| POORE BROTHERS INC Item 1A Risk Factors Any one of the following factors could affect operating results |
| You should read and carefully consider these risk factors, and the entirety of this report, before you invest in our securities |
| Risks Related to Our Business We may incur significant future expenses due to the implementation of our business strategy |
| The Company has an aggressive strategic plan to achieve its long-term vision of being a significant marketer of consumer brands |
| Such action is subject to the substantial risks, expenses and difficulties frequently encountered in the implementation of a new business 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 require the Company to incur substantial additional expenses, including advertising and promotional costs, “slotting” expenses (ie, 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 will be able to implement its new strategic plan, that its business strategy will prove successful or that it will be able to maintain profitability during such implementation |
| We may not be able to obtain the additional financing we need to implement our business strategy |
| A significant element of the Company’s business strategy is the development, acquisition and/or licensing of innovative 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, 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 |
| 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, be 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 |
| We expect our future growth to be derived in significant part, from acquisitions, but our acquisition strategy may not be successful or we may not be successful integrating acquisitions |
| A significant element of the Company’s business strategy is the pursuit of selected strategic acquisition opportunities for the purpose of expanding, complementing and/or diversifying the Company’s business |
| 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 |
| We are subject to ongoing financial covenants under our main credit facility, and if we fail to meet those covenants or otherwise default on our credit facility, our lender may accelerate our borrowings |
| At December 31, 2005, the Company had outstanding indebtedness under a credit agreement with US Bancorp (the “US Bancorp Credit Agreement”) in the aggregate principal amount of dlra0dtta5 million |
| The indebtedness under the US 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 US Bancorp Credit Agreement so long as borrowings from US Bancorp remain outstanding |
| Should the Company be in default under any of such covenants, US 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 US Bancorp Credit Agreement |
| At December 31, 2005, the Company was in compliance with all financial covenants under the US Bancorp Credit Agreement (including a minimum tangible net worth, a minimum fixed charge coverage ratio and a minimum current ratio) |
| As the Company implements its business strategy, there can be no assurance that the Company will remain in compliance with the financial covenants in the future |
| Any acceleration of the borrowings under the US Bancorp Credit Agreement prior to the applicable 11 ______________________________________________________________________ maturity dates could have a material adverse effect upon the Company |
| ” We may not be able to successfully implement our strategy to expand our business internationally |
| The Company plans to expand sales to Canadian customers 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 US and foreign export regulations, potential adverse tax consequences and currency exchange rate fluctuations |
| We may incur material losses and costs as a result of product liability claims that may be brought against us or any product recalls we have to make |
| 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 |
| We are subject to numerous governmental regulations, and our failure to comply with those regulations could result in fines or penalties being imposed on us |
| 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 |
| Additionally, as a direct result of the September 11, 2001 terrorism attack, the FDA issued the Bioterrorism Act of 2002 (“the Act”) to protect the US 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 US 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 |
| The Act was effective January 1, 2005 |
| 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 0dtta5 grams, unless it is less than 0dtta5 grams in which case it may be expressed as 0 grams |
| We cannot assure you that we will not face fines or penalties if our efforts to comply with these regulations are determined to be inadequate |
| Newly adopted governmental regulations could increase our costs or liabilities or impact the sale of our products |
| The food industry is highly regulated |
| We cannot assure you 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 |
| Unavailability of our necessary supplies, at reasonable prices, could materially adversely affect our operations |
| 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, and the Company uses a variety of oils in the production of its products |
| Nonetheless, the Company is dependent on its suppliers to provide the Company with products and ingredients in adequate supply and on a timely basis |
| 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, 12 ______________________________________________________________________ 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 |
| We do not own the patents for the technology we use to manufacture our TGI Friday’s® and Tato Skins® brand products |
| The Company licenses patented technology from a third party in connection with the manufacture of its TGI Friday’s® and Tato Skins® brand products and has an exclusive right to use such technology within North America until the patents expire on December 26, 2006 |
| Once these patents expire, we will no longer have exclusive rights to this technology and may face additional competition that could adversely affect our revenues |
| Moreover, competitors of the Company, certain of which may have significantly greater resources than the Company, may utilize different technology in the manufacture of products that are similar to those currently manufactured, or that may in the future be manufactured, by the Company |
| The entry of any such products into the marketplace could have a material adverse effect on sales of TGI Friday’s® and Tato Skins® brand products, as well as any such future products, by the Company |
| The taste and quality of Poore Brothers®, Bob’s Texas Style® and Boulder Canyon Natural Foods^TM brand potato chips is largely due to two elements of the Company’s manufacturing process: its use of batch-frying and its use of distinctive seasonings to produce a variety of flavors |
| The Company does not have exclusive rights to the use of either element; consequently, competitors may incorporate such elements into their own processes |
| The majority of revenues are derived from a limited number of snack food brands |
| The Company derives a substantial portion of its revenue from a limited number of snack food brands |
| For the year ended December 31, 2005, over 74prca of the Company’s net revenues were attributable to the TGI 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 other snack food products associated with that brand |
| Decreased sales from any one of our 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 |
| We depend on a license agreement for the right to sell our TGI Friday’s® brand products and other products, and we may rely on similar license agreements in the future |
| The TGI 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, 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 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 |
| The loss of one of our major customers could have a material adverse effect on our business |
| Two customers of the Company, Wal*Mart (including its SAM’s Clubs), and Vistar, formerly Vending Services of America, a national vending distributor accounted for 19prca and 11prca, respectively, of the Company’s 2005 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 10prca of the Company’s revenues for 2005 |
| A decision by any major customer to cease or substantially reduce its purchases could have a material adverse effect on the Company’s business |
| 13 ______________________________________________________________________ The loss of certain key employees could adversely affect our business |
| The Company’s success is dependent in large part upon the abilities of its executive officers, including Eric Kufel, President and Chief Executive Officer, Steve Sklar, Senior Vice President of Marketing and Thomas F Tierney, Senior Vice President of Sales |
| The Company’s refocused business strategy will challenge its executive officers, and the inability of such 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 |
| Risks Related to Our Industry We may not be able to compete successfully in our highly competitive industry |
| The market for snack foods, such as those sold by the Company, including potato chips, cookies and meat snacks, is large and intensely competitive |
| Competitive factors in the snack food industry include product quality and taste, brand awareness among consumers, access to supermarket shelf space, price, advertising and promotion, variety of snacks offered, nutritional content, product packaging and package design |
| The Company competes in that market principally on the basis of product taste and quality |
| The snack food industry is dominated by large food companies, including Frito-Lay, Inc, Nabisco and others which have 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 products similar to those of the Company |
| With expansion of Company operations into new markets the Company 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 |
| There can be no assurance of the Company’s ability to compete successfully |
| 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 |
| Our business may be adversely affected by oversupply of food products at the wholesale and retail levels and seasonal fluctuations |
| Profitability in the food product industry is subject to oversupply of certain food products at the wholesale and retail levels, which can result in our products going out of date before they are sold |
| The food products industry is also seasonal |
| Consumers tend to purchase our products at higher levels during the major summer holidays and also at times surrounding the major sporting events throughout the year |
| We may not be able to respond successfully to shifting consumer tastes |
| 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 |
| The success of new products will be key to the success of the Company’s business plan and 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 |
| Diet trends may adversely affect our revenues |
| Increased consumer concerns about nutrition and healthy diets and the risk that sales of our food product may decline due to perceived health concerns, changes in consumer tastes or other reasons beyond the control of the Company may adversely affect our revenues |
| 14 ______________________________________________________________________ Risks Related to Our Securities The market price of our Common Stock is volatile |
| 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 dlra3dtta50 per share in the initial public offering, the market price of the Common Stock experienced a substantial decline, reaching a low of dlra0dtta50 per share (based on last reported sale price of the Common Stock on the Nasdaq SmallCap Market) on December 22, 1998 |
| During fiscal 2005, 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 dlra6dtta77 per share to a low of dlra2dtta57 per share |
| The last reported sales price of the Common Stock on the Nasdaq SmallCap Market on March 24, 2006 was dlra2dtta93 per share |
| There can be no assurance as to the future market price of the Common Stock |
| See “Our Common Stock may not continue to trade at a market price sufficient to prevent our de-listing from the NASDAQ SmallCap Market |
| ” Our Common Stock may not continue to trade at a market price sufficient to prevent our de-listing from the NASDAQ SmallCap Market |
| 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 dlra1dtta00 |
| 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 |
| 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 “The market price of our Common Stock is volatile |
| ” A significant amount of our Common Stock is controlled by individuals, and the interests of such individuals may conflict with those of other shareholders |
| 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 21prca of the outstanding shares of Common Stock based on Capital Foods’ Schedule 13G filing |
| Accordingly, Capital Foods is in a position to exercise substantial influence on the business and affairs of the Company |
| (“Heartland”), Eagle Rock Capital Management, LLC (“Eagle Rock”) and Gruber and McBaine Capital Management, LLC (“Gruber”), which, based on their Schedule 13G filings, are currently the beneficial owners of approximately 10prca, 9prca and 7prca, respectively, of the outstanding shares of Common Stock |
| Capital Foods, Heartland, Eagle Rock and Gruber are hereinafter referred to collectively as the “Significant Shareholders |
| ” There can be no assurance that one or more of those Significant Shareholder will not adopt or support a plan to undertake a material change in the management or business of the Company |
| 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 |
| A significant amount of our Common Stock is subject to registration rights, and the registration and sale of such shares could negatively affect the market price of our Common Stock and impair our ability to obtain financing |
| Approximately 4dtta3 million 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 |
| 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 |
| All or a portion of such shares may, at the election of the holders thereof, be included in a future registration statement of the Company and, upon the effectiveness thereof, may be sold in the public markets |
| No prediction can be made as to the effect, if any, that future sales of shares of Common Stock will have on the market price of the Common Stock prevailing from time to time |
| Sales of substantial amounts of Common Stock, or the 15 ______________________________________________________________________ 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 |
| Our Certificate of Incorporation authorizes us to issue preferred stock, and the rights of holders of Common Stock may be adversely affected by the rights of holders of any such preferred stock |
| The Company’s Certificate of Incorporation authorizes the issuance of up to 50cmam000 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 |