Table
of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 27, 2008
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number: 1-14556
THE
INVENTURE GROUP, INC.
(Exact name of registrant as specified in its
charter)
Delaware
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86-0786101
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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5050 N. 40
th
Street, Suite 300
Phoenix, Arizona 85018
(Address of principal executive offices) (Zip
Code)
Registrants telephone number, including area
code:
(623)
932-6200
Securities registered pursuant to Section 12(b) of
the Act:
Title of Class
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Name of exchange on which registered
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Common Stock, $.01 par value
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Nasdaq
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Securities registered pursuant to Section 12(g) of
the Act:
None
Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
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Yes
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No
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Indicate by
check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
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Yes
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No
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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),
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and (2) has been subject to such filing requirements for the
past 90 days.
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Yes
x
No
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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 Registrants
knowledge, in definitive proxy or information statements incorporated by
reference in
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Part III of this Form 10-K
or any amendment to this Form 10-K.
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Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer, and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a
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smaller reporting company)
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Indicate by
check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
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Yes
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No
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The aggregate market value of the voting stock (Common Stock, $.01 par
value) held by non-affiliates of the Registrant was approximately $29.2 million
based upon the closing market price on June 28, 2008, the last business
day of the Registrants most recently completed second fiscal quarter.
The number of issued and outstanding shares of Common Stock, $.01 par
value, as of March 26, 2009 was 17,884,456.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrants Annual Meeting of
Shareholders to be held on May 19, 2009 are incorporated by reference into
Part III of this Form 10-K.
EXCHANGE ACT REPORTS AVAILABLE ON COMPANY
WEBSITE
Under SEC Filings on the Investors page of the Companys
website located at www.inventuregroup.net, 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 SEC): the
Companys Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, Proxy Statement on Schedule 14A related to
the Companys 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. You
may also read and copy any materials we file with the SEC at the SECs Public
Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website
located at http://www.sec.gov that contains the information we file of furnish
electronically with the SEC.
Table
of Contents
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), Section 21E of the Securities Exchange Act
of 1934, as amended, and the Private Securities Litigation Reform Act of 1995,
and The Inventure Group, 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 Companys current views
with respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties, including
specifically the possibility that the Company will need additional financing
due to future operating losses or in order to implement the Companys 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
Companys 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
Companys 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.
Item 1.
Business
Description of Business
The Inventure Group, Inc. (the Company) is a $100+ million
marketer and manufacturer of healthy/all natural and indulgent specialty food
brands. The Company is headquartered in Phoenix, Arizona with plants in
Arizona, Indiana and Washington. The
goal is to build a rapidly growing specialty brand company that specializes on
evolving consumer eating habits in two primary product segments: 1)
Healthy/Natural Food Products 2) Indulgent Specialty Snack Food Brands. The company sells its products nationally
through a number of channels including: Grocery, Natural, Mass, Drug, Club,
Vending, Food Service, Convenience Stores and International.
In the Healthy/Natural portfolio, products include Rader Farms frozen
berries and Boulder Canyon Natural Foods
TM
brand kettle cooked potato chips. In the
Indulgent Specialty category, products include TGI Fridays® brand snacks under
license from TGI Fridays Inc., BURGER KING
TM
brand snack
products under license from Burger King Corporation, Poore Brothers® kettle
cooked potato chips, Bobs Texas Style® kettle cooked chips, Tato Skins® brand
potato snacks and OBoises® potato snacks. The Company also manufactures private label snacks for certain grocery
retail chains and distributes in Arizona snack food products that are
manufactured by others.
The Inventure Group, Inc.s
frozen berry products are manufactured by Rader Farms, Inc. (Rader
Farms) a Washington corporation located in Whatcom County, and acquired by the
Company in May of 2007. Rader
Farms grows processes and markets premium berry blends, raspberries,
blueberries, and rhubarb and purchases marionberries, cherries, cranberries,
strawberries and other fruits from a select network of fruit growers for
resale. The fruit is processed, frozen and packaged for sale and distribution
to wholesale customers. The company also uses third party processors for
certain products.
The Companys snack products are manufactured at the Arizona and
Indiana plants as well as some third party plants for certain products.
For the fiscal years 2008 and 2007, net revenues totaled $113,058,715
and $90,910,580, respectively, and T.G.I. Fridays® brand salted snacks
represented 33% and 47%, respectively, of the Companys total net revenues.
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Percent of Total Net Revenues
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2008
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2007
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Branded snack and berry products
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80
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%
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86
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%
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Private label products
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17
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%
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11
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%
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Total manufactured snack and berry products
revenues
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97
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%
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97
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%
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Distributed products segment revenues
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3
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%
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3
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%
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Total revenues
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100
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%
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100
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%
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The Company produces T.G.I. Fridays® brand snacks, BURGER KING
TM
snack products, Tato Skins® brand potato
snacks, OBoises® brand potato snacks and Boulder Canyon Natural Foods
TM
Rice and Bean Snacks, utilizing a sheeting and
frying process that includes licensed technology. Each snack product is offered
in several different flavors and formulations.
All of these products are manufactured at the Company-owned facility in
Bluffton, Indiana, except for Mozzarella Snack Sticks, Hot Pepper Jack Cheese Fries, Onion Rings and
French Toast products which are produced by contract manufacturers on behalf of
the Company and sold under the T.G.I. Fridays® and BURGER KING
TM
brand name.
Poore Brothers®, Bobs Texas Style® and Boulder Canyon Natural Foods
TM
brand potato chips are manufactured with a
batch-frying process that the Company believes produces potato chips with
enhanced crispness and flavor. Poore Brothers®, Bobs Texas Style® and Boulder
Canyon Natural Foods
TM
potato chips are each offered in a variety of
flavors. The Company also manufactures
potato chips for sale on contract manufacturing basis using a continuous frying
process. The Companys potato chips are
manufactured at a Company-owned facility in Goodyear, Arizona. See
Products
and
Marketing and
Distribution.
At the Company-owned farming operations in Lynden, Washington, the
Company grows raspberries, blueberries and rhubarb which are individually quick
frozen on site to enhance shelf life.
The Company also purchases marionberries, cherries, cranberries,
strawberries and other fruit from a select network of fruit growers for
resale. The fruit is processed, frozen
and packaged for sale and distribution nationally to wholesale customers under
the Rader Farms® brand, as well as co-branded with store brands.
The Companys business objective is to build a diverse portfolio of
Healthy/Natural and Indulgent Specialty 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 Companys growth strategy is to develop, acquire or license innovative
Healthy and or Natural food brands. 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 Companys executive offices are located at 5050 N.
40
th
Street, Suite 300 Phoenix, Arizona 85018,
and its telephone number is (623) 932-6200.
Company History
The Inventure Group, 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. The Company changed its name from
Poore Brothers, Inc. to The Inventure Group, Inc. on May 23, 2006.
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 Bobs 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®, OBoisies®, and
Pizzarias® trademarks and 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 Canyon Natural Foods
TM
brand of totally natural potato chips. In May 2007, the Company acquired Rader
Farms, Inc., including a farming operation and a berry processing facility
in Lynden, Washington.
In 2000, the Company
launched its T.G.I. Fridays® brand salted snacks pursuant to a license
agreement with TGI Fridays Inc., which expires in 2014. In 2007, the Company launched its BURGER KING
TM
snack products
pursuant to a license agreement with
Burger King Corporation
, which expires in 2012.
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The Company continues to
introduce line extensions and test market new and innovative snack food
products.
Business Strategy
The Companys business strategy is to continue building a diverse
portfolio of Healthy/Natural (Rader Farms® and Boulder Canyon Natural Foods
TM
) and Indulgent Specialty
(T.G.I. Fridays®, BURGER KING
TM
,
Poore Brothers®) food brands with annualized revenues of $5 million to $50
million each through building existing brands, licensing, acquisition or
development. The goals of our strategy
are to (i) capitalize on Healthy/Natural and Indulgent Specialty food
brand opportunities, (ii) deliver incremental category growth for
retailers, (iii) provide product innovation targeted to a defined consumer
segment, (iv) complement, rather than compete directly against, large
national 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 the Companys
long-term business strategy are as follows:
Develop,
Acquire or License Innovative Healthy/Natural and Indulgent
Specialty Food Brands.
A
significant element of the Companys business strategy is to develop, acquire
or license new innovative Healthy/Natural and Indulgent Specialty food brands
that provide strategic fit with our existing business and possess strong
national brand equity in order to expand, complement or diversify the Companys
existing business. The Company initiated this element of its strategy in 2000
by launching its first national niche brand, T.G.I. Fridays® brand salted
snacks, under an exclusive license from TGI Fridays Inc. and in 2007 launched
its second national niche brand, BURGER KING
TM
snack products pursuant to a license agreement
with Burger King Corporation. The
Company plans to continue developing, acquiring or licensing additional
specialty food brands, though it intends to mitigate the financial impact of
launching new brands by introducing new licensed products in small-scale test
markets rather than large scale regional or national introductions.
Broaden
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 has recently
extended the shelf life of our Poore Brothers® brands in order for us to expand
beyond Arizona. We are expanding the
distribution of our Boulder Canyon Natural Foods
TM
brand nationally through the natural channel
as well as through the natural segment in the grocery channel. The Company is looking at expanding overseas
with the T.G.I. Fridays® brand as well as BURGER KING
TM
and Boulder Canyon Natural Foods
TM
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.
Pursue
Acquisitions.
In 2007, the Company acquired Rader Farms, Inc. (Rader Farms) for
an estimated total cost of approximately $20.9 million. The Company
continues to evaluate acquisition opportunities in the specialty food area
where we can use our competencies in Operations, Sales, Marketing and
Distribution in order to drive revenue and profit growth.
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 brands presence. We have launched a number of new items such
as: T.G.I. Fridays® Buffalo Sticks, T.G.I. Fridays® Kettle Chips, BURGER KING
TM
Onion Rings, Poore Brothers® Sweet Chili &
Red Pepper, Poore Brothers® 50% Reduced Salt, Boulder Canyon Natural Foods
TM
Balsamic Vinegar & Rosemary, and Boulder
Canyon Natural Foods
TM
Rice & Adzuki Bean snack chips.
Leverage
Infrastructure and Capacity.
The Companys Indiana, Arizona and Washington
facilities are currently operating at approximately 40%, 80% and 50% of their
respective manufacturing capacities. The
Company currently has arrangements with several grocery chains for the
manufacture and distribution by the Company of their respective private label
snacks and believes that additional contract manufacturing opportunities
exist. While such arrangements 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. The
Company also utilizes contract manufacturers excess capacity to produce items
that the Company does not have the equipment or ability to manufacture.
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Improve
Profit Margins.
The Company plans to increase gross profit margins through increased
long-term revenue growth, improved operating efficiencies, 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.
Products
Manufactured Snack Food Products
.
The Company produces T.G.I. Fridays® brand
Potato Skins snacks, BURGER KING
TM
brand potato snack products , Tato Skins®
brand potato snacks and OBoises brand snacks utilizing a sheeting and frying
process. All of these are offered in
several different flavors and formulations and are manufactured at the
Company-owned facility in Bluffton, Indiana, except for Mozzarella Snack
Sticks, Hot Pepper Jack Cheese Fries,
Onion Rings and French Toast products which are produced by contract
manufacturers on behalf of the Company and sold under the T.G.I. Fridays® and
BURGER KING
TM
brand name.
Poore Brothers®, Bobs Texas Style®, and Boulder Canyon Natural Foods
TM
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®, Bobs Texas
Style® and Boulder Canyon Natural Foods
TM
potato chips are
each offered in a variety of flavors.
The Company currently has agreements with several grocery chains
pursuant to which the Company produces their respective private label potato
chips in the styles and flavors specified by each grocery chain.
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.
Berry Farming and Processing.
The Company grows raspberries, blueberries and rhubarb at its Company-owned
farming operations in Lynden, Washington, which are individually quick frozen
on site to enhance shelf life. The
Company also purchases marionberries, cherries, cranberries and strawberries
from a select network of fruit growers for resale. The fruit is processed and packaged for sale
and distribution nationally to wholesale customers under the Rader Farms®
brand, as well as through store brands.
Manufacturing
The Company-owned 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. Fridays®,
BURGER KING
TM
,
and Tato Skins® brand products.
The Indiana facility is currently operating at approximately 40% of
capacity. Certain T.G.I. Fridays®, BURGER
KING
TM
, Tato Skins® brand products and
Boulder Canyon Natural Foods
TM
Rice and Bean Snacks are produced utilizing a
sheeting and frying process that includes some licensed technology. Some T.G.I. Fridays® brand salted snack
products are produced by contract manufacturers on behalf of the Company. See
Patents, Trademarks and
Licenses
.
Recently
developed technology at the Bluffton plant allows the Company to use existing
equipment to make pellet snacks that are entirely different in appearance and
taste from its other product lines. The
Company believes this technology will help expand the T.G.I. Fridays® and
BURGER KING product lines and facilitate the addition of new Indulgent
Specialty food brands
.
The Company believes that a key
element of the success to date of the Poore Brothers®, Bobs Texas Style® and
Boulder Canyon Natural Foods
TM
brand potato chips has been the Companys 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 Companys use of a
batch-frying process, as opposed to the conventional continuous line cooking
method, and the Companys use of distinctive seasonings to produce potato chips
in a variety of flavors. The Company
believes that although the batch-frying process produces less volume, it is
superior to conventional continuous line cooking methods because it enhances
crispness and flavor through greater control over temperature and other cooking
conditions.
The Company-owned manufacturing facility in Goodyear, Arizona has the
capacity to produce up to approximately 2,500 pounds of potato chips per hour,
including 1,300 pounds of batch-fried branded potato chips per hour and 1,200
pounds of continuous-fried private label potato chips per hour. The Arizona facility is currently operating
at approximately 80% of capacity.
The Company-owned farming and facility in Lynden, Washington has the
capacity to produce up to eight million pounds of grown berries per year. The individually quick frozen (IQF)
processing facilities located at the same location
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have the capacity to apply the IQF process to forty million pounds of
berries annually. Overall, the farming
and processing facilities are operating at 75% and 50% of capacity,
respectively.
There can be no assurance that the Company will obtain sufficient business
to recoup the Companys investments in its manufacturing facilities or to
increase the utilization rates of such facilities. See
Item 2. Properties
.
Marketing and Distribution
The Companys T.G.I. Fridays® brand snack food products have achieved
significant market presence across a number of 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 the
Companys manufacturing processes. The
Company has retained various sales and marketing agencies with employees and
offices nationwide to represent T.G.I. Fridays® brand snacks on behalf of the
Company in the grocery and convenience store channels. The Companys own sales organization, as well
as brokers, sells T.G.I. Fridays® brand snacks in the mass, club and drug
channels. The Company also obtains
significant sales on T.G.I. Fridays® brand snacks in the vending channel
nationwide through an independent network of brokers and distributors.
The Companys potato chip brands are distributed to grocery and other
retailers primarily by a select group of independent distributors. The Companys Boulder Canyon Natural Foods
TM
brand potato chip products have achieved
significant market presence in Colorado and in natural food stores nationwide
as well as other leading grocery retailers.
Poore Brothers® brand potato chip products have achieved significant
market presence in the southwest United States.
The Companys Bobs Texas Style® brand potato chip products have
achieved significant market presence in south/central Texas. 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
all of the various channels in which we operate. The Company has also retained
an International broker to expand sales internationally.
The Companys distribution network throughout Arizona includes
approximately 42 independently operated service routes. Each route is operated by an independent
distributor who merchandises to major grocery store chains in Arizona, such as
Albertsons, Bashas, Frys and Safeway stores.
In addition to servicing major supermarket chains, the Companys
independent distributors service many smaller 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 currently also
retains a Canadian sales and marketing agency to sell to Canadian customers and
is seeking opportunities to selectively expand its growth in other countries.
The Companys marketing of its berry products is essentially performed
through brokerage arrangements with whom the Company has relationships. Similar to its snack business, the Company
selects brokers primarily on the basis of quality of service, call frequency on
customers, financial capability and relationships they have with supermarkets
and club stores including access to freezer space for the berry products.
Successful marketing of the Companys products depends, in part, upon
obtaining adequate shelf or freezer space for such products, particularly in
supermarkets, C-Stores, discount stores and the club channel for both snacks
and berry products and vending machines for snacks. 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 Companys 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 Companys financial
performance.
The Companys marketing programs are designed to increase product trial
and build brand awareness in core markets.
Most of the Companys 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.
The Companys marketing programs also include selective event sponsorship
designed to increase brand awareness and to provide opportunities to mass
sample branded products. The Company
also invests marketing dollars in brand and category research.
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Suppliers
The principal raw materials used by the Company are potatoes, potato
flakes, wheat flour, corn, oils and berries.
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 and corn are widely available year-round, although they are subject to
seasonal price fluctuations. The Company
will lock in prices as appropriate. The
Company uses a variety of oils in the production of its snack 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 snack
manufacturing process. Although the
Company produces many of its berry products in its own farms, it also augments
that production by purchasing additional berries to meet customer demands.
The Company chooses its suppliers based primarily on price,
availability, service and quality.
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 Companys
performance specifications, quality standards or delivery schedules could have
a material adverse effect on the Companys operations. In particular, a sudden scarcity, a
substantial price increase, or an unavailability of product ingredients could
materially adversely affect the Companys operations. There can be no assurance that alternative
ingredients would be available when needed and on commercially attractive
terms, if at all.
Customers
Costco accounted for 24% of the Companys 2008 net revenues. The remainder of the Companys 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 Companys net revenues in 2008. A decision by any of the Companys major
customers to cease or substantially reduce their purchases could have a
material adverse effect on the Companys business.
The majority of the Companys revenues are attributable to external
customers in the United States. The
Company does sell to Canadian and international customers as well, however, the
revenues attributable to Canadian and International customers is
insignificant. All of the Companys
assets are located in the United States.
Competition
The Companys snack products generally compete against other snack
foods, including potato chips and tortilla chips. The snack food industry is large and highly
competitive and is dominated by large food companies, including Frito-Lay, Inc.,
a subsidiary of PepsiCo, Inc., Procter and Gamble and General Mills. These companies possess substantially greater
financial, production, marketing, distribution and other resources than the
Company, and their brands are more widely recognized than the Companys
products. Numerous other companies that
are actual or potential competitors of the Company offer products similar to
the Companys, and some of these have greater financial and other resources
(including more employees and more extensive facilities) than the Company. In addition, many 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 Companys 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 Companys 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.
The Companys berry products generally compete against other packaged
berries on the basis of quality and price.
Obtaining freezer space at supermarkets and club stores is tantamount to
successfully competing with other berry products, as supermarkets and club
stores will frequently only carry one brand of frozen berry products,
contrasted to snack products where multiple brands are carried.
The principal competitive factors affecting the markets of the
Companys products include product quality and taste, brand awareness among
consumers, access to shelf or freezer space, price, advertising and promotion,
varieties offered, nutritional content, product packaging and package
design. The Company competes in its
markets principally on the basis of product quality and taste. While products produced at the Companys
Bluffton, Indiana facility involve the use of certain licensed technology and
unique manufacturing processes, the taste and quality of products produced at
the Companys Goodyear, Arizona facility are largely due to two elements of the
Companys manufacturing process: its use of batch-frying
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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.
Government Regulation
The manufacture, labeling and distribution of the Companys 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 snack products through various testing and quality control
procedures. The Company does not believe
that compliance with the NLEA regulations materially increases the Companys
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 Acts 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,
and the Company believes it is currently compliant with this provision.
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.
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
Companys products and have a material adverse effect on the Company.
In addition to laws relating to food products, the Companys operations
are governed by laws relating to environmental matters, workplace safety and
worker health, principally the Occupational Safety and Health Act. The Company believes that it presently
complies in all material respects with such laws and regulations.
Employees
As of December 27, 2008, the Company had 374 full-time employees,
including 323 in manufacturing and distribution, 24 in sales and marketing and
27 in administration and finance. The
Companys employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage. The Company believes that its relations with
its employees are good.
Patents, Trademarks and Licenses
The Company produces T.G.I. Fridays® brand snacks, BURGER KING
TM
brand potato snack products, Tato Skins® brand
potato crisps and Boulder Canyon Natural Foods
TM
Rice
and Beans Snacks utilizing a sheeting and frying process that includes
technology that the Company licenses from a third party. Pursuant to the license agreement between the
Company and the third party, the Company has a royalty-bearing, exclusive right
license to use the technology in the United States, Canada, and Mexico until
such time the parties mutually agree to terminate the agreement and provide
written sixty (60) days notice to each other.
In consideration for the use of this technology, the Company is required
to make royalty payments on sales of products manufactured utilizing the
technology until such termination date.
The patents for this technology expired December 26, 2006. However,
should products substantially similar to Tato Skins®, OBoisies® and Pizzarias®
become available for any reason in the marketplace by any manufacturer other
than the Company which results in a sales decline of 10% or more, any royalty
obligation for the respective product(s) shall cease.
The Company licenses the T.G.I. Fridays®
brand snacks trademark from T.G.I. Fridays 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. Fridays® brand snack products and is required to achieve certain
minimum sales levels by certain dates during the contract term.
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The Company licenses the
BURGER
KING
TM
brand
snacks trademark from Burger King Corporation under a license agreement with a term expiring in 2012. Pursuant to the license agreement, the
Company is required to make royalty payments on sales of BURGER KING
TM
brand snack products and is
required to achieve certain minimum sales levels by certain dates during the
contract term.
The Company continues to
evaluate new licensing opportunities to broaden its product offering
and to complement the growth of its existing T.G.I. Fridays® and
BURGER
KING
TM
product
lines through the introduction of new products in snack foods as well as other
consumer product categories.
The Company owns the following trademarks in
the United States: Poore Brothers®, Rader Farms
TM
, An Intensely Different Taste®, Texas Style®, Boulder Canyon®, Tato
Skins®, OBoisies®, Pizzarias®, Braids® and Knots®.
The Company considers its trademarks to be of
significant importance in the Companys business. The Company is not aware of any circumstances
that would have a material adverse effect on the Companys ability to use its
trademarks.
Any
termination of any of the Companys license agreements, whether at the
expiration of its term or prior thereto, could have a material adverse effect
on the Companys financial condition and results of operations.
Seasonality
The food products industry is seasonal.
Consumers tend to purchase our snack products at higher levels during
the major summer holidays and also at times surrounding major sporting events
throughout the year. Additionally, we
may face seasonal price increases for raw materials.
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 is striving to achieve its long-term vision of being a
significant marketer of specialty food brands.
Such action is subject to the substantial risks, expenses and
difficulties frequently encountered in the implementation of a business
strategy. Even if the Company is
successful in developing, acquiring and/or licensing new brands, and increasing
distribution and sales volume of the Companys existing products, it may
require the Company to incur substantial additional expenses, including
advertising and promotional costs, slotting expenses (i.e., the cost of
obtaining shelf of freezer 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 Companys
business strategy, even if revenues increase significantly. There can be no
assurance that the Company will be able to implement its 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 Companys business strategy is the
development, acquisition and/or licensing of innovative specialty food brands,
for the purpose of expanding, complementing and/or diversifying the Companys
business. In connection with each of the Companys previous 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 Companys
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 Companys
shareholders.
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We expect some of our future growth to be
derived in part, from acquisitions, but our acquisition strategy may not be
successful, or we may not be successful integrating acquisitions.
An element of the Companys business strategy is the pursuit of
selected strategic acquisition opportunities for the purpose of expanding,
complementing and/or diversifying the Companys 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 managements 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 Companys 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 Companys
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 27, 2008, the Company had outstanding indebtedness in
the aggregate principal amount of $20.7 million.
We borrowed the principal amount of $16 million of our indebtedness
pursuant to a credit agreement with U.S. Bank National Association (U.S. Bank)
which is secured by substantially all assets of the Company. At December 27, 2008, our line of credit
balance under the agreement was $8.2 million.
The Companys obligations under the Credit Agreement are guaranteed by
each of its subsidiaries. The Company is
required to comply with certain financial covenants pursuant to the U.S. Bank
Credit Agreement so long as borrowings from U.S. Bank remain outstanding. Should the Company be in default under any of
such covenants, U.S. Bank 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 Credit Agreement.
At December 27, 2008, the Company was in compliance with all
covenants of the Credit Agreement.
$12.5 million
of the indebtedness is secured by the Companys land and buildings at its
Goodyear, AZ, Bluffton, IN, and Lynden, WA facilities.
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 Credit
Agreement prior to the applicable maturity dates could have a material adverse
effect upon the Company. See
Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
.
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 U.S. 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 or product recall, 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 U.S. food supply. While
there are four parts to the Act, only two of the provisions impact the
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Company. One requirement that
applied to 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 Acts 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 0.5 grams, unless it is
less than 0.5 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
Companys products and have a material adverse effect on the Company.
We do not own the patents for the technology
we use to manufacture our T.G.I. Fridays®, BURGER KING
TM
and Tato Skins® brand products
.
The Company licenses technology from a third party in connection with
the manufacture of its T.G.I. Fridays®, BURGER KING
TM
and Tato Skins® brand
products and has a royalty-bearing, exclusive right license to use the
technology necessary to produce these products in the United States, Canada,
and Mexico until such time the parties mutually agree to terminate the
agreement and provide written sixty (60) days notice to each other. In consideration for the use of this
technology, the Company is required to make royalty payments to the third party
on sales of products manufactured utilizing the technology until such
termination date. The patents for this
technology expired December 26, 2006.
Since these patents expired, we no longer have exclusive rights to this
technology and, as a result, 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 the Companys sales of T.G.I. Fridays®, BURGER
KING
TM
and
Tato Skins® brand products, as well as any such future products.
The taste and quality of Poore Brothers®, Bobs Texas Style® and
Boulder Canyon Natural Foods
TM
brand potato chips is largely due to two
elements of the Companys 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 our revenues are derived from
a limited number of food brands.
The Company derives a substantial portion of
its revenue from a limited number of snack food brands. For the year ended December 27, 2008,
76% of the Companys net revenues were attributable to the T.G.I. Fridays®
brand
products, the Boulder Canyon Natural Foods
TM
brand products and Rader Farms® brand
products. A decrease in the popularity
of these brands during any year could have a material adverse effect on the
Companys business, financial condition and results of operations. There can be no assurance that any of the Companys
food brands will retain their historical levels of popularity or increase in
popularity. Any impact to a licensed
brands reputation could also lead to an impact on the Companys other snack
food products associated with that brand.
Decreased sales from any one of our key food brands without a
corresponding increase in sales from other existing or newly introduced
products would have a material adverse effect on the Companys financial
condition and results of operations.
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We depend on a license agreement for the
right to sell our T.G.I. Fridays® brand and BURGER KING
TM
brand products and we may rely on similar
license agreements in the future.
The T.G.I. Fridays® brand products are manufactured and sold by the
Company pursuant to a license agreement by and between the Company and TGI
Fridays 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 Fridays 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 Companys financial condition and results of operations.
The BURGER KING
TM
brand
products are manufactured and sold by the Company pursuant to a license
agreement by and between the Company and Burger King Corporation which expires
in 2012. 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 Burger King Corporation. Any termination of the license agreement,
whether at the expiration of its term or prior thereto, could have a material
adverse effect on the Companys 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 Companys financial
condition and results of operations.
The loss of one of our major customers could
have a material adverse effect on our business
.
Costco accounted for 24% of the Companys 2008 net revenues, with the
remainder of the Companys 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 Companys
revenues for 2008. A decision by any
major customer to cease or substantially reduce its purchases could have a
material adverse effect on the Companys business.
The loss of certain key employees could
adversely affect our business
.
The Companys success is dependent in large part upon the abilities of
its executive officers, including Terry McDaniel, Chief Executive Officer and
Steve Weinberger, Chief Financial Officer.
The Companys 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 Companys business and prospects.
Risks Related to the Snack Business
We may not be able to compete successfully in
our highly competitive industry.
The market for snack foods, such as those sold by us, including potato
chips 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., Procter and Gamble and others which have substantially
greater financial and other resources than the Company and sell brands that are
more widely recognized than are the Companys 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
13
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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 Companys position in its existing markets. There
can be no assurance of the Companys ability to compete successfully.
Unavailability of our necessary supplies, at
reasonable prices, could materially adversely affect our operations.
The Companys 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 Companys 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 Companys performance
specifications, quality standards or delivery schedules could have a material
adverse effect on the Companys operations.
In particular, a sudden scarcity, a substantial price increase, or an
unavailability of product ingredients could materially adversely affect the
Companys operations. There can be no
assurance that alternative ingredients would be available when needed and on
commercially attractive terms, if at all.
We may incur substantial costs in order to
market our snacks.
Successful marketing of snack 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 Companys 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 Companys financial
performance.
Our business may be adversely affected by
oversupply of snack products at the wholesale and retail levels and seasonal
fluctuations.
Profitability in the food product industry is subject to oversupply of
certain snack products at the wholesale and retail levels, which can result in
our products going out of date before they are sold. The snack 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 Companys products.
The success of new products will be key to the success of the Companys
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.
Risks Related to the Rader Farms Business
Farming is subject to numerous
inherent risks including changes in weather conditions or natural disasters
that can have an adverse impact on crop production and materially affect our
results of operations.
The Company,
through its subsidiary Rader Farms, Inc. is subject to the risks that
generally relate to the agricultural industry. Change in weather conditions and
natural disasters, such as earthquakes, droughts, extreme cold or pestilence,
may affect the planting, growing and delivery of crops, reduce sales stock,
interrupt distribution, and have a material adverse impact on our business,
financial condition and results of operations. Our competitors may be affected
differently by such weather conditions and natural disasters depending on the
location of their supplies or operations.
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Revenues are derived from
one brand; the loss or impairment of this brand may have a material adverse
effect on operating results
.
Rader Farms derives the
majority of its revenue from the sales of one brand. The Companys net revenues
are predominantly attributable to the Rader Farms®
brand of frozen berries. A decrease in the
popularity of frozen berries during any year could have a material adverse
effect on the Companys business, financial condition and results of
operations. There can be no assurance that the Rader Farms® brand will retain its historical level of
popularity or increase in popularity. Decreased sales from the Rader Farms®
brand of frozen berries would have a material adverse effect on the Companys
financial condition and results of operations.
Unavailability of purchased
berries, at reasonable prices, could materially adversely affect our
operations.
The Companys manufacturing costs are subject to
fluctuations in the prices of certain commodity prices. Berries are not readily
available year-round, therefore, the Company uses an individual quick frozen
(IQF) technique to freeze the berries harvested for use during the year to meet
processing demands. In addition to freezing our own home-grown berries, we also
purchase a significant amount of berries from outside suppliers to meet
customer demands. The Company is dependent on its suppliers to provide the
Company with adequate supply and on a timely basis. The failure of certain
suppliers to meet the Companys performance specifications, quality standards
or delivery schedules could have a material adverse effect on the Companys
operations. In particular, a sudden scarcity, a substantial price increase, or
an unavailability of certain types of berries could materially adversely affect
the Companys operations. There can be no assurance that alternative products
would be available when needed and on commercially attractive terms, if at all.
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
.
The sale of food products for human consumption
involves the risk of injury to consumers. Such hazards could result from:
tampering by unauthorized third parties; product contamination (such as
listeria, e-coli, and salmonella) or spoilage; the presence of foreign objects,
substances, chemicals, and other agents; residues introduced during the
growing, storage, handling or transportation phases; or improperly formulated
products. 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
or product recall, could have a material adverse effect on the financial
condition or results of operations of the Company.
Risks Related to Our Securities
The market price of our Common Stock is
volatile.
The market price of our Common Stock has experienced a high level of
volatility since the completion of the Companys 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 Capital Market) on December 22,
1998. During fiscal 2008, the market
price of the Common Stock (based on last reported sale price of the Common
Stock on the Nasdaq Capital Market) ranged from a high of $2.23 per share to a
low of $1.21 per share. The last
reported sales price of the Common Stock on the Nasdaq Capital Market on December 27,
2008 was $1.60 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 Capital Market.
15
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Our Common
Stock may not continue to trade at a market price sufficient to prevent our
de-listing from the NASDAQ Capital Market.
In order for the Companys Common Stock to continue to be listed on the
Nasdaq Capital 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
Companys 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 Capital 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 Companys 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, holding approximately 23% 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. In addition, Heartland Advisors, Inc.
(Heartland) and SRB Management, L.P. (SRB) are the beneficial owners of
approximately 18% and 11%, respectively, of the outstanding shares of Common
Stock at December 27, 2008 based on their Schedule 13G filings. Capital Foods, Heartland and SRB are
hereinafter referred to collectively as the Significant Shareholders. There can be no assurance that one or more of
the 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 4.3 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 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 Companys 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
16
Table
of Contents
premium on their shares. In
addition, under Section 203 of the Delaware General Corporation Law (the
DGCL), the Company is prohibited from engaging in any business combination
(as defined in the DGCL) with any interested shareholder (as defined in the
DGCL) unless certain conditions are met.
This statutory provision could also have an anti-takeover effect.
Item 2.
Properties
The Company owns a 140,000 square foot manufacturing facility located
on 15 acres of land in Bluffton, Indiana, approximately 20 miles south of Ft.
Wayne, Indiana. The facility is financed
by a mortgage with U.S. Bank National Association that matures in December,
2016. The Company produces its T.G.I.
Fridays® brand snacks, BURGER KING
TM
brand snacks and Tato Skins® brand potato
snacks at the Bluffton, Indiana facility.
The Company owns a 60,000 square foot manufacturing facility located on
7.7 acres of land in Goodyear, Arizona, approximately 15 miles west of Phoenix,
Arizona. 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®,
Bobs Texas Style® and Boulder Canyon Natural Foods
TM
brand potato chips, as well as its private
label potato chips, at the Goodyear, Arizona facility.
The Company owns a farming, processing and storage facility located on
696 acres of land in Lynden, Washington, which is leased from the Uptrails
Group LLC, owned by four members of the Rader family. One of the four, Brad Rader, is a current
employee of the Company and two of the others, Lyle and Sue Rader, were the
former owners of Rader Farms. This lease
commenced on the acquisition date and is effect until May 17, 2017. Lease payments are $43,500 per month
throughout the term of the lease.
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, the
initial term expiring in November 2006, with respect to the facility and
has entered into the first of two three-year renewal options. Current lease payments are approximately
$32,500 per month.
The Company is responsible for all insurance costs, utilities and real
estate taxes in connection with its facilities. The Company believes that its
facilities are adequately covered by insurance.
Item 3. Legal
Proceedings
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 Companys financial position or results of operations.
The Inventure
Group, Inc. is one of eight companies sued by the Environmental Law
Foundation in August, 2006 in the Superior Court for the State of California
for the County of Los Angeles by the Attorney General of the State of
California for alleged violations of California Proposition 65. California
Proposition 65 is a state law that, in part, requires companies to warn
California residents if a product contains chemicals listed within the statute.
The plaintiff seeks injunctive relief and penalties but has made no specific
demands. Settlement discussions are
ongoing.
Item 4.
Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
The Companys Common Stock is traded on the Nasdaq Capital Market tier
of the Nasdaq Stock Market under the symbol SNAK. There were approximately 206 shareholders of
record on March 26, 2009. The
Company believes the number of beneficial owners is substantially greater than
the number of record holders because a large portion of the Common Stock is
held of record in broker street names.
17
Table
of Contents
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 Companys
business and does not anticipate paying any dividends at any time in the
foreseeable future. Additionally,
certain debt agreements of the Company limit the Companys ability to declare
and pay dividends.
The following table sets forth the range of high and low sale prices of
the Companys Common Stock as reported on the Nasdaq Capital Market for each
quarter of the fiscal years ended December 27, 2008 and December 29,
2007.
|
|
Sales Prices
|
|
Period of Quotation
|
|
High
|
|
Low
|
|
Fiscal 2007:
|
|
|
|
|
|
First Quarter
|
|
$
|
2.90
|
|
$
|
2.35
|
|
Second Quarter
|
|
$
|
3.18
|
|
$
|
2.68
|
|
Third Quarter
|
|
$
|
3.24
|
|
$
|
2.02
|
|
Fourth Quarter
|
|
$
|
2.41
|
|
$
|
1.60
|
|
|
|
|
|
|
|
Fiscal 2008:
|
|
|
|
|
|
First Quarter
|
|
$
|
2.23
|
|
$
|
1.70
|
|
Second Quarter
|
|
$
|
2.03
|
|
$
|
1.66
|
|
Third Quarter
|
|
$
|
2.13
|
|
$
|
1.59
|
|
Fourth Quarter
|
|
$
|
1.95
|
|
$
|
1.21
|
|
The information appearing under the heading Securities Authorized for
Issuance under Equity Compensation Plans in the Companys 2009 Proxy Statement
is incorporated by reference in this section.
On December 27, 2008 the Companys Board of Directors approved the
retirement of all treasury stock shares purchased under its various
programs. A total of 1,933,827 shares
were retired at cost. The Companys
treasury stock balance as of December 27, 2008 was zero. See Note 9 to our Financial Statements in
this Annual Report for a summary of stock repurchases made during 2008, 2007
and 2006.
Item 7.
Managements Discussion
and Analysis of Financial Condition and Results of Operations
Managements 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 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 Item 1A.: Risk Factors. Accordingly, the Companys actual future
results may differ materially from historical results or those currently
anticipated.
Overview
The Companys net revenue increased 24.4% in fiscal 2008. Net revenues
from sales of T.G.I. Fridays® snack products, which comprised 33% of total net
revenues, decreased 12.5%. During our second
quarterly review, the Company identified the 20% volume decline in T.G.I.
Fridays® as a concern in the warehouse snack segment. The Company made
progress in the third quarter, as net revenues from this brand declined by only
6%, and total Bluffton, Indiana produced products were up 9% for the
quarter. The Company continues to work with the T.G.I Fridays® group to
extend its product offerings into new categories and channels of
distribution. Additionally, the Company believes that the new T.G.I.
Fridays® branded products currently scheduled for roll out in first quarter
2009 will strengthen this category. Net
revenues from potato chips and other snacks increased 36.2% in 2008. The table below highlights the changes
between years:
Net Revenues Comparison
($ in millions)
|
|
2008
|
|
2007
|
|
% Change
|
|
T.G.I. Fridays®
|
|
$
|
37.6
|
|
$
|
42.9
|
|
(12.5
|
)%
|
Potato Chips and Other Snacks
|
|
37.1
|
|
27.2
|
|
36.2
|
%
|
Rader Farms Berry Products
|
|
38.4
|
|
20.8
|
|
84.6
|
%
|
Total
|
|
$
|
113.1
|
|
$
|
90.9
|
|
24.4
|
%
|
18
Table
of Contents
In connection with the implementation of the Companys business
strategy, the Company is likely to require future debt or equity financings
(particularly in connection with future strategic acquisitions). Expenditures stemming 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.
Key Trends
Retailer Consolidation
The retail food environment continues to be influenced by consolidation
as fewer large retailers, including Kroger, Safeway and Wal*Mart, are gaining a
larger share of the grocery retail environment.
These retailers are also consolidating their regional buying operations
into singular national operations to improve efficiency. This action creates opportunities for the
Company because brands like T.G.I. Fridays® and BURGER KING
TM
brand snack products are niche brands that can
be sold effectively on a national basis.
Consumer Trends
The snack industry has been heavily influenced in the past five years
by a proliferation of new flavors and health focused snacks, with a rapid
increase in the number of low-fat, low-carb and all-natural and organic
products. Mainstream retailers such as
Safeway have now created standalone natural and organic sections in their
stores. The Company believes this trend
for healthier snacks will continue and will provide opportunities for its Rader
Farms berry products to experience revenue growth.
Raw Material and Freight Price Increases and
Subsequent Retail Price Increases
The snack foods industry has experienced higher costs as a result of
the increase in the price of potatoes and oil.
Additionally, both inbound transportation of raw materials and outbound
transportation of finished goods have experienced higher costs as a result of
freight surcharges. Nearly all raw
materials have experienced higher pricing both as a result of higher freight
costs and certain products require oil based raw materials. As a result of these raw material price
increases, many companies, including us, have implemented price increases in
2007 and 2008.
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 Regarding Forward-Looking
Statements on page 3.
Year ended December 27, 2008 compared to
the year ended December 29, 2007
|
|
2008
|
|
2007
|
|
Difference
|
|
(dollars in millions)
|
|
$
|
|
% of Rev
|
|
$
|
|
% of Rev
|
|
$
|
|
%
|
|
Net revenues
|
|
$
|
113.1
|
|
100.0
|
%
|
$
|
90.9
|
|
100.0
|
%
|
$
|
22.2
|
|
24.4
|
%
|
Cost of revenues
|
|
90.9
|
|
80.4
|
|
75.3
|
|
82.8
|
|
15.6
|
|
20.7
|
|
Gross profit
|
|
22.2
|
|
19.6
|
|
15.6
|
|
17.2
|
|
6.6
|
|
42.3
|
|
Selling, general and administrative
expenses
|
|
16.8
|
|
14.9
|
|
14.1
|
|
15.5
|
|
2.7
|
|
19.1
|
|
Impairment of intangible asset
|
|
|
|
|
|
2.7
|
|
3.0
|
|
(2.7
|
)
|
(100.0
|
)
|
Operating income (loss)
|
|
5.4
|
|
4.7
|
|
(1.2
|
)
|
(1.3
|
)
|
6.6
|
|
550.0
|
|
Interest income (expense), net
|
|
(1.3
|
)
|
(1.1
|
)
|
(1.0
|
)
|
(1.1
|
)
|
(0.3
|
)
|
30.0
|
|
Income (loss) before income taxes
|
|
4.1
|
|
3.6
|
|
(2.2
|
)
|
(2.4
|
)
|
6.3
|
|
286.4
|
|
Income tax benefit (provision)
|
|
(1.7
|
)
|
(1.5
|
)
|
0.7
|
|
0.8
|
|
(2.4
|
)
|
342.9
|
|
Net income (loss)
|
|
$
|
2.4
|
|
2.1
|
%
|
$
|
(1.5
|
)
|
(1.7
|
)%
|
$
|
3.9
|
|
260.0
|
%
|
19
Table of Contents
For the fiscal year ended December 27, 2008, net revenues
increased 24.4%, or $22.2 million, to $113.1 million compared with net revenues
of $90.9 million for the previous fiscal year.
The increase in Net Revenues were attributable to a number of factors;
a full year of Rader Farms which was acquired in May 2007, a 29% increase
in Boulder Canyon Natural Foods
TM
brand kettle cooked chips, an increase of 18%
in Poore Brothers® kettle cooked chips, an increase in Private Label snacks of
82% which reflects the companys strategy of moving into Premium Private Label
products to fill up the Indiana plant and BURGER KING
TM
branded snacks sales of $5.5 million for the
year. These increase were partially offset by a 12.5% reduction in the TGI
Fridays® brand of snacks.
Gross profit for 2008 increased $6.6 million to $22.2 million, and
increased as a percentage of net revenues to 19.6% as compared to 17.2% in
2007. The primary cause of this increase
was the improvement in gross margin realized from our snack products, increasing
to 19.8% as compared to 16.6% in the prior year, attributable to product price
increases and cost reduction activities at our plants. Rader Farms gross margin was 19.4%, compared
to 18.9% in the prior year.
Selling, general and administrative expenses were $16.8 million or
14.9% of net revenues for the year versus $16.8 million or 18.5% of Net Revenue
last year. Last years expenses included a $2.7 million impairment charge
realized on the Bobs Texas Style® and Tato Skins® trademarks. Excluding these
write downs, last years expenses would have been 15.5% of net revenues.
The Companys effective income tax expense rate was 42.1% in 2008 while
its effective tax benefit rate was 32.1% in 2007. The change in the effective rate is due to
differences in non-deductible expenses, primarily stock based compensation
related to individual stock option grants.
Net income for 2008 was $2.4 million, representing a $3.9 million
increase when compared to net loss of $1.5 million for 2007. The net income for 2008 equated to $0.13 per
basic and diluted share, compared with $(0.08) per basic and diluted share, in
2007.
Liquidity and Capital Resources
Net working capital was $4.5 million (a current ratio of 1.2:1) and
$3.6 million (a current ratio of 1.2:1) at December 27, 2008 and December 29,
2007, respectively. For the fiscal year
ended December 27, 2008, operating activities provided $5.4 million,
primarily as a result of our generation of net income in fiscal year 2008,
compared to a net loss in 2007, and an increase in accounts payable and accrued
liabilities of $1.9 million. Investing
activities utilized $3.9 million, primarily due to the purchase of fixed
assets. Financing activities utilized
$1.3 million, largely due to the Companys payments towards debt borrowings and
purchases of treasury stock.
For the fiscal year ended December 29, 2007, the Company utilized
$0.7 million in operating activities primarily as a result of increased
inventories. Investing activities
utilized $23.4 million, primarily due to the acquisition of Rader Farms and the
purchase of fixed assets. Financing
activities provided $15.9 million, largely due to debt borrowings and draw
downs on the Companys line of credit.
The Companys Goodyear, Arizona manufacturing and
distribution facility is subject to a $1.6 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
$16,825 are determined based on a twenty-year amortization period.
The Companys Bluffton, Indiana manufacturing and
distribution facility was purchased for $3.0 million in December, 2006. The
facility is subject to a $2.3 million mortgage loan from U.S. Bank National
Association,
(U.S.
Bank) bears interest at the 30
day LIBOR plus 165 basis points and is secured by the building and the land on
which it is located. The interest rate associated with this debt instrument was
fixed to 6.85% via an interest rate swap agreement with U.S. Bank in December 2006. The loan matures in December, 2016; however
monthly principal and interest installments of $18,392 are determined based on
a twenty-year amortization period.
To fund the acquisition of Rader Farms the Company
entered into a Loan Agreement (the Loan Agreement) with U.S. Bank. Each of
our subsidiaries is a guarantor of the Loan Agreement, which is secured by a
pledge of all of the assets of our consolidated group. The borrowing capacity
available to us under the Loan Agreement consists of notes representing:
·
a $15,000,000 revolving line of credit
maturing on June 30, 2011; based on asset eligibility, there was $3.0
20
Table of Contents
million of borrowing availability under the line of
credit at December 27, 2008.
·
an equipment term loan, secured by the
equipment acquired, subject to a $5.8 million mortgage loan from U.S. Bank,
bears interest at the 30 day LIBOR plus 165 basis points. The loan matures in
May, 2014 and monthly principal installments are $71,429 plus interest and
·
a real estate term loan, secured by a
leasehold interest in the real property we are leasing from the former owners
of Rader Farms in connection with the Acquisition, subject to a $4.0 million
real estate term loan from U.S. Bank, bears interest at the 30 day LIBOR plus
165 basis points. The interest rate associated with this debt instrument was
fixed to 4.28% via an interest rate swap agreement with U.S. Bank in
January 2008. The loan matures in July, 2017; however monthly principal
and interest installments of $36,357 are determined based on a fifteen-year
amortization period.
The Company
believes that its current financing arrangement with U.S. Bank will provide
adequate ability to finance future capital expenditures, including planned
improvements to our Goodyear, AZ facility in 2009.
All borrowings under the revolving line of credit
will bear interest at either (i) the prime rate of interest announced by U.S.
Bank from time to time or (ii) LIBOR, plus the LIBOR Rate Margin (as
defined in the revolving credit facility note). The term loan will bear
interest at LIBOR, plus the LIBOR Rate Margin (as defined in the term loan
note).
As is customary in such financings, U.S. Bank may
terminate its commitments and accelerate the repayment of amounts outstanding
and exercise other remedies upon the occurrence of an event of default (as
defined in the Loan Agreement), subject, in certain instances, to the expiration
of an applicable cure period. The agreement requires the Company to maintain
compliance with certain financial covenants, including a minimum tangible net
worth, a minimum fixed charge coverage ratio and a debt to equity ratio. At December 27,
2008, the Company was in compliance with all of the financial covenants.
At December 27, 2008, the Company had a net operating loss
carryforward available for federal income taxes of approximately $0.6
million. The Companys accumulated net
operating loss carryforward will begin to expire in 2023.
Off-Balance Sheet Arrangements
Under SEC regulations, in certain circumstances, the Company is
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; and
·
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.
The Company does not have any off-balance sheet arrangements that are
required to be disclosed pursuant to these regulations, other than those
described in the Notes to Consolidated Financial Statements. The Company does not have, nor does it engage
in, transactions with any special purpose entities. Other than an interest rate swap, the Company
is not engaged in any derivative activities and had no forward exchange
contracts outstanding at December 27, 2008. In the ordinary course of business, the
Company enters 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.
Managements Plans
In connection with the implementation of the Companys business
strategy, the Company may incur operating losses in the future and may require
future debt or equity financings (particularly in connection with future
strategic acquisitions, new brand introductions or capital expenditures). Expenditures relating to acquisition-related
integration costs, market and territory expansion and new product development
and introduction may adversely affect promotional and 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 expansion or new products may benefit future periods. Management believes that the Company will
generate positive cash flow from operations during the next twelve months,
which, along with its existing working capital and borrowing facilities, will
enable the Company to meet its operating cash requirements for the next twelve
months. The belief is based on current
operating plans and certain assumptions, including those relating to the
Companys future revenue levels and expenditures, industry and general economic
conditions and other conditions. For instance, if current general economic
conditions continue or worsen, we believe that our sales forecasts may prove to
be less reliable than they have in the past as consumers may change their buying
habits with respect to snack food
21
Table
of Contents
products. Unexpected price increases for commodities used in our snack
products, or adverse weather conditions affecting our Rader Farms crop yield
could also impact our financial condition.
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, will be on
terms attractive to the Company.
Critical Accounting Policies and Estimates
The Securities and Exchange Commission indicated that a critical
accounting policy is one which is both important to the portrayal of the
Companys financial condition and results and requires managements most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. The Company believes that the following
accounting policies fit this definition:
Allowance for Doubtful Accounts.
The Company
maintains an allowance for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. If the financial condition of the Companys
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
Inventories.
The Companys 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.
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. During 2007, the
Company determined the carrying values of two trademarks were impaired
following the completion of a discounted cash flow analysis and recorded a $2.7
million charge as a result. In 2008, the
Company conducted a similar analysis, and believes the carrying values of its
trademarks are appropriate.
In determining that each of our trademarks has an indefinite life,
management considered the factors found in paragraph 11 of SFAS No. 142.
Management believes that each of these trademarks has the continued ability to
generate cash flows indefinitely. Managements determination that these
trademarks have indefinite lives includes an evaluation of historical cash
flows and projected cash flows for each of these trademarks. The Company
continues making investments to market and promote each of these brands, and
management continues to believe that the market opportunities and brand
extension opportunities will generate cash flows for an indefinite period of
time. In addition, there are no legal, regulatory, contractual, economic or
other factors to limit the useful life of these trademarks, and management
intends to renew each of these trademarks, which can be accomplished at little
cost.
Advertising and Promotional Expenses and
Trade Spending.
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 accounted for
as a reduction of revenue 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 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. Marketing programs that deal directly with
the consumer, primarily consisting of in-store demonstrations/samples and a
sponsorship with a professional baseball team, are recorded as a marketing
expense in selling, general and administrative expenses. Further discussion of these marketing
programs is expanded upon below:
·
Demonstrations/Samples
:
The Company periodically arranges
in-store product demonstrations with club stores (i.e. Sams, Costco or BJs)
or grocery retailers. Product
demonstrations are conducted by independent third party providers designated by
the various retailer or club chains.
During the in-store demonstrations the consumers in the stores receive
small samples of our products, and consumers are not required to purchase our
product in order to receive the sample. The cost of product used in the demonstrations,
which is insignificant, and the fee we pay to the independent third party
providers who conduct the in-store demonstrations are recorded as a sales and
marketing expense in selling, general and
22
Table
of Contents
administrative expenses.
·
Sponsorship
: The Company has a sponsorship with the
Arizona Diamondbacks Major League Baseball team. The sponsorship involves using the Arizona
Diamondbacks team and Company marks inside and outside of the stadium to build
awareness for the Company brands.
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 $0.6 million at December 27, 2008. 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. The Company expects to utilize its NOL in
future periods, and no valuation allowance is considered necessary.
Revenue Recognition.
In accordance with accounting principles
generally accepted in the United States, the Company recognizes operating
revenues upon shipment of products to customers provided title and risk of loss
pass to its customers. In those instances where title and risk of loss does not
pass until delivery, revenue recognition is deferred until delivery has
occurred. Revenue for products sold
through our direct store delivery distributed product segment is recognized
when the product is received by the retailer.
Provisions and allowances for sales returns, promotional allowances and
discounts are also recorded as a reduction of revenues in the Companys
consolidated financial statements
Stock-Based
Compensation
.
On January 1, 2006, we adopted
Statement of Financial Accounting Standards (SFAS) 123R,
Share-Based
Payment
,
under the
modified prospective method. SFAS 123R
requires us to measure the cost of employee services received in exchange for
stock options granted using the fair value method as of the beginning of 2006.
We account for our stock options under the fair value
method of accounting using a Black-Scholes valuation model to measure stock
option fair values at the date of grant. Prior to May 2008, all stock option
grants had a 5-year term. The fair value of these stock option grants is
amortized to expense over the vesting period, generally three years for
employees and one year for the Board of Directors. In May 2008, the Companys Board of
Directors approved a 10 year term for all future stock option grants, with
vesting periods of five years and one year for employees and Board of Director
members, respectively.
The above listing is not intended to be a comprehensive list of all of
the Companys accounting policies. In
many cases the accounting treatment of a particular transaction is specifically
dictated by generally accepted accounting principles, with no need for
managements judgment in their application.
See the Companys 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.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109
(FIN 48)
,
which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize in
its financial statements the impact of a tax position if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. The provisions of FIN 48 are effective as of the beginning of the
2007 fiscal year, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. The Companys
adoption of FIN 48 did not affect the financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. While SFAS No. 157
will not impact our valuation methods, it will expand our disclosures of assets
and liabilities which are recorded at fair value. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years.
The Company adopted SFAS No. 157 effective January 1, 2008 and
its adoption did not have a material impact on our financial position, results
of operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS No. 159). SFAS No. 159
allows entities to choose to measure eligible financial instruments at fair
value
23
Table
of Contents
with changes in fair value recognized in earnings of each subsequent
reporting date. The fair value election
is available for most financial assets and liabilities on an
instrument-by-instrument basis and is to be elected on the date the financial
instrument is initially recognized. SFAS
159 is effective for all entities as of the beginning of a reporting entitys
first fiscal year that begins after November 15, 2007 (with earlier
application permitted under certain circumstances). The adoption of SFAS No. 159 had no
impact on the Companys financial position or statement of operations.
In December 2007, the FASB issued SFAS No. 141 (revised
2007),
Business Combinations
(SFAS No. 141(R)),
which replaces SFAS No. 141,
Business
Combinations
. SFAS No. 141(R) retains the underlying
concepts of SFAS No. 141 that require all business combinations to be
accounted for at fair value under the acquisition method of accounting,
however, SFAS No. 141(R) significantly changes certain aspects
of the prior guidance including: (i) acquisition-related costs, except for
those costs incurred to issue debt or equity securities, will no longer be
capitalized and must be expensed in the period incurred; (ii) non-controlling
interests will be valued at fair value at the acquisition date; (iii) in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date; (iv) restructuring costs
associated with a business combination will no longer be capitalized and must
be expensed subsequent to the acquisition date; and (v) changes in
deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date will no longer be recorded as an adjustment of goodwill,
rather such changes will be recognized through income tax expense or directly
in contributed capital. SFAS 141(R) is effective for all business
combinations having an acquisition date on or after the beginning of the first
annual period subsequent to December 15, 2008, with the exception of the
accounting for valuation allowances on deferred taxes and acquired tax
contingencies.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160,
Noncontrolling
Interests in Consolidated Financial Statements an amendment of
Accounting Research Bulletin No. 51
(SFAS 160).
SFAS 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 also establishes disclosure requirements that clearly
identify and distinguish between the controlling and noncontrolling interests
and requires the separate disclosure of income attributable to controlling and
noncontrolling interests. SFAS 160 is effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the impact
that the adoption of SFAS 160 will have on its consolidated financial
statements.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161,
Disclosures about
Derivative Instruments and Hedging Activities an amendment of FASB
Statement No. 133
(SFAS 161). SFAS 161 applies to
all entities and requires specified disclosures for derivative instruments and
related hedge items accounted for under SFAS 133,
Accounting
for Derivative Instruments and Hedging Activities
. SFAS 161 requires enhanced disclosures about
how and why an entity uses derivative instruments, how derivative instruments
and related hedged items are accounted for and their effect on an entitys
financial position, financial performance, and cash flows. SFAS 161 is
effective for fiscal years and interim periods beginning after November 15,
2008. The adoption of SFAS 161 is not
expected to have a material impact on the Companys financial position, results
of operations or liquidity.
24
Table of Contents
Item 8. Financial
Statements and Supplementary Data
Report of Independent
Registered Public Accounting Firm
|
31
|
Consolidated
balance sheets as of December 27, 2008 and December 29, 2007
|
33
|
Consolidated
statements of operations for the years ended December 27, 2008, and
December 29, 2007
|
34
|
Consolidated
statements of shareholders equity for the years ended December 27,
2008, and December 29, 2007
|
35
|
Consolidated
statements of cash flows for the years ended December 27, 2008, and
December 29, 2007
|
36
|
Notes to
consolidated financial statements
|
38
|
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
None.
Item
9A(T). Controls and Procedures.
(a)
Evaluation of
Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Companys 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 Companys 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 SECs rules and forms.
The Companys Chief Executive Officer and Chief Financial Officer do
not expect that the Companys internal controls will prevent all errors and all
fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of internal controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected.
Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that internal controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
No change occurred in our internal controls over financial reporting
(as defined in Rule 13a-15(f) of the Exchange Act) during the three
months ended December 27, 2008 that has materially affected, or is
reasonably likely to materially affect our internal control over financial
reporting.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. Our internal control
over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those
policies and procedures that:
(i)
|
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company;
|
(ii)
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of our
management and directors; and
|
(iii)
|
provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of assets that could have a
material effect on the financial statements.
|
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect all misstatements or instances of fraud. As
such, a control system, no matter how well conceived and operated, can provide
only reasonable assurance that the objectives of the control system are met.
Also, projections of any evaluation of effectiveness to
25
Table
of Contents
future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management assessed the effectiveness of internal control over
financial reporting as of December 27, 2008. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on our assessment and those criteria,
management believes that we maintained effective internal control over
financial reporting as of December 27, 2008.
This Annual Report does not include an attestation report of the
Companys registered public accounting firm regarding internal control over
financial reporting. Managements report
was not subject to attestation by the Companys registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission
that permit the Company to provide only managements report in this Annual
Report.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate
Governance
Code of Ethics
Each of the Companys directors, officers and employees are required to
comply with The Inventure Group, 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 Companys 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 Companys financial
reporting obligations. The Code of
Business Conduct and Ethics and the Financial Code of Ethics are available on
the Companys website at www.inventuregroup.net, 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 5050 N. 40
th
St. Suite #300, Phoenix, Arizona
85018. The Company will post to its
website any amendments to these Codes, or waiver from the provisions thereof,
applicable to the Companys directors or any principal executive officer,
principal financial officer principal accounting officer or controller, or any
person performing similar functions under the Investors-Governance-Code of
Business Conduct-Waivers caption.
The information regarding Directors and Executive Officers appearing
under the headings Proposal 1: Election of Directors, Executive Officers, Meetings
and Committees of the Board of Directors and Section 16(a) Beneficial
Ownership Reporting Compliance of the Companys 2009 Proxy Statement is
incorporated by reference in this section.
Item 11. Executive Compensation
The information appearing under the headings Director Compensation, Employment
Agreements, Compensation Committee Report on Executive Compensation and Executive
Officer Compensation of the Companys 2009 Proxy Statement is incorporated by
reference in this section.
Item 12. Security Ownership of Beneficial Owners and
Management and Related Stockholder Matters
The information appearing under the headings Security Ownership of
Certain Beneficial Owners and Management and Securities Authorized for
Issuance Under Equity Compensation Plans of the Companys 2009 Proxy Statement
is incorporated by reference in this section.
Item 13. Certain Relationships and Related
Transactions, and Director Independence
The information appearing under the heading Meetings and Committees of
the Board of Directors and Certain Relationships and Related Transactions of
the Companys 2009 Proxy Statement is incorporated by reference in this
section.
26
Table of Contents
Item 14. Principal Accountant Fees and Services
Information appearing under the heading Independent Auditors of the
Companys 2009 Proxy Statement is incorporated by reference in this section.
PART IV
Item 15. Exhibits and Financial Statement
Schedules:
The following documents are filed as part of this Annual Report on Form 10-K
1.
Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated balance sheets as of December 27, 2008 and December 29,
2007
Consolidated statements of income for the
years ended December 27, 2008 and December 29, 2007
Consolidated statements of shareholders equity for the years ended December 27,
2008 and December 29, 2007
Consolidated statements of cash flows for the years ended December 27,
2008 and December 29, 2007
Notes to consolidated financial statements
2.
Financial Schedules
Schedules have been omitted because of the absence of conditions under
which they are required or because the information required is included in the
Companys consolidated financial statements or notes thereto.
3.
Exhibits required by
Item 601 of Regulation S-K:
Exhibit
Number
|
|
Description
|
3.1
|
|
Certificate of Incorporation of the Company filed with the Secretary
of State of the State of Delaware on February 23, 1995. (1)
|
3.2
|
|
Certificate of Amendment to the Certificate of Incorporation of the
Company filed with the Secretary of State of the State of Delaware on
March 3, 1995. (1)
|
3.3
|
|
Certificate of Amendment to the Certificate of Incorporation of the
Company filed with the Secretary of State of the State of Delaware on
October 7, 1999. (1)
|
3.4
|
|
By-Laws of the Company (as amended and restated on January 11,
2005). (2)
|
3.5
|
|
Certificate of Amendment to the Certificate of Incorporation of the
Company filed with the Secretary of State of the State of Delaware on
May 24, 2006. (1)
|
4.1
|
|
Specimen Certificate for shares of Common Stock. (3)
|
10.10
|
|
Fixed Rate Note dated June 4, 1997, by and between La Cometa
Properties, Inc. and Morgan Guaranty Trust Company of New York. (4)
|
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. (4)
|
10.12
|
|
Guaranty Agreement dated June 4, 1997, by and between the
Company and Morgan Guaranty Trust Company of New York. (4)
|
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. (5)
|
10.18
|
|
Commercial Lease, dated May 1, 1998, by and between Wabash
Foods, LLC and American Pacific Financial Corporation. (6)
|
27
Table of Contents
10.23
|
|
License Agreement, dated April 3, 2000, by and between the
Company and TGI Fridays Inc. (Certain portions of this exhibit have been
omitted pursuant to a confidential treatment request filed with the
Securities and Exchange Commission.) (7)
|
10.25
|
|
First Amendment to License Agreement, dated as of July 11, 2001,
by and between the Company and TGI Fridays Inc. (certain portions of this
exhibit have been omitted pursuant to a confidentiality treatment request
filed with the Securities and Exchange Commission.) (8)
|
10.33
|
|
Commercial Lease Agreement, dated May 22, 2003, by and between
the Company and Westland Park LLC (9)
|
10.34
|
|
Warehouse Services Agreement, dated June 30, 2003, by and
between the Company and Customized Distribution Services, Inc. (9)
|
10.37 *
|
|
Form of Officer Nonstatutory Stock Option Agreement. (10)
|
10.40
|
|
Loan Agreement (Revolving Line of Credit Loan and Term Loan) dated August 19,
2005 between the Company and U.S. Bank National Association. (11)
|
10.41
|
|
Security Agreement relating to the Loan Agreement dated August 19,
2005 between the Company and U.S. Bank National Association. (11)
|
10.42
|
|
$5 Million Promissory Note (Facility 1 - Revolving Line of Credit
Loan) dated August 19, 2005 between the Company and U.S. Bank National
Association. (11)
|
10.43
|
|
$756,603 Promissory Note (Facility 2 Term Loan) dated August 19,
2005 between the Company and U.S. Bank National Association. (11)
|
10.44*
|
|
Executive Employment Agreement dated August 1, 2005 between the
Company and Steven Sklar. (11)
|
10.45*
|
|
Restricted Stock Agreement dated August 1, 2005 between the
Company and Steven Sklar. (11)
|
10.49*
|
|
Poore Brothers, Inc. Amended and Restated 2005 Equity Incentive
Plan. (12)
|
10.50*
|
|
Form of Director Nonstatutory Stock Option Agreement Amended and
Restated 2005 Equity Incentive Plan. (13)
|
10.51*
|
|
Form of Employee Incentive Stock Option Agreement Amended and
Restated 2005 Equity Incentive Plan. (13)
|
10.52*
|
|
Executive
Employment Agreement by and between Poore Brothers, Inc. and Eric J.
Kufel, dated as of February 14, 2006. (14)
|
10.53*
|
|
Executive
Employment Agreement by and between Poore Brothers, Inc. and Terry
McDaniel, dated as of April 17, 2006. (15)
|
10.54
|
|
Commercial Lease Agreement, dated May 8, 2006, by and between
the Company and B.G. Associates, Inc. (16)
|
10.57*
|
|
Executive
Employment Agreement by and between the Company and Steve Weinberger, dated
as of July 27, 2006. (17)
|
10.58*
|
|
The
Inventure Group, Inc. Deferred Compensation Plan. (18)
|
10.59
|
|
Asset Purchase Agreement dated as of May 17, 2007, by and among
Rader Farms Acquisition Corp., Rader Farms, Inc. and the Company
Shareholders named therein. (19)
|
10.60
|
|
Agricultural Ground Lease dated as of May 17, 2007, by and among
Lyle Rader, Sue Rader, Brad Rader, Julie Newell and Rader Farms Acquisition
Corp. (19)
|
10.61
|
|
Loan Agreement (Revolving Line of Credit and Term Loan) dated as of May 16,
2007, by and between The Inventure Group, Inc. and U.S. Bank, National
Association. (19)
|
10.62
|
|
Promissory Note (Facility 1 Revolving Line of Credit Loan) dated May 16,
2007, by The Inventure Group, Inc. in favor of U.S. Bank, National
Association. (19)
|
10.63
|
|
Promissory Note (Facility 2 Term Loan) dated May 16, 2007, by
The Inventure Group, Inc. in favor of U.S. Bank, National Association. (19)
|
10.64
|
|
Security Agreement (Blanket All Business Assets) dated as of May 16,
2007, by and among between The Inventure Group, Inc., La Cometa
Properties, Inc., Poore Brothers Bluffton, LLC, Tejas PB Distributing, Inc.,
Boulder Natural Foods, Inc., BN Foods, Inc., Rader Farms
Acquisition Corp. and U.S. Bank, National Association. (19)
|
10.65
|
|
Term Loan Agreement dated as of June 28, 2007, by and between
The Inventure Group, Inc. and U.S. Bank, National Association. (19)
|
28
Table of Contents
10.66
|
|
Promissory Note Secured by Deed of Trust (Term Loan) dated June 28,
2007, by The Inventure Group, Inc. in favor of U.S. Bank, National
Association. (19)
|
10.67
|
|
Deed of Trust dated June 28, 2007, by and between Rader Farms
Acquisition Corp. and U.S. Bank National
Association. (19)
|
10.68*
|
|
Letter Agreement effective as of May 19, 2008, by and between
the Company and Eric J. Kufel. (20)
|
21.1
|
|
List of Subsidiaries of the Company. (21)
|
23.1
|
|
Consent of Moss Adams LLP (22)
|
23.2
|
|
Consent of Deloitte & Touche LLP. (22)
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15(d)-14(a). (22)
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
Rule 15(d)-14(a) (22)
|
32
|
|
Certification of Chief Executive Officer and Chief Financial 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. (22)
|
*
|
Management compensatory plan or arrangement.
|
(1)
|
Incorporated by reference to the Companys Current Report on
Form 8-K filed on May 23, 2006.
|
(2)
|
Incorporated by reference to the Companys Current Report on Form 8-K
filed on January 12, 2005.
|
(3)
|
Incorporated by reference to the Companys Registration Statement on
Form SB-2, Registration No. 333-5594-LA.
|
(4)
|
Incorporated by reference to the Companys Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1997.
|
(5)
|
Incorporated by reference to the Companys definitive Proxy Statement
on Schedule 14A filed with the Commission on September 19, 1999.
|
(6)
|
Incorporated by reference to the Companys Annual Report on
Form 10-KSB for the year ended December 31, 1999.
|
(7)
|
Incorporated by reference to the Companys Quarterly Report on
Form 10-QSB for the quarter ended March 31, 2001.
|
(8)
|
Incorporated by reference to the Companys Quarterly Report on
Form 10-QSB for the quarter ended September 30, 2001.
|
(9)
|
Incorporated by reference to the Companys Annual Report on
Form 10-K for the fiscal year ended December 27, 2003.
|
(10)
|
Incorporated by reference to the Companys Annual Report on
Form 10-K for the fiscal year ended December 25, 2004.
|
(11)
|
Incorporated by reference to the to the Companys Quarterly Report on
10-Q for the quarter ended October 1, 2005.
|
(12)
|
Incorporated by reference to the Companys definitive Proxy Statement
on Schedule 14A filed with the Securities and Exchange Commission on April 18,
2008.
|
(13)
|
Incorporated by reference to the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2005.
|
(14)
|
Incorporated by reference to the Companys Current Report on
Form 8-K/A filed on February 16, 2006.
|
(15)
|
Incorporated by reference to the Companys Current Report on
Form 8-K filed on April 17, 2006.
|
(16)
|
Incorporated by reference to the Companys Quarterly Report on 10-Q
for the quarter ended April 1, 2006.
|
(17)
|
Incorporated by reference to the Companys Current Report on Form 8-K
field on July 27, 2006.
|
(18)
|
Incorporated by reference to the Companys Current Report on
Form 8-K as filed on January 23, 2007.
|
(19)
|
By reference to the Companys Quarterly Report on Form 10-Q for
the quarter ended June 30, 2007.
|
(20)
|
Incorporated by reference to the Companys Current Report on
Form 8-K filed on May 9, 2008.
|
(21)
|
Incorporated by reference to the Companys Annual Report on
Form 10-K for the fiscal year ended December 29, 2007.
|
(22)
|
Filed herewith.
|
29
Table
of Contents
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 27, 2009
|
THE INVENTURE GROUP, INC.
|
|
|
|
By:
|
/s/ Terry McDaniel
|
|
Terry McDaniel
|
|
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/ Terry McDaniel
|
|
Chief Executive Officer and Director
|
|
March 27, 2009
|
Terry McDaniel
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Steve Weinberger
|
|
Chief Financial Officer,
Secretary & Treasurer
|
|
March 27, 2009
|
Steve Weinberger
|
|
(Principal Financial and Accounting
Officer)
|
|
|
|
|
|
|
|
/s/ Larry R. Polhill
|
|
Chairman and Director
|
|
March 27, 2009
|
Larry R. Polhill
|
|
|
|
|
|
|
|
|
|
/s/ Ashton D. Asensio
|
|
Director
|
|
March 27, 2009
|
Ashton D. Asensio
|
|
|
|
|
|
|
|
|
|
/s/ Mark S. Howells
|
|
Director
|
|
March 27, 2009
|
Mark S. Howells
|
|
|
|
|
|
|
|
|
|
/s/ Macon Bryce Edmonson
|
|
Director
|
|
March 27, 2009
|
Macon Bryce Edmonson
|
|
|
|
|
|
|
|
|
|
/s/ Ronald Kesselman
|
|
Director
|
|
March 27, 2009
|
Ronald Kesselman
|
|
|
|
|
|
|
|
|
|
/s/ Itzhak Reichman
|
|
Director
|
|
March 27, 2009
|
Itzhak Reichman
|
|
|
|
|
30
Table of Contents
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Inventure Group, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of The
Inventure Group, Inc. and subsidiaries (the Company) as of December 27,
2008 and the related consolidated statements of operations, stockholders
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Companys management.
Our responsibility is to express an opinion on the financial statements
based on our audit.
We conducted our audit in accordance with the standards of the 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. Our audit included 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 Companys 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, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Inventure Group, Inc.
as of December 27, 2008, and the results of their operations and their
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ MOSS ADAMS LLP
Scottsdale, Arizona
March 27, 2009
31
Table
of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board
of Directors and Stockholders of
The Inventure Group, Inc.
Phoenix, AZ
We have
audited the accompanying consolidated balance sheet of The Inventure Group, Inc.
and subsidiaries (f.k.a. Poore Brothers, Inc. and Subsidiaries) (the Company)
as of December 29, 2007, and the related consolidated statements of
operations, stockholders equity, and cash flows for the year ended December 29,
2007. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on the financial statements based on our audit.
We conducted
our audit in accordance with the standards of the 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. Our audit included 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 Companys 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,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of The Inventure Group, Inc. (f.k.a.
Poore Brothers, Inc. and Subsidiaries) as of December 29, 2007, and
the results of their operations and their cash flows for the year ended December 29,
2007, in conformity with accounting principles generally accepted in the United
States of America.
/s/
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 27, 2009
32
Table of Contents
THE INVENTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
December 27,
2008
|
|
December 29,
2007
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
683,567
|
|
$
|
494,918
|
|
Accounts receivable, net of allowance for
doubtful accounts of $80,740 in 2008 and $29,161 in 2007
|
|
9,767,750
|
|
8,604,741
|
|
Inventories, net
|
|
13,979,526
|
|
11,585,597
|
|
Deferred income tax asset
|
|
831,779
|
|
1,180,349
|
|
Other current assets
|
|
777,192
|
|
707,093
|
|
Total current assets
|
|
26,039,814
|
|
22,572,698
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
24,548,060
|
|
23,436,752
|
|
Goodwill, net
|
|
11,616,225
|
|
11,589,988
|
|
Trademarks and other intangibles, net
|
|
2,799,160
|
|
2,827,742
|
|
Other assets
|
|
257,783
|
|
263,539
|
|
Total assets
|
|
$
|
65,261,042
|
|
$
|
60,690,719
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,629,321
|
|
$
|
6,001,136
|
|
Line of credit
|
|
8,188,990
|
|
7,452,309
|
|
Accrued liabilities
|
|
4,520,347
|
|
4,206,078
|
|
Current portion of long-term debt
|
|
1,204,080
|
|
1,181,888
|
|
Current portion of accrued costs related to
brand discontinuance and other exit cost accruals
|
|
|
|
97,229
|
|
Total current liabilities
|
|
21,542,738
|
|
18,938,640
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
11,251,510
|
|
12,445,383
|
|
Interest rate swaps
|
|
886,222
|
|
|
|
Deferred income tax liability
|
|
2,529,266
|
|
1,574,727
|
|
Total liabilities
|
|
36,209,736
|
|
32,958,750
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 8 and
12)
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Preferred stock, $100 par value; 50,000
shares authorized; no shares issued or outstanding at December 27, 2008
and December 29, 2007
|
|
|
|
|
|
Common stock, $.01 par value; 50,000,000
shares authorized; 18,232,586 and 20,186,213 shares issued and outstanding at
December 27, 2008 and December 29, 2007, respectively
|
|
182,525
|
|
201,863
|
|
Additional paid-in capital
|
|
25,740,911
|
|
29,304,491
|
|
Accumulated other comprehensive income
|
|
(448,610
|
)
|
|
|
Retained earnings
|
|
3,576,480
|
|
1,207,189
|
|
|
|
29,051,306
|
|
30,713,543
|
|
Less : treasury stock, at cost: -0- shares
at December 27, 2008 and 1,345,398 shares at December 29, 2007
|
|
|
|
(2,981,574
|
)
|
Total shareholders equity
|
|
29,051,306
|
|
27,731,969
|
|
Total liabilities and shareholders equity
|
|
$
|
65,261,042
|
|
$
|
60,690,719
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
33
Table of Contents
THE INVENTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
December 27,
2008
|
|
December 29,
2007
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
113,058,715
|
|
$
|
90,910,580
|
|
|
|
|
|
|
|
Cost of revenues
|
|
90,864,406
|
|
75,331,567
|
|
|
|
|
|
|
|
Gross profit
|
|
22,194,309
|
|
15,579,013
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses
|
|
16,827,692
|
|
14,146,981
|
|
Impairment of intangible assets
|
|
|
|
2,671,372
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
5,366,617
|
|
(1,239,340
|
)
|
|
|
|
|
|
|
Interest expense, net
|
|
(1,275,535
|
)
|
(974,223
|
)
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
4,091,082
|
|
(2,213,563
|
)
|
|
|
|
|
|
|
Income tax benefit (provision)
|
|
(1,721,791
|
)
|
710,090
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,369,291
|
|
$
|
(1,503,473
|
)
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
Basic
|
|
$
|
0.13
|
|
$
|
(0.08
|
)
|
Diluted
|
|
$
|
0.13
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
Weighted average number of common shares:
|
|
|
|
|
|
Basic
|
|
18,736,331
|
|
19,206,344
|
|
Diluted
|
|
18,736,331
|
|
19,206,344
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
34
Table of Contents
THE INVENTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
Additional
|
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
|
Common Stock
|
|
Paid-in
|
|
Retained
|
|
Comprehensive
|
|
Treasury
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Income (Loss)
|
|
Stock, at Cost
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 30, 2006
|
|
20,150,746
|
|
$
|
201,508
|
|
$
|
28,854,243
|
|
$
|
2,710,662
|
|
$
|
|
|
$
|
(1,845,421
|
)
|
$
|
29,920,992
|
|
Exercise of common stock options, including
related tax benefit
|
|
35,467
|
|
355
|
|
76,976
|
|
|
|
|
|
|
|
77,331
|
|
Restricted stock and
related compensation expense
|
|
|
|
|
|
60,793
|
|
|
|
|
|
|
|
60,793
|
|
Stock-based compensation expense
|
|
|
|
|
|
312,479
|
|
|
|
|
|
|
|
312,479
|
|
Purchase of treasury stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
(1,136,153
|
)
|
(1,136,153
|
)
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
(1,503,473
|
)
|
|
|
|
|
(1,503,473
|
)
|
Balance, December 29, 2007
|
|
20,186,213
|
|
$
|
201,863
|
|
$
|
29,304,491
|
|
$
|
1,207,189
|
|
$
|
|
|
$
|
(2,981,574
|
)
|
$
|
27,731,969
|
|
Net income
|
|
|
|
|
|
|
|
2,369,291
|
|
|
|
|
|
2,369,291
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
(448,610
|
)
|
|
|
(448,610
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,920,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock and
related compensation expense
|
|
|
|
|
|
31,812
|
|
|
|
|
|
|
|
31,812
|
|
Stock-based compensation expense
|
|
|
|
|
|
260,925
|
|
|
|
|
|
|
|
260,925
|
|
Purchase of treasury stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
(894,081
|
)
|
(894,081
|
)
|
Retirement of treasury stock, at cost
|
|
(1,933,827
|
)
|
(19,338
|
)
|
(3,856,317
|
)
|
|
|
|
|
3,875,655
|
|
|
|
Balance, December 27, 2008
|
|
18,252,386
|
|
$
|
182,525
|
|
$
|
25,740,911
|
|
$
|
3,576,480
|
|
$
|
(448,610
|
)
|
$
|
|
|
$
|
29,051,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
35
Table of Contents
THE INVENTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
December 27,
2008
|
|
December 29,
2007
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,369,291
|
|
$
|
(1,503,473
|
)
|
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Depreciation
|
|
2,737,526
|
|
2,054,013
|
|
Amortization
|
|
49,025
|
|
52,273
|
|
Impairment of trademark
|
|
|
|
2,671,372
|
|
Provision for bad debts
|
|
83,794
|
|
84,346
|
|
Deferred income taxes
|
|
1,602,186
|
|
(702,672
|
)
|
Share-based compensation expense
|
|
260,925
|
|
312,479
|
|
Restricted stock compensation expense
|
|
31,812
|
|
60,793
|
|
Excess tax benefit from exercise of stock
options
|
|
|
|
(5,827
|
)
|
(Gain on sale)/loss on disposition of
equipment
|
|
1,360
|
|
(2,760
|
)
|
Change in assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(1,246,803
|
)
|
(463,903
|
)
|
Inventories
|
|
(2,393,928
|
)
|
(2,460,997
|
)
|
Other assets and liabilities
|
|
(41,716
|
)
|
(347,233
|
)
|
Accounts payable and accrued liabilities
|
|
1,914,452
|
|
(445,882
|
)
|
Net cash provided by (used in) operating
activities
|
|
5,367,924
|
|
(697,471
|
)
|
Cash flows used in investing activities:
|
|
|
|
|
|
Purchase of land, building and equipment
|
|
(3,850,964
|
)
|
(2,494,203
|
)
|
Purchase of Rader Farms, Inc.
|
|
|
|
(20,938,678
|
)
|
Proceeds from disposition of equipment
|
|
770
|
|
13,000
|
|
Net cash used in investing activities
|
|
(3,850,194
|
)
|
(23,419,881
|
)
|
Cash flows provided by (used in) financing
activities:
|
|
|
|
|
|
Net borrowings (repayments) on Line of
credit
|
|
736,681
|
|
7,452,309
|
|
Proceeds from issuance of common stock
|
|
|
|
77,331
|
|
Debt borrowings
|
|
|
|
10,166,133
|
|
Payments made on long term debt
|
|
(1,171,681
|
)
|
(624,436
|
)
|
Excess tax benefit from exercise of stock
options
|
|
|
|
5,827
|
|
Treasury stock purchases
|
|
(894,081
|
)
|
(1,136,153
|
)
|
Net cash provided by (used in) financing
activities
|
|
(1,329,081
|
)
|
15,941,011
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
188,649
|
|
(8,176,341
|
)
|
Cash and cash equivalents at beginning of
year
|
|
494,918
|
|
8,671,259
|
|
Cash and cash equivalents at end of year
|
|
$
|
683,567
|
|
$
|
494,918
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
36
Table of Contents
THE INVENTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year Ended
|
|
|
|
December 27,
2008
|
|
December 29,
2007
|
|
Supplemental disclosure of cash flow
information:
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
1,134,900
|
|
$
|
992,735
|
|
Cash paid during the period for income
taxes
|
|
8,717
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash
investing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Rader Farms, Inc.
|
|
|
|
|
|
Fair value of current assets acquired
|
|
|
|
$
|
7,720,037
|
|
Fair value of fixed assets acquired
|
|
|
|
10,472,359
|
|
Goodwill
|
|
|
|
5,603,736
|
|
Trademark
|
|
|
|
1,070,000
|
|
Customer relationship
|
|
|
|
100,000
|
|
Covenant-not-to compete
|
|
|
|
160,000
|
|
Total assets acquired
|
|
|
|
25,126,132
|
|
Fair value of liabilities assumed
|
|
|
|
(4,187,454
|
)
|
Total cash expended to acquire Rader
Farms, Inc.
|
|
|
|
$
|
20,938,678
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
37
Table
of Contents
THE
INVENTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Business and Summary of
Significant Accounting Policies:
The Inventure Group, 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. The Company changed its name from
Poore Brothers, Inc. to The Inventure Group, Inc. on April 10,
2006.
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 Bobs 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®,
OBoisies®, and Pizzarias® trademarks and 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 Canyon Natural
Foods
TM
brand of totally natural potato chips.
In October 2000, the
Company launched its T.G.I. Fridays® brand snacks pursuant to a license
agreement with TGI Fridays Inc., which expires in 2014.
In May 2007, the Company acquired Rader Farms,
Inc. including the Rader Farms® trademark and the Lynden, Washington frozen
fruit processing operation, for a total cost of $20.9 million. See Note 2 to the Consolidated Financial
Statements for additional information.
In October 2007, the
Company launched its BURGER KING
TM
brand snack products pursuant to a license
agreement with Burger King Corporation, which expires in 2012.
The Companys fiscal year ends on the last
Saturday occurring in the month of December of each calendar year. Accordingly, fiscal 2008 commenced December 30,
2007 and ended December 27, 2008.
Our fiscal year ends on the last Saturday of each December, resulting in
an additional week of results every five or six years.
Business
The Company is engaged in
the development, production, marketing and distribution of innovative snack
food products and frozen berry products that are sold primarily through grocery
retailers, mass merchandisers, club stores, convenience stores and vend
distributors across the United States and Internationally. The Company currently manufactures and sells
nationally T.G.I. Fridays® brand snacks under license from TGI Fridays Inc.
and BURGER KING
TM
brand snack products under license from Burger
King Corporation. The Company currently (i) manufactures
and sells its own brands of snack food products, including Poore Brothers®, Bobs
Texas Style® and Boulder Canyon Natural Foods
TM
brand batch-fried potato chips, Tato Skins®
brand potato snacks and OBoises® potato snacks. (ii) manufactures private
label snacks for grocery and various other retail chains and (iii) distributes
in Arizona snack food products that are manufactured by others. The Company sells its T.G.I. Fridays® brand
snack products and BURGER KING
TM
brand snack products to mass merchandisers,
grocery, club and drug stores directly and to primarily convenience stores and
vend operators through independent distributors. The Companys other brands are also sold
through independent distributors.
In
addition, with the acquisition of Rader Farms, the Company grows, processes and
markets premium berry blends, raspberries, blueberries, and rhubarb and
purchases marionberries, cherries, cranberries, strawberries, and other fruits from
a select network of fruit growers for resale.
The fruit is processed, frozen and packaged for sale and distribution
nationally to wholesale customers under the Rader Farms® brand, as well as
through store brands.
38
Table
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Principles of Consolidation
The consolidated financial statements include
the accounts of The Inventure Group, Inc. and all of its wholly owned
subsidiaries. All significant
intercompany amounts and transactions have been eliminated.
Use
of Estimates
The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. The Company routinely
evaluates 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. The 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.
Fair Value of Financial
Instruments
At December 27,
2008 and December 29, 2007, 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 fixed interest at 9.03%,
which has a fair value of $1.3 million at both December 27, 2008 and December 29,
2007. The Company estimates fair values
of financial instruments by using available market information. Considerable judgment is required in
interpreting market data to develop the estimate of fair value. Accordingly, the estimate 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.
Derivative Financial Instruments
The Company utilizes
interest rate swaps in the management of its variable interest rate exposure
and does not enter into derivatives for trading purposes. All derivatives are measured at fair
value. The Companys interest rate swaps
are classified as cash flow hedges.
Cash and Cash Equivalents
The Company considers all
highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents.
Accounts Receivable
Accounts receivable
consist primarily of receivables from customers and distributors for products
purchased. Receivable are past due
when they are unpaid greater than thirty days.
The Company determines any required reserves by considering a number of
factors, including the length of time the accounts receivable have been
outstanding, and the Companys loss history.
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
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. 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. We capitalize
certain computer software and software development costs incurred in connection
with developing or obtaining computer software for internal use. Capitalized
software costs are included in property, plant and equipment and amortized on a
straight-line basis when placed into service over three 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,, the Company evaluates 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.
39
Table of Contents
Intangible
Assets
Goodwill and trademarks are reviewed for impairment annually, or more
frequently if impairment indicators arise. Goodwill, by reporting unit, is
required to be tested for impairment between the annual tests if an event
occurs or circumstances change that more-likely-than-not reduces 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. Amortizable intangible assets
are amortized using the straight-line method over their estimated useful lives,
which is the estimated period over which economic benefits are expected to be
provided.
In determining that each of our trademarks has an indefinite life,
management considered the factors found in paragraph 11 of SFAS No. 142.
Management believes that each of our trademarks has the continued ability to
generate cash flows indefinitely. Managements determination that our
trademarks have indefinite lives includes an evaluation of historical cash
flows and projected cash flows for each of these trademarks. In addition, there
are no legal, regulatory, contractual, economic or other factors to limit the
useful life of these trademarks, and management intends to renew each of these
trademarks, which can be accomplished at little cost.
During 2007, the Company determined the carrying values of two
trademarks were impaired and recorded a $2.7 million charge. In 2008, the Company conducted its annual
review of intangible assets and believes the carrying values are appropriate.
Self-Insurance Reserves
The Company is partially self-insured for the purposes of providing
health care benefits to employees covered by its insurance plan. The plan covers all full-time employees of
the Company on the first day of the month after hiring date for salaried
employees, and the first day of the month following the ninetieth day of
service for hourly employees. The plan
covers the employees dependents, if elected by the employee. The company has contracted with an insurance
carrier for stop loss coverage that comments when $75,000 in claims is paid
annually for a covered participant. In
addition, the Company has contracted for aggregate stop loss insurance which
provides coverage after the maximum amount paid by the Company exceeds
approximately $1.5 million. Estimated
unpaid claims included in accrued liabilities amount to $275,877 and $321,241
at December 27, 2008 and December 29, 2007 respectively. These amounts represents managements best
estimate of amounts that have not been paid prior to the year-end dates. It is reasonably possible that the expense
the Company will ultimately incur could differ.
Advertising and Promotional Expenses and
Trade Spending
.
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 accounted for as a reduction of revenue
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
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 when the transaction occurs.
Marketing programs that deal directly with the consumer, primarily
consisting of in-store demonstration/samples and a sponsorship with a
professional baseball team, are recorded as a marketing expense in selling,
general and administrative expenses. Further discussion of these marketing
programs is expanded upon below:
·
Demonstrations/Samples:
The Company will
periodically arrange in-store product demonstrations with club stores (i.e.
Sams, Costco or BJs) or grocery retailers. Product demonstrations are
conducted by independent third party providers designated by the various retailer
or club chains. During the in-store demonstrations the consumers in the stores
receive small samples of our products, and consumers are not required to
purchase our product in order to receive the sample. The cost of product used
in the demonstrations, which is insignificant, and the fee paid to the
independent third party providers who conduct the in-store demonstrations are
recorded as a sales and marketing expense in selling, general and
administrative expenses.
·
Sponsorship
: The Company has a sponsorship with the
Arizona Diamondbacks Major League Baseball team. The sponsorship involves using the Arizona
Diamondbacks team and Company marks inside and outside of the stadium to build
awareness for the Company brands.
Revenue
Recognition
In accordance with
accounting principles generally accepted in the United States, the Company
recognizes operating revenues upon shipment of products to customers provided
title and risk of loss pass to its customers. In those instances where title
and risk of loss does not pass until delivery, revenue recognition is deferred
until delivery has occurred. Revenue for
products sold through our direct store delivery distributed product segment is
recognized when the product is received by the retailer. Provisions and allowances for sales returns,
promotional allowances and discounts are also recorded as a reduction of
revenues in the Companys consolidated financial statements.
40
Table of
Contents
Income
Taxes
We account for
income taxes under the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements.
Under this method, deferred tax assets and liabilities are determined based on
the differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the period that
includes the enactment date.
We record net
deferred tax assets to the extent we believe these assets will more likely than
not be realized. In making such determination, we consider all available
positive and negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax planning strategies
and recent financial operations.
In July 2006,
the Financial Accounting Standards Board (FASB) issued Financial
Interpretation (FIN) 48, Accounting for Uncertainty in Income Taxes, which
clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with Statement of Financial Accounting
Standards (SFAS) 109, Accounting for Income Taxes. FIN 48 provides that a
tax benefit from an uncertain tax position may be recognized when it is more likely
than not that the position will be sustained upon examination, including
resolutions of any related appeals or litigation processes, based on the
technical merits. Income tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. This interpretation also provides guidance
on measurement, derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We adopted FIN 48
effective January 1, 2007.
It is the
Companys policy to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As of the date
of adoption of FIN 48, the Company did not have any accrued interest or
penalties associated with any unrecognized tax benefits, nor was any interest
or penalties recorded during the years ended December 27, 2008 and December 29,
2007.
The Company files income tax returns in the U.S. federal jurisdiction
and various state jurisdictions. The Companys U.S. federal income tax returns
for years 2005 through 2008 remain open to examination by the Internal Revenue
Service. The Companys state tax returns for years 2004 through 2008 remain
open to examination by the state.
Stock
Options and Stock-Based Compensation
The Companys 1995 Stock Option Plan (the 1995 Plan), as amended,
provided for the issuance of options to purchase 3,500,000 shares of Common
Stock. The options granted pursuant to the 1995 Plan expire over a five-year
period and generally vest over three years. In addition to options granted
under the 1995 Plan, the Company also issued non-qualified options (non-plan
options) to purchase Common Stock to certain Directors and Officers 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 of the underlying common
stock on the date of grant and are non-compensatory. The 1995 Plan expired in
May 2005 with 410,518 reserved but unissued shares of Common Stock available
for issuance under the 1995 Plan, and was replaced by the Inventure Group, Inc.
2005 Equity Incentive Plan (the 2005 Plan) as described below.
The 2005 Plan was approved at the Companys 2005 Annual Meeting of
Shareholders and reserved for issuance that number of shares of Common Stock
determined by adding (a) 410,518, which is the number of reserved but unissued
shares available for issuance under the 1995 Plan, (b) 500,000, which is the
number of additional shares approved by the stockholders on May 23, 2006 to be
added to the 2005 Plan, and (c) 500,000, which is the number of additional
shares approved by the stockholders on May 19, 2008 to be added to the 2005
Plan. If any shares of Common Stock subject
to awards granted under the 1995 Plan or the 2005 Plan are canceled, those
shares will be available for future awards under the 2005 Plan. The 2005 Plan expires in May 2015, and awards
granted under the 2005 Plan may include nonqualified stock options, incentive
stock options, restricted stock, restricted stock units, stock appreciation
rights, performance units and stock-reference awards. Prior to May 2008, all stock option grants
had a 5-year term. The fair value of these stock option grants is amortized to
expense over the vesting period, generally three years for employees and one
year for the Board of Directors. In May
2008, the Companys Board of Directors approved a 10 year term for all future
stock option grants, with vesting periods of five years and one year for
employees and Board of Director members, respectively.
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payment, which requires that compensation cost
related to all share-based payment arrangements, including employee stock
options, be recognized in the financial statements based on the fair value
method of accounting. In addition, SFAS No. 123R requires that excess tax
benefits related to share-based payment arrangements be classified as cash
inflows from financing activities and cash outflows from operating activities.
SFAS No. 123R is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations.
As originally permitted by SFAS 123, the Company had previously elected
to apply the guidance in APB Opinion No. 25, which allowed companies to
use the intrinsic value method of accounting to measure the value of
share-based
41
Table
of Contents
payment transactions with employees. Based on this method, the Company
had not previously recognized the compensation cost related to employee stock
options in the financial statements as the stock options granted had an
exercise price equal to the fair market value of the underlying common stock on
the date of grant. Effective January 1, 2006, the Company adopted the
provisions of SFAS 123R using the modified prospective application method.
Accordingly, prior period amounts have not been restated. Under the modified prospective
application method, the compensation cost related to the unvested stock options
granted prior to the adoption of SFAS No. 123R, and all new awards will be
recognized in the financial statements over the requisite service period based
on the fair value of the awards.
During the years ended December 27, 2008 and December 29,
2007, the total share-based compensation expense from restricted stock
recognized in the financial statements was $31,812 and $60,793, respectively.
There were no share-based compensation costs which were capitalized. As of December 27,
2008 and December 29, 2007 the total unrecognized costs related to
non-vested restricted stock awards granted was $0 and $38,810, respectively.
The Company expects to recognize such costs in the financial statements over a
weighted-average period of three years.
Total share-based compensation expense from vested options recognized
in the financial statements was $260,925 in 2008 and $312,479 in 2007 which
reduced income from operations accordingly. There were no share-based
compensation costs which were capitalized.
There were no stock options exercised during the year ended December 27,
2008. The Company received $77,331 in
cash from the exercise of stock options during the year ended December 29,
2007. The excess tax benefit realized
for the tax deductions from the exercise of options of the share-based payment
arrangements for the year ended December 29, 2007 was $5,827.
For purposes of applying SFAS 123R, the fair value of each stock option
award that was granted prior to the effective date continues to be accounted
for in accordance with SFAS 123 except that amounts must be recognized in
the income statement. The fair value of each stock option grant was estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions for the years ended:
|
|
2008
|
|
2007
|
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
Expected volatility
|
|
46
|
%
|
47
|
%
|
Risk-free interest rate
|
|
1% - 3
|
%
|
4% - 5
|
%
|
Expected life Employees options
|
|
3.5 years
|
|
1.8 years
|
|
Expected life Board of directors options
|
|
1.4 years
|
|
1.6 years
|
|
The expected dividend yield was based on the Companys expectation of
future dividend payouts. The volatility assumption was based on historical volatility
during the time period that corresponds to the expected life of the option. The
expected life (estimated period of time outstanding) of stock options granted
was estimated based on historical exercise activity. The risk-free interest
rate assumption was based on the interest rate of U.S. Treasuries on the date
the option was granted.
As of December 27, 2008, the amount of
unrecognized compensation expense to be recognized over the next two years, in
accordance with SFAS 123R, is approximately $0.2 million. This expected
compensation expense does not reflect any new awards, or modifications to
existing awards, that could occur in the future. Generally, the Company issues
new shares upon the exercise of stock options as opposed to reissuing treasury
shares.
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. Diluted earnings per
share is calculated by including all dilutive common shares such as stock
options and restricted stock. The total stock options outstanding of 2,223,833
and restricted shares outstanding of 35,853 were excluded from the weighted
average per share calculation for the year ended December 27, 2008 because
inclusion of such would be anti-dilutive. Exercises of outstanding stock
options or warrants are assumed to occur for purposes of calculating diluted
earnings per share for periods in which their effect would not be
anti-dilutive. No exercises were assumed for the years ended December 27,
2008 and December 29, 2007 because they would be anti-dilutive. Earnings
per common share was computed as follows for the years ended December 27,
2008 and December 29, 2007:
42
Table of Contents
|
|
2008
|
|
2007
|
|
Basic Earnings Per Common Share:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,369,291
|
|
$
|
(1,503,473
|
)
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
18,736,331
|
|
19,206,344
|
|
Earnings (loss) per common share
|
|
$
|
0.13
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
Diluted Earnings Per Common Share:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,369,291
|
|
$
|
(1,503,473
|
)
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
18,736,331
|
|
19,206,344
|
|
Incremental shares from assumed conversions
- Stock options and restricted stock
|
|
|
|
|
|
Adjusted weighted average number of common
shares
|
|
18,736,331
|
|
19,206,344
|
|
|
|
|
|
|
|
Earnings (loss) per common share
|
|
$
|
0.13
|
|
$
|
(0.08
|
)
|
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109
(FIN 48)
,
which clarifies the
accounting for uncertainty in tax positions. FIN 48 requires that the Company
recognize in its financial statements the impact of a tax position if that
position is more likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 are effective as of
the beginning of the 2007 fiscal year, with the cumulative effect of the change
in accounting principle recorded as an adjustment to opening retained earnings.
The Companys adoption of FIN 48 did not affect the financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157)
,
which clarifies the definition of fair value whenever
another standard requires or permits assets or liabilities to be measured at
fair value. Specifically, the standard clarifies that fair value should be
based on the assumptions market participants would use when pricing the asset
or liability, and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. SFAS No. 157 also requires
expanded financial statement disclosures about fair value measurements,
including disclosure of the methods used and the effect on earnings. SFAS No. 157
is effective for fiscal years beginning after November 15, 2007. The
adoption of SFAS No. 157 had no impact on the Companys financial position
or statement of operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities
(SFAS No. 159). SFAS No. 159
allows entities to choose to measure eligible financial instruments at fair
value with changes in fair value recognized in earnings of each subsequent
reporting date. The fair value election is available for most financial assets
and liabilities on an instrument-by-instrument basis and is to be elected on
the date the financial instrument is initially recognized. SFAS 159 is
effective for all entities as of the beginning of a reporting entitys first
fiscal year that begins after November 15, 2007 (with earlier application
permitted under certain circumstances). The adoption of SFAS No. 159 had
no impact on the Companys financial position or statement of operations.
In December 2007, the FASB issued
SFAS No. 141 (revised 2007),
Business
Combinations
(SFAS No. 141(R)), which replaces
SFAS No. 141,
Business
Combinations
. SFAS No. 141(R) retains the underlying
concepts of SFAS No. 141 that require all business combinations to be
accounted for at fair value under the acquisition method of accounting,
however, SFAS No. 141(R) significantly changes certain aspects
of the prior guidance including: (i) acquisition-related costs, except for
those costs incurred to issue debt or equity securities, will no longer be
capitalized and must be expensed in the period incurred; (ii) non-controlling
interests will be valued at fair value at the acquisition date; (iii) in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date; (iv) restructuring costs
associated with a business combination will no longer be capitalized and must
be expensed subsequent to the acquisition date; and (v) changes in
deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date will no longer be recorded as an adjustment of goodwill,
rather such changes will be recognized through income tax expense or directly
in contributed capital. SFAS 141(R) is effective for all business
combinations having an acquisition date on or after the beginning of the first
annual period subsequent to December 15, 2008, with the exception of the
accounting for valuation allowances on deferred taxes and acquired tax
contingencies. SFAS 141(R) amends SFAS 109 such that adjustments
made to valuation allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective date of
SFAS 141(R) would also apply the provisions of SFAS 141(R).
43
Table
of Contents
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160,
Noncontrolling
Interests in Consolidated Financial Statements an amendment of
Accounting Research Bulletin No. 51
(SFAS 160).
SFAS 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 also establishes disclosure requirements that clearly
identify and distinguish between the controlling and noncontrolling interests
and requires the separate disclosure of income attributable to controlling and
noncontrolling interests. SFAS 160 is effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the impact
that the adoption of SFAS 160 will have on its consolidated financial
statements.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161,
Disclosures about
Derivative Instruments and Hedging Activities an amendment of FASB
Statement No. 133
(SFAS 161). SFAS 161 applies to
all entities and requires specified disclosures for derivative instruments and
related hedge items accounted for under SFAS 133,
Accounting
for Derivative Instruments and Hedging Activities
. SFAS 161 requires enhanced disclosures about
how and why an entity uses derivative instruments, how derivative instruments
and related hedged items are accounted for and their effect on an entitys
financial position, financial performance, and cash flows. SFAS 161 is
effective for fiscal years and interim periods beginning after November 15,
2008. The adoption of SFAS 161 is not
expected to have a material impact on the Companys financial position, results
of operations or liquidity.
2.
Acquisition:
Rader Farms, Inc.
On May 17,
2007, The Inventure Group, Inc. and subsidiaries (The Inventure Group or
the Company) completed the acquisition of Rader Farms, Inc. (Rader Farms)
for a total cost of approximately $20.9 million, including $0.2 million of
acquisition costs, which was funded by cash of $4.9 million plus $16 million
in debt. Rader Farms is a Washington corporation located in Whatcom County. The
Company grows processes and markets premium berry blends, raspberries,
blueberries, and rhubarb and purchases marionberries, cherries, cranberries and
strawberries from a select network of fruit growers for resale. The fruit is
processed, frozen and packaged for sale and distribution to wholesale
customers.
The
acquisition was accounted for as a purchase pursuant to Statement of Financial
Accounting Standards No. 141,
Business Combinations
(SFAS No. 141), and accordingly, the operating results of Rader Farms are
included in our consolidated financial statements from the date of acquisition.
The purchase price was determined through an arms-length negotiation between
the parties, and has been allocated to the underlying assets based on an
estimate of fair values and remaining economic lives. Adjustments have been
made to the original purchase price allocation to adjust inventory and accounts
receivables acquired at the purchase date. The estimated amortization period
for the intangibles acquired and valued to date in this transaction consist of
the customer relationship amortized over 10 years and the covenant-not-to-compete
amortized over 5 years. The Goodwill recognized in the transaction is
essentially equivalent for both book and tax purposes.
The following table summarizes the fair value
for the assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
Useful Life
|
|
|
|
|
|
|
|
Fair value of current assets acquired
|
|
$
|
7,720,037
|
|
|
|
Fair value of fixed assets acquired
|
|
10,472,359
|
|
|
|
Goodwill
|
|
5,603,736
|
|
|
|
Trademarks
|
|
1,070,000
|
|
|
|
Customer relationship
|
|
100,000
|
|
10 years
|
|
Covenant not to compete
|
|
160,000
|
|
5 years
|
|
Total assets acquired
|
|
25,126,132
|
|
|
|
Fair value of current liabilities assumed
|
|
(4,187,454
|
)
|
|
|
Net assets acquired
|
|
$
|
20,938,678
|
|
|
|
The following unaudited pro-forma
consolidated results of operations for the year ended December 29, 2007 assumes
the Rader Farms acquisition occurred as of the beginning of the year. The
pro-forma results are not necessarily indicative of the actual results that
would have occurred had the acquisition been completed as of the beginning of
the period presented, nor is it necessarily indicative of future consolidated
results.
|
|
Year Ended
|
|
|
|
December 29, 2007
|
|
|
|
|
|
Total revenues
|
|
$
|
105,732,297
|
|
Net income (loss)
|
|
$
|
(763,832
|
)
|
Basic earnings (loss) per share
|
|
$
|
(0.04
|
)
|
Diluted earnings (loss) per share
|
|
$
|
(0.04
|
)
|
3. Goodwill
and Trademarks:
Goodwill, trademarks and other intangibles, net
consisted of the following
as of December 27, 2008 and December 29, 2007:
44
Table
of Contents
|
|
Estimated
Useful Life
|
|
December 27,
2008
|
|
December 29,
2007
|
|
Goodwill:
|
|
|
|
|
|
|
|
The Inventure Group, Inc.
|
|
|
|
$
|
5,986,252
|
|
$
|
5,986,252
|
|
Rader Farms, Inc.
|
|
|
|
5,629,973
|
|
5,603,736
|
|
|
|
|
|
|
|
|
|
Total goodwill, net
|
|
|
|
$
|
11,616,225
|
|
$
|
11,589,988
|
|
|
|
|
|
|
|
|
|
Trademarks:
|
|
|
|
|
|
|
|
The Inventure Group, Inc.
|
|
|
|
$
|
1,535,659
|
|
$
|
1,535,659
|
|
Rader Farms, Inc.
|
|
|
|
1,070,000
|
|
1,070,000
|
|
|
|
|
|
|
|
|
|
Other intangibles:
|
|
|
|
|
|
|
|
Rader - Covenant-not-to-compete, gross
carrying amount
|
|
5 years
|
|
160,000
|
|
160,000
|
|
Rader - Covenant-not-to-compete, accum.
amortization
|
|
|
|
(50,673
|
)
|
(18,667
|
)
|
Rader - Customer relationship, gross
carrying amount
|
|
10 years
|
|
100,000
|
|
100,000
|
|
Rader - Customer relationship, accum.
amortization
|
|
|
|
(15,826
|
)
|
(19,250
|
)
|
|
|
|
|
|
|
|
|
Total trademarks and other intangibles, net
|
|
|
|
$
|
2,799,160
|
|
$
|
2,827,742
|
|
The weighted average useful life of
amortizable intangible assets is 6.92 years.
Amortization expense for the years ending December 27, 2008 and December 29,
2007 was $49,025 and $52,273, respectively. As of December 27, 2008, we
expect amortization expense on these intangible assets over the next five years
to be as follows:
2009
|
|
$
|
42,000
|
|
2010
|
|
$
|
42,000
|
|
2011
|
|
$
|
42,000
|
|
2012
|
|
$
|
23,327
|
|
2013
|
|
$
|
10,000
|
|
Goodwill
and trademarks are reviewed for impairment annually in the second fiscal
quarter, 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 reduces 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 the carrying values of its intangible
assets are appropriate.
4.
Accrued Liabilities:
Accrued
liabilities consisted of the following as of December 27, 2008 and December 29,
2007:
|
|
2008
|
|
2007
|
|
Accrued payroll and payroll taxes
|
|
$
|
1,531,079
|
|
$
|
1,385,596
|
|
Accrued royalties and commissions
|
|
679,152
|
|
561,458
|
|
Accrued advertising and promotion
|
|
669,256
|
|
1,022,639
|
|
Accrued other
|
|
1,640,860
|
|
1,236,385
|
|
|
|
$
|
4,520,347
|
|
$
|
4,206,078
|
|
5.
Inventories:
Inventories
consisted of the following as of December 27, 2008 and December 29,
2007:
|
|
2008
|
|
2007
|
|
Finished goods
|
|
$
|
6,133,453
|
|
$
|
3,838,344
|
|
Raw materials
|
|
7,846,073
|
|
7,747,253
|
|
|
|
$
|
13,979,526
|
|
$
|
11,585,597
|
|
45
Table
of Contents
6. Property and Equipment:
Property and
equipment consisted of the following as of December 27, 2008 and December 29,
2007:
|
|
Useful Lives
|
|
2008
|
|
2007
|
|
Buildings and improvements
|
|
20 30 years
|
|
$
|
10,797,734
|
|
$
|
10,799,281
|
|
Equipment
|
|
7 15 years
|
|
23,444,317
|
|
20,402,765
|
|
Land
|
|
|
|
346,506
|
|
346,506
|
|
Vehicles
|
|
5 years
|
|
117,918
|
|
268,330
|
|
Furniture and office equipment
|
|
2 5 years
|
|
4,133,450
|
|
3,174,208
|
|
|
|
|
|
38,839,925
|
|
34,991,090
|
|
Less accumulated depreciation and
amortization
|
|
|
|
(14,291,865
|
)
|
(11,554,338
|
)
|
|
|
|
|
$
|
24,548,060
|
|
$
|
23,436,752
|
|
7. Long-Term Debt and Line of Credit:
Long-term debt consisted of the following as of December 27, 2008
and December 29, 2007:
|
|
December 27,
2008
|
|
December 29,
2007
|
|
Mortgage loan due monthly through July,
2012; interest at 9.03%; collateralized by land and building in
Goodyear, AZ
|
|
$
|
1,577,093
|
|
$
|
1,633,771
|
|
Mortgage loan due monthly through December,
2016; interest rate at 30 day LIBOR plus 165 basis points, fixed through
a swap agreement to 6.85%; collateralized by land and building in Bluffton,
IN
|
|
2,284,909
|
|
2,344,220
|
|
Equipment term loan due monthly through
May, 2104; interest at LIBOR plus 165 basis points; collateralized by
equipment at Rader Farms in Lynden, WA
|
|
4,714,286
|
|
5,571,429
|
|
Real Estate term loan due monthly through
July, 2017; interest at LIBOR plus 165 basis points; fixed through a swap agreement to 4.28%; secured
by a leasehold interest in the real property in Lynden, WA
|
|
3,780,919
|
|
3,937,763
|
|
Vehicle term loan and other miscellaneous loans
due in various monthly installments through February, 2011; collateralized by
vehicles
|
|
88,183
|
|
140,088
|
|
Office Equipment leases due June 2012
|
|
10,200
|
|
|
|
|
|
12,455,590
|
|
13,627,271
|
|
Less current portion of long-term debt
|
|
(1,204,080
|
)
|
(1,181,888
|
)
|
Long-term debt, less current portion
|
|
$
|
11,251,510
|
|
$
|
12,445,383
|
|
46
Table
of Contents
Annual maturities of long-term debt as of December 27,
2008 are as follows:
Year
|
|
|
|
2009
|
|
$
|
1,204,082
|
|
2010
|
|
1,202,516
|
|
2011
|
|
1,216,446
|
|
2012
|
|
1,226,236
|
|
2013
|
|
1,254,188
|
|
Thereafter
|
|
6,352,123
|
|
|
|
$
|
12,455,591
|
|
To fund the acquisition of Rader Farms, the Company entered into a Loan
Agreement (the Loan Agreement) with U.S. Bank National Association (U.S.
Bank). Each of our subsidiaries is a guarantor of the Loan Agreement, which is
secured by a pledge of all of the assets of our consolidated group. The
borrowing capacity available to us under the Loan Agreement consists of notes
representing:
·
a $15,000,000
revolving line of credit maturing on June 30, 2011; $8,188,990 was
outstanding at December 27, 2008. Based on eligible assets, the amount
available under the line of credit was $3,042,003 at December 27, 2008. As
defined in the revolving credit facility note, all borrowings under the revolving line of credit will bear interest at
either (i) the prime rate of interest announced by U.S. Bank from time to
time or (ii) LIBOR plus the LIBOR Rate Margin. The rate at December 27, 2008 was 3.25%
·
Equipment term
loan due May 2014 noted above.
·
Real estate term
loan due July 2017 noted above.
U.S.
Bank may terminate its commitments and accelerate the repayment of amounts
outstanding and exercise other remedies upon the occurrence of an event of default
(as defined in the Loan Agreement), subject, in certain instances, to the
expiration of an applicable cure period. The agreement requires the Company to
maintain compliance with certain financial covenants, including a minimum
tangible net worth, a minimum fixed charge coverage ratio and a minimum current
ratio. At December 27, 2008, the Company was in compliance with all of the
financial covenants. Deferred financing fees totaling $119,744, which are
included in Other Assets, were recorded in connection with the Loan Agreement
and are being amortized over the life of the loan.
Interest income (expense), net consisted of
the following for the fiscal years ended December 27, 2008 and December 29,
2007:
|
|
2008
|
|
2007
|
|
Interest expense
|
|
$
|
(1,275,872
|
)
|
$
|
(1,172,989
|
)
|
|
|
|
|
|
|
Interest income
|
|
337
|
|
198,766
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
$
|
(1,275,535
|
)
|
$
|
(974,223
|
)
|
Interest Rate Swaps
To
manage exposure to changing interest rates, the Company selectively enters into
interest rate swap agreements. The
Companys interest rate swaps qualify for and are designated as cash flow
hedges. Changes in the fair value of a
swap that is highly effective and that is designated and qualifies as a cash
flow hedge to the extent that the hedge is effective, are recorded in other
comprehensive income (loss).
The
Company entered into an interest rate swap in 2006 to convert the interest rate
of the mortgage to purchase the Bluffton, Indiana plant from the contractual
rate of 30 day LIBOR plus 165 basis points to a fixed rate of 6.85%. On
September 28, 2008, the Companys first day of its fiscal fourth quarter, the
Company prospectively redesignated the hedging relationship to a cash flow
hedge. The swap has a fixed pay-rate of
6.85% and a notional amount of approximately $2.3 million at December 27,
2008 and expires in December, 2016. We
evaluate the effectiveness of the hedge on a quarterly basis and at December 27,
2008 the hedge is highly effective. The
interest rate swap had fair value of ($425,726) at December 27, 2008,
which is recorded as a liability on the accompanying consolidated balance
sheet. The swap value was determined in
accordance with SFAS No. 157 using Level 2 observable inputs and
approximates the net loss that would have
47
Table
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been
realized if the contract had been settled on December 27, 2008. An unrealized loss of $138,528 was recorded
as interest expense in the Companys condensed, consolidated statement of
operations during the three quarters ending September 27, 2008, associated
with this swap.
The
Company entered into another interest rate swap in January 2008 to
effectively convert the interest rate of the real estate term loan to a fixed
rate of 4.28%. The interest rate swap is
structured with a decreasing notional amounts to match the expected pay down of
the debt. The notional value of the swap
at December 27, 2008 was $3.8 million.
The interest rate swap is effective through December 27, 2008 and
is accounted for as a cash flow hedge derivative. We evaluate the effectiveness of the hedge on
a quarterly basis and during the year ended December 27, 2008 the hedge is
highly effective. The interest rate swap
had fair value of ($460,496) at December 27, 2008, which is recorded as a
liability on the accompanying consolidated balance sheet, and was recorded in
Accumulated other comprehensive income, all of which represents the change in
fair value for the year ended December 27, 2008. This value was determined in accordance with
SFAS No. 157 using Level 2 observable inputs and approximates the net loss
that would have been realized if the contract had been settled on December 27,
2008.
8. Commitments and Contingencies:
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 Companys financial
position or results of operations. See Note 12, Litigation.
The Company leases one-half of a 200,000 square foot facility in
Bluffton, Indiana which is used as a distribution center. The Company entered
into an operating lease, the initial term expiring in November 2006, with
respect to the facility and has entered into the first of two three-year
renewal options. Current lease payments are approximately $32,500 per month. The
Company also has entered into a service agreement expiring in December 2009
with a third party for warehousing services. The service agreement includes
certain minimum monthly usage commitments amounting to $1,188,000 in each of
2008 and 2009.
The Company owns a farming, processing and storage facility located on
696 acres of land in Lynden, Washington, which is leased from the Uptrails
Group LLC, owned by four members of the Rader family. One of the four, Brad
Rader, is a current employee of the Company and two of the others, Lyle and Sue
Rader, were the former owners of Rader Farms. This operating lease commenced on
the acquisition date and is effect until May 17, 2017. Lease payments are
$43,500 per month throughout the term of the lease.
In addition to the Companys facility and
land leases, the Company has entered into a variety of operating leases for
equipment and vehicles. Rental expense
under all operating leases was $2,111,242 and $1,658,886 for fiscal 2008 and
2007, respectively. Minimum future
rental commitments under non-cancelable leases as of December 27, 2008 are
as follows:
Year
|
|
Operating
Leases
|
|
2009
|
|
$
|
1,581,000
|
|
2010
|
|
1,260,000
|
|
2011
|
|
1,027,000
|
|
2012
|
|
925,000
|
|
2013
|
|
564,000
|
|
Thereafter
|
|
1,948,000
|
|
Total
|
|
$
|
7,305,000
|
|
|
|
|
|
|
|
The Company licenses technology from a third
party in connection with the manufacture of its T.G.I. Fridays® and Tato
Skins® brand products and has a royalty-bearing, exclusive right license to use
the technology in the United States, Canada, and Mexico until such time the
parties mutually agree to terminate the agreement and provide written sixty
(60) days notice to each other. In
consideration for the use of this technology, the Company is required to make
royalty payments to the third party on sales of products manufactured utilizing
the technology until such termination date.
The patents for this technology expired December 26, 2006. However,
should products substantially similar to Tato Skins® , OBoisies® and
Pizzarias® become available, for any reason, in the marketplace by any
manufacturer other than the Company which results in a sales decline of 10% or
more, any royalty obligation for the respective product (s) shall cease.
48
Table
of Contents
The Company
licenses the T.G.I. Fridays® brand snacks trademark from TGI Fridays 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. Fridays® brand
snack products and is required to achieve certain minimum sales levels by
certain dates during the contract term.
The Company
licenses the
BURGER KING
TM
brand snacks trademark from BURGER KING
Corporation under a license agreement with
a term expiring in 2012. Pursuant to the
license agreement, the Company is required to make royalty payments on sales of
BURGER KING
TM
brand snack products and is required to
achieve certain minimum sales levels by certain dates during the contract term.
9. Shareholders
Equity:
Common Stock
Approximately 4.3 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 any future
registration statement of the Company and, upon the effectiveness thereof, may
be sold in the public markets.
On August 1, 2005, the Company issued to its Senior Vice President
of Marketing 35,353 shares of restricted stock under the Companys 2005 Equity
Incentive Plan, subject to vesting in equal annual installments over three
years. The restricted stock was valued
at the fair market value of the Common Stock on the date of grant, and the
resulting unearned compensation expense was $175,000. During 2008 and 2007, amortization expense of
$38,812 and $58,215, respectively, related to this grant is included in
selling, general and administrative expenses.
Preferred Stock
The Company has authorized 50,000 shares of
$100 par value Preferred Stock, none of which is outstanding. The Company may issue such shares of
Preferred Stock in the future without shareholder approval.
Stock Options
The Companys 1995 Stock Option Plan (the
1995 Plan), as amended, provided for the issuance of options to purchase
3,500,000 shares of Common Stock. The
options granted pursuant to the 1995 Plan expire over a five-year period and
generally vest over three years. In
addition to options granted under the 1995 Plan, the Company also issued
non-qualified options (non-plan options) to purchase Common Stock to certain
Directors and Officers 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. The 1995 Plan expired
in May 2005 with 410,518 reserved but unissued shares of Common Stock available
for issuance under the 1995 Plan, and was replaced by the Inventure Group, Inc.
2005 Equity Incentive Plan (the 2005 Plan) as described below.
The 2005 Plan
was approved at the Companys 2005 Annual Meeting of Shareholders and reserved
for issuance that number of shares of Common Stock determined by adding (a)
410,518, which is the number of reserved but unissued shares available for
issuance under the 1995 Plan, (b) 500,000, which is the number of additional
shares approved by the stockholders on May 23, 2006 to be added to the 2005
Plan, and (c) 500,000, which is the number of additional shares approved by the
stockholders on May 19, 2008 to be added to the 2005 Plan. If any shares of Common Stock subject to
awards granted under the 1995 Plan or the 2005 Plan are canceled, those shares
will be available for future awards under the 2005 Plan. The 2005 Plan expires in May 2015, and awards
granted under the 2005 Plan may include: nonqualified stock options, incentive
stock options, restricted stock, restricted stock units, stock appreciation
rights, performance units and stock-reference awards.. Prior to May 2008, all stock option grants
had a 5-year term. The fair value of these stock option grants is amortized to
expense over the vesting period, generally three years for employees and one
year for the Board of Directors. In May
2008, the Companys Board of Directors approved a 10 year term for all future
stock option grants, with vesting periods of five years and one year for
employees and Board of Director members, respectively. As of December 27, 2008, there were 3,032
shares of Common Stock available for Awards under the 2005 Plan.
49
Table
of Contents
During fiscal years 2007 and 2008, stock option
activity was as follows:
|
|
Plan Options
|
|
Non-Plan Options
|
|
|
|
Options
Outstanding
|
|
Weighted
Average
Exercise Price
|
|
Options
Outstanding
|
|
Weighted
Average
Exercise Price
|
|
Balance, December 30, 2006
|
|
722,000
|
|
$
|
2.80
|
|
52,500
|
|
$
|
3.60
|
|
Granted
|
|
1,081,500
|
|
2.71
|
|
|
|
|
|
Canceled
|
|
(125,533
|
)
|
3.13
|
|
(7,500
|
)
|
3.60
|
|
Exercised
|
|
(35,467
|
)
|
2.18
|
|
|
|
|
|
Balance, December 29, 2007
|
|
1,642,500
|
|
$
|
2.73
|
|
45,000
|
|
$
|
3.60
|
|
Granted
|
|
1,000,000
|
|
1.83
|
|
|
|
|
|
Canceled
|
|
(418,667
|
)
|
2.66
|
|
(45,000
|
)
|
3.60
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Balance, December 27, 2008
|
|
2,223,833
|
|
$
|
2.34
|
|
|
|
$
|
|
|
The following table summarizes information
about stock options outstanding and exercisable at December 27, 2008:
Range of
Exercise Prices
|
|
Options
Outstanding
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
Weighted
Average
Exercise
Price
|
|
Options
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
$ 1.59 - $1.94
|
|
1,000,000
|
|
7.5
|
|
$
|
1.83
|
|
|
|
$
|
|
|
$ 2.10 - $2.99
|
|
1,126,833
|
|
2.3
|
|
$
|
2.70
|
|
692,167
|
|
$
|
2.70
|
|
$ 3.08 - $3.60
|
|
82,000
|
|
3.4
|
|
$
|
3.12
|
|
50,667
|
|
$
|
3.12
|
|
$ 4.20 - $5.00
|
|
15,000
|
|
1.6
|
|
$
|
5.00
|
|
15,000
|
|
$
|
5.00
|
|
|
|
2,223,833
|
|
4.6
|
|
$
|
2.34
|
|
757,834
|
|
$
|
2.77
|
|
The following table summarizes information
about stock options outstanding and exercisable at December 29, 2007:
Range of
Exercise Prices
|
|
Options
Outstanding
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
Weighted
Average
Exercise
Price
|
|
Options
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
$ 2.10 - $2.99
|
|
1,530,500
|
|
3.4
|
|
$
|
2.68
|
|
234,999
|
|
$
|
2.66
|
|
$ 3.08 - $3.60
|
|
142,000
|
|
3.1
|
|
$
|
3.13
|
|
60,000
|
|
$
|
3.52
|
|
$ 4.20 - $5.00
|
|
15,000
|
|
2.6
|
|
$
|
5.00
|
|
15,000
|
|
$
|
5.00
|
|
|
|
1,687,500
|
|
3.3
|
|
$
|
2.75
|
|
309,999
|
|
$
|
3.00
|
|
The table below summarizes the number of
exercisable options outstanding and the weighted average exercise prices for
each of the previous two fiscal years:
|
|
Plan Options
|
|
Non-Plan Options
|
|
|
|
Exercisable Options
Outstanding
|
|
Weighted Average
Exercise Price
|
|
Exercisable Options
Outstanding
|
|
Weighted Average
Exercise Price
|
|
December 27, 2008
|
|
757,834
|
|
$
|
2.77
|
|
|
|
$
|
|
|
December 29, 2007
|
|
264,999
|
|
$
|
2.42
|
|
45,000
|
|
$
|
3.60
|
|
The weighted average grant-date fair value of options granted during
the years ending December 27, 2008 and December 29, 2007 was $0.53 and $0.91
respectively.
The total intrinsic value related to stock options exercisable and
outstanding was zero as of December 27, 2008 and as of December 29,
2007. The aggregate intrinsic value is
based on the exercise price and the Companys closing stock price of $1.60 as
of December 27, 2008. and $2.05 as of December 29, 2007.
Treasury Stock
In September 2008, the Companys Board
of Directors approved a stock re-purchase program whereby up to $2 million of
common stock could be purchased from time to time at the discretion of
management (the 2008 program). The
repurchased shares were held as treasury stock and are available for general
corporate purposes. The program expires
August 23, 2009 and the Company continues to evaluate its share repurchase
opportunities.
50
Table
of Contents
Period
|
|
Total Number
of Shares
Repurchased
|
|
Weighted
Average
Price Paid
Per Share
|
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Programs
|
|
Maximum that
may yet be
Purchased Under
the 2008 Program
|
|
|
|
|
|
|
|
|
|
|
|
9/24/08 Approved
|
|
|
|
|
|
|
|
$
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
9/24/08 - 12/27/08
|
|
498,029
|
|
$
|
1.46
|
|
498,029
|
|
498,029
|
|
Program Remaining
|
|
|
|
|
|
|
|
$
|
1,501,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In August, 2007 the Companys Board of
Directors approved a stock re-purchase program whereby up to $3 million of
common stock could be purchased from time to time at the discretion of
management (the 2007 program).
The
repurchased shares were held as treasury stock and were available for general
corporate purposes. On July 29,
2008, the Company repurchased 90,000 shares at $1.80 per share for a total cost
of $162,000 from Eric J. Kuefel, the Companys former Chief Executive Officer,
on the open market through M.S. Howells & Co., a broker-dealer in
which Mark S. Howells, a director of the Company, is a principal. M.S. Howells & Co. received a
brokerage fee of $1,800, or $0.02 per share in connection with this
transaction. The 2007 program expired on August 23, 2008.
In May, 2006 the Companys Board of Directors
approved a stock re-purchase program whereby up to $3 million of common stock
could be purchased from time to time at the discretion of management (the 2006
program).
The 2006 program expired on February 14,
2007. The repurchased shares were
held as treasury stock and were available for general corporate purposes.
A summary of common stock repurchases under
the 2006-2008 programs is set forth in the following table. All shares of
common stock were repurchased pursuant to open market transactions. Common stock held in the Companys treasury
has been recorded at cost.
Period
|
|
Program
|
|
Total Number
of Shares
Repurchased
|
|
Weighted
Average
Price Paid
Per Share
|
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Programs
|
|
Amount
Repurchased Under
the Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/24/08 12/27/08
|
|
2008
|
|
498,029
|
|
$
|
1.46
|
|
498,029
|
|
$
|
729,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/30/07 8/23/08
|
|
2007
|
|
90,400
|
|
1.82
|
|
90,400
|
|
164,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/31/07 12/29/07
|
|
2007
|
|
526,658
|
|
2.16
|
|
526,658
|
|
1,136,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/1/06 11/30/06
|
|
2006
|
|
818,740
|
|
2.25
|
|
818,740
|
|
1,845,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
1,933,827
|
|
$
|
2.00
|
|
1,933,827
|
|
$
|
3,875,655
|
|
On December 27, 2008 the Companys Board
of Directors approved the retirement of all treasury stock shares purchased
under the 2006, 2007, and 2008 programs.
A total of 1,933,827 shares were retired at cost. The Companys treasury stock balance of
shares held as of December 27, 2008 was zero.
10.
Income
Taxes:
The benefit
(or provision) for income taxes consisted of the following for the years ended December 27,
2008 and December 29, 2007:
51
Table
of Contents
|
|
2008
|
|
2007
|
|
Current:
|
|
|
|
|
|
Federal
|
|
$
|
2,709
|
|
$
|
|
|
State
|
|
(122,314
|
)
|
7,418
|
|
|
|
(119,605
|
)
|
7,418
|
|
Deferred:
|
|
|
|
|
|
Federal
|
|
(1,460,881
|
)
|
589,143
|
|
State
|
|
(141,305
|
)
|
113,529
|
|
|
|
(1,602,186
|
)
|
702,672
|
|
Total benefit (provision) for income taxes
|
|
$
|
(1,721,791
|
)
|
$
|
710,090
|
|
The following table provides reconciliation
between the amount determined by applying the statutory federal income tax rate
to the pretax income amount for the years ended December 27, 2008 and December 29,
2007:
|
|
2008
|
|
2007
|
|
Benefit (provision) at statutory rate
|
|
$
|
(1,390,946
|
)
|
$
|
752,509
|
|
State tax benefit (provision), net
|
|
(217,734
|
)
|
110,664
|
|
Nondeductible expenses and other
|
|
(113,111
|
)
|
(153,083
|
)
|
Income tax benefit (provision)
|
|
$
|
(1,721,791
|
)
|
$
|
710,090
|
|
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,
2008 and December 29, 2007:
|
|
2008
|
|
2007
|
|
Deferred Tax Asset current
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
196,046
|
|
$
|
664,333
|
|
Allowance for doubtful accounts
|
|
31,488
|
|
11,373
|
|
Accrued liabilities
|
|
510,864
|
|
344,524
|
|
Other
|
|
93,381
|
|
160,119
|
|
|
|
831,779
|
|
1,180,349
|
|
Deferred Tax Liability noncurrent
|
|
|
|
|
|
Depreciation and amortization
|
|
(2,859,733
|
)
|
(1,606,117
|
)
|
AMT minimum tax credit carryforward
|
|
31,390
|
|
31,390
|
|
Unrealized loss on interest rate swap
|
|
299,077
|
|
|
|
|
|
(2,529,266
|
)
|
(1,574,727
|
)
|
Net deferred tax liability
|
|
$
|
(1,697,487
|
)
|
$
|
(394,378
|
)
|
The Company has recorded a deferred tax asset
of $196,046 reflecting the benefit of approximately $577,000 in loss carryforwards. Such deferred tax assets expire between 2023
and 2025. Realization of the tax benefit is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced
. The Company also has an alternative minimum
tax (AMT) credit carryforward for federal income tax purposes of $31,390 at December 27,
2008.
Generally accepted accounting principles
require that a valuation allowance be established when it is more-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 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. The Company provides for income taxes at a
rate equal to the combined federal and state effective rates, which
approximated 42% under current tax rates.
11. Business
Segments and Significant Customers:
For the years ended December 27, 2008 and December 29, 2007,
Costco was the only customer accounting for more than 10% of total Company net
revenue. Costco accounted for
$27,160,000 or 24% and $13,620,000 or 15%, for fiscal years 2008 and 2007,
respectively.
52
Table of Contents
The Companys operations consist of three reportable segments:
manufactured snack products, berry products and distributed products. The manufactured products segment produces
potato chips, potato crisps and potato skins for sale primarily to snack food
distributors and retailers. The berry
products segment produces frozen berries for sale primarily to groceries and
mass merchandisers. The distributed
products segment sells snack food products manufactured by other companies to
the Companys Arizona snack food distributors.
The Companys reportable segments offer different products and services. The majority of the Companys revenues are
attributable to external customers in the United States. The Company does sell to customers in Canada,
the United Kingdom, Mexico, Japan, and Argentina as well, however the revenues
attributable to those customers is immaterial.
All of the Companys assets are located in the United States. The Company does not allocate any assets to
the distributed products segment.
|
|
Percent of Net Revenues
|
|
|
|
2008
|
|
2007
|
|
Branded snack products
|
|
59
|
%
|
71
|
%
|
Private label snack products
|
|
4
|
%
|
3
|
%
|
Total manufactured snack products segment
revenues
|
|
63
|
%
|
74
|
%
|
|
|
|
|
|
|
Berry products
|
|
34
|
%
|
23
|
%
|
Distributed products segment revenues
|
|
3
|
%
|
3
|
%
|
|
|
|
|
|
|
Total revenues
|
|
100
|
%
|
100
|
%
|
In fiscal years 2008 and 2007, the T.G.I.
Fridays® brand snacks represented 33% and 47%, respectively, of the Companys
total net revenues.
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.
|
|
Manufactured
Snack
Products
|
|
Berry
Products
|
|
Distributed
Products
|
|
Consolidated
|
|
2008
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
71,732,580
|
|
$
|
38,404,530
|
|
$
|
2,921,604
|
|
$
|
113,058,715
|
|
Depreciation and amortization included in
segment gross profit
|
|
889,057
|
|
393,285
|
|
|
|
1,282,342
|
|
Segment gross profit
|
|
14,307,658
|
|
7,440,169
|
|
446,482
|
|
22,194,309
|
|
Goodwill
|
|
5,986,252
|
|
5,629,973
|
|
|
|
11,616,225
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
67,405,404
|
|
20,750,403
|
|
$
|
2,754,773
|
|
$
|
90,910,580
|
|
Depreciation and amortization included in
segment gross profit
|
|
890,178
|
|
554,719
|
|
|
|
1,444,897
|
|
Segment gross profit
|
|
11,337,227
|
|
3,926,857
|
|
314,929
|
|
15,579,013
|
|
Goodwill
|
|
5,986,252
|
|
5,603,736
|
|
|
|
11,589,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
Table
of Contents
The following table reconciles reportable
segment gross profit to the Companys consolidated income before income tax
benefit (provision) for the years ended December 27, 2008 and December 29,
2007:
|
|
2008
|
|
2007
|
|
Segment gross profit
|
|
$
|
22,194,309
|
|
$
|
15,579,013
|
|
Unallocated amounts:
|
|
|
|
|
|
Operating expenses
|
|
(16,827,692
|
)
|
(16,818,353
|
)
|
Interest income (expense), net
|
|
(1,275,535
|
)
|
(974,223
|
)
|
Income before income taxes
|
|
$
|
4,091,082
|
|
$
|
(2,213,563
|
)
|
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,
individually and in the aggregate, will
not have a material adverse effect on the financial statements taken as a
whole.
The Inventure
Group, Inc. is one of eight companies sued by the Environmental Law
Foundation in August, 2006 in the Superior Court for the State of California
for the County of Los Angeles by the Attorney General of the State of
California for alleged violations of California Proposition 65. California
Proposition 65 is a state law that, in part, requires companies to warn
California residents if a product contains chemicals listed within the statute.
The plaintiff seeks injunctive relief and penalties but has made no specific
demands. Settlement discussions are
ongoing.
13. Related Party Transactions:
The Company owns the farming operations and the processing and storage
facility located on 696 acres of land in Lynden, Washington, which is leased
from the Uptrails Group LLC, owned by four members of the Rader family. One of the four, Brad Rader, is a current
employee of the Company and two of the others, Lyle and Sue Rader, were the
former owners of Rader Farms. This
operating lease commenced on the acquisition date and is effect until May 17,
2017. Lease payments are $43,500 per
month throughout the term of the lease.
14. Quarterly Financial Data (Unaudited):
The results for any
single quarter are not necessarily indicative of the Companys results for any
other quarter or the full year. The sum
of quarterly earnings (loss) per share information may not agree to the annual
amount due to rounding and use of the treasury stock method of calculating
earnings (loss) per share.
54
Table
of Contents
(in 000s, except for share and
per share data)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Full Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
26,171
|
|
$
|
29,249
|
|
$
|
29,822
|
|
$
|
27,817
|
|
$
|
113,059
|
|
Gross profit
|
|
5,075
|
|
5,301
|
|
7,112
|
|
4,706
|
|
22,194
|
|
Operating income (loss)
|
|
1,259
|
|
1,336
|
|
2,118
|
|
654
|
|
5,367
|
|
Net income (loss)
|
|
$
|
411
|
|
$
|
723
|
|
$
|
1,103
|
|
$
|
132
|
|
$
|
2,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
$
|
0.04
|
|
$
|
0.06
|
|
$
|
0.01
|
|
$
|
0.13
|
|
Diluted
|
|
$
|
0.02
|
|
$
|
0.04
|
|
$
|
0.06
|
|
$
|
0.01
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
18,810,994
|
|
18,840,415
|
|
18,750,919
|
|
18,452,948
|
|
18,736,331
|
|
Diluted
|
|
18,811,208
|
|
18,840,415
|
|
18,750,919
|
|
18,452,948
|
|
18,736,331
|
|
(in 000s, except for share and
per share data)
|
|
First
Quarter
|
|
Second
Quarter (1)
|
|
Third
Quarter
|
|
Fourth
Quarter (2)
|
|
Full Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
16,980
|
|
$
|
22,926
|
|
$
|
25,372
|
|
$
|
25,633
|
|
$
|
90,911
|
|
Gross profit
|
|
3,097
|
|
4,362
|
|
4,495
|
|
3,625
|
|
15,579
|
|
Operating income (loss)
|
|
189
|
|
766
|
|
536
|
|
(2,730
|
)
|
(1,239
|
)
|
Net income (loss)
|
|
$
|
106
|
|
$
|
332
|
|
$
|
41
|
|
$
|
(1,982
|
)
|
$
|
(1,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
0.00
|
|
$
|
(0.10
|
)
|
$
|
(0.08
|
)
|
Diluted
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
0.00
|
|
$
|
(0.10
|
)
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
19,302,251
|
|
19,303,394
|
|
19,285,759
|
|
18,933,971
|
|
19,206,344
|
|
Diluted
|
|
19,317,893
|
|
19.381,322
|
|
19,290,538
|
|
18,933,971
|
|
19,206,344
|
|
(1) The Company acquired Rader Farms on May 17,
2007.
(2) The Company recorded an impairment
charge of $2.7 million in the fourth quarter.
15. Accounts Receivable Allowance:
Changes to the allowance
for doubtful accounts during the each of the two fiscal years ended December 27,
2008 are summarized below:
|
|
Balance at
beginning of period
|
|
Charges
(Reductions) to
Expense
|
|
(Write-offs)
Collections
|
|
Balance at end
of period
|
|
Fiscal 2007
|
|
$
|
26,452
|
|
84,346
|
|
(81,637
|
)
|
$
|
29,161
|
|
Fiscal 2008
|
|
$
|
29,161
|
|
83,794
|
|
(32,215
|
)
|
$
|
80,740
|
|
16. Concentrations of Credit Risk:
The Companys cash
is placed with major banks. The Company,
in the normal course of business, maintains balances in excess of Federal
insurance limits.
55
Table
of Contents
The Companys
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 2008 and 2007, substantially all of the
Companys customers were distributors or retailers whose sales were
concentrated in the grocery industry, throughout the United States. The Company investigates a customers credit
worthiness before extending credit. At December 27,
2008 and December 29, 2007, three customers accounted for 30% and 26% of
accounts receivable, respectively.
56
Table of Contents
EXHIBIT INDEX
23.1
|
|
Consent of Moss Adams LLP.
|
|
|
|
23.2
|
|
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 pursuant to
Rule 13a-14(a) or Rule 15(d)-14(a).
|
|
|
|
32
|
|
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.
|
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