 20.1 1.0 7.1 Selling, general and administrative expenses 10.6 15.4 13.3 20.0 (2.8 ) (20.6 ) Operating income 3.7 5.4 0.0 0.0 3.7 3700 Insurance claim settlement income, net — 0.0 1.9 2.9 (1.9 ) (100.0 ) Interest expense, net (0.2 ) (0.3 ) (0.2 ) (0.4 ) 0.0 0.0 Income before income taxes 3.5 5.1 1.7 2.6 1.8 109.1 Income tax (provision) (1.4 ) (2.0 ) (0.6 ) (1.0 ) 0.8 119.2 Net income $ 2.1 3.1 % $ 1.1 1.6 % $ 1.0 102.9 % For the fiscal year ended December 25, 2004, net revenue increased 3% to $68.7 million, compared with net revenue of $66.4 million for the previous fiscal year. T.G.I. Friday’s® brand snacks net revenue increased 21% over 19 packaging equipment, there were $0.3 million and $1.0 million of Selling, general and administrative expenses decreased to $10.6 million in In fiscal 2003, other income and expense included $1.9 million of pre-tax income from an insurance claim settlement. The provision for income taxes increased to 39.7% of income before income taxes in fiscal 2004 from 37.9% in fiscal 2003 primarily due to an increase in state taxes. Net income for 2004 increased 103% to $2.1 million, or $0.11 per basic and diluted share, compared with net income Year ended December 27, 2003 compared to the year ended December 28, 2002 2003 2002 Difference 2003 2002 Difference (dollars in millions) $ % of Rev $ % of Rev $ % $ % of Rev $ % of Rev $ % Net revenues $ 66.4 100.0 % $ 59.3 100.0 % $ 7.1 12.0 % $ 66.4 100.0 % $ 59.3 100.0 % $ 7.1 11.9 % Cost of revenues 53.1 79.9 % 48.0 80.9 % 5.1 10.5 % 52.1 78.3 48.0 80.9 4.1 8.4 Write-down of equipment/brand discontinuance 1.0 1.6 0.0 0.0 1.0 100.0 Gross profit 13.3 20.1 % 11.3 19.1 % 2.0 17.7 % 13.3 20.1 11.3 19.1 2.0 17.7 Selling, general and administrative expenses 13.3 20.0 % 8.6 14.6 % 4.7 53.9 % 13.3 20.0 8.6 14.6 4.7 53.9 Operating income 0.0 0.0 % 2.7 4.5 % (2.7 ) (99.0 )% 0.0 0.0 2.7 4.5 (2.7 ) (99.0 ) Insurance claim settlement income, net 1.9 2.9 % 0.3 0.4 % 1.6 639.8 % 1.9 2.9 0.3 0.4 1.6 639.8 Interest expense, net (0.2 ) (0.4 )% (0.5 ) (0.9 )% 0.3 53 % (0.2 ) (0.4 ) (0.5 ) (0.9 ) 0.3 53.2 Income before income taxes 1.7 2.6 % 2.4 4.0 % (0.7 ) (29.2 )% 1.7 2.6 2.4 4.0 (0.7 ) (29.2 ) Income tax benefit (provision) (0.6 ) (1.0 )% 0.2 0.4 % (0.8 ) (364.3 )% (0.6 ) (1.0 ) 0.2 0.4 (0.8 ) (364.3 ) Net income $ 1.1 1.6 % $ 2.6 4.4 % $ (1.5 ) (60.1 )% $ 1.1 1.6 % $ 2.6 4.4 % $ (1.5 ) (60.1 )% For the fiscal year ended December 27, 2003, net revenue increased 12% to $66.4 million, compared with revenue of $59.3 million for the previous fiscal year. The Company’s net revenue increased in the manufactured products segment as a result of growth in the T.G.I. Friday’s® brand Gross profit for 2003 increased to $13.3 million, or 20% of net revenue, compared to $11.3 million, or 19% of net revenue, in 2002 due to the revenue increase, improved manufacturing efficiencies and despite a $1.0 million pretax impairment write-down of idle packaging equipment during 2003. Selling, general and administrative expenses increased to $13.3 million in fiscal 2003, up from $8.6 million in 2002, or 20% versus 15% of net revenue. The increase was driven by introductory consumer marketing programs, such as national television advertising, and other costs associated with the new Crunch Toons® brand launch. In fiscal 2002, the Company benefited from the reversal of a deferred tax valuation allowance of approximately $1.2 million related to the Company’s net operating loss carryforward. 2002 2001 Difference $ % of Rev $ % of Rev $ % Net revenues $ 59.3 100.0 % $ 53.9 100.0 % $ 5.4 10.1 % Cost of revenues 48.0 80.9 % 43.0 79.7 % 5.0 11.8 % Gross profit 11.3 19.1 % 10.9 20.3 % 0.4 3.3 % Selling, general and administrative expenses 8.6 14.6 % 8.8 16.4 % (0.2 ) (2.0 )% Operating income 2.7 4.5 % 2.1 4.0 % 0.6 25.6 % Insurance claim settlement income, net 0.3 0.4 % 0.0 0.0 % 0.3 6361.8 % Interest expense, net (0.5 ) (0.9 )% (1.0 ) (1.9 )% (0.5 ) (48.2 )% Income before income taxes 2.4 4.0 % 1.1 2.0 % 1.3 120.0 % Income tax benefit (provision) 0.2 0.4 % 0.0 0.1 % 0.2 664.7 % Net income $ 2.6 4.4 % $ 1.0 1.9 % $ 1.6 152.3 % Net income for 20 significantly Liquidity and Capital Resources Net working capital was $11.7 million (a current ratio of 2.6:1) and $7.9 million (a current ratio of 2.2:1) 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 The Company’s Goodyear, Arizona manufacturing, distribution and headquarters facility is subject to a $1.8 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 At December Off-Balance Sheet Arrangements Under SEC regulations, in certain circumstances, we are required to make certain disclosures regarding the following off-balance sheet arrangements, if material: • Any obligation under certain guarantee contracts; • Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; • Any obligation under certain derivative instruments; • Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us. 21 We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations, other than those described in the Notes to Consolidated Financial Statements. We do not have, nor do we engage in, transactions with any special purpose entities. We are not engaged in hedging activities and had no forward exchange contracts or other derivatives outstanding at December 25, 2004. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States, and are more fully discussed below. Contractual Obligations The following table outlines the Company’s future contractual financial obligations as of December Total Less than 1 1 – 3 Years 3 – 5 Years More than 5 Total Less than 1 1 – 3 Years 3 – 5 Years More than 5 Long-term debt $ 4,071,956 $ 932,155 $ 1,458,369 $ 109,297 $ 1,572,135 $ 3,119,801 $ 1,390,667 $ 99,894 $ 119,585 $ 1,509,655 Operating leases 8,778,167 1,562,869 2,994,569 1,460,978 2,759,751 6,879,564 1,419,066 2,297,894 892,922 2,269,682 Other cash obligations 6,719,000 1,432,400 2,812,800 2,473,800 — Outside Warehouse Minimum Monthly Usage Charges 4,752,000 1,188,000 2,376,000 1,188,000 — Royalty payments (i) 633,600 258,400 276,800 98,400 — Lease payments on machine (ii) 326,904 163,452 163,452 — — Total contractual cash obligations $ 19,569,123 $ 3,927,424 $ 7,265,738 $ 4,044,075 $ 4,331,886 $ 15,711,869 $ 4,419,585 $ 5,214,040 $ 2,298,907 $ 3,779,337 For information regarding the Company’s long-term debt, please read “Liquidity and Capital Resources” above and Note 6 in Item 8. The Company has entered into a variety of operating leases for equipment and facilities. For information regarding the Company’s facility leases, please read “Item 2: Properties” and Note The Company currently has no material marketing or capital expenditure commitments. 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 Securities and Exchange Commission 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 complex judgments, often as a result of the need to make estimates about 22 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. The allowance for doubtful accounts was 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 and trademarks are reviewed for impairment annually, or more frequently if impairment indicators arise. Goodwill is required to be tested for impairment between the annual tests if an event occurs or circumstances change that more-likely-than-not reduce the fair value of a reporting unit below its carrying value. Intangible assets with indefinite lives are required to be tested for impairment between the annual tests if an event occurs or circumstances change indicating that the asset might be impaired. The Company believes at this time that the carrying values continue to be appropriate. Advertising and Promotional Expenses. 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 period in which such costs are incurred by the Company. Anytime the Company offers consideration (cash or credit) as a trade advertising or promotion allowance to a purchaser of products at any point along the distribution chain, the amount is accrued and recorded as a reduction in revenue. Any marketing programs that deal directly with the consumer are recorded in selling, general and administrative expenses. 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 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 included in this Annual Report on Form 10-K which contain accounting policies and other disclosures required by accounting principles generally accepted in the United States. New Accounting Pronouncements In January 2003, the FASB issued interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities – An Interpretation of Accounting Research Bulletin (“ARB”) No. 51.” This interpretation was subsequently revised by FIN 46 (Revised 2003) in December 2003. This revised interpretation states that consolidation of variable interest entities will be required by the primary beneficiary if the entities do not effectively disperse risks among the parties involved. The requirements are effective for fiscal years ending after December 15, 2003 for special-purpose entities and for all other types of entities for periods ending after March 31, 2004. 23 restated (either to the beginning of the year of adoption or for all In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”. This statement clarifies the accounting for the abnormal amount of idle facilities expense, freight, handling costs and wasted material. This statement requires that those items be recognized as current-period expense. In addition, the statement requires that allocation of fixed overhead to the cost of conversion be based on Item The principal market risks to which the Company is exposed that may adversely impact the Company’s results of operations and financial position are changes in certain raw material prices and interest rates. The Company has no market risk sensitive instruments held for trading purposes. Raw materials used by the Company are exposed to the impact of changing commodity prices. The Company’s most significant raw material requirements include potatoes, potato flakes, wheat flour, corn and oil. The Company attempts to minimize the effect of future price fluctuations related to the purchase of raw materials primarily through forward purchasing to cover future manufacturing requirements, generally for periods from one to 12 months. Futures contracts are not used in combination with the forward purchasing of these raw materials. The Company’s procurement practices are intended to reduce the risk of future price increases, but also may potentially limit the ability to benefit from possible price decreases. The Company The Company’s primary concentration of credit risk is related to certain trade accounts receivable. In the normal course of business, the Company extends unsecured credit to its customers. In Item Consolidated balance sheets as of December Item None. 24 Item 9A. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms. (b) Change in Internal Control over Financial Reporting No change in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially None. Item Code of Ethics. Each of the Company’s directors, officers and employees are required to comply with the Poore Brothers, Inc. Code of Business Conduct and Ethics adopted by the Company. The Code of Business Conduct and Ethics sets forth policies covering a broad range of subjects and requires strict adherence to laws and regulations applicable to the Company’s business. The Company has also adopted a Financial Code of Ethics for its Chief Executive Officer, Chief Financial Officer and all other finance managers. The Financial Code of Ethics supplements the Code of Business Conduct and Ethics and is intended to emphasize the importance of honest and ethical conduct in connection with the Company’s financial reporting obligations. The Code of Business Conduct and Ethics and the Financial Code of Ethics are available on the Company���s website at www.poorebrothers.com, under the “Investors-Governance” captions. Copies of these Codes may also be obtained, without charge, by any shareholder upon written request directed to the Secretary of the Company at 3500 South La Cometa Drive, Goodyear, Arizona 85338. The Company will post to its website any amendments to these Codes, or waiver from the provisions thereof, applicable to the Company’s directors or any principal executive officer, principal financial officer, principal accounting officer or controller, or any person performing similar functions under the “Investor-Governance-Code of Business Conduct-Waivers” caption. The information regarding Directors and Executive Officers appearing under the headings “Proposal 1: Election of Directors,” “Executive Item The information appearing under the headings “Compensation of Directors,” “Employment Agreements,” “Compensation Committee Report on Executive Compensation,” and “Executive Compensation” of the Company’s Item The information appearing in the Company’s Item The information appearing in the Company’s Item Information Item The following documents are filed as part of this Annual Report on Form 10-K: (a)1. Financial Statements Consolidated balance sheets as of December (a)2. Financial Schedules Schedules have been omitted because of the absence of conditions under which they are required or because information required is included in the Company’s financial statements or notes thereto. (a)3. Exhibits required by Item 601 of Regulation S-K: Exhibit Description 3.1 — Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware on February 23, 1995. (14) 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. (14) 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. (14) 3.4 — By-Laws of the Company. 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 — Warrant to purchase 400,000 shares of Common Stock, issued by the Company to Wabash Foods on October 7, 1999. (2) 4.5 — Form of Revolving Note, Term Note A and Term Note B issued by the Company to U.S. Bancorp Republic Commercial Finance, Inc. on October 7, 1999. (4) 4.6 — 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. (4) 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) 26 10.3*— 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) 10.4*— 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) 10.5*— Non-Qualified Stock Option Agreement dated as of October 22, 1996, by and between the Company and Mark S. Howells. (1) 10.6*— Letter Agreement dated as of November 5, 1996, by and between the Company and Jeffrey J. Puglisi. (1) 10.7*— Letter Agreement dated November 1, 1996, by and among the Company, Mark S. Howells, Jeffrey J. Puglisi, David J. Brennan and Parris H. Holmes, Jr. (1) 10.8*— Letter Agreement dated December 4, 1996, by and between the Company and Jeffrey J. Puglisi, relating to stock options. (1) 10.9*— Letter Agreement dated December 4, 1996, by and between the Company and Mark S. Howells, relating to stock options. (1) 10.10 — Fixed Rate Note dated June 4, 1997, by and between La Cometa Properties, Inc. and Morgan Guaranty Trust Company of New York. (3) 10.11 — 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) 10.12 — Guaranty Agreement dated June 4, 1997, by and between the Company and Morgan Guaranty Trust Company of New York. (3) 10.13 — 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. (2) 10.14 — Letter Agreement dated July 30, 1999 by and between the Company and Stifel, Nicolaus & Company, Incorporated. (5) 10.15*— Poore Brothers, Inc. 1995 Stock Option Plan, as amended. (4) 10.16 — Credit Agreement, dated as of October 3, 1999, by and between the Company and U.S. Bancorp Republic Commercial Finance, Inc. (4) 10.17 — Security Agreement, dated as of October 3, 1999, by and between the Company and U.S. Bancorp Republic Commercial Finance, Inc. (4) 10.18 — Commercial Lease, dated May 1, 1998, by and between Wabash Foods, LLC and American Pacific Financial Corporation. (4) 10.19 — 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) 10.20 — Registration Rights Agreement dated as of June 8, 2000, by and between Boulder Potato Company and the Company. (6) 10.21 — 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) 10.22 — Second Amendment to Credit Agreement (dated March 2, 2001), by and between the Company and U.S. Bank National Association. (7) 10.23 — 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.) (7) 10.24 — Third Amendment to Credit Agreement (dated March 30, 2001), by and between the Company and U.S. Bank National Association. (8) 10.25 — 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). (9) 10.26 — 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.) 10.27 — Fourth Amendment to Credit Agreement (dated as of June 29, 2002), by and between the Company and U.S. Bank National Association. (10) 10.28 — License Agreement, dated November 20, 2002, by and between the Company and Warner Bros., a division of Time Warner Entertainment Company, L.P. (Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission.) (11) 10.29 — License Agreement, dated November 20, 2002, by and between the Company and Warner Bros., a division of Time Warner Entertainment Company, L.P. (Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission.) (11) 10.30 — License Agreement, dated July 19, 2000, by and between the Company and M.J. Quinlan & Associates Pty. Limited (Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission.) (11) 27 10.31*— Executive Employment Agreement entered into as of January 5, 2003, by and between Poore Brothers, Inc. and Eric J. Kufel (12) 10.32*— Executive Employment Agreement entered into as of 10.33*— Executive Employment Agreement entered into as of January 5, 2003, by and between Poore Brothers, Inc. and Glen E. Flook (12) 10.34 — Fifth Amendment to Credit Agreement (dated as of September 27, 2003) by and between the Company and U.S. Bank National Association (13) 10.35 — License Agreement, dated November 10, 2003, by and between the Company and Warner Bros. Consumer Products Inc. (Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission.) (14) 10.36 — Commercial Lease Agreement, dated May 22, 2003, by and between the Company and Westland Park LLC (14) 10.37 — Warehouse Services Agreement, dated June 30, 2003, by and between the Company and Customized Distribution Services, Inc. (14) 10.38 — License Agreement - #13770-WBLT-Amendment 1, dated June 14, 2004, by and between the Company and Warner Bros. Consumer Products, Inc. (15) 10.39 — License Agreement - #14559-SCOO-Amendment 1, dated June 14, 2004, by and between the Company and Warner Bros. Consumer Products, Inc. (15) 10.40* — Executive Employment Agreement entered into as of July 19, 2004 by and between Poore Brothers, Inc. and David Greenberg (16) 10.41* — Executive Employment Agreement entered into as of December 6, 2004 by and between Poore Brothers, Inc. and Richard M. Finkbeiner (18) 10.42* — Form of Officer Nonstatutory Stock Option Agreement (19) 21.1 — List of Subsidiaries of the Company. 23.1 — Consent of Deloitte & Touche, LLP. 31.1 — Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) 31.2 — Certification of Chief Financial Officer Certification of * (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 definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on September 15, 1999. (3) Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997. (4) Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999. (5) Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999. (6) Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2000. (7) Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the quarter ended March 31, 2001. (8) Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001. (9) Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2001. (10) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2002. (11) Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002. (12) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2003. (13) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2003. (14) Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2003. (15) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 26, 2004. (16) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 25, 2004. (17) Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 12, 2005. (18) Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 23, 2004. (19) Filed herewith. 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 POORE BROTHERS, INC. By: /s/ Thomas W. Freeze 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/ Thomas W. Freeze President, Chief Executive Officer, and Director March 22, 2005 Thomas W. Freeze (Principal Executive Officer) /s/ Richard M. Finkbeiner Senior Vice President and Chief Financial Officer, March 22, 2005 Richard M. Finkbeiner (Principal Financial Officer and Principal Accounting Officer) /s/ Eric J. Kufel March Eric J. Kufel /s/ Mark S. Howells March Mark S. Howells /s/ F. Phillips Giltner, III Director March F. Phillips Giltner, III /s/ James W. Myers Director March James W. Myers /s/ Director March /s/ Director March REPORT OF INDEPENDENT We have audited the accompanying consolidated balance sheets of Poore Brothers, Inc. and subsidiaries (the “Company”) as of December We conducted our audits in accordance with In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Poore Brothers, Inc. and subsidiaries as of December DELOITTE & TOUCHE LLP Phoenix, Arizona 30 POORE BROTHERS, INC. AND SUBSIDIARIES December 25, December 27, December 27, December 28, 2004 2003 ASSETS Current assets: Cash and cash equivalents $ 3,239,570 $ 1,395,187 $ 9,675,490 $ 3,239,570 Accounts receivable, net of allowance of $347,000 in 2003 and $409,000 in 2002 5,714,106 4,427,531 Accounts receivable, net of allowance of $89,000 in 2004 and $347,000 in 2003 5,379,362 5,714,106 Inventories 2,400,503 1,760,401 2,145,742 2,400,503 Deferred income tax asset 2,254,996 421,942 1,341,723 2,254,996 Other current assets 889,003 803,665 471,051 889,003 Total current assets 14,498,178 8,808,726 19,013,368 14,498,178 Property and equipment, net 11,755,096 13,009,948 10,815,963 11,755,096 Goodwill 5,986,252 5,565,687 5,986,252 5,986,252 Trademarks 4,207,032 4,207,032 4,207,032 4,207,032 Other assets, net 133,762 165,233 Other assets 94,672 133,762 Total assets $ 36,580,320 $ 31,756,626 $ 40,117,287 $ 36,580,320 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 3,012,059 $ 2,937,602 $ 2,809,187 $ 3,012,059 Accrued liabilities 2,703,040 2,806,149 2,656,887 2,703,040 Current portion of long-term debt 932,155 1,105,004 1,390,667 932,155 Current portion of accrued costs related to brand discontinuance and other current liabilities 442,533 — Total current liabilities 6,647,254 6,848,755 7,299,274 6,647,254 Long-term debt, less current portion 3,139,801 4,105,118 1,729,134 3,139,801 Non-current portion of accrued costs related to brand discontinuance and other liabilities 492,541 — Deferred income tax liability 1,731,625 80,512 1,788,252 1,731,625 Total liabilities 11,518,680 11,034,385 11,309,201 11,518,680 Commitments and contingencies (Note 7) Commitments and contingencies (Note 8) Shareholders’ equity: Preferred stock, $100 par value; 50,000 shares authorized; no shares issued or outstanding at December 27, 2003 and December 28, 2002 — — Common stock, $.01 par value; 50,000,000 shares authorized; 18,581,788 and 16,729,911 shares issued and outstanding at December 27, 2003 and December 28, 2002, respectively 185,817 167,299 Preferred stock, $100 par value; 50,000 shares authorized; no shares issued or outstanding at December 25, 2004 and December 27, 2003 — — Common stock, $.01 par value; 50,000,000 shares authorized; 19,647,561 and 18,581,788 shares issued and outstanding at December 25, 2004 and December 27, 2003, respectively 196,476 185,817 Additional paid-in capital 25,673,752 22,404,835 27,274,825 25,673,752 Accumulated deficit (797,929 ) (1,849,893 ) Retained earnings (deficit) 1,336,785 (797,929 ) Total shareholders’ equity 25,061,640 20,722,241 28,808,086 25,061,640 Total liabilities and shareholders’ equity $ 36,580,320 $ 31,756,626 $ 40,117,287 $ 36,580,320 The accompanying notes are an integral part of these consolidated financial statements. 31 POORE BROTHERS, INC. AND SUBSIDIARIES Years Ended Years Ended December 25, December 27, December 28, December 27, December 28, December 31, 2004 2003 2002 Net revenues $ 66,417,836 $ 59,348,471 $ 53,904,816 $ 68,734,763 $ 66,417,836 $ 59,348,471 Cost of revenues 52,068,963 48,036,462 42,958,822 52,747,106 52,068,963 48,036,462 Write-down of equipment 1,030,352 — — 308,104 1,030,352 — Costs related to brand discontinuance 1,414,759 — — Gross profit 13,318,521 11,312,009 10,945,994 14,264,794 13,318,521 11,312,009 Selling, general and administrative expenses 13,290,660 8,637,652 8,816,627 10,558,544 13,290,660 8,637,652 Operating income 27,861 2,674,357 2,129,367 3,706,250 27,861 2,674,357 Insurance claim settlement income, net 1,918,784 259,376 4,014 — 1,918,784 259,376 Interest expense, net (252,820 ) (539,733 ) (1,045,117 ) (164,797 ) (252,820 ) (539,733 ) Total other income (expense) 1,665,964 (280,357 ) (1,041,103 ) Total other (expense) income (164,797 ) 1,665,964 (280,357 ) Income before income tax benefit (provision) 1,693,825 2,394,000 1,088,264 Income before income tax (provision) benefit 3,541,453 1,693,825 2,394,000 Income tax benefit (provision) (641,861 ) 242,837 (43,000 ) Income tax (provision) benefit (1,406,739 ) (641,861 ) 242,837 Net income $ 1,051,964 $ 2,636,837 $ 1,045,264 $ 2,134,714 $ 1,051,964 $ 2,636,837 Earnings per common share: Basic $ 0.06 $ 0.16 $ 0.07 $ 0.11 $ 0.06 $ 0.16 Diluted $ 0.06 $ 0.15 $ 0.06 $ 0.11 $ 0.06 $ 0.15 Weighted average number of common shares: Basic 17,572,951 16,146,081 15,050,509 18,794,977 17,572,951 16,146,081 Diluted 18,476,486 17,826,953 17,198,648 18,947,553 18,476,486 17,826,953 The accompanying notes are an integral part of these consolidated financial statements. 32 POORE BROTHERS, INC. AND SUBSIDIARIES Additional Accumulated Total Common Stock Additional Retained Earnings Common Stock Shares Amount Capital (Deficit) Total Shares Amount 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 Other issuances 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 15,687,518 $ 156,875 $ 21,175,485 $ (4,486,729 ) $ 16,845,631 Exercise of common stock options 349,016 3,490 508,304 — 511,794 349,016 3,490 508,304 — 511,794 Other issuances of common stock 693,377 6,934 721,044 — 727,978 693,377 6,934 721,044 — 727,978 Net income — — — 2,636,837 2,636,837 — — — 2,636,837 2,636,837 Balance, December 28, 2002 16,729,911 167,299 22,404,835 (1,849,893 ) 20,722,241 16,729,911 167,299 22,404,835 (1,849,893 ) 20,722,241 Exercise of common stock options, including related tax benefit 1,362,633 13,626 2,810,606 — 2,824,232 1,362,633 13,626 2,810,606 — 2,824,232 Other issuances of common stock 489,244 4,892 458,311 — 463,203 489,244 4,892 458,311 — 463,203 Net income — — — 1,051,964 1,051,964 — — — 1,051,964 1,051,964 Balance, December 27, 2003 18,581,788 $ 185,817 $ 25,673,752 $ (797,929 ) $ 25,061,640 18,581,788 185,817 25,673,752 (797,929 ) 25,061,640 Exercise of common stock options, including related tax benefit 878,499 8,785 1,602,947 — 1,611,732 Other issuances of common stock 187,274 1,874 (1,874 ) — — Net income — — — 2,134,714 2,134,714 Balance, December 25, 2004 19,647,561 $ 196,476 $ 27,274,825 $ 1,336,785 $ 28,808,086 The accompanying notes are an integral part of these consolidated financial statements. 33 POORE BROTHERS, INC. AND SUBSIDIARIES Years Ended Years Ended December December December 31, December 25, December 27, December 28, Cash flows provided by (used in) operating activities: Net income $ 1,051,964 $ 2,636,837 $ 1,045,264 $ 2,134,714 $ 1,051,964 $ 2,636,837 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,285,221 1,288,333 1,237,260 1,340,453 1,285,221 1,288,333 Amortization 31,064 33,939 694,067 25,163 31,064 33,939 Allowance for doubtful accounts 23,822 329,996 53,558 Provision for bad debts (111,623 ) 23,822 379,000 Other asset amortization 121,413 423,088 349,723 44,066 121,413 423,088 Deferred income taxes 641,861 (341,430 ) — 969,899 641,861 (341,430 ) Costs related to brand discontinuance 1,758,919 — — Tax benefit from exercise of stock options 830,371 — — 315,017 830,371 — Write-down of equipment 1,030,352 — — Write-down of equipment and accrual of lease costs 308,104 1,030,352 — (Gain) loss on disposition of fixed assets (926 ) 7,073 (167,450 ) 16,571 (926 ) 7,073 Change in operating assets and liabilities: Accounts receivable (1,225,065 ) 365,782 240,981 446,367 (1,225,065 ) 316,778 Inventories, net of reserve (725,434 ) (13,045 ) (186,238 ) Inventories, net of brand discontinuance write-offs (1,390 ) (725,434 ) (13,045 ) Other assets and liabilities (1,030,146 ) (794,934 ) (396,916 ) (139,705 ) (1,030,146 ) (794,934 ) Accounts payable and accrued liabilities (28,652 ) 1,906,049 (776,807 ) (559,426 ) (28,652 ) 1,906,049 Net cash provided by operating activities 2,005,845 5,841,688 2,093,442 6,547,129 2,005,845 5,841,688 Cash flows (used in) provided by investing activities: Purchase of equipment (1,120,795 ) (581,087 ) (2,655,535 ) Proceeds from disposition of fixed assets 61,000 6,006 700,000 Cash flows provided by (used in) investing activities: Purchase of property and equipment (455,769 ) (1,120,795 ) (581,087 ) Proceeds from disposition of property and equipment — 61,000 6,006 Net cash (used in) investing activities (1,059,795 ) (575,081 ) (1,955,535 ) (455,769 ) (1,059,795 ) (575,081 ) Cash flows provided by (used in) financing activities: Proceeds from issuance of common stock 2,036,499 627,494 1,313,571 1,296,715 2,036,499 627,494 Stock issuance costs — — (10,774 ) Payments made on long-term debt (1,138,166 ) (1,954,844 ) (2,404,470 ) (952,155 ) (1,138,166 ) (1,954,844 ) Net increase (decrease) in working capital line of credit — (3,438,268 ) 1,530,410 — — (3,438,268 ) Net cash provided by (used in) financing activities 898,333 (4,765,618 ) 428,738 344,560 898,333 (4,765,618 ) Net increase in cash and cash equivalents 1,844,383 500,989 566,645 6,435,920 1,844,383 500,989 Cash and cash equivalents at beginning of year 1,395,187 894,198 327,553 3,239,570 1,395,187 894,198 Cash and cash equivalents at end of year $ 3,239,570 $ 1,395,187 $ 894,198 $ 9,675,490 $ 3,239,570 $ 1,395,187 Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 248,587 $ 521,420 $ 1,055,248 $ 293,908 $ 248,587 $ 521,420 Summary of non-cash investing and financing activities: Common Stock issued for acquisition earnout 420,566 210,786 185,274 — 420,566 210,786 Common Stock warrant issued for sales commissions — — 16,800 Conversion of Convertible Debenture into Common Stock — 401,497 — — — 401,497 Note payable issued for purchase of equipment — — 538,308 The accompanying notes are an integral part of these consolidated financial statements. 34 POORE BROTHERS, INC. AND SUBSIDIARIES 1. Organization, Business and Summary of Significant Accounting Policies: In December 1996, the Company completed an initial public offering of its Common Stock. In November 1998, the Company acquired the business and certain assets (including the Bob’s Texas Style® potato chip brand) of Tejas Snacks, L.P. (“Tejas”), a Texas-based potato chip manufacturer. In October 1999, the Company acquired Wabash Foods, LLC (“Wabash”) including the Tato Skins®, As part of the Boulder acquisition, the Company In October 2000, the Company launched its T.G.I. Friday’s® brand salted snacks pursuant to a license agreement with TGI Friday’s Inc., which expires in 2014. The Company’s fiscal year Business The Company is engaged in the development, production, marketing and distribution of innovative 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. 35 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. Fair Value of Financial Instruments At December Inventories 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. 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. In accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we evaluate the recoverability of property and equipment not held for sale by comparing the carrying amount of the asset or group of assets against the estimated undiscounted future cash flows expected to result from the use of the asset or group of assets and their eventual disposition. If the undiscounted future cash flows are less than the carrying value of the asset or group of assets being evaluated, an impairment loss is recorded. The loss is measured as the difference between the fair value and carrying value of the asset or group of assets being evaluated. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less cost to sell. The estimated fair value would be based on the best information available under the circumstances, including prices for similar assets or the results of valuation techniques, including the present value of expected future cash flows using a discount rate commensurate with the risks involved. Intangible Assets In June 2001, the 36 Upon adoption on January 1, 2002, the Company ceased the amortization of goodwill and other intangible assets with indefinite lives in accordance with SFAS No. 142. Goodwill Revenue Recognition In accordance with accounting principles generally accepted in the United States, the Company recognizes operating revenues upon shipment of products to customers when title and risk of loss pass to its customers. Provisions and allowances for sales returns, promotional allowances and discounts are also recorded as a reduction of revenues in the Company’s consolidated financial statements. Advertising and Promotion 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 period in which such costs are incurred by the Company. Anytime the Company offers consideration (cash or credit) as trade advertising or promotional allowance to a purchaser of products at any point along the distribution chain, the amount is accrued and recorded as a reduction in revenue. Any marketing programs that deal directly with the consumer are recorded in selling, general and administrative expenses. Accrued advertising and promotion, which is included in the current liabilities section of the accompanying consolidated balance sheet, was $547,000 and $1,157,000 on December 25, 2004 and 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. 37 Stock Options and Stock-Based Compensation The Company’s stock-based compensation plan, described in Note The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”. Accordingly, no compensation cost has been recognized for the stock option plan. Awards under the plan vest over periods ranging from one to three years, depending on the type of award. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all option grants, using the Black-Scholes valuation model, for the years ended December 25, 2004, December 27, 2003 and December 28, 2003 2002 2001 2004 2003 2002 Net income as reported $ 1,051,964 $ 2,636,837 $ 1,045,264 $ 2,134,714 $ 1,051,964 $ 2,636,837 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (382,380 ) (1,010,139 ) (850,301 ) (518,950 ) (382,380 ) (1,010,139 ) Pro forma net income $ 669,584 $ 1,626,698 $ 194,963 $ 1,615,764 $ 669,584 $ 1,626,698 Net income per share – basic – as reported $ 0.06 $ 0.16 $ 0.07 $ 0.11 $ 0.06 $ 0.16 Pro forma net income per share – basic $ 0.04 $ 0.10 $ 0.01 $ 0.09 $ 0.04 $ 0.10 Net income per share – diluted – as reported $ 0.06 $ 0.15 $ 0.06 $ 0.11 $ 0.06 $ 0.15 Pro forma net income per share – diluted $ 0.04 $ 0.09 $ 0.01 $ 0.09 $ 0.04 $ 0.09 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 38 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. Earnings per common share was computed as follows for the years ended December 2003 2002 2001 Basic Earnings Per Common Share: Net income $ 1,051,964 $ 2,636,837 $ 1,045,264 Weighted average number of common shares 17,572,951 16,146,081 15,050,509 Earnings per common share $ 0.06 $ 0.16 $ 0.07 Diluted Earnings Per Common Share: Net income $ 1,051,964 $ 2,636,837 $ 1,045,264 Weighted average number of common shares 17,572,951 16,146,081 15,050,509 Incremental shares from assumed conversions - Debentures — 120,279 — Warrants 325,496 476,019 690,428 Stock options 578,039 1,084,574 1,457,711 Adjusted weighted average number of common shares 18,476,486 17,826,953 17,198,648 Earnings per common share $ 0.06 $ 0.15 $ 0.06 2004 2003 2002 Basic Earnings Per Common Share: Net income $ 2,134,714 $ 1,051,964 $ 2,636,837 Weighted average number of common shares 18,794,977 17,572,951 16,146,081 Earnings per common share $ 0.11 $ 0.06 $ 0.16 Diluted Earnings Per Common Share: Net income $ 2,134,714 $ 1,051,964 $ 2,636,837 Weighted average number of common shares 18,794,977 17,572,951 16,146,081 Incremental shares from assumed conversions - Debentures — — 120,279 Warrants — 325,496 476,019 Stock options 152,576 578,039 1,084,574 Adjusted weighted average number of common shares 18,947,553 18,476,486 17,826,953 Earnings per common share $ 0.11 $ 0.06 $ 0.15 New Accounting Pronouncements In 39 In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”. This statement clarifies the accounting for the abnormal amount of idle facilities expense, freight, handling costs and wasted material. This statement requires that those items be recognized as current-period expense. In addition, the statement requires that allocation of fixed overhead to the cost of conversion be based on 2. Goodwill and Trademarks: Goodwill and trademarks relate to the 1998, 1999 and 2000 acquisitions described in Note 1. Intangibles not subject to amortization consisted of the following as of December 2003 2002 Goodwill (1) $ 5,986,252 $ 5,565,687 Trademarks 4,207,032 4,207,032 $ 10,193,284 $ 9,772,719 2001 Net Income As reported $ 1,045,264 Add back: Goodwill and trademark amortization 652,104 Adjusted $ 1,697,368 Basic earnings per common share: As reported $ 0.07 Add back: Goodwill and trademark amortization 0.04 Adjusted $ 0.11 Diluted earnings per common share: As reported $ 0.06 Add back: Goodwill and trademark amortization 0.04 Adjusted $ 0.10 2004 2003 Goodwill $ 5,986,252 $ 5,986,252 Trademarks 4,207,032 4,207,032 $ 10,193,284 $ 10,193,284 3. Concentrations of Credit Risk: The Company’s cash is placed with major banks. The Company, in the normal course of business, maintains balances in excess of Federal insurance limits. The Company’s primary concentration of credit risk is related to certain trade accounts receivable. In the normal course of business, the Company extends unsecured credit to its customers. In 4. Inventories: Inventories consisted of the following as of December 2003 2002 2004 2003 Finished goods $ 1,610,776 $ 713,616 $ 1,537,488 $ 1,610,776 Raw materials 789,727 1,046,785 608,254 789,727 $ 2,400,503 $ 1,760,401 $ 2,145,742 $ 2,400,503 40 5. Property and Equipment: Property and equipment consisted of the following as of December Useful Lives 2003 2002 Buildings and improvements 20 – 30 years $ 5,313,578 $ 5,226,016 Equipment 7 – 15 years 10,700,679 11,464,258 Land — 272,006 272,006 Vehicles 5 years 34,893 11,393 Furniture and office equipment 2 – 5 years 1,447,145 1,207,291 17,768,301 18,180,964 Less accumulated depreciation and amortization (6,013,205 ) (5,171,016 ) $ 11,755,096 $ 13,009,948 Useful Lives 2004 2003 Buildings and improvements 20 – 30 years $ 5,364,778 $ 5,313,578 Equipment 7 – 15 years 10,768,784 10,700,679 Land — 272,006 272,006 Vehicles 5 years 16,825 34,893 Furniture and office equipment 2 – 5 years 1,547,608 1,447,145 17,970,001 17,768,301 Less accumulated depreciation and amortization (7,154,038 ) (6,013,205 ) $ 10,815,963 $ 11,755,096 On October 28, 2000, the Company experienced a fire at the Goodyear, Arizona manufacturing 6. Long-Term Debt: Long-term debt consisted of the following as of December 2003 2002 Term loan due in monthly installments through July 1, 2006; interest at prime rate (4.0% at December 27, 2003); collateralized by accounts receivable, inventories, equipment and general intangibles $ 2,259,377 $ 3,181,685 Mortgage loan due in monthly installments through July 2012; interest at 9.03%; collateralized by land and building 1,812,579 1,851,888 Capital lease obligations due in monthly installments through 2003; interest rates ranging from 8.2% to 11.3%; collateralized by equipment — 45,779 Capital Expenditures Term loan due in monthly installments through October 31, 2003; interest at prime plus 1% (5.0% at December 27, 2003); collateralized by equipment — 130,770 4,071,956 5,210,122 Less current portion (932,155 ) (1,105,004 ) $ 3,139,801 $ 4,105,118 2004 2003 Term loan due in monthly installments through July 1, 2006; interest at prime rate (4.0% at December 25, 2004); collateralized by accounts receivable, inventories, equipment and general intangibles $ 1,347,069 $ 2,259,377 Mortgage loan due in monthly installments through July 2012; interest at 9.03%; collateralized by land and building 1,772,732 1,812,579 3,119,801 4,071,956 Less current portion (1,390,667 ) (932,155 ) $ 1,729,134 $ 3,139,801 Annual maturities of long-term debt as of December Year 2004 $ 932,155 2005 935,906 2006 522,463 2007 52,192 2008 57,105 Thereafter 1,572,135 $ 4,071,956 Year 2005 $ 1,390,667 2006 47,702 2007 52,192 2008 57,105 2009 62,480 Thereafter 1,509,655 $ 3,119,801 41 Interest expense consisted of the following at December 25, 2004, December 27, 2003 and December 28, 2003 2002 2001 2004 2003 2002 Interest expense $ 275,619 $ 541,754 $ 1,046,215 $ 221,258 $ 275,619 $ 541,754 Interest income (22,799 ) (2,021 ) (1,098 ) (56,461 ) (22,799 ) (2,021 ) Interest expense, net $ 252,820 $ 539,733 $ 1,045,117 $ 164,797 $ 252,820 $ 539,733 The Company’s Goodyear, Arizona manufacturing, distribution and headquarters facility is subject to a $1.8 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 During 2002, the Company’s remaining outstanding 9% Convertible Debenture due July 1, 2002 in the principal amount of $401,497 held by Wells Fargo Small Business Investment Company, Inc. (“Wells Fargo SBIC”) was converted into 401,497 shares of the Company’s The U.S. Bancorp Credit Agreement consists of a $5.0 million line of credit, a $0.5 million capital expenditure line of credit (“CapEx Term Loan”) and a $5.8 million Term Loan A. At December 7. Brand Discontinuance: On June 11, 2004, the In connection with the brand discontinuation, and included in the $1.1 million charge above, the Company negotiated amendments to its license agreements with Warner Bros. Consumer Products pursuant to which the Agreements will remain in 42 June 11, 2004 Write-offs and Dec. 25, 2004 Inventory and equipment write-offs $ 294,768 $ (294,768 ) $ — Write-down of prepaid royalties and present value of guaranteed minimum royalty payments 1,119,991 (527,519 ) 592,472 (1,2) Reclamation costs 344,160 (309,662 ) 34,498 (1) Present value of remaining lease payments on equipment — 308,104 308,104 (1,3) $ 1,758,919 $ (823,845 ) $ 935,074 (1) These amounts are reflected in the Consolidated Balance Sheets as “Current and Non-current portions of accrued costs related to brand discontinuance and other liabilities”. (2) In accordance with SFAS No. 146, interest accretion was (3) In accordance with SFAS No. 146, the fair value of 43 The Company is periodically a party to various lawsuits arising in the ordinary course of business. Management believes, based on discussions with legal counsel, that the resolution of such lawsuits, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position or results of operations. The Company leases a 140,000 square foot facility located on 15 acres of land in Bluffton, Indiana, approximately 20 miles south of Ft. Wayne, Indiana. The Company has entered into a lease expiring in April 2018 with respect to the facility and the lease has two five-year renewal options. Current lease payments are approximately $22,000 per month. The lease payments are subject to an annual CPI-based increase. The Company produces its T.G.I. Friday’s® brand The Company also leases one-half of a 200,000 square foot facility in Bluffton, Indiana which is used as a distribution center. The Company has entered into a lease expiring in November 2006 with respect to the facility and the lease has two three-year renewal options. Current lease payments are approximately In addition to the Company’s facility leases, the Company has entered into a variety of operating leases for equipment and vehicles. Rental expense under all operating leases was $1,666,000, $1,158,000 Year Operating Operating 2004 $ 1,562,869 2005 1,526,496 $ 1,419,066 2006 1,468,073 1,336,307 2007 951,372 961,587 2008 509,606 518,403 2009 374,519 Thereafter 2,759,751 2,269,682 Total $ 8,778,167 $ 6,879,564 The Company licenses patented technology from The Company licenses the T.G.I. Friday’s® brand o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the fiscal year ended December 25, 2004
EXCHANGE ACT OF 1934
incorporation or organization)ýo$34,022,860$26,187,413 based upon the closing market price on June 28, 2003,25, 2004, the last business day of the Registrant’s most recently completed second fiscal quarter.21, 200411, 2005 was 18,581,788.19,647,561.18, 200417, 2005 are incorporated by reference into Part III of this Form 10-K.AVAILABILEAVAILABLE ON COMPANY WEBSITEof Formon Schedule 14A related to the Company’s Annual Shareholders Meeting, and any amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.Company’s relatively brief operating history, 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, lack of consumer acceptance of existing and future products, dependence upon key license agreements, dependence upon major customers, 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 if the Company fails to satisfy the applicable listing criteria (including a minimum share price) in the future 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-K 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.11. Business. Business salted snack food products that are sold primarily through grocery retailers, mass merchandisers, club stores, convenience stores and vend distributors across the United States. The Company currently manufactures and sells nationally (i) T.G.I. Friday’s® brand salted snacks under license from TGI Friday’s Inc. and (ii) Crunch Toons® brand salted snacks, featuring Looney Tunes™ and Scooby Doo™ characters under license from Warner Bros. Consumer Products. The Company also currently (i) manufactures and sells regionally its own brands of salted snack food products, including Poore Brothers®, Bob’s Texas Style®, and Boulder Potato Company® brand batch-fried potato chips and Tato Skins® brand potato snacks, (ii) manufactures private label potato chips for grocery retail chains in the southwest, and (iii) distributes in Arizona snack food products that are manufactured by others. For the fiscal years 2003, 2002 and 2001, net revenues totaled $66,417,836, $59,348,471 and $53,904,816, respectively. The Company sells its T.G.I. Friday’s® brand salted snack products and its Crunch Toons® brand salted snack products to grocery retailers, mass merchandisers, grocery, club and clubdrug stores directly and to primarily convenience stores and vend operators through independent distributors. The Company’s other productsbrands are also sold through independent distributors. InFor the fiscal years 2004, 2003 and 2002, net revenues totaled $68,734,763, $66,417,836 and 2001, the$59,348,471, respectively, and T.G.I. Friday’s® brand salted snacks represented 61%72%, 60%61% and 41%60%, respectively, of the Company’s total net revenues. See Note 1011 “Business Segments and Significant Customers” to the financial statements included in Item 8. snacks, Crunch Toons® brand potato snacks and Tato Skins® brand potato 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 2010. T.G.I. Friday’s® brand salted snacks, Crunch Toons® brand potato snacks and Tato Skins® brand potato snacks are offered in several different flavors and formulations. All of these products are manufactured at the Company’s leased facility in Bluffton, Indiana, except for Mozzarella StickSnack Sticks, Onion Rings and Onion RingHot Pepper Jack Cheese Fries products which are produced by contract manufacturers on behalf of the Company and sold under the T.G.I. Friday’s® brand name. The Company acquired the Bluffton, Indiana manufacturing operation in October 1999 as part of its acquisition of Wabash Foods, LLC. In November 2002, Warner Bros. Consumer Products granted the Company rights to introduce an innovative new brand of salted snacks featuring Looney Tunes™ characters. The Company launched the Crunch Toons® brand nationwide in the summer of 2003 under a multi-year agreement that grants the Company exclusive salted snack category brand licensing and promotional rights for Looney Tunes™ characters. In November 2003, Warner Bros. Consumer Products granted the Company rights to market its Crunch Toons® brand of salted snacks featuring Scooby-Doo™ characters beginning in the first quarter of 2004 under a multi-year agreement that grants the Company exclusive salted snack category brand licensing and promotional rights for Scooby-Doo™ characters. See “Products” and “Patents and Trademarks”.potato chips are currently offered in six flavors, and Boulder Potato Company® potato chips are currentlyeach offered in eightseven 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.”bebuild a leading developer, manufacturer, marketer and distributordiverse portfolio of innovative branded salted snack foods by providingnational niche food brands that provide 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 snack food brands that provide strategic fit and possess strong national brand equity in order to5$185, 274,$185,274, respectively. With each issuance of shares the Company increased the goodwill recorded from this acquisition.Looney Tunes™ characters pursuant to a multi-year license agreement with Warner Bros. Consumer Products. The agreement grantsCompany decided to discontinue the brand in June 2004 and amended its license agreements with Warner Bros. Consumer Products. See “Note 7. Brand Discontinuance.”exclusive saltedsigned a multi-year license agreement with Cinnabon, Inc. pursuant to which the Company plans to develop and sell a variety of snack category brand licensingproducts, to include cookies and promotional rights for Looney Tunes™ characters.bars under the Cinnabon® brand.Business Strategy
each.each through licensing, acquisition or development. This represents a broadening of the Company’s strategy is intendedwhich previously was focused exclusively on salted snack foods. The goals of this new strategy are to enable us(i) capitalize on national niche market opportunities, (ii) deliver incremental category growth for retailers, (iii) provide product innovation targeted to a defined consumer segment, (iv) complement, rather than to compete directly against, large national competitors.competitors with leading national brands, and (v) build relationships with major retailers in all channels of distribution by providing them higher margins, excellent customer service and constant innovation. The primary elements of ourthe Company’s long-term business strategy are as follows: Snack Food Brands. A significant element of the Company’s business strategy is to develop, acquire or license new innovative snack food brands that provide strategic fit and possess strong national brand equity in order to expand, complement or diversify the Company’s existing business. In October 2000 the Company initiated this element of its strategy by launching ourits first national niche brand, T.G.I. Friday’s® brand salted snacks, under an exclusive license from TGI Friday’s Inc. which expires in 2014. In June 2003 the Company launched its second national niche brand, Crunch Toons®, featuring Looney Tunes™ characters, under a multi-year agreement with Warner Bros. Consumer Products that grantsProducts. This brand launch was unsuccessful and the brand was discontinued in June 2004. The Company signed a license agreement in September 2004 to develop and sell Cinnabon® brand salted snacks, shelf-stable cookies and breakfast/snack bars under an exclusive brand licensing and promotional rights. In November 2003,license from Cinnabon, Inc. These products are expected to commence initial shipments in the Company also acquired the exclusive brand licensing and promotional rights to Scooby Doo™ characters pursuant to a multi-year agreement with Warner Bros. Consumer Products.second quarter of 2005. The Company plans to continue developing, acquiring or licensing additional national niche brands.Increase SalesBroaden Distribution of Existing Brands. The Company plans to increase distribution and build the market share of its existing branded products through selected trade activity in various existing or new markets and channels. For example, the Company plans to expand sales to Canadian customers that it commenced in 2004 and is exploring other international market opportunities for its brands. Marketing efforts may include, among other things, trade advertising and promotional programs with distributors and retailers, in-store advertisements, in-store displays and limited consumer advertising, public relations and coupon programs.Improve Profit Margins.Develop New Products for Existing Brands. In addition, the Company plans to continue its innovation activities to identify and develop (i) new line extensions for its brands, such as new flavors or products, and (ii) new food segments in which to expand the brand’s presence. For example, in the second quarter of 2005 the Company plans to commence initial shipments of a new line of tender meat snacks under the T.G.I. Friday’s® brand. In June 2000 the Company acquired the Boulder Potato Company® brand natural potato chips and plans in 2005 to re-position this brand. This would allow the Company to identify potential additional food segments besides salted snacks in which to develop and launch new products.forty percent40% and fifty percent50% of their respective manufacturing capacities. The Company willcurrently has arrangements with several grocery chains for the manufacture and distribution by the Company of their respective private label potato chips and believes that additional contract manufacturing opportunities exist. While they are extremely price competitive and can be short in duration, the Company believes that they may provide a profitable opportunity for the Company to improve the capacity utilization of its facilities. The Company intends to seek additional private label and contract manufacturing customers located near its facilities who demand superior product quality at a reasonable price.6 more effective promotions and higher margin new products. It believes that additional improvements to its manufactured products’ gross profit margins are possible with the achievement of the business strategies discussed above. Depending on product mix, the Company believes that the existing manufacturing facilities could produce, in the aggregate, up to $150 million in annual revenue volume and thereby further reduce manufacturing product costs as a percentage of cost of goods sold.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 also 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.net revenue.Products
Crunch Toons® brand potato snacks and Tato Skins® brand potato crisps utilizing a sheeting and frying process. T.G.I. Friday’s® brand salted snacks, Crunch Toons® brand potato snacks and Tato Skins® brand potato crisps are offered in several different flavors and formulations. All of these products are manufactured at the Company’s leased facility in Bluffton, Indiana, except for Mozzarella StickSnack Sticks, Onion Rings and Onion RingHot Pepper Jack Cheese Fries products which are produced by contract manufacturers on behalf of the Company and sold under the T.G.I. Friday’s® brand name. The Company expects that its licensed Cinnabon® brand salted snacks, packaged cookies and breakfast/snack bars will be produced by contract manufacturers and sold under the Cinnabon® name.potato chips are currently offered in six flavors, and Boulder Potato Company® potato chips are currentlyeach offered in eight flavors.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 sucheach grocery chains.chain.has ceased distribution of Snyders’ pretzels which represented approximately 50%, or $2 million, of the distributed products segment revenues in 2003. The Company does not expect thisThis revenue loss todid not have a material adverse affecteffect on the Company’s overall profitability in 2004., Crunch Toons® and Tato Skins® brand products. The Indiana facility is currently operating at approximately forty percent40% of capacity. Certain T.G.I. Friday’s®, Crunch Toons® and Tato Skins® brand products are produced utilizing a sheeting and frying process that includes some patented technology. The Company licenses the technology from third parties and has exclusive rights to use the technology within the United States until the patents expire, which ranges from 2004 to 2010. Some T.G.I. Friday’s® brand salted snack products are produced by contract manufacturers on behalf of the Company. See “Patents, Trademarks and TrademarksLicenses.”batch fryingbatch-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 batchbatch- 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 up to approximately 3,500 pounds of potato chips per hour, including 1,400 pounds of batch friedbatch-fried branded potato chips per hour and 2,100 pounds of continuous fried private label potato7batch fryingbatch-frying equipment which, if needed, could be installed without significant time or cost, and which would result in increased capacity to produce the batch friedbatch-fried potato chips. The Arizona facility is currently operating at approximately fifty percent50% of capacity.Description of Property.Properties.”Marketing and Distribution
in the vending channel nationwide through an independent networkacross a number of brokers and distributors, particularly in the midwest and east.sales channels. The Company attributes the success of its products in these markets to consumer loyalty. The Company believes this loyalty results from the products’ differentiated taste, texture and flavor variety which result from its manufacturing processes. The Company has retained Acosta, Inc., a leading national sales and marketing agency with employees and offices nationwide to represent T.G.I. Friday’s® brand salted snacks and Crunch Toons® brand potato snacks on behalf of the Company in the grocery and convenience store channels. T.G.I. Friday’s® brand salted snacks are now sold in nearly 50% of U.S. grocery stores nationwide and in over 75% of the top 50 convenience store chains. The Company’s own sales organization sells T.G.I. Friday’s® brand salted snacks and Crunch Toons® brand salted snacks in the mass, club and drug channels. The Company also obtains significant sales on T.G.I. Friday’s® brand salted snacks in the vending channel nationwide through an independent network of brokers and distributors. The Company expects to use these same selling and distribution methods to achieve a strong retail presence on its line of Cinnabon® branded products, which it expects to begin shipping in the second quarter of 2005.Arizona, New Mexico, Southern California, Hawaii, Missouri, Ohio and Michigan.the southwest United States. The Company’s Bob’s Texas Style® brand potato chip products have achieved significant market presence in south/central Texas, including Houston, San Antonio and Austin.Texas. The Company’s Boulder Potato Company® brand potato chip products have achieved significant market presence in Colorado and in natural food stores across the country.nationwide. 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.8Customers
and Wal*Mart (including its SAM’s Clubs) accounted for 13%21% and 20%14%, respectively, of the Company’s 20032004 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 revenues in 2003.2004. 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.AllThe majority of the Company’s revenues are attributable to external customers in the United States, and allhowever, the Company started selling product to Canadian customers in October, 2004. All of itsthe Company’s assets are located in the United States.Market Overview and Competition
$22.5$23.5 billion at retail in 20022003 (the latest year for which data is available) with potato chips, tortilla chips and potato crisps, accounting for nearly 50% of the market, and corn snacks, popcorn, pretzels, nuts, meat snacks and other products accounting for the balance. Total salted snack sales, in dollar terms, increased in each of the last ten years, ranging from an increase of 8.5% (in 1997) to 0.3% (in 1995), with a 20022003 increase of 2.9%4.5%. Potato chip, tortilla chips and potato crisps combined sales have increased within a similar range, with 2002 retail sales of $10.4in 2003 were $10.6 billion, a 0.2% increase over 20012002 sales of $10.2$10.4 billion.salted snack foods, including potato chips, and tortilla chips.chips, cookies, etc. The salted snack food industry is large and highly competitive and is dominated primarily by large food companies, including Frito-Lay, Inc., a subsidiary of PepsiCo, Inc. Frito-Lay, Inc. possesses, Nabisco, Keebler and Kraft. These Companies possess 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 it has innovative products and methods of operation that will enable it to compete successfully, there can be no assurance of its ability to do so.batch fryingbatch-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.9Although notThe Act is effective until January 1, 2005, and the Company believes it is currently compliant with this provision.Employees
27, 2003,25, 2004, the Company had 282271 full-time employees, including 238225 in manufacturing and distribution, 2021 in sales and marketing and 2425 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.TrademarksLicenses2006.2008. 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.produces Crunch Toons® brand salted snacks utilizing a sheeting and frying process that includes patented technologydoes not believe that the Company licenses from M.J. Quinlan & Associates Pty. Limited, a company incorporated under the laws of New South Wales (“Quinlan”). Pursuant to the license agreement between the Company and Quinlan, the Company has an exclusive right to use the patented technology within the United States until the agreement expires. The initial period covered by the agreement extends through 2010 and automatically renews for five (5) year increments after that, unless terminated by Licensee. In consideration for the useexpiration of these patents will have an adverse effect on the Company is required to make royalty payments to Quinlan on sales of products manufactured utilizing the patented technology.Company.10The Company licenses the Cinnabon® brand for salted snacks, shelf-stable packaged cookies and breakfast/snack bars from Cinnabon Inc. under a license agreement with terms and options extending through 2015. Pursuant to the license agreement, the Company is required to make royalty payments on sales of Cinnabon® brand products and is required to achieve certain minimum sales levels by certain dates during the contract term.In November 2002, Warner Bros. Consumer Products grantedThe Company continues to evaluate new licensing opportunities to broaden its product offering and to complement the Company rights to introduce an innovativegrowth of its existing T.G.I. Friday’s® and Cinnabon® product lines through the introduction of new brand ofproducts in salted snacks (Crunch Toons®) featuring Looney Tunes™ characters, including Bugs Bunny, Tweety and the Tasmanian Devil. The Company launched the new brand nationwide in the summer of 2003 under a multi-year agreement that grants the Company exclusive salted snack category brand licensing and promotional rights for Looney Tunes™ characters. In November 2003, the Company also acquired the exclusive brand licensing and promotional rights to Scooby Doo™ characters pursuant to a multi-year agreement with Warner Bros. Consumer Products. Both agreements require the payment of minimum royalties during the term of the agreements.as well as other food categories., and Knots® and Crunch Toons®.Risk Factors
Brief Operating History; Prior Net Losses; Accumulated Deficit; Significant Future Expenses due to Implementation of Business Strategy. Although certainThe Company has recently developed a more aggressive strategic plan to achieve a new long-term vision of the Company’s subsidiaries have operated for several years, the Company asbeing a whole has a relatively brief operating history upon which an evaluation$200 million marketer of its prospects can be made.Intensely DifferentTM food brands. Such prospects areaction is subject to the substantial risks, expenses and difficulties frequently encountered in the establishment and growthimplementation 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 27, 2003, the Company had an accumulated deficit of $797,929 and net working capital of $7,850,924. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”be expectedrequire the Company 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’sCompany will be able to implement its new strategic plan, that its business strategy will prove successful or that the Companyit will be profitable in the future.able to maintain profitability during such implementation.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® in November 1998, Tato Skins® in October 1999, and Boulder Potato Company® 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 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” — 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.In recent years, aA significant element of the Company’s business strategy has beenis 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 identify, finance and complete additional suitable acquisitions on acceptable terms, or that future acquisitions, if completed, will be successful. Any future acquisitions could divert management’s attention from the daily operations of the Company and otherwise require additional management, operational and financial resources. Moreover, there 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.11Substantial Leverage; Financial Covenants Pursuant to U.S. Bancorp Credit Agreement; Possible Acceleration of Indebtedness. At December 27, 2003,25, 2004, 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 $2,259,377.$1,347,069. 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 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 27, 2003,25, 2004, 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 and minimum tangible capital requirements). ThereAs the Company implements its business strategy, there can be no assurance that the Company will beremain 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 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”2003,2004, 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 $5.60$4.05 per share to a low of $1.90$2.07 per share. The last reported sales price of the Common Stock on the Nasdaq SmallCap Market on March 21, 200411, 2005 was $3.15$3.25 per share. There can be no assurance as to the future market price of the Common Stock. See “Compliance with Nasdaq Listing Maintenance Requirements.” salted snack foods, such as those sold by the Company, including potato chips, tortilla chips, pretzelscookies and meat snacks, is large and intensely competitive. Competitive factors in the salted snack food industry include product quality and taste, brand awareness among consumers, access to supermarket shelf space, price, advertising and promotion, variety of snacks offered, nutritional content, product packaging and package design. The Company competes in that market principally on the basis of product taste and quality.primarily dominated by large food companies, including Frito-Lay, Inc., Nabisco and others which hashave 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.12There can be no assurance thatIn the Crunch Toons®first half of 2005, the Company plans to test-market new Cinnabon® branded products, such as cookies and bars, as well as a new product category, meat snacks, several new salted snack products under the T.G.I. Friday’s® brand, will achieve a significant degreeand intends to introduce more new product lines in the future. The success of market acceptance, that acceptance, if achieved,new products will be sustained for any significant period or that product life cycles will be sufficientkey to permit the Company to recover start-upsuccess of the Company’s business plan and other associated costs, such as minimum royalty commitments or raw material inventories. 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.Products; Future Expiration of Patented Technology Licensed by the CompanyProducts. The Company licenses patented technology from a third party in connection with the manufacture of its T.G.I. Friday’s® and Tato Skins® brand products and has an exclusive right to use such technology within North America until the patents expire between 2004 and 2006. The Company also licenses patented technology from a third party in connection with the manufacture of its Crunch Toons® brand salted snacks and has an exclusive right to use such technology within the United States until the agreement expires. The initial period covered by the agreement extends through 2010 and automatically renews for five (5) year increments after that, unless terminated by the Company. In addition, the Company expects to utilize patented technology from one or more third parties in connection with the manufacture of future products. Upon the expiration of such patents, competitors2008. Competitors of the Company, certain of which may have significantly greater resources than the Company, may utilize the patenteddifferent technology in the manufacture of products that are similar to those currently manufactured, or that may in the future be manufactured, by the Company with such patented technology.Company. The entry of any such products into the marketplace could have a material adverse effect on sales of T.G.I. Friday’s®, Crunch Toons®Friday’s ® and Tato Skins® brand products, as well as any such future products, by the Company.batch fryingbatch-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.AgreementAgreements and Future License Agreements. The Company derives a substantial portion of its revenue from a limited number of snack food brands. For the year ended December 27, 2003, approximately 71%25, 2004, over 70% of the Company’s net revenues were attributable to the T.G.I. Friday’s® brand products and the Poore Brothers® 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. Any impact to a licensed brand’s reputation could also lead to an impact on the Company’s snack food products associated with that brand. 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.13 whether at the expiration of its term or prior thereto, could have a material adverse effect on the Company’s financial condition and results of operations.Additionally, the Crunch Toons® brand products, featuring Looney Tunes™ and Scooby Doo™ characters, are currently being sold by the Company pursuant to multi-year license agreements by and between the Company and Warner Bros. Consumer Products. Pursuant to the license agreements, the Company is subject to various requirements and conditions (including without limitation, minimum royalty payments). The failure of the Company to comply with certain of such requirements and conditions could result in the early termination of the license agreements by Warner Bros. Consumer Products. Any termination of the license agreements, whether at the expiration of its term or prior thereto, could have a material adverse effect on the Company’s financial condition and results of operations.and Wal*Mart (including its SAM’s Clubs), accounted for 13%21% and 20%14%, respectively, of the Company’s 20032004 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 2003.2004. A decision by any major customer to cease or substantially reduce its purchases could have a material adverse effect on the Company’s business.Employees; Non-Compete AgreementsEmployees. The Company’s success is dependent in large part upon the abilities of its executive officers, including Eric J. Kufel,Thomas W. Freeze, President and Chief Executive Officer, Glen E. Flook, Executive Vice President of Innovation, Thomas F. Tierney, Senior Vice President-Operations,President of Sales and Thomas W. Freeze,Richard M. Finkbeiner, Senior Vice President and Chief Financial Officer. The Company’s refocused business strategy will challenge its executive officers, and the inability of the Company’s executivesuch 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 currently maintains “key man” life insurance with respect to the Company’s President and Chief Executive Officer in the amount of $5,000,000. The employment of the executive officers of the Company is on an “at-will” basis. The executive officers are entitled to severance under certain circumstances. The Company has non-compete agreements with all of its executive officers. See “Item 10. Directors and Executive Officers of the Registrant.”Although notThe Act is effective until January 1, 2005, and the Company believes it is currently compliant with this provision.14(without giving effect to the possible exercise of warrants to purchase 250,000 shares of Common Stock also held bybased on Capital Foods).Foods’ Schedule 13G filing. 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, based on their Schedule 13G filings, are currently the beneficial owners of approximately 9%7%, 6%4% and 6%4%, 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.6,896,1055,699,900 shares of outstanding Common Stock and 300,000 shares of Common Stock issuable upon the 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.1522. Properties. Properties
salted snacks, Crunch Toons® brand potato snacks and Tato Skins® brand potato snacks at the Bluffton, Indiana facility.$30,000$31,500 per month. 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 facility is financed by a mortgage with Morgan Guaranty Trust Company of New York that matures in June 2012. The Company produces its Poore Brothers®, Bob’s Texas Style® and Boulder Potato Company® brand potato chips, as well as its private label potato chips at the Goodyear, Arizona facility.3.3. Legal Proceedings
4.4. Submission of Matters to a Vote of Security HoldersNone.16PART II
5.5. Market for Registrant’s Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities
21, 2004.20, 2005. 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. Additionally, certain debt agreements of the Company limit the Company’s ability to declare and pay dividends.27, 200325, 2004 and December 28, 2002.27, 2003.166.6. Selected Financial Data7.7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsBusiness and Future OutlookOverview salted snack food products that are sold primarily through grocery retailers, mass merchandisers, club stores, convenience stores and vend distributors across the United States. The Company currently manufactures and sells nationally (i) T.G.I. Friday’s® brand salted snacks under license from TGI Friday’s Inc. and (ii) Crunch Toons® brand salted snacks, featuring Looney Tunes™ and Scooby Doo™ characters under license from Warner Bros. Consumer Products. The Company also currently (i) manufactures and sells regionally its own brands of salted snack food products, including Poore Brothers®, Bob’s Texas Style®, and Boulder Potato Company® brand batch-fried potato chips and Tato Skins® brand potato snacks, (ii) manufactures private label potato chips for grocery retail chains in the southwest, and (iii) distributes in Arizona snack food products that are manufactured by others.1720032004 results were the fifthsixth straight year of profitability and increased revenue for the Company. The Company’s net revenue grew 3% in fiscal 2004. T.G.I. Friday’s®, which comprised 72% of total net revenue, grew 21%. Our batch-fried chips growth rate was flat. Tato Skins® brand declined, mostly because of the cannibalization of T.G.I. Friday’s® brand continues its strong revenuebrand. Excluding discontinued products, our growth particularly in the mass, vending and convenience store channels, and two new items for the brand, Mozzarella Sticks and Onion Rings, are performing well initially.represented true product innovation for the industrydid not meet expectations and was enthusiastically received by retailers.discontinued in June 2004. Net revenue from Crunch Toons® was $0.3 million and $3.4 million in fiscal 2004 and 2003, respectively. Also, a distributed product was discontinued in early 2004 which represented a $2.0 million decline in net revenue in fiscal 2004. The Company invested significantlytable below highlights the changes between years:consumer and trade marketing programs to support its launch during 2003. The Company expected its fourth-quarter television advertising and the release of a major motion picture to provide momentum for the brand through increased consumer trial and awareness. However, consumer response to these fourth-quarter marketing activities fell far short of our expectations.millions)2004 goals reflect significantly improved profitability and continued revenue growth. The Company expectsgrowth has exceeded the industry average over the last few years primarily due to deliver significantly improved profitability as a result of increased revenue, improved operating efficiencies, and the absence of introductory marketing expenses for the Crunch Toons® brand. We also intend to make investments to support continued growth of the T.G.I. Friday’s® brand, as well as consumer research, product development and market testing of new brand concepts.The Company’s key revenue priority for 2004 is to deliver continued strong revenueits growth from T.G.I. Friday’s® brandbranded products. This growth has been due to penetration into new and existing accounts, primarily in vend, mass, grocery and convenience stores. However, this growth will slow unless theby expanding distribution particularlyas well as other food categories. The Company commenced selling internationally to Canadian customers during the fourth quarter of fiscal 2004 and it will continue to seek opportunities to selectively expand its growth in other countries. In addition, we have activated an acquisition strategy to help us accelerate our growth in order to leverage our existing competencies or gain new ones. Specifically, in the mass merchandiser, convenience storefirst half of 2005, we will be test-marketing our new Cinnabon® branded products, such as cookies and grocery channels. The Company also plans to evaluate packaging, pricing and promotional strategies for the Crunch Toons® brand. During the first quarter of 2004,bars, as well as a new characterproduct category, meat snacks, and product flavor, Scooby Doo™ BBQ, will be introduced. The Company plans to proceed cautiously with its investments in the Crunch Toons® brand and moderate its revenue expectations accordingly. There can be no assurances that the brand will be successful. Due to the February 2004 discontinuation of a product line not manufactured by the Company, the distributedseveral new salted snack products segment is expected to generate approximately 50% less revenue. This will allow the Company to increase its focus on growing both the Poore Brothers® andunder our T.G.I. Friday’s® brands in its home market.brand. 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 tostemming from acquisition-related integration costs, trade and consumer marketing programs and new product development may adversely affect operating 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 investments may benefit future periods. The Company currently has no material consumer marketing or capital expenditure commitments. Management believes that cash flow from operations, during the next twelve months, along with available working capital and borrowing facilities, should enable the Company to meet its operating cash requirements through 2004. 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.Significant changesYear ended December 25, 2004 compared to the Company’s business mix and certain events that have been recordedyear ended December 27, 2003 the last three years affect the comparisons of fiscal 2003, 2002, and 2001 operations. Consequently, comparative results are more difficult to analyze and explain. Where practicable, this discussion addresses not only the financial results as reported, but also the key results and factors affectingaccounting for 72% of the Company’s on-going business.total net revenue for fiscal 2004. The Company’s batch-fried kettle chip brands were flat in comparison to fiscal 2003 and the Tato Skin® brand declined in fiscal 2004. The Company’s discontinued Crunch Toons® brand snacks declined $3.1 million in net revenue versus last year and distributed products segment revenue declined $2.0 million due to the discontinuance of a product line.In 2001, the Emerging Issues Task Force (EITF) issued EITF Issue No. 01-9, “AccountingGross profit for Consideration Given2004 increased to $14.3 million, or 21% of net revenue, compared to $13.3 million, or 20% of net revenue, in 2003. Cost of revenues decreased from 78.4% of net revenue last year to 76.7% this year. The improvement was due to efficiency gains in manufacturing and supply chain partially offset by a Vendoran increase in freight costs. Due to a Customer or a Resellersome idledthe Vendor’s Products,” (EITF Issue No. 01-9). EITF Issue No. 01-9 addresses the accounting for certain consideration given by a vendor to a customerequipment write-downs in 2004 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 reduction2003, respectively. Also included in revenue unless certain criteria are met. The Company adopted the provisions2004 cost of the EITF Issue No. 01-9 effective in the first quarterrevenues was $1.4 million of 2002 and as a result, costs previously recorded as expense are now recorded and reflected as reductions in revenue. The Company was also required to reclassify amounts in prior periods in order to conform to the revised presentation of these costs if practicable. As a result of adopting EITF Issue No. 01-9, the Company reduced both net revenues and selling,Crunch Toons® brand discontinuance costs.2001 by $3,761,072. Therefiscal 2004, down from $13.3 million in 2003, or 15% versus 20% of net revenue. The decrease was no changeprimarily due to $3.5 million of consumer marketing costs associated with the 2001 previously reportedCrunch Toons® brand launch in 2003.as a result of this change.18Effective January 1, 2002, the Company changed the fiscal year from the twelve calendar months ending on December 31 each year to the 52-week period ending on the last Saturday occurring$1.1 million, or $0.06 per basic and diluted share, in the month of December of each calendar year. Accordingly, fiscal 2003 commenced December 29, 2002 and ended December 27, 2003.prior year period.salted snacks. Overall, T.G.I. Friday’s® brand salted snacks revenue was 13% higher than in 2002, accounting for approximately 61% of the Company’s net revenue for the year. The Company’s Crunch Toons® brand snacks contributed $3.5$3.4 million in net revenue during the year. The growth from these brands was partially offset by anticipated lower shipments of Tato Skins® brand snacks in the vending channel which resulted from our deliberate efforts to cannibalize the brand with T.G.I. Friday’s® brand salted snacks, and by slightly lower revenue from private label potato chips. The Company’s batch-fried kettle chip brands were flat versus 2002 and the distributed products segment rose modestly.Net income for 2003 declined 60% to $1.1 million, or $0.06 per basic and diluted share, compared with net income of $2.6 million, or $0.16 per basic and $0.15 per diluted share, in the prior-year period. As expected, net income was impacted significantly in fiscal 2003 by approximately $3.5 million in planned introductory consumer marketing programs, such as national television advertising, as well as other costs associated with the launch of the Crunch Toons® brand.In fiscal 2003, otherOther income and expense included $1.9 million and $0.3 million of pre-tax income from an insurance claim settlement.settlement in fiscal years 2003 and 2002, respectively.Year ended December 28, 2002 compared to the year ended December 31, 200119For fiscal 2002, net revenues reached $59.3 million, up 10% from fiscal 2001 net revenues of $53.9 million. The Company’s revenue increase was attributable to growth from T.G.I Friday’s® brand salted snacks, which accounted for over 60% of revenues. The growth of this brand was partially offset by anticipated lower shipments of Tato Skins® and Poore Brothers® brand snacks in the vending channel which resulted primarily from our deliberate efforts to cannibalize the Tato skins® brand with T.G.I. Friday’s® brand salted snacks, as well as by lower shipments of private label potato chips. Revenues from our other batch-fried kettle chip brands and distributed products rose modestly. Revenues in fiscal 2001 included approximately $1.2 million from the Company’s Texas merchandising operation which was sold in the fourth quarter of 2001.2002 was2003 declined 60% to $1.1 million, or $0.06 per basic and diluted share, compared with net income of $2.6 million, or $0.16 per basic and $0.15 per diluted share, an increase of 152% compared to fiscal 2001in the prior-year period. As expected, net income of $1.0 million, or $0.07 per basic and $0.06 per diluted share. The Company’s improved profitability was principally attributable to increased revenue and improved operating efficiencies, which also allowed the Company to impacted increase promotional spending to support continued growth, particularly for T.G.I. Friday’s® brand salted snacks. In addition, the Company recorded an income tax credit of $242,837 in fiscal 2002 compared to an income tax provision of $43,0002003 by approximately $3.5 million in fiscal 2001. The change primarily reflectsplanned introductory consumer marketing programs, such as national television advertising, as well as other costs associated with the income tax benefit of a deferred tax valuation allowance reversal in the third quarter of 2002.Manufacturing efficiencies improved as a result of increased production volumes due to higher revenues, and gross profit increased 3% to $11.3 million, or 19% of net revenue, despite the higher promotional spending.Profits were also positively affected by both lower selling, general and administrative expenses and lower interest expense. Selling, general and administrative expenses declined 2% to $8.6 million, or 15% of net revenue, despite higher revenues due to tight spending controls and no intangibles amortization expense as a resultlaunch of the adoption of SFAS No. 142 in 2002. Goodwill and trademark amortization expense was $652,000 in 2001. Interest expense declined 48% to $0.5 million due to reduced indebtedness, improved working capital management and lower interest rates.Crunch Toons® brand., $2.0 million (a current ratio of 1.3:1) at December 25, 2004 and $2.0 million (a current ratio of 1.3:1) at December 27, 2003, respectively. For the fiscal year ended December 28, 200225, 2004, the Company generated cash flow of $6.5 million from operating activities, invested $0.5 million in new equipment, made $1.0 million in payments on long-term debt and December 31, 2001, respectively.received $1.3 million in proceeds from the issuance of Common Stock. For the fiscal year ended December 27, 2003, the Company generated cash flow of $2.0 million from operating activities, principally from income, depreciation expense and the write-down of equipment offset by accounts receivable and other assets and liabilities, invested $1.1 million in new equipment, made $1.1 million in payments on long-term debt and received $2.0 million in proceeds from the issuance of common stock.Common Stock pursuant to the exercise of stock options. For the fiscal year ended December 28, 2002, the Company generated cash flow of $5.8 million from operating activities, principally from operating income and an increase in accrued liabilities, invested $0.6 million in new equipment, and made $5.4 million in payments on long-term debt. For the fiscal year ended December 31, 2001, the Company generated cash flow of $2.1 million from operating activities, principally from operating income, invested $2.7 million in new equipment, and made $0.9 million in net payments on long-term debt.On October 7, 1999, the Company signed a Credit Agreement with U.S. Bancorp (the “U.S. Bancorp Credit Agreement”). In April 2001, theThe U.S. Bancorp Credit Agreement was amended to increase the U.S. Bancorpconsists of a $5.0 million Line of Credit, from $3.0 million to $5.0 million, establish a $0.5 million capital expenditure line of credit (the CapEx(CapEx Term Loan”), extend and a $5.8 million term loan (“Term Loan A”). The Company is evaluating its options to either payoff the U.S. Bancorp Line of Credit maturity date from October 2002 to October 31, 2003, and modify certain financial covenants.Term Loan A and/or negotiate a new credit facility with a bank. In June 2002,July 2004, the U.S. Bancorp Credit Agreement was amended again to extend the U.S. Bancorp Line of Credit maturity date from October 31, 2003 to October 31, 2005 and modify certain financial covenants. Effective September 27, 2003,covenants that allow the U.S. Bancorp Credit Agreement was amendedCompany to modifyexclude one-time extraordinary, non-operating gains/losses during the capital expenditure limit for 2003, increasing it to $1.5 million.applicable period.20and up to 60% of eligible finished goods inventories and 50% of eligible raw materials inventories. At December 27, 2003,25, 2004, the Company had a borrowing base of approximately $3.7$4.2 million 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 annual operating results, ratio, a minimum tangible capital base and a minimum fixed charge coverage ratio. At December 27, 2003,25, 2004, 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 27, 2003,25, 2004, there was no outstanding balance on the U.S. Bancorp Line of Credit and approximately $2.3$1.3 million on the U.S. Bancorp Term Loan A.$18,425$16,825 are determined based on a twenty-year amortization period.At December 31, 2001, the Company had outstanding a 9% Convertible Debenture due July 1,During 2004, 2003 and 2002, in the principal amount of $427,656 held by Wells Fargo Small Business Investment Company, Inc. (“Wells Fargo SBIC”). The 9% Convertible Debenture was secured by land, building, equipment and intangibles. Interest on the 9% Convertible Debenture was paid by the Company on a monthly basis. Monthly principal payments of approximately $5,000 were required to be made by the Company on the Wells Fargo SBIC 9% Convertible Debenture through June 2002 and the remaining balance was due on July 1, 2002. In June 2002, Wells Fargo SBIC converted its 9% Convertible Debenture holdings into 401,497 shares of Common Stock.During 2003, 2002 and 2001, the Company received $1.3 million, $2.0 million $627,000 and $1.3$0.6 million of proceeds from the issuance of common stock.Common Stock. Proceeds in 20032004 and 20022003 were primarily due to the exercise of stock options.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. The Company has granted BFS US Special Opportunities Trust PLC both demand and piggyback registration rights with respect to the shares of Common Stock purchased in the offering.27, 2003,25, 2004, the Company had a net operating loss carryforward available for federal income taxes of approximately $4.7$1.9 million. The Company’s accumulated net operating loss carryforward will begin to expire in varying amounts between 2010 and 2018.27, 2003,25, 2004, due by period:
Year
Years
Year
Years2178 in Item 8.“Other cash obligations” in the table above consists of (i) minimum commitments regarding third party warehouse operations services over five years and (ii) remaining minimum royalty payments due licensors pursuant to brand licensing agreements discussed in “Item 1: Business” under the “Patents, Trademarks and Trademarks” section.Licenses” section and (ii) remaining lease payments relating to a machine the Company determined as not to be used in the future discussed in “Item 7: Brand Discontinuance.”$347,000$89,000 and $409,000$347,000 at December 27, 200325, 2004 and December 28, 2002,27, 2003, respectively.$4.7$1.9 million at December 27, 2003.25, 2004. 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. During the third quarter of 2002, the Company concluded that it was more likely than not22that its deferred tax asset at that time would be realized and also began providing for income taxes at a rate equal to the combined federal and state effective rates, which approximated 38% under current tax rates, rather than the 7.5% rate previously being used to record a tax provision for only certain state income taxes. 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 will remain unaffected until the benefit of the NOL is utilized.We haveThe Company has no variable interest entities and do not believe thatthe adoption of FIN No,No. 46 (R) willdid not impact our futureoperations or financial results.position.In May 2003,On December 16, 2004, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics123R, “Share-Based Payment,” requiring all share-based payments to employees, including grants of both Liabilities and Equity.” This Statement requires, among other things, the classification of certain financial instruments previously classified within the equity section of the balance sheet,employee stock options, to be includedrecognized as compensation expense in liabilities.the consolidated financial statements based on their fair values. This Statementstandard is effective for financial instruments entered into or modifiedperiods beginning after May 31, 2003 and June 15, 20032005 and includes two transition methods. Upon adoption, we will be required to use either the modified prospective or the modified retrospective transition method. Under the modified prospective method, awards that are granted, modified, or settled after the date of adoption should be measured and accounted for in accordance with SFAS 123R. Unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS 123 except that amounts must be recognized in the income statement. Under the modified retrospective approach, the previously-reported amounts areother instruments. The adoptionperiods presented) to reflect the SFAS 123 amounts in the income statement. We are currently evaluating the impact of this Statement had no impactstandard and its transitional alternatives.ourthe normal capacity of the production facilities. This statement is effective for inventory costs incurred after December 31, 2005. Adoption of this statement will not have a material effect on the financial position or resultsstatements of operations.the Company.7A.7A. Quantitative and Qualitative Disclosures about Market Riskalso has interest rate risk with respect to interest expense on variable rate debt, with rates based upon changes in the prime rate. Therefore, the Company has an exposure to changes in those rates. At December 27, 200325, 2004 and December 28, 2002,27, 2003, the Company had $2.3$1.3 million and $3.2$2.3 million of variable rate debt outstanding. A hypothetical 10% adverse change in weighted average interest rates during fiscal 20032004 and 20022003 would have had an unfavorableminimal impact of $0.02 million and $0.03 million respectively, on both the Company’s net earnings and cash flows.20032004 and 2002,2003, 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 27, 2003,25, 2004, two customers accounted for approximately 28%32% of the Company’s accounts receivable.238.8. Financial Statements and Supplementary DataReportsFinancial Statements27, 200325, 2004 and December 28, 200227, 20039.9. Changes in and Disagreements with AuditorsAccountants on Accounting and Financial Disclosure
effect,affect, the Company’s internal control over financial reporting.10.10. Directors and Executive Officers of the RegistrantOfficers,” “Corporate Governance”Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s 20042005 Proxy Statement is incorporated by reference in this section.1111. Executive Compensation. Executive Compensation20042005 Proxy Statement is incorporated by reference.12.12. Security Ownership of Beneficial Owners and Management and Related Stockholder Matters20042005 Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans” is incorporated by reference.242513.13. Certain Relationships and Related Transactions20042005 Proxy Statement under the heading “Certain Relationships and Related Transactions” is incorporated by reference.14.14. Principal Accountant Fees and Servicesregarding principal accountant fees and services is containedappearing in the Company’s 20042005 Proxy Statement andunder the heading “Independent Auditors” is incorporated by reference.15.15. Exhibits and Financial Statement Schedules and Reports on Form 8-KSchedules:ReportsReport of independent public accountants with respect to the year ended December 31, 2001Financial Statements27, 200325, 2004 and December 28, 200227, 2003
Number(1)(17)2526January 5, 2003,August 15, 2004 by and between Poore Brothers, Inc. and Thomas W. Freeze (12)(16)(14)(19)(14)23.2 —Notice Regarding Consent of Arthur Andersen LLP (14)(19) (14). (19)and Principal Accounting Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) (14). (19)32.132 — Chief Executive Officer and Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (14)(19)Compensation plansManagement compensatory plan or arrangements in which directors or executive officers are eligible to participate.arrangement.(b) Current Reports on Form 8-K.(1) Current Report on Form 8-K, announcing the Company’s earnings for the fiscal quarter ended September 27, 2003 (filed with the Commission on October 23, 2003).(2) Current Report on Form 8-K, announcing the introduction of Scooby-Doo™ Crunch Toons® brand salted snacks in the first quarter of 2004 (filed with the Commission on November 17, 2003).272823, 200422, 2005Eric J. KufelThomas W. FreezeEric J. KufelPresident, Chief Executive Officer, andChairman, Director23, 200422, 2005(Principal Executive Officer)/s/ Thomas W. FreezeSenior Vice President, Chief Financial Officer,March 23, 2004Thomas W. FreezeTreasurer, Secretary, and Director(Principal Financial Officer andPrincipal Accounting Officer)Chairman, Director23, 200422, 200523, 200422, 200523, 200422, 2005Robert C. PearsonLarry R. Polhill23, 200422, 2005Robert C. PearsonLarry R. PolhillAaron M. ShenkmanShannon Bard23, 200422, 2005Aaron M. ShenkmanShannon Bard2829AUDITORS’ REPORTREGISTERED PUBLIC ACCOUNTING FIRMShareholdersTo the Board of Directors and BoardStockholders ofDirectors of
Poore Brothers, Inc. and Subsidiaries:
Goodyear, Arizona27, 200325, 2004 and December 28, 2002,27, 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows and shareholders’ equity for each of the twothree years in the period ended December 27, 2003.25, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe financial statements based on our audits. The Company’s consolidated financial statements as of December 31, 2001 and for the year ended December 31, 2001, before the reclassifications described in Note 1 and before the inclusion of the disclosures discussed in Note 2 to the consolidated financial statements, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 11, 2002.auditingthe standards generally accepted inof the United States of America.Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, 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.27, 200325, 2004 and December 28, 2002,27, 2003, and the results of their operations and their cash flows for each of the twothree years in the period ended December 27, 200325, 2004, in conformity with accounting principles generally accepted in the United States of America.As discussed above, the financial statements of the Company for the year ended December 31, 2001 were audited by other auditors who have ceased operations. As described in Note 1, those financial statements have been reclassified to give effect to Emerging Issues Task Force (EITF) Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products, which was adopted by the Company on January 1, 2002. We audited the reclassifications described in Note 1 that were applied to conform the 2001 financial statements to the comparative presentation required by EITF Issue 01-9. Our audit procedures with respect to the 2001 disclosures in Note 1 included (i) comparing the amounts shown as customer incentive costs in Note 1 to underlying accounting analysis obtained from management, and (2) on a test basis, comparing the amounts comprising the customer incentive costs obtained from management to independent supporting documentation, and (3) testing the mathematical accuracy of the underlying analysis. In our opinion, such reclassifications have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such reclassifications and, accordingly, we do not express an opinion or any form of assurance on the 2001 financial statements taken as a whole.As described in Note 2, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 2 with respect to 2001 included (1) comparing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized in those periods related to goodwill and intangible assets that are no longer being amortized, as a result of initially applying SFAS 142 (including any related tax effects) to the Company’s underlying analysis obtained from management, and (2) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income and the related earnings-per-share amounts. In our opinion, the disclosures for 2001 in Note 2 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.March 19, 2004Phoenix, Arizona29REPORT OF INDEPENDENT PUBLIC ACCOUNTANTSNOTE: The report of Arthur Andersen LLP presented below is a copy of a previously issued Arthur Andersen LLP report. This report has not been reissued by Arthur Andersen LLP nor has Arthur Andersen LLP provided a consent to the inclusion of its report in this Form 10-K.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 LLPFebruary 11, 2002
March 21, 2005
2003
2002
CONSOLIDATED STATEMENTS OF INCOME
2003
2002
2001
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Paid-in
Capital
Deficit
Paid-in
CONSOLIDATED STATEMENTS OF CASH FLOWS
27, 2003
28, 2002
2001
2004
2003
2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe Company,Poore Brothers, Inc., (“the Company”, a Delaware corporation, was formed in 1995 as a holding company to acquire a potato chip manufacturing and distribution business which had been founded by Donald and James Poore in 1986.O’Boises®O’Boisies®, and Pizzarias® trademarks, the Bluffton, Indiana manufacturing operation and assumed all of Wabash Foods’ liabilities. In June 2000, the Company acquired Boulder Natural Foods, Inc. (“Boulder”) and the Boulder Potato Company® brand of totally natural potato chips.agreed to a provision that it may bewas required to issue additional unregistered shares of common stockCommon Stock to the seller on each of the first second and thirdthree anniversaries of the closing of the acquisition. AllThe issuance of such issuances were dependant upon, and were calculated basedshares was dependent upon increases in sales of Boulder productsproduct as compared to previous periods. In 2003, 2002 and 2001, the Company was required to issue 93,728 shares valued at $420,566, 88,864 shares valued at $210,786 and increased the goodwill recorded from this acquisition. In 2002,57,898 shares valued at $185,274, respectively. With each issuance of shares the Company was required to issue 88,864 shares pursuant to this provision, which were valued at $210, 786 and increased the goodwill recorded from this acquisition. In 2001 the Company was required to issue 57,898 shares pursuant to this provision, which were valued at $185, 274 and increased the goodwill recorded from this acquisition.On December 27, 2001,In June 2003, 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.In November 2002, Warner Bros. Consumer Products granted the Company rights to introduce a new brand of salted snacks featuring Looney Tunes™ characters. The Company launched the new brand nationwide in the summer of 2003 under a multi-year agreement that grants the Company exclusive salted snack category brand licensing and promotional rights for Looney Tunes™ characters.In November 2003, Warner Bros. Consumer Products granted the Company exclusive salted snack category brand licensing and promotional rights for Scooby-Doo™ to be used in its Crunch Toons® brand salted snacks.potato snacks, initially featuring characters pursuant to a multi-year license agreement with Warner Bros. Consumer Products. The Company decided to discontinue the brand in June 2004, and amended its license agreements with Warner Bros. Consumer Products.Effective January 1, 2002,In September 2004, the Company changed itssigned a multi-year license agreement with Cinnabon, Inc. pursuant to which the Company plans to develop and sell a variety of snack products, to include cookies and bars under the Cinnabon® brand.from the twelve calendar months ending on December 31 each year to the 52-week period endingends on the last Saturday occurring in the month of December of each calendar year. Accordingly, fiscal 20032004 commenced December 29, 200228, 2003 and ended December 27, 2003.25, 2004.salted snack food products that are sold primarily through grocery retailers, mass merchandisers, club stores, convenience stores and vend distributors across the United States. 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, expensescurrently manufactures and difficulties frequently encounteredsells nationally T.G.I. Friday’s® brand snacks under license from TGI Friday’s Inc. The Company also currently (i) manufactures and sells regionally its own brands of salted snack food products, including Poore Brothers®, Bob’s Texas Style®, and Boulder Potato Company® brand batch-fried potato chips and Tato Skins® brand potato snacks, (ii) manufactures private label potato chips for grocery retail chains in the establishmentsouthwest, and growth of a new business(iii) distributes in theArizona snack food industry.products that are manufactured by others. The market for saltedCompany sells its T.G.I. Friday’s® brand snack foods, such as potato chips, tortilla chips, popcornproducts to mass merchandisers, grocer, club and pretzels, is largedrug stores directly and intensely competitive.to primarily convenience stores and vend operators through independent distributors. The industry is dominated by one significant competitor and includes manyCompany’s other competitors with greater financial and other resources than the Company.brands are also sold through independent distributors.WeThe Company routinely evaluate ourevaluates its estimates, including those related to accruals for customer programs and incentives, product returns, brand discontinuance costs, bad debts, income taxes, long-lived assets, inventories and contingencies. We base ourThe Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.27, 200325, 2004 and December 28, 2002,27, 2003, 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, except for the mortgage loan with interest at 9.03%, which has a fair value of approximately $1.4 million at December 27, 2003.25, 2004. 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.Financial Accounting Standards Board (“FASB”)FASB issued Statement of Financial Accounting Standards (“SFAS”)SFAS No. 142, “Goodwill and Other Intangible Assets”. 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.36is recorded at cost and trademarks are reviewed for impairment annually, or more frequently, if impairment indicators arise. Goodwill amortization expense was approximately $321,000 in 2001. See Note 2.Trademarks are recorded at cost and are reviewedis required to be tested for impairment annuallybetween the annual tests if an event occurs or more frequentlycircumstances change that more-likely-than-not reduce the fair value of a reporting unit below its carrying value. Trademarks with indefinite lives, are required to be tested for impairment between the annual tests if impairment indicators arise. Amortization expense on these trademarks was approximately $331,000 in 2001.an event occurs or circumstances change indicating that the asset might be impaired. The Company believes at this time that the carrying values continue to be appropriate. See Note 2.All product is shipped with terms FOB-origin and revenue is recognized at the time the shipment leaves the Company’s docks, which is when title and risk of loss pass to the customer.$946,000 inDecember 27, 2003, and 2002, respectively. The 2003 balance included amounts related to our Crunch Toons® brand, which we discontinued during 2004.8,9, is accounted for under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.2002 and December 31, 2001:2002:3757%62%, 44%57% and 58%44%; risk-free interest rate of 2.4%3.15%, 3.8%2.4% and 3.4%3.8%; and expected lives of 3 years for 2004, 2003 and 2002, and 2001, respectively. Under this method, the weighted average fair value of the options granted was $1.80, $1.27 and $1.59 per share in 2003, 2002 and 2001, respectively.27, 2003, December 28, 2002 and December 31, 2001:38Options and warrants to purchase 327,500, 950,577 and 653,077 shares of Common Stock outstanding at25, 2004, December 27, 2003 and December 28, 2002 and December 31, 2001, respectively, 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 year ended December 31, 2001 conversion of the convertible debentures was not assumed, as the effect of the conversion would be anti-dilutive.2002:2001, the Emerging Issues Task Force (EITF) issued EITF Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products,” (EITF Issue No. 01-9). EITF Issue No. 01-9 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 adopted the provisions of the EITF Issue No. 01-9 effective in the first quarter of 2002 and as a result, costs previously recorded as expense are now recorded and reflected as reductions in revenue. The Company was also required to reclassify amounts in prior periods in order to conform to the revised presentation of these costs if practicable. As a result of adopting EITF Issue No. 01-9, the Company reduced both net revenues and selling, general and administrative expenses in 2001 by $3,761,072. There was no change to the 2001 previously reported net income as a result of this change.In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN 45 expands the disclosure requirements to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The Interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company does not have and does not anticipate issuing any guarantees which would be required to be recognized as a liability under the provisions of FIN 45 and the adoption of this Interpretation did not have an impact on its results of operations or financial position.In January 2003, the FASB issued interpretation (“FIN”)FIN No. 46, “Consolidation of Variable Interest Entities – An Interpretation of Accounting Research Bulletin (“ARB”) No. 51.” This interpretation was subsequently revised by FIN 46 (Revised 2003) in December 2003. This revised interpretation states that consolidation of variable interest entities will be required by the primary beneficiary if the entities do not effectively disperse risks among the parties involved. The requirements are effective for fiscal years ending after December 15, 2003 for special-purpose entities and for all other types of entities for periods ending after March 31, 2004. We haveThe Company has no variable interest entities and do not believe thatthe adoption of FIN No,No. 46 (R) willdid not impact our futureoperations or financial results.position.In May 2003,On December 16, 2004, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics123R, “Share-Based Payment,” requiring all share-based payments to employees, including grants of both Liabilities and Equity.” This Statement requires, among other things, the classification of certain financial instruments previously classified within the equity section of the balance sheet,employee stock options, to be includedrecognized as compensation expense in liabilities.the consolidated financial statements based on their fair values. This Statementstandard is effective for financial instruments entered into or modifiedperiods beginning after May 31, 2003 and June 15, 20032005 and includes two transition methods. Upon adoption, we will be required to use either the modified prospective or the modified retrospective transition method. Under the modified prospective method, awards that are granted, modified, or settled after the date of adoption should be measured and accounted for in accordance with SFAS 123R. Unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS 123 except that amounts must be recognized in the income statement. Under the modified retrospective approach, the previously-reported amounts are restated (either to the beginning of the year of adoption or for all other instruments. The adoptionperiods presented) to reflect the SFAS 123 amounts in the income statement. We are currently evaluating the impact of this Statement had no impactstandard and its transitional alternatives.ourthe normal capacity of the production facilities. This statement is effective for inventory costs incurred after December 31, 2005. Adoption of this statement will not have a material effect on the financial position or resultsstatements of operations.the Company.27, 200325, 2004 and December 28, 2002:(1) Additions to goodwill are related to the earn-out payment to the previous owners of Boulder Natural Foods, Inc.39In connection with the implementation of SFAS No. 142, effective January 1, 2002, the Company ceased amortizing goodwill and other intangible assets with indefinite lives. The following table shows the pro forma impact of the adoption of SFAS No. 142 for the year ended December 31, 2001.27, 2003:20032004 and 2002,2003, 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 27, 2003,25, 2004, two customers accounted for approximately 28%32% of accounts receivable in the accompanying Consolidated Balance Sheets.27, 200325, 2004 and December 28, 2002:27, 2003:27, 200325, 2004 and December 28, 2002:27, 2003:40Depreciation expense was $1,285,221, $1,288,333 and $1,237,260 in 2003, 2002 and 2001, respectively.plant, causing a temporary shutdown of manufacturing operations at the facility. There was extensive damage to the roofplant. In 2002 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.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 2001,2003, the Company recorded approximately $1.4 millionincome of incremental expenses incurred as a result of the fire, primarily associated with outsourcing production. These extra expenses were charged to “cost of revenues”$259,376 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. “Insurance claim settlement income, net” on the accompanying Consolidated Statement of Income$1,918,784, respectively, for fiscal 2001 includes (i) a gain of $167,000, representing the excess of insurancenet proceeds over the book value for the building and equipment of $533,000 damaged by the fire, and (ii) fire related expenses not reimbursed byfrom the insurance company of approximately $163,000.In December 2002, the Company received an additional $261,000 from its insurance company in partial settlement of outstanding claims, which is shown in “Insurance claim settlement income, net” on the accompanying Consolidated Statement of Income for fiscal 2002.�� This includes (i) a gain of $121,000, representing additional insurance proceeds over the book value of equipment previously written off, and (ii) reimbursement of $140,000 for expenses previously denied by the insurance company.In June 2003, the Company received $2,000,000 from its insurance company as final settlement of outstanding claims which is shown in “Insurance claim settlement income, net” on the accompanying Consolidated Statement of Income for fiscal 2003. This includes (i) $1,100,000 as reimbursement for the additional capital equipment costs, and (ii) $900,000 as reimbursement for business interruption. Additionally, the Company incurred expenses as a result of the mediation in the amount of approximately $82,000 which were netted against the proceeds. The Company does not have any receivables related to the fire reflected in the accompanying Consolidated Balance Sheets as of December 27, 2003 or December 28, 2002.fire.Also inIn June 2003, the Company concluded that some of its packaging equipment that had recently been replaced by more technologically advanced machinery was no longer likely to be reinstalled and used. Therefore, in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” the Company performed an assessment of the equipment’s fair value, which resulted in the need to write-down the equipment approximately $1,030,000.by $1,030,352. In addition, in December, 2004, the Company concluded that a packaging machine in its Indiana plant was no longer likely to be used.27, 200325, 2004 and December 28, 2002:27, 2003:4127, 200325, 2004 are as follows:2002 and December 31, 2001:2002:$18,425$16,825 are determined based on a twenty-year amortization period.commonCommon stock.27, 2003,25, 2004, there were no balances on either the line of credit ofor the CapEx Term Loan, and $2.3$1.3 million outstanding on Term Loan A. In June 2002, the U.S. Bancorp Credit Agreement was amended to extend the U.S. Bancorp Line of Credit maturity date from October 31, 2003 to October 31, 2005 and modify certain financial covenants.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 finished goods inventories and 50% of eligible raw materials inventories. At December 27, 2003,25, 2004, the Company had a borrowing base of approximately $3,656,000$4.2 million 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 annual operating results, ratio, a minimum tangible capital base and a minimum fixed charge coverage ratio. In July 2004, the U.S. Bancorp Credit Agreement was amended to modify certain financial covenants that allow the Company to exclude one-time extraordinary, non-operating gains/losses during the applicable period. At December 27, 2003,25, 2004, the Company was in compliance with all of the financial covenants. Management believes thatfulfillmentCompany discontinued its Crunch Toons® brand. As a result of the Company’s plans and objectives will enablediscontinuance, the Company recorded expenses in the second quarter of approximately $1.8 million. The charge covered approximately $1.1 million related to attainminimum royalties under the license agreements and $0.3 million in inventories, which are shown in “Costs related to brand discontinuance” on the accompanying Consolidated Statement of Income for 2004. In addition, a sufficient levelcharge of profitability$0.3 million in estimated allowances given to the Company’s customers to sell-off remaining distributor and retailer inventories were recorded and are included in “Net revenues” on the accompanying Consolidated Statement of Income for 2004.compliance with these financial covenants. There can be no assurance, however, thateffect but become non-exclusive. However, because the Company will attain any such profitability and remainhas ceased using the Crunch Toons® brand in compliance. Any accelerationaccordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, the Company estimated the fair value of the remaining guaranteed future minimum payments under the U.S. Bancorp Credit Agreement prior toagreements by computing the scheduled maturitypresent value of the U.S. Bancorp Line of Credit or the U.S. Bancorp Term Loans could have a material adverse effect upon thefuture cash payments.Company. AsThe following table summarizes the activity of the accrued costs related to brand discontinuance and other for the year ended December 27, 2003, there25, 2004:
Balance
Payments
Balanceno outstanding balance onrecorded for the U.S. Bancorp Lineyear and future royalty payments will be made in accordance with the amended agreements.Credit or CapEx term loan.remaining operating lease payments were recorded relating to a machine the Company determined as not to be used in the future. Future operating lease payments will be made in accordance with the existing lease agreement.7.8. Commitments and Contingencies:salted snacks, Crunch Toons® brand potato snacks and Tato Skins® brand potato snacks at the Bluffton, Indiana facility.$30,000$31,500 per month. The Company also has entered into a service agreement expiring in December 2008 with a third party for warehousing services. The service agreement includes certain minimum monthly usage commitments. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations.”$956,000 and $507,000$956,000 for each of fiscal 2004, 2003 2002 and 2001,2002, respectively. Minimum future rental commitments under non-cancelable leases as of December 27, 200325, 2004 are as follows:
Leases
Leasesa third partyMiles Willard in connection with the manufacture of its T.G.I. Friday’s® and Tato Skins® brand productsproducts. Pursuant to the license agreement between the Company and Miles Willard, the Company has an exclusive right to use suchthe patented technology within North America until the patents expire between 2004 and 2006. The Company also licenses patented technology from a third party in connection with the manufacture of its Crunch Toons® brand salted snacks and has an exclusive right to use such technology within the United States until the agreement expires. The initial period covered by the agreement extends through 2010 and automatically renews for five (5) year increments after that, unless terminated by Licensee.2008. 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. salted 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® brand salted snack products and is required to achieve certain minimum sales levels by certain dates during the contract term.In November 2002, Warner Bros. Consumer Products grantedThe Company licenses the Cinnabon® brand for salted snacks, shelf-stable packaged cookies and breakfast/snack bars from Cinnabon Inc. under a license agreement with terms and options extending through 2015. Pursuant to the license agreement, the Company rightsis required to introduce an innovative newmake royalty payments on sales of Cinnabon® brand of salted snacks (Crunch Toons®) featuring Looney Tunes™ characters, including Bugs Bunny, Tweetyproducts and is required to achieve certain minimum sales levels by certain dates during the Tasmaniancontract term.4344
Devil. The Company launched the new brand nationwide in the summer of 2003 under a multi-year agreement that grants the Company exclusive salted snack category brand licensing and promotional rights for Looney Tunes™ characters. In November 2003, the Company also acquired the exclusive brand licensing and promotional rights to Scooby Doo™ characters pursuant to a multi-year agreement with Warner Bros. Consumer Products. Both agreements require the payment of minimum royalties during the term of the agreements.
8.9. Shareholders’ Equity:
Common Stock
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$0.01 par value, to BFS US Special Opportunities Trust PLC (“BFS”), 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. TheIn connection with such transaction, the Company has granted BFS US Special Opportunities Trust PLC both demand and piggyback registration rights to BFS. Pursuant to the demand registration rights, the Company may be required, upon demand of BFS, to file a registration statement (the “BFS Registration Statement”) with respect tothe Securities and Exchange Commission covering the resale of the shares of Common Stock purchasedissued to BFS in the offering.transaction. The Company will be required to pay all expenses relating to any such 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 5,699,900 shares of outstanding Common Stock 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.
Preferred Stock
The Company has authorized 50,000 shares of $100 par value Preferred Stock, none of which was outstanding at December 27, 200325, 2004 or December 28, 2002.27, 2003. The Company may issue such shares of Preferred Stock in the future without shareholder approval.
Warrants
During the fiscal years 2001, 2002, 2003 and 20032004 warrant activity was as follows:
|
| Warrants |
| Weighted |
|
| Warrants |
| Weighted |
| ||
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 |
|
| 1,283,298 |
| $ | 1.11 |
| |
Exercised |
| (269,505 | ) | 1.00 |
|
| (269,505 | ) | 1.00 |
| ||
Balance, December 28, 2002 |
| 1,013,793 |
| 1.11 |
|
| 1,013,793 |
| 1.11 |
| ||
Exercised |
| (395,516 | ) | 1.16 |
|
| (395,516 | ) | 1.16 |
| ||
Cancelled |
| (160,277 | ) | 1.26 |
|
| (160,277 | ) | 1.26 |
| ||
Balance, December 27, 2003 |
| 458,000 |
| 1.02 |
|
| 458,000 |
| 1.02 |
| ||
Exercised |
| (187,274 | ) | 1.00 |
| |||||||
Cancelled |
| (270,726 | ) | 1.05 |
| |||||||
Balance, December 25, 2004 |
| 0 |
| $ | 0.00 |
| ||||||
Warrants havehad been issued in connection with prior financings and the acquisition of Wabash. At December 27, 2003,25, 2004 there were no longer any outstanding warrants had exercise prices ranging from $0.88 to $3.62 and a weighted average remaining term of 0.7 years. Warrants that were exercisable at December 27, 2003 totaled 458,000 with a weighted average exercise price per share of $1.02.warrants.
45
As of July 30, 1999, the Company agreed to the assignment of a five-year 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. The warrant providesprovided the holder thereof certain anti-dilution and piggyback registration rights. The warrant was exercisable as to 50% of the shares when the Company’s pro forma annual sales reached $30 million, which it did when the Company completed the Wabash acquisition in October 1999. The remaining 50% of the warrant iswas exercisable whenif the Company’s pro forma annual sales reachreached $100 million. This warrant expired during 2004.
44
Stock Options
The Company’s 1995 Stock Option Plan (the “Plan”), as amended, in May 2001, provides for the issuance of options to purchase 2,500,0003,000,000 shares of Common Stock. The options granted pursuant to the Plan expire over a five-yearperiod and generally vest over three years. In addition to options granted under the Plan, the Company also issued non-qualified options (non-plan options) to purchase Common Stock to certain Directors and officersOfficers which are exercisable and expire either five or ten years from date of grant. All options are issued at an exercise price of fair market value at the date of grant and are non-compensatory. Fair market value is determined based on the price of sales of Common Stock occurring at the time of the option award.
During fiscal years 2001, 2002, 2003 and 2003,2004, stock option activity was as follows:
|
| Plan Options |
| Non-Plan Options |
|
| Plan Options |
| Non-Plan Options |
| ||||||||||
|
| Options |
| Weighted |
| Options |
| Weighted |
|
| Options |
| Weighted |
| Options |
| Weighted |
| ||
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 |
|
| 2,010,317 |
| $ | 1.97 |
| 1,645,000 |
| $ | 1.54 |
|
Granted |
| 367,500 |
| 2.86 |
| — |
| — |
|
| 367,500 |
| 2.86 |
| — |
| — |
| ||
Canceled |
| (324,334 | ) | 2.78 |
| (66,667 | ) | 2.61 |
|
| (324,334 | ) | 2.78 |
| (66,667 | ) | 2.61 |
| ||
Exercised |
| (315,683 | ) | 1.19 |
| (33,333 | ) | 2.61 |
|
| (315,683 | ) | 1.19 |
| (33,333 | ) | 2.61 |
| ||
Balance, December 28, 2002 |
| 1,737,800 |
| 2.15 |
| 1,545,000 |
| 1.47 |
|
| 1,737,800 |
| 2.15 |
| 1,545,000 |
| 1.47 |
| ||
Granted |
| 230,000 |
| 3.44 |
| 117,500 |
| 3.60 |
|
| 230,000 |
| 3.44 |
| 117,500 |
| 3.60 |
| ||
Canceled |
| (28,667 | ) | 3.03 |
| — |
| — |
|
| (28,667 | ) | 3.03 |
| — |
| — |
| ||
Exercised |
| (782,633 | ) | 1.51 |
| (580,000 | ) | 1.40 |
|
| (782,633 | ) | 1.51 |
| (580,000 | ) | 1.40 |
| ||
Balance, December 27, 2003 |
| 1,156,500 |
| 2.82 |
| 1,082,500 |
| 1.74 |
|
| 1,156,500 |
| 2.82 |
| 1,082,500 |
| 1.74 |
| ||
Granted |
| 625,000 |
| 2.69 |
| — |
| — |
| |||||||||||
Canceled |
| (335,001 | ) | 2.96 |
| (10,000 | ) | 3.60 |
| |||||||||||
Exercised |
| (145,166 | ) | 1.66 |
| (725,000 | ) | 1.42 |
| |||||||||||
Balance, December 25, 2004 |
| 1,301,333 |
| $ | 2.85 |
| 347,500 |
| $ | 2.35 |
| |||||||||
Tax benefits on stock options exercised are recorded as increases to additional paid-in capital and totaled $1.9 million in$315,017, $830,371 and $0 for each of fiscal 2003.2004, 2003 and 2002, respectively.
The following table summarizes information about stock options outstanding and exercisable at December 27, 2003:25, 2004:
Range of |
| Options |
| Weighted Average |
| Weighted |
| Options |
| Weighted |
| ||
$1.00 - $1.8438 |
| 1,059,000 |
| 1.26 |
| $ | 1.40 |
| 1,059,000 |
| $ | 1.40 |
|
$2.10 - $2.995 |
| 587,500 |
| 3.08 |
| $ | 2.75 |
| 264,996 |
| $ | 2.77 |
|
$3.08 - $3.60 |
| 572,500 |
| 3.50 |
| $ | 3.36 |
| 220,001 |
| $ | 3.13 |
|
$4.50 - $4.94 |
| 20,000 |
| 4.79 |
| $ | 4.78 |
| — |
| — |
| |
|
| 2,239,000 |
| 2.34 |
| $ | 2.28 |
| 1,543,997 |
| $ | 1.88 |
|
Range of |
| Options |
| Weighted Average |
| Weighted |
| Options |
| Weighted |
| ||
$1.0819-$1.8438 |
| 170,500 |
| 0.48 |
| $ | 1.17 |
| 170,500 |
| $ | 1.17 |
|
$2.10 - $2.99 |
| 855,833 |
| 3.25 |
| $ | 2.57 |
| 353,055 |
| $ | 2.69 |
|
$3.08 - $3.60 |
| 592,500 |
| 3.21 |
| $ | 3.26 |
| 289,167 |
| $ | 3.23 |
|
$4.20 - $4.94 |
| 30,000 |
| 3.72 |
| $ | 4.59 |
| 16,666 |
| $ | 4.43 |
|
|
| 1,648,833 |
| 2.96 |
| $ | 2.68 |
| 829,388 |
| $ | 2.60 |
|
46
The table below summarized the number of exercisable options outstanding and the weighted average exercise prices for each of the previous fiscal years:
|
| Plan Options |
| Non-Plan Options |
| ||||||
|
| Exercisable Options |
| Weighted Average |
| Exercisable Options |
| Weighted Average |
| ||
December 27, 2003 |
| 603,997 |
| $ | 2.51 |
| 940,000 |
| $ | 1.47 |
|
December 28, 2002 |
| 1,034,793 |
| $ | 1.60 |
| 1,019,999 |
| $ | 1.37 |
|
December 31, 2001 |
| 1,299,982 |
| $ | 1.56 |
| 1,044,999 |
| $ | 1.39 |
|
45
|
| Plan Options |
| Non-Plan Options |
| ||||||
|
| Exercisable Options |
| Weighted Average |
| Exercisable Options |
| Weighted Average |
| ||
December 25, 2004 |
| 553,555 |
| $ | 2.89 |
| 275,833 |
| $ | 2.02 |
|
December 27, 2003 |
| 603,997 |
| $ | 2.51 |
| 940,000 |
| $ | 1.47 |
|
December 28, 2002 |
| 1,034,793 |
| $ | 1.60 |
| 1,019,999 |
| $ | 1.37 |
|
9.10. Income Taxes:
The (provision) benefit (provision) for income taxes consisted of the following for the years ended December 25, 2004, December 27, 2003 and December 28, 2002 and December 31, 2001:2002:
|
| 2003 |
| 2002 |
| 2001 |
|
| 2004 |
| 2003 |
| 2002 |
| ||||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Federal |
| $ | — |
| $ | — |
| $ | — |
|
| $ | — |
| $ | — |
| $ | — |
|
State |
| — |
| (98,593 | ) | (43,000 | ) |
| (83,855 | ) | — |
| (98,593 | ) | ||||||
|
| $ | — |
| $ | (98,593 | ) | $ | (43,000 | ) |
| $ | (83,855 | ) | $ | — |
| $ | (98,593 | ) |
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Federal |
| $ | (559,000 | ) | $ | 413,430 |
| $ | — |
|
| $ | (1,220,220 | ) | $ | (559,000 | ) | $ | 413,430 |
|
State |
| (82,861 | ) | (72,000 | ) | — |
|
| (102,664 | ) | (82,861 | ) | (72,000 | ) | ||||||
|
| $ | (641,861 | ) | $ | 341,430 |
| $ | — |
|
| $ | (1,322,884 | ) | $ | (641,861 | ) | $ | 341,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total (provision) benefit for income taxes |
| $ | (641,861 | ) | $ | 242,837 |
| $ | (43,000 | ) |
| $ | (1,406,739 | ) | $ | (641,861 | ) | $ | 242,837 |
|
The following table provides a reconciliation between the amount determined by applying the statutory federal income tax rate to the pretax income amount for the years ended December 25, 2004, December 27, 2003 and December 28, 2002 and December 31, 2001:2002:
|
| 2003 |
| 2002 |
| 2001 |
|
| 2004 |
| 2003 |
| 2002 |
| |||||||
Provision at statutory rate |
| $ | (575,900 | ) | $ | (813,960 | ) | $ | (370,010 | ) |
| $ | (1,204,094 | ) | $ | (575,900 | ) | $ | (813,960 | ) | |
State income tax, net |
| (54,961 | ) | (170,593 | ) | (56,742 | ) |
| (173,530 | ) | (54,961 | ) | (170,593 | ) | |||||||
Nondeductible expenses |
| (11,000 | ) | (11,983 | ) | (18,722 | ) |
| (29,115 | ) | (11,000 | ) | (11,983 | ) | |||||||
Net operating loss utilized and reversal of valuation allowance |
| — |
| 1,239,373 |
| 402,474 |
|
| — |
| — |
| 1,239,373 |
| |||||||
Income tax (provision) benefit |
| $ | (641,861 | ) | $ | 242,837 |
| $ | (43,000 | ) |
| $ | (1,406,739 | ) | $ | (641,861 | ) | $ | 242,837 |
| |
The income tax effects of loss carryforwards and temporary differences between financial and income tax reporting that give rise to the deferred income tax asset and liability are as follows as of December 27, 200325, 2004 and December 28, 2002:27, 2003:
|
| 2003 |
| 2002 |
|
| 2004 |
| 2003 |
| ||||
Deferred Tax Asset - current |
|
|
|
|
| |||||||||
Deferred Tax Asset – current |
|
|
|
|
| |||||||||
Net operating loss carryforward |
| $ | 1,707,000 |
| $ | — |
|
| $ | 639,000 |
| $ | 1,707,000 |
|
Bad debt expense |
| 134,000 |
| 160,000 |
| |||||||||
Allowance for doubtful accounts |
| 35,000 |
| 134,000 |
| |||||||||
Accrued liabilities |
| 174,000 |
| 121,000 |
|
| 292,000 |
| 174,000 |
| ||||
Other |
| 240,000 |
| 141,000 |
|
| 375,723 |
| 239,996 |
| ||||
|
| 2,255,000 |
| 422,000 |
|
| 1,341,723 |
| 2,254,996 |
| ||||
Deferred Tax Liability – noncurrent |
|
|
|
|
|
|
|
|
|
| ||||
Net operating loss carryforward |
| — |
| 1,022,000 |
| |||||||||
Depreciation and amortization |
| (1,732,000 | ) | (966,570 | ) |
| (1,829,252 | ) | (1,731,625 | ) | ||||
Deferred tax asset valuation allowance |
| — |
| (136,000 | ) | |||||||||
AMT minimum tax credit carryforward |
| 41,000 |
| — |
| |||||||||
|
| (1,732,000 | ) | (80,570 | ) |
| (1,788,252 | ) | (1,731,625 | ) | ||||
Net deferred tax assets |
| $ | 523,000 |
| $ | 341,430 |
| |||||||
Net deferred tax (liability) asset |
| $ | (446,529 | ) | $ | 523,371 |
| |||||||
47
The Company experienced significant net losses in prior fiscal years resulting in a net operating loss (“NOL”) carryforward (“NOLC”) for federal income tax purposes of approximately $4.7$1.9 million at December 27, 2003.25, 2004. The Company’s NOLCNOL will begin to expire in varying amounts between 2010 and 2018. The Company also has an alternative minimum tax (“AMT”) credit carryforward for federal income tax purposes of $41,000 at December 25, 2004.
Generally accepted accounting principles require that a valuation allowance be established when it is more likely than notmore-likely-than-not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is required, the Company takes into account all positive and negative evidence with regard to the utilization of a deferred tax asset including our past earnings history, expected future earnings, the character
46
and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of a deferred tax asset, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. During the third quarter of 2002, theThe Company concluded that it was more likely than not that its deferred tax asset at the time would be realized, and also began providingprovides for income taxes at a rate equal to the combined federal and state effective rates, which approximated 38%39% under current tax rates. The $136,000 deferred tax valuation allowance at December 28, 2002 relates to certain state NOL carryforwards that expired unused at December 27, 2003.
10.11. Business Segments and Significant Customers:
For the year ended December 27, 2003,25, 2004, Wal*Mart (including its SAM’s Clubs) and Vistar, a national vending distributor, andwere the only two customers with revenues over 10% of total Company revenue. Wal*Mart (including its SAM’s Clubs) accounted for $14,211,000, or 21%, $13,237,000, or 20%, and $12,414,000, or 21%, for fiscal years 2004, 2003 and 2002, respectively. Vistar accounted for $9,373,000, or 14%, $8,751,000, or 13%, and $13,237,000, or 20%, respectively, of the Company’s consolidated net revenues. For the years ended December 28, 2002 and December 31, 2001, Vistar and Wal*Mart accounted for $7,784,000, or 13%, for fiscal years 2004, 2003 and $12,414,000, or 21%, respectively, and $6,886,000, or 12% and $9,353,000, or 16%, respectively, of the Company’s consolidated net revenues.2002, respectively.
The Company’s operations consist of two segments: manufactured products and distributed products. The manufactured products segment produces potato chips, potato crisps, and tortilla chipspotato skins 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 Canada and all of its assets are located in the United States.
|
| Percent of Total Revenues |
|
| Percent of Total Revenues |
| ||||||||
|
| 2003 |
| 2002 |
| 2001 |
|
| 2004 |
| 2003 |
| 2002 |
|
Branded products |
| 91 | % | 89 | % | 84 | % |
| 94 | % | 91 | % | 90 | % |
Private label products |
| 4 | % | 5 | % | 7 | % | |||||||
|
|
|
|
|
|
|
| |||||||
Private label products. |
| 3 | % | 3 | % | 3 | % | |||||||
|
|
|
|
|
|
|
| |||||||
Total manufactured products segment revenues |
| 94 | % | 93 | % | 91 | % |
| 97 | % | 94 | % | 93 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed products segment revenues |
| 6 | % | 7 | % | 9 | % |
| 3 | % | 6 | % | 7 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| 100 | % | 100 | % | 100 | % |
| 100 | % | 100 | % | 100 | % |
In fiscal years 2004, 2003 2002 and 2001,2002, the T.G.I. Friday’s® brand salted snacks represented 61%72%, 60%61% and 41%60%, respectively, of the Company’s total net revenues. Effective February 1, 2004, the Company has ceased distribution of Snyders’ pretzels which represented approximately 50%, or $2 million, of distributed products segment revenues in 2003.
48
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 assets, selling, general and administrative expenses, income taxes or other income and expense to segments and has no significant non-cash items other than depreciation and amortization.segments.
|
| Manufactured |
| Distributed |
| Consolidated |
| |||
2003 |
|
|
|
|
|
|
| |||
Revenues from external customers |
| $ | 62,278,649 |
| $ | 4,139,187 |
| $ | 66,417,836 |
|
Depreciation and amortization included in segment gross profit |
| 943,541 |
| — |
| 943,541 |
| |||
Segment gross profit |
| 12,660,767 |
| 657,754 |
| 13,318,521 |
| |||
|
|
|
|
|
|
|
| |||
2002 |
|
|
|
|
|
|
| |||
Revenues from external customers |
| $ | 55,321,985 |
| $ | 4,026,486 |
| $ | 59,348,471 |
|
Depreciation and amortization included in segment gross profit |
| 936,499 |
| — |
| 936,499 |
| |||
Segment gross profit |
| 10,797,357 |
| 514,652 |
| 11,312,009 |
| |||
|
|
|
|
|
|
|
| |||
2001 |
|
|
|
|
|
|
| |||
Revenues from external customers |
| $ | 49,116,667 |
| $ | 4,788,149 |
| $ | 53,904,816 |
|
Depreciation and amortization included in segment gross profit |
| 859,776 |
| — |
| 859,776 |
| |||
Segment gross profit |
| 10,711,869 |
| 234,125 |
| 10,945,994 |
| |||
47
|
| Manufactured |
| Distributed |
| Consolidated |
| |||
2004 |
|
|
|
|
|
|
| |||
Revenues from external customers |
| $ | 66,629,008 |
| $ | 2,105,755 |
| $ | 68,734,763 |
|
Depreciation and amortization included in segment gross profit |
| 998,415 |
| — |
| 998,415 |
| |||
Segment gross profit |
| 13,958,782 |
| 306,012 |
| 14,264,794 |
| |||
|
|
|
|
|
|
|
| |||
2003 |
|
|
|
|
|
|
| |||
Revenues from external customers |
| $ | 62,278,649 |
| $ | 4,139,187 |
| $ | 66,417,836 |
|
Depreciation and amortization included in segment gross profit |
| 943,541 |
| — |
| 943,541 |
| |||
Segment gross profit |
| 12,660,767 |
| 657,754 |
| 13,318,521 |
| |||
|
|
|
|
|
|
|
| |||
2002 |
|
|
|
|
|
|
| |||
Revenues from external customers |
| $ | 55,321,985 |
| $ | 4,026,486 |
| $ | 59,348,471 |
|
Depreciation and amortization included in segment gross profit |
| 936,499 |
| — |
| 936,499 |
| |||
Segment gross profit |
| 10,797,357 |
| 514,652 |
| 11,312,009 |
| |||
The following table reconciles reportable segment gross profit to the Company’s consolidated income before income tax provision for the years ended December 25, 2004, December 27, 2003 and December 28, 2002 and December 31, 2001:2002:
|
| 2003 |
| 2002 |
| 2001 |
|
| 2004 |
| 2003 |
| 2002 |
| ||||||
Segment gross profit |
| $ | 13,318,521 |
| $ | 11,312,009 |
| $ | 10,945,994 |
|
| $ | 14,264,794 |
| $ | 13,318,521 |
| $ | 11,312,009 |
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Selling, general and administrative expenses |
| (13,290,660 | ) | (8,637,652 | ) | (8,816,627 | ) |
| (10,558,544 | ) | (13,290,660 | ) | (8,637,652 | ) | ||||||
Insurance claim settlement income, net |
| 1,918,784 |
| 259,376 |
| 4,014 |
|
| — |
| 1,918,784 |
| 259,376 |
| ||||||
Interest expense, net |
| (252,820 | ) | (539,733 | ) | (1,045,117 | ) |
| (164,797 | ) | (252,820 | ) | (539,733 | ) | ||||||
Income before income taxes |
| $ | 1,693,825 |
| $ | 2,394,000 |
| $ | 1,088,264 |
|
| $ | 3,541,453 |
| $ | 1,693,825 |
| $ | 2,394,000 |
|
11.12. 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.
12.13. 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$22,000 per month, plus CPI adjustments, and the Company is responsible for all real estate taxes, utilities and insurance. American Pacific Financial Corporation is an affiliate of Capital Foods, LLC the single largest shareholder of the Company, currently holding approximately 23% of the outstanding shares of Common Stock (without giving effect to the possible exercise of warrants to purchase 250,000 shares of Common Stock also held by Capital Foods).Stock.
49
The results for any single quarter are not necessarily indicative of the Company’s results for any other quarter or the full year.
(in 000’s, except for share and per |
| First |
| Second |
| Third |
| Fourth |
| Full Year |
| |||||
Fiscal 2003 |
|
|
|
|
|
|
|
|
|
|
| |||||
Net revenues |
| $ | 15,218 |
| $ | 18,581 |
| $ | 16,661 |
| $ | 15,958 |
| $ | 66,418 |
|
Gross profit |
| 3,031 |
| 3,724 |
| 3,609 |
| 2,955 |
| 13,319 |
| |||||
Operating income (loss) |
| 558 |
| 1,294 |
| 516 |
| (2,340 | ) | 28 |
| |||||
Net income (loss) |
| $ | 303 |
| $ | 1,971 |
| $ | 288 |
| $ | (1,510 | ) | $ | 1,052 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| $ | 0.02 |
| $ | 0.12 |
| $ | 0.02 |
| $ | (0.08 | ) | $ | 0.06 |
|
Diluted |
| $ | 0.02 |
| $ | 0.11 |
| $ | 0.01 |
| $ | (0.08 | ) | $ | 0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| 16,730,642 |
| 16,984,728 |
| 17,997,911 |
| 18,578,407 |
| 17,572,951 |
| |||||
Diluted |
| 18,025,514 |
| 18,343,696 |
| 19,369,977 |
| 18,578,407 |
| 18,476,486 |
| |||||
48
14.Quarterly Financial Data (unaudited):
(in 000’s, except for share and per share data) |
| First |
| Second |
| Third |
| Fourth |
| Full Year |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Fiscal 2004 |
|
|
|
|
|
|
|
|
|
|
| |||||
Net revenues |
| $ | 17,719 |
| $ | 17,441 |
| $ | 17,176 |
| $ | 16,399 |
| $ | 68,735 |
|
Gross profit |
| 3,580 |
| 2,687 |
| 4,305 |
| 3,693 |
| 14,265 |
| |||||
Operating income |
| 916 |
| 53 |
| 1,610 |
| 1,127 |
| 3,706 |
| |||||
Net income |
| $ | 534 |
| $ | 1 |
| $ | 956 |
| $ | 644 |
| $ | 2,135 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| $ | 0.03 |
| $ | 0.00 |
| $ | 0.05 |
| $ | 0.03 |
| $ | 0.11 |
|
Diluted |
| $ | 0.03 |
| $ | 0.00 |
| $ | 0.05 |
| $ | 0.03 |
| $ | 0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| 18,602,978 |
| 18,622,839 |
| 18,831,954 |
| 19,141,844 |
| 18,794,977 |
| |||||
Diluted |
| 19,317,706 |
| 19,164,767 |
| 19,202,074 |
| 19,319,000 |
| 18,947,553 |
| |||||
The sum of quarterly earnings per share information may not agree to the annual amount due to the use of the treasury stock method of calculating earnings per share.
50
(in 000’s, except for share and per share data) |
| First |
| Second |
| Third |
| Fourth |
| Full Year |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Fiscal 2003 |
|
|
|
|
|
|
|
|
|
|
| |||||
Net revenues |
| $ | 15,218 |
| $ | 18,581 |
| $ | 16,661 |
| $ | 15,958 |
| $ | 66,418 |
|
Gross profit |
| 3,031 |
| 3,724 |
| 3,609 |
| 2,955 |
| 13,319 |
| |||||
Operating income (loss) |
| 558 |
| 1,294 |
| 516 |
| (2,340 | ) | 28 |
| |||||
Net income (loss) |
| $ | 303 |
| $ | 1,971 |
| $ | 288 |
| $ | (1,510 | ) | $ | 1,052 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| $ | 0.02 |
| $ | 0.12 |
| $ | 0.02 |
| $ | (0.08 | ) | $ | 0.06 |
|
Diluted |
| $ | 0.02 |
| $ | 0.11 |
| $ | 0.01 |
| $ | (0.08 | ) | $ | 0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| 16,730,642 |
| 16,984,728 |
| 17,997,911 |
| 18,578,407 |
| 17,572,951 |
| |||||
Diluted |
| 18,025,514 |
| 18,343,696 |
| 19,369,977 |
| 18,578,407 |
| 18,476,486 |
| |||||
The sum of quarterly earnings per share information may not agree to the annual amount due to the use of the treasury stock method of calculating earnings per share.
Selling, general and administrative expenses increased to $5.3 million in the fourth quarter of 2003, resulting in an operating loss of $2.3 million, up from $2.3 million in 2002.million. The increase was driven by the planned introductory consumer marketing programs and other costs associated with the launch of Crunch Toons®.
49
(in 000’s, except for share and per share |
| First |
| Second |
| Third |
| Fourth |
| Full Year |
| |||||
Fiscal 2002 |
|
|
|
|
|
|
|
|
|
|
| |||||
Net revenues |
| $ | 14,278 |
| $ | 15,358 |
| $ | 15,209 |
| $ | 14,503 |
| $ | 59,348 |
|
Gross profit |
| 2,517 |
| 3,188 |
| 2,564 |
| 3,043 |
| 11,312 |
| |||||
Operating income |
| 552 |
| 819 |
| 550 |
| 753 |
| 2,674 |
| |||||
Net income |
| $ | 380 |
| $ | 640 |
| $ | 1,051 |
| $ | 565 |
| $ | 2,637 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| $ | 0.02 |
| $ | 0.04 |
| $ | 0.06 |
| $ | 0.03 |
| $ | 0.16 |
|
Diluted |
| $ | 0.02 |
| $ | 0.04 |
| $ | 0.06 |
| $ | 0.03 |
| $ | 0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
|
|
| |||||
Basic |
| 15,692,387 |
| 15,833,473 |
| 16,362,344 |
| 16,686,148 |
| 16,146,081 |
| |||||
Diluted |
| 17,439,210 |
| 18,079,446 |
| 17,961,882 |
| 18,049,958 |
| 17,826,953 |
| |||||
The sum of quarterly earnings per share information may not agree to the annual amount due to the use of the treasury stock method of calculating earnings per share.
14.15. Accounts Receivable Allowance
Changes to the allowance for doubtful accounts during the three years ended December 27, 200325, 2004 are summarized below:
|
| Balance at |
| Charges to Expense |
| Write-offs |
| Balance at end |
|
| Balance at |
| Charges |
| Write-offs |
| Balance at end |
| ||||
Allowance for Doubtful Accounts |
|
|
|
|
|
|
|
|
| |||||||||||||
Fiscal 2001 |
| $ | 246,000 |
| 332,000 |
| 359,000 |
| $ | 219,000 |
| |||||||||||
Fiscal 2002 |
| $ | 219,000 |
| 379,000 |
| 189,000 |
| $ | 409,000 |
|
| $ | 219,000 |
| 379,000 |
| 189,000 |
| $ | 409,000 |
|
Fiscal 2003 |
| $ | 409,000 |
| 24,000 |
| 86,000 |
| $ | 347,000 |
|
| $ | 409,000 |
| 24,000 |
| 86,000 |
| $ | 347,000 |
|
Fiscal 2004 |
| $ | 347,000 |
| (112,000 | ) | (146,000 | ) | $ | 89,000 |
| |||||||||||
5051
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.1 — | List of subsidiaries of Poore Brothers, Inc. |
|
|
23.1 — | Consent of Deloitte & Touche LLP |
|
|
|
|
31.1 — | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) |
|
|
| Certification of Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) |
|
|
| Certification of Chief Executive Officer and Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
51* - Management compensatory plan or arrangement
52