Table
of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 27,
2008
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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
|
|
86-0786101
|
(State or Other
Jurisdiction of Incorporation or
|
|
(I.R.S. Employer
|
Organization)
|
|
Identification
No.)
|
|
|
|
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
Indicate by check whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
x
No
o
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):
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
x
|
|
|
|
|
(Do not check if a
|
|
|
|
|
|
|
smaller reporting company)
|
|
|
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
o
No
x
Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date: 20,186,213 as of November 6, 2008.
Table
of Contents
PART I. FINANCIAL
INFORMATION
Item 1. Financial
Statements
THE INVENTURE GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(unaudited)
|
|
September 27,
2008
|
|
December 29,
2007
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
223,652
|
|
$
|
494,918
|
|
Accounts receivable, net of allowance for
doubtful accounts of $53,206 in 2008 and $29,161 in 2007
|
|
10,993,709
|
|
8,604,741
|
|
Inventories
|
|
16,527,741
|
|
11,585,597
|
|
Deferred income tax asset
|
|
|
|
1,180,349
|
|
Other current assets
|
|
664,381
|
|
707,093
|
|
Total current assets
|
|
28,409,483
|
|
22,572,698
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
24,256,395
|
|
23,436,752
|
|
Goodwill
|
|
11,616,225
|
|
11,589,988
|
|
Trademarks and other intangibles
|
|
2,809,659
|
|
2,827,742
|
|
Other assets
|
|
262,630
|
|
263,539
|
|
Total assets
|
|
$
|
67,354,392
|
|
$
|
60,690,719
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,122,152
|
|
$
|
6,001,136
|
|
Line of credit
|
|
9,318,350
|
|
7,452,309
|
|
Accrued liabilities
|
|
6,486,227
|
|
4,206,078
|
|
Current portion of long-term debt
|
|
1,201,597
|
|
1,181,888
|
|
Current portion of accrued costs related to
brand discontinuance and other exit cost accruals
|
|
|
|
97,229
|
|
Total current liabilities
|
|
24,128,326
|
|
18,938,640
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
11,551,554
|
|
12,445,383
|
|
Interest rate swaps
|
|
14,691
|
|
|
|
Deferred income tax liability
|
|
1,574,727
|
|
1,574,727
|
|
Total liabilities
|
|
37,269,298
|
|
32,958,750
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Preferred stock, $100 par value; 50,000
shares authorized; no shares issued or outstanding at September 27, 2008
and December 29, 2007
|
|
|
|
|
|
Common stock, $.01 par value; 50,000,000
shares authorized; 20,186,213 shares issued and outstanding at
September 27, 2008 and December 29, 2007, respectively
|
|
201,863
|
|
201,863
|
|
Additional paid-in capital
|
|
29,599,764
|
|
29,304,491
|
|
Retained earnings
|
|
3,444,264
|
|
1,207,189
|
|
Accumulated other comprehensive income
|
|
(14,691
|
)
|
|
|
Treasury stock, at cost: 1,435,798 shares
at September 27, 2008 and 1,345,398 shares at December 29,
2007
|
|
(3,146,106
|
)
|
(2,981,574
|
)
|
Total shareholders equity
|
|
30,085,094
|
|
27,731,969
|
|
Total liabilities and shareholders equity
|
|
$
|
67,354,392
|
|
$
|
60,690,719
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
Table
of Contents
THE INVENTURE GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
|
|
Quarter Ended
|
|
Nine Months Ended
|
|
|
|
September 27,
|
|
September 29,
|
|
September 27,
|
|
September 29,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net revenues
|
|
$
|
29,822,135
|
|
$
|
25,372,397
|
|
$
|
85,241,866
|
|
$
|
65,278,389
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
22,710,078
|
|
20,876,973
|
|
67,753,250
|
|
53,324,358
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
7,112,057
|
|
4,495,424
|
|
17,488,615
|
|
11,954,031
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses
|
|
4,994,732
|
|
3,959,539
|
|
12,776,064
|
|
10,462,822
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
2,117,325
|
|
535,885
|
|
4,712,552
|
|
1,491,209
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
23,158
|
|
|
|
197,307
|
|
Interest expense
|
|
(318,890
|
)
|
(432,014
|
)
|
(1,000,127
|
)
|
(762,128
|
)
|
Interest income (expense), net
|
|
(318,890
|
)
|
(408,856
|
)
|
(1,000,127
|
)
|
(564,821
|
)
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
1,798,435
|
|
127,029
|
|
3,712,425
|
|
926,388
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
(695,197
|
)
|
(85,600
|
)
|
(1,475,350
|
)
|
(447,673
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,103,238
|
|
$
|
41,429
|
|
$
|
2,237,075
|
|
$
|
478,715
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
$
|
0.00
|
|
$
|
0.12
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.06
|
|
$
|
0.00
|
|
$
|
0.12
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
18,750,919
|
|
19,285,759
|
|
18,790,591
|
|
19,297,135
|
|
Diluted
|
|
18,750,919
|
|
19,290,538
|
|
18,790,591
|
|
19,317,235
|
|
The accompanying
notes are an integral part of these condensed consolidated financial
statements.
4
Table
of Contents
THE INVENTURE GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Nine months Ended
|
|
|
|
September 27,
2008
|
|
September 29,
2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
2,237,075
|
|
$
|
478,715
|
|
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
|
|
|
|
|
|
Depreciation
|
|
2,015,655
|
|
1,426,408
|
|
Amortization
|
|
18,082
|
|
51,933
|
|
Provision for bad debts
|
|
24,045
|
|
79,268
|
|
Deferred income taxes
|
|
1,180,349
|
|
381,253
|
|
Share-based
compensation expense
|
|
262,962
|
|
237,715
|
|
Amortization
of deferred compensation expense
|
|
31,813
|
|
46,240
|
|
Gain on disposition of equipment
|
|
(4,377
|
)
|
(2,760
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(2,413,013
|
)
|
(1,157,327
|
)
|
Inventories
|
|
(4,942,144
|
)
|
(4,244,520
|
)
|
Other assets and liabilities
|
|
(47,919
|
)
|
(54,912
|
)
|
Accounts payable and accrued liabilities
|
|
3,441,244
|
|
(959,288
|
)
|
Net cash provided by (used in) operating
activities
|
|
1,803,772
|
|
(3,717,275
|
)
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Acquisition of Rader Farms, Inc., net
of cash acquired
|
|
|
|
(21,051,101
|
)
|
Increase in restricted cash nonqualified
deferred compensation
|
|
(71,506
|
)
|
(30,535
|
)
|
Purchase of property and equipment
|
|
(2,830,921
|
)
|
(1,920,605
|
)
|
Purchase of short-term investments
|
|
|
|
13,000
|
|
Net cash used in investing activities
|
|
(2,902,427
|
)
|
(22,989,241
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Line of credit borrowings (payments), net
|
|
1,866,041
|
|
7,687,707
|
|
Bank overdraft adjustment
|
|
|
|
1,239,599
|
|
Debt borrowings
|
|
|
|
10,089,927
|
|
Payments made on long-term debt
|
|
(874,120
|
)
|
(369,829
|
)
|
Proceeds
from issuance of common stock
|
|
|
|
45,829
|
|
Treasury
stock purchases
|
|
(164,532
|
)
|
(640,383
|
)
|
Net cash provided by (used in) financing
activities
|
|
827,389
|
|
18,052,850
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
(271,266
|
)
|
(8,653,666
|
)
|
Cash and cash equivalents at beginning of
period
|
|
494,918
|
|
8,671,259
|
|
Cash and cash equivalents at end of period
|
|
$
|
223,652
|
|
$
|
17,593
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow
information:
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
851,289
|
|
$
|
597,619
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash
activities:
|
|
|
|
|
|
Net accrual for interest expense resulting
from interest rate swap
|
|
$
|
138,528
|
|
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
5
Table of
Contents
THE INVENTURE GROUP, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization
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 May 2007,
the Company acquired Rader Farms, Inc. including the Rader Farms®
trademark and the Lynden, Washington frozen fruit processing operation.
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 completed the acquisition of Rader Farms, Inc. for a total
cost of $20.9 million. See Note 2 in the
Form 10-K for the fiscal year ended December 29, 2007 for additional
information.
In July 2007, the
Company launched its BURGER KING
TM
brand snack products pursuant to
a license agreement with BURGER KING CORP
TM
which expires in 2012.
The
Company continues to introduce line extensions and test market new and
innovative snack food products.
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.
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 CORP
TM
. We also distribute Braids® and pretzels. The Company also 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 and Tato Skins® brand potato snacks, (ii) manufactures
private label potato chips for grocery retail chains in the Southwest and (iii) distributes
in Arizona snack food products that are manufactured by others. 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 convenience stores
and vend operators primarily 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 and strawberries 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 sold directly
through various store brands.
Basis of Presentation
The condensed, 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. The financial statements have been prepared
in accordance with the instructions for Form 10-Q and, therefore, do not
include all the information and footnotes required by accounting principles
generally accepted in the United States of America. In the opinion of management, the condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary in order to make the condensed
consolidated financial statements not misleading. A description of the Companys accounting
policies and other financial information is included in the audited financial
statements filed with the Companys Annual Report on Form 10-K for the
fiscal year ended December 29, 2007.
The results of operations for the quarter and nine months ended September 27,
2008 are not necessarily indicative of the results expected for the full year.
6
Table of
Contents
Adoption of New Accounting Pronouncement
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. We adopted SFAS No. 157
effective January 1, 2008 and its adoption did not have a material impact
on our financial position, results of operations and 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 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.
Earnings Per Common Share
Basic
earnings per common share is computed by dividing net income by the weighted
average number of shares of Common Stock outstanding during the period. Exercises of outstanding stock options are
assumed to occur for purposes of calculating diluted earnings per share for
periods in which their effect would not be anti-dilutive. 1,645,833 and 745,000 shares of common stock
for the quarters and nine months ended September 27, 2008 and September 29,
2007, respectively, were excluded from the computation of diluted earnings per
share because the options exercise prices were greater than the average market
price of common shares and, therefore, the effect would be anti-dilutive. Earnings per common share was computed as
follows for the quarters and nine months ending September 27, 2008 and September 29,
2007:
|
|
Quarter Ended
|
|
Nine Months Ended
|
|
|
|
September 27,
2008
|
|
September 29,
2007
|
|
September 27,
2008
|
|
September 29,
2007
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,103,238
|
|
$
|
41,429
|
|
$
|
2,237,075
|
|
$
|
478,715
|
|
Weighted average number of common shares
|
|
18,750,919
|
|
19,285,759
|
|
18,790,591
|
|
19,297,135
|
|
Earnings per common share
|
|
$
|
0.06
|
|
$
|
0.00
|
|
$
|
0.12
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,103,238
|
|
$
|
41,429
|
|
$
|
2,237,075
|
|
$
|
478,715
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
18,750,919
|
|
19,285,759
|
|
18,790,591
|
|
19,297,135
|
|
Incremental shares from assumed conversions of stock options and non-
vested shares of restricted stock
|
|
|
|
4,779
|
|
|
|
20,100
|
|
Adjusted weighted average number of common shares
|
|
18,750,919
|
|
19,290,538
|
|
18,790,591
|
|
19,317,235
|
|
Earnings per common share
|
|
$
|
0.06
|
|
$
|
0.00
|
|
$
|
0.12
|
|
$
|
0.02
|
|
Stock Options, Stock-Based Compensation and Shareholders Equity
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
expired over a five-year period and generally vested 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 and was replaced by the Inventure Group, Inc. 2005
Equity Incentive Plan (the 2005 Plan) as described below.
7
Table of Contents
The 2005 Plan expires in May 2015. 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. 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
Equity Incentive Plan. As of September 27,
2008, there were 286,032 shares of Common Stock available for Awards under the
2005 Plan.
During the nine months ended
September 27, 2008 and September 29, 2007 the total share-based
compensation expense from restricted stock recognized in the financial
statements was $31,813 and $46,240, respectively and is included in selling,
general and administrative expenses.
There were no share-based compensation costs which were
capitalized. As of September 27,
2008, there were no unrecognized costs related to non-vested restricted stock
awards. The Company recognized such
costs in the financial statements over a period of three years, which concluded
during the third quarter of fiscal 2008.
During the nine months ended
September 27, 2008 and September 29, 2007, the Company recorded
$262,962 and $237,715 of share-based compensation expense, respectively,
related to stock options. During the
quarters ended September 27, 2008 and September 29, 2007, the Company
recorded $102,588 and $83,740 of share-based compensation expense,
respectively, related to stock options.
The
Company estimated the fair value of incentive stock options issued using the
Black-Scholes option pricing model, with the following assumptions:
|
|
September 27,
2008
|
|
September 29,
2007
|
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
Expected volatility
|
|
46
|
%
|
50
|
%
|
Risk-free interest rate
|
|
2.5
3.5
|
%
|
4
5
|
%
|
Expected life
|
|
1.4
years
|
|
2.4
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 September 27, 2008, the amount of
unrecognized compensation expense to be recognized over the next two years, in
accordance with SFAS 123R, is approximately $306,000. 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.
Stock options become exercisable, based on a three or five year vesting
schedule, in annual increments of either thirty-three or twenty percent
beginning one year after grant date and become fully exercisable after three or
five years from the date of grant. Share-based compensation expense related to
stock option awards is recognized on the straight-line method over the expected
life, which is generally between one and three years.
The
following table summarizes stock option activity during the nine months ended September 27,
2008:
|
|
Plan Options
|
|
Non-Plan Options
|
|
|
|
Options
Outstandin
g
|
|
Weighted
Average
Exercise Price
|
|
Options
Outstandin
g
|
|
Weighted
Average
Exercise Price
|
|
Balance, December 29, 2007
|
|
1,642,500
|
|
$
|
2.73
|
|
45,000
|
|
$
|
3.60
|
|
Granted
|
|
645,000
|
|
$
|
1.88
|
|
|
|
|
|
Forfeited
|
|
(346,667
|
)
|
2.63
|
|
(45,000
|
)
|
3.60
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Balance, September 27, 2008
|
|
1,940,833
|
|
$
|
2.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no intrinsic
value for outstanding or exercisable options as of September 27, 2008.
There
were no restricted stock awards granted during the nine months ended September 27,
2008 and September 29, 2007. All
restricted stock awards vest three years from the date of grant. Share-based
compensation expense related to restricted stock awards is recognized on the
straight-line method over the requisite service period, which is approximately
three years, and the related share-based compensation expense is included in
selling, general and administrative expenses.
8
Table of
Contents
In
August 2007, the Companys Board of Directors approved a stock re-purchase
program whereby up to $3 million of common stock was permitted to be purchased
from time to time at the discretion of management (2007 Program).
The
repurchased shares are held as treasury stock and are available for general
corporate purposes. Common stock held in the Companys treasury has been
recorded at cost. 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. Kufel, 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 the
transaction. The 2007 Program
expired August 23,
2008.
A summary of common stock repurchases under the
2007 program is set forth in the following table. All shares of common stock
were repurchased pursuant to open market transactions.
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 2007 Program
|
|
|
|
|
|
|
|
|
|
|
|
|
8/2007 Approved
|
|
|
|
|
|
|
|
$
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
|
8/31/07 - 8/23/08
|
|
617,058
|
|
$
|
2.11
|
|
617,058
|
|
1,300,685
|
|
Program unutilized
|
|
|
|
|
|
|
|
$
|
1,699,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2008, the Companys Board of
Directors approved a stock re-purchase program whereby up to $2 million of
common stock may be purchased from time to time at the discretion of management
(2008 Program). During the third
quarter, the Company did not repurchase any shares under this program but has
repurchased $340,649 after quarter end and through October 31,
2008, leaving $1,659,360 or remaining authorization. This program expires August 23, 2009 and
we continue to evaluate our share repurchase opportunities.
Deferred Compensation Plan
Effective
January 1, 2007 the Company entered into a deferred compensation
plan. The assets are vested in cash and
cash equivalents and are reflected in other current assets and the related
obligation is reflected in accrued liabilities in the balance sheet.
2. Accrued Liabilities:
Accrued
liabilities consisted of the following as of September 27, 2008 and December 29,
2007:
|
|
September 27,
2008
|
|
December 29,
2007
|
|
Accrued payroll and payroll taxes
|
|
$
|
1,534,899
|
|
$
|
1,385,596
|
|
Accrued royalties and commissions
|
|
640,823
|
|
561,458
|
|
Accrued advertising and promotion
|
|
1,035,826
|
|
1,022,639
|
|
Accrued other
|
|
3,274,679
|
|
1,236,385
|
|
|
|
$
|
6,486,227
|
|
$
|
4,206,078
|
|
3. Inventories:
Inventories consisted of the following
as of September 27,
2008 and December 29, 2007
:
|
|
September 27,
|
|
December 29,
|
|
|
|
2008
|
|
2007
|
|
Finished goods
|
|
$
|
6,314,234
|
|
$
|
3,838,344
|
|
Raw materials
|
|
10,213,507
|
|
7,747,253
|
|
|
|
$
|
16,527,741
|
|
$
|
11,585,597
|
|
9
Table of
Contents
4. Goodwill, Trademarks and Other
Intangibles, Net:
Goodwill, trademarks and other intangibles, net
consisted of the following
as of September 27, 2008 and December 29,
2007:
|
|
Estimated
Useful Life
|
|
September 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.
|
|
|
|
1,535,660
|
|
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
|
|
|
|
(42,672
|
)
|
(18,667
|
)
|
Rader - Customer relationship, gross carrying amount
|
|
10
years
|
|
100,000
|
|
100,000
|
|
Rader - Customer relationship, accum. amortization
|
|
|
|
(13,329
|
)
|
(19,250
|
)
|
|
|
|
|
|
|
|
|
Total Trademarks and other intangibles, net
|
|
|
|
$
|
2,809,659
|
|
$
|
2,827,742
|
|
Amortization expense for the nine months ended September 27, 2008
and September 29, 2007 was $18,082 and $51,933, respectively. As of September 27,
2008, we expect amortization expense on these intangible asset over the next
five years to be as follows:
2008
|
|
$
|
42,000
|
|
2009
|
|
$
|
42,000
|
|
2010
|
|
$
|
42,000
|
|
2011
|
|
$
|
42,000
|
|
2012
|
|
$
|
23,000
|
|
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 carrying values were not
impaired as of September 27, 2008.
10
Table of
Contents
5.
Long-Term
Debt:
Long-term debt consisted of the following as of September 27, 2008
and December 29, 2007:
|
|
September 27,
|
|
December 29,
|
|
|
|
2008
|
|
2007
|
|
Mortgage loan due monthly through July, 2012; interest at 9.03%;
collateralized by land and building in Goodyear, AZ
|
|
$
|
1,591,744
|
|
$
|
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
|
|
2,300,342
|
|
2,344,220
|
|
Equipment term loan due monthly through May, 2014; interest at LIBOR
plus 165 basis points; collateralized by equipment at Rader Farms in
Lynden, WA
|
|
4,928,571
|
|
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
|
|
3,820,300
|
|
3,937,763
|
|
Vehicle term loan and capital leases due in various monthly
installments through February, 2011; collateralized by vehicles
|
|
112,194
|
|
140,088
|
|
|
|
12,753,151
|
|
13,627,271
|
|
Less current portion of long-term debt
|
|
(1,201,597
|
)
|
(1,181,888
|
)
|
Long-term debt, less current portion
|
|
$
|
11,551,554
|
|
$
|
12,445,383
|
|
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; $9,318,350 outstanding at September 27,
2008. Based on eligible assets, the amount available under the line of credit
was $5,681,651 at September 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.
·
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 September 27, 2008, the Company was in compliance with all of
the financial covenants. Deferred financing fees totaling $119,774, which are
included in Other Assets, were recorded in connection with the Loan Agreement
and are being amortized over the life of the respective loan.
Interest Rate Swaps
The
Company entered into an interest rate swap in December 2006 to effectively
convert the interest rate of the mortgage to purchase the Bluffton, IN plant to
a fixed rate of 6.85%. The swap is not
accounted for as a cash flow hedge, and as result, unrealized gains and losses
are recorded in the Companys condensed, consolidated statements of
income. The swap has a fixed pay-rate of
6.85% and a notional amount of $2.3 million at September 27, 2008 and
expires in December, 2016. The value of
the swap is recorded as a $138,528 liability at September 27, 2008.
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 decreasing notional amounts to match the expected pay down of
the debt. The notional value of the swap
at September 27, 2008 was $3.8 million.
The interest rate swap is effective though September 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 three months ended September 27, 2008 the
hedge is highly effective. The interest
rate swap had a net present value of ($14,691) at September 27, 2008 and
was recorded in Accumulated other comprehensive income On the accompanying
condensed consolidated balance sheets.
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 September 27, 2008.
11
Table of
Contents
6
. 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 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 not yet made any specific demands. Settlement
discussions are underway and the Company has begun accruing an amount to cover
the potential liability that could result.
7. Business Segments:
The
Companys operations consist of three reportable segments: manufactured
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 club stores and groceries. 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.
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
|
|
Distributed
Snack Products
|
|
Processed
Berry Products
|
|
Consolidated
|
|
Quarter ended September
27, 2008
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
19,371,582
|
|
$
|
711,547
|
|
$
|
9,739,006
|
|
$
|
29,822,135
|
|
Depreciation and amortization in segment gross profit
|
|
209,716
|
|
|
|
110,929
|
|
320,645
|
|
Segment gross profit
|
|
4,095,023
|
|
215,001
|
|
2,802,033
|
|
7,112,057
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 29, 2007
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
16,535,722
|
|
$
|
668,644
|
|
$
|
8,168,031
|
|
$
|
25,372,397
|
|
Depreciation and amortization in segment gross profit
|
|
225,303
|
|
|
|
228,406
|
|
453,709
|
|
Segment gross profit
|
|
2,481,658
|
|
105,200
|
|
1,908,566
|
|
4,495,424
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 27, 2008
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
53,654,586
|
|
$
|
2,105,193
|
|
$
|
29,482,087
|
|
$
|
85,241,866
|
|
Depreciation and amortization in segment gross profit
|
|
662,683
|
|
|
|
278,926
|
|
941,609
|
|
Segment gross profit
|
|
10,904,333
|
|
598,214
|
|
5,986,068
|
|
17,488,615
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 29, 2007
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
50,716,443
|
|
$
|
2,080,737
|
|
$
|
12,481,209
|
|
$
|
65,278,389
|
|
Depreciation and amortization in segment gross profit
|
|
667,445
|
|
|
|
304,675
|
|
972,120
|
|
Segment gross profit
|
|
8,961,716
|
|
305,102
|
|
2,687,213
|
|
11,954,031
|
|
12
Table of
Contents
The following table reconciles reportable segment gross profit to the
Companys consolidated income before income tax benefit (provision) for the
quarters and nine months ended September 27, 2008 and September 29,
2007:
|
|
Quarter Ended
|
|
Nine Months Ended
|
|
|
|
September 27,
2008
|
|
September 29,
2007
|
|
September 27,
2008
|
|
September 29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit
|
|
$
|
7,112,057
|
|
$
|
4,495,424
|
|
$
|
17,488,615
|
|
$
|
11,954,031
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
4,994,732
|
|
3,959,539
|
|
12,776,064
|
|
10,462,822
|
|
Interest income (expense), net
|
|
(318,890
|
)
|
(408,856
|
)
|
(1,000,127
|
)
|
(564,821
|
)
|
Income before income tax provision
|
|
$
|
1,798,435
|
|
$
|
127,029
|
|
$
|
3,712,425
|
|
$
|
926,388
|
|
8.
Income Taxes:
The Company has recorded a deferred tax asset of $
664,000 reflecting the benefit of approximately $1.9 million in loss
carryforwards. Such deferred tax assets
expire between 2018 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 $ 31,000 at September 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 40% under current tax rates.
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
This Quarterly
Report on Form 10-Q, 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
Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q 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 Capital
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 Quarterly Report on Form 10-Q will in fact transpire or prove to be
accurate. Readers are cautioned to
consider the specific risk factors described herein and in Risk Factors in
the Companys Annual Report on Form 10-K for the fiscal year ended December 29,
2007 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.
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Results of Operations
Quarter ended September 27,
2008 compared to the quarter ended September 29, 2007
Net revenues for the third quarter of fiscal 2008
were $29.8 million, 17.5% higher than last years third quarter net revenues of
$25.4 million. This increase was
primarily attributable to a 19.2% increase in revenues from the Processed Berry
products division, which is due to increased volume and increased prices of
raspberries. In addition, the Company
recognized a 16.7% increase in revenues from the Snack Products divisions, lead
by increases in both branded snacks and private label snacks.
Gross profit for the quarter ended September 27,
2008 increased 58% or $2.6 million as compared to September 29, 2007. $0.9 million of this increase in gross profit
is attributable to the Processed Berry products division and is caused by the
increased net revenues already noted above.
The remaining increase of $1.7 million is attributable to the Snack
Product divisions, which continued to benefit from volume increases, price
increases and cost controls implemented at the two snack manufacturing
facilities. The gross margin for the
quarter ended September 27, 2008 was 23.8% compared to 17.7% for the year
earlier comparable period. This increase
is primarily attributable to the increased gross margin noted within the Snack
Products division.
Selling, general and administrative expenses were
$5.0 million in the third quarter of 2008 as compared to $4.0 million in the
third quarter of 2007. The overall
increase is primarily due to the addition of some additional headcount, certain
incentive payment accruals and accruals for certain professional services
rendered to the Company. As a percentage
of net revenues, these expenses increased to 16.7% of net revenues as compared
to 15.6% of net revenues in the third quarter of 2007.
Net interest expense was $318,890 in the third
quarter of 2008 compared to net interest expense of $408,856 in the third
quarter of 2007. This decrease is
largely attributable to lower interest rates and lower levels of long term debt
in the third quarter of fiscal 2008 as compared to the same period of the prior
year.
Net income was $1.1 million,
or $0.06 per basic and diluted share, compared to net income of $41,429, or
$0.00 per basic and diluted share in the third quarter of last year.
Nine months ended
September 27, 2008
compared
to the nine months
ended September 29,
2007
For
the nine months ended September 27, 2008 net revenues increased 30.6%, or
$19.9 million, to $85.2 million, compared with net revenue of $65.3 million in
the first nine months of the previous year. Total net revenues for the
nine months ended September 27, 2008 include $29.5 million from Rader
Farms, representing an increase of $17.0 million from the $12.5 million of net
revenues from Rader Farms recognized during the first nine months of 2007.
Gross
profit for the nine months ended September 27, 2008 was $17.5 million, or
20.5% of net revenues, compared to $12.0 million, or 18.3% of net revenues for
the nine months ended September 29, 2007.
The Company was generally able to improve gross margins though price
increases and plant cost efficiencies, which served to offset raw materials and
freight cost increases incurred during the first nine months of 2008 as
compared to the first nine months of 2007.
Selling,
general and administrative expenses increased to $12.8 million for the nine
months ended September 27, 2008 from $10.5 million for the nine months
ended September 29, 2007, but decreased as a percentage of net revenues
from 16.0% of net revenues for the first nine months of 2007 to 15.0% of net
revenues for the first nine months of 2008.
The acquisition of Rader Farms in May 2007 allowed us to leverage
our overall selling, general and administrative expenses, thereby causing them
to decrease as a percentage of net revenues.
Net
interest expense was $1,000,127 in the first nine months of 2008 compared to
net interest expense of $564,821 in the first nine months of 2007 due primarily
to the May 2007 acquisition of Rader Farms, which resulted in increased
debt and increased interest expense.
Net
income for the nine months ended September 27, 2008 was $2.2 million, or
$0.12 per basic and diluted share, compared with net income of $0.5 million, or
$0.02 per basic and diluted share, in the prior-year period.
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Liquidity and Capital Resources
Net working capital was $4.3
million (a current ratio of 1.2:1) at September 27, 2008 and $3.6 million
(a current ratio of 1.2:1) at December 29, 2007. For the nine months ended September 27,
2008, the Company generated cash flow of $1.8 million from operating
activities, invested $2.8 million in equipment, borrowed a net $1.9 million on
its line of credit and utilized $0.9 million to pay down its other debt. Inventories increased $4.9 million, accounts
receivable increased $2.4 million and accounts payable increased $3.2 million
as compared to December 29, 2007 balances.
Each of these is primarily due to seasonality factors inherent in our
business, which typically cause inventories to increase during the summer and
fall months, as a result of berry harvest season and higher consumer demands
for snack products. Despite these
increases which typically utilize operating cash, the Company still generated
operating cash flow of $1.8 million largely as a result of its strong operating
results. The Company increased its
spending on equipment as compared to $1.9 million in the first nine months of
fiscal 2007 primarily due to the acquisition of Rader Farms in May 2007
so, consequently, there was comparatively less capital spending in the prior
year. For nine months ended September 29,
2007, the Company utilized $3.7 million in it operating activities, utilized
another $21.1 million to acquire Rader Farms and borrowed $18.1 million,
principally to acquire Rader Farms.
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, 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 National Association 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 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; based on
asset eligibility, there was $5.7 million of borrowing availability under the
line of credit at September 27, 2008;
·
an
equipment term loan, secured by the equipment acquired, subject to a $5.1
million mortgage loan from U.S. Bank National Association, 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 $3.9 million real estate term loan from U.S. Bank
National Association, 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 National Association 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.
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 September 27, 2008, the Company was in compliance with all of
the financial covenants.
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In
August 2007, the Companys Board of Directors approved a stock re-purchase
program whereby up to $3 million of common stock was permitted to be purchased
from time to time at the discretion of management (2007 Program).
The
repurchased shares are held as treasury stock and are available for general
corporate purposes. Common stock held in the Companys treasury has been
recorded at cost. 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. Kufel, 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 the
transaction. The 2007 Program
expired August 23,
2008.
A summary of common stock repurchases under the
2007 program is set forth in the following table. All shares of common stock
were repurchased pursuant to open market transactions.
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 2007 Program
|
|
8/2007 Approved
|
|
|
|
|
|
|
|
$
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
|
8/31/07 - 8/23/08
|
|
617,058
|
|
$
|
2.11
|
|
617,058
|
|
1,300,685
|
|
Program unutilized
|
|
|
|
|
|
|
|
$
|
1,699,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2008, the Companys Board of
Directors approved a stock re-purchase program whereby up to $2 million of
common stock may be purchased from time to time at the discretion of management
(2008 Program). During the third
quarter, the Company did not repurchase any shares under this program but has
repurchased $340,649 after quarter end and through October 31,
2008, leaving $1,659,351 or remaining authorization. This program expires August 23, 2009 and
we continue to evaluate our share repurchase opportunities.
Interest Rate Swap
The
Company entered into an interest rate swap in December 2006 to effectively
convert the interest rate of the mortgage to purchase the Bluffton, IN plant to
a fixed rate of 6.85%. The swap is not
accounted for as a cash flow hedge, and as result, unrealized gains and losses
are recorded in the Companys condensed, consolidated statements of
income. The swap has a fixed pay-rate of
6.85% and a notional amount of $2.3 million at September 27, 2008 and
expires in December, 2016. The value of
the swap is recorded as a $138,528 liability at September 27, 2008.
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 decreasing notional amounts to match the expected pay down of
the debt. The notional value of the swap
at September 27, 2008 was $3.8 million.
The interest rate swap is effective though September 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 three months ended September 27, 2008 the
hedge is highly effective. The interest
rate swap had a net present value of ($14,691) at September 27, 2008 and
was recorded in Accumulated other comprehensive income On the accompanying
condensed consolidated balance sheets.
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 September 27, 2008.
Contractual Obligations
The Companys future
contractual obligations consist principally of long-term debt, operating
leases, minimum commitments regarding third party warehouse operations
services, remaining minimum royalty payments due licensors pursuant to brand
licensing agreements and severance charges to terminated executives. As of September 27,
2008 there have been no material changes to the Companys contractual
obligations since its December 29, 2007 fiscal year end, other than
scheduled payments. The Company
currently has no material marketing or capital expenditure commitments.
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
16
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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
continue to 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. This 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. If any of these factors change, the Company
may require future debt or equity financings to meet its business requirements.
There can be no assurance that any required financings will be available or, if
available, on terms attractive to the Company.
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Table of
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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. The Company
believes the carrying values are appropriate after recognition of the trademark
impairment. Further discussion of goodwill and trademarks is expanded upon
below:
·
The Companys Bobs Texas Style potato chip brand was acquired in 1998
when the business of Tejas Snacks, L.P. was acquired. Following a trademark
impairment charge of $0.9 million recorded in 2007, the Bobs Texas Style
trademark has a carrying value of approximately $0.3 million.
·
The Companys Tato Skins potato chip brand was acquired in 1999 when
the business of Wabash Foods was acquired.
Following an impairment charge if $1.8 million recorded in 2007, the
Wabash - Tato Skins trademark has a carrying value of approximately $0.4
million.
·
The Companys Boulder Canyon potato chip brand was acquired in 2000
when the business of Boulder Natural Foods, Inc. was acquired. The Boulder
Canyon trademark has a carrying value of $0.9 million.
·
The Companys Rader Farms frozen berry brand was acquired in 2007 when
the business of Rader Farms was acquired. The acquisition resulted in Goodwill
of $5.6 million and trademarks of $1.1 million, which remain the carrying
values at September 27, 2008.
In
determining that each of these 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.
The
Company recorded goodwill for each of the four acquisitions noted above. The
three acquired potato chip businesses were fully integrated into and are
included in the Companys Branded Snack Products business segment. The Rader Farms frozen berry business is
included in the Companys Berry Products business segment.
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
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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 or Costco) 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 administrative expenses. When we conduct
in-store product demonstrations, we do not pay or give any consideration to the
club stores or grocery retailers in which the demonstrations occur.
·
Sponsorship:
The Company has one significant sponsorship
with the Arizona Diamondbacks Major League Baseball team which takes place
during their baseball season. We do not sell product to the Arizona
Diamondbacks, and the sponsorship clearly involves an identifiable benefit to
us as the fans at the stadium see our name on the main scoreboard during each
game. The value is reasonably estimated
due to the fact that the team charges us a fixed amount per game which we
record as a sales and marketing expense in selling, general and administrative
expenses.
Income Taxes.
On a
cumulative basis, the Company has been profitable since 1999; however, it
experienced significant net losses in prior fiscal years which resulted in a
net operating loss (NOL) carryforward for federal income tax purposes of
approximately $1.9 million at September 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. No valuation allowance was required at September 27,
2008.
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. All stock option grants have a 5-year or
10-year term. The fair value of stock option grants is amortized to expense
over the vesting period, generally three or five years for employees and one
year for the Board of Directors.
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 the
Companys Annual Report on Form 10-K for the fiscal year ended December 29,
2007 which contains accounting policies and other disclosures required by
accounting principles generally accepted in the United States.
New Accounting Policies
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.
19
Table of Contents
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
This information has been omitted pursuant to Item
305(e) of Regulation S-K, promulgated under the Securities Act of 1933, as
amended.
Item 4. Controls and Procedures
(a)
Evaluation
of Disclosure Controls and Procedures
The Companys management, with the participation of
its 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.
(b)
Change
in Internal Control over Financial Reporting
No change in the Companys internal control over
financial reporting occurred during the Companys most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
The Company is periodically a party to
various lawsuits arising in the ordinary course of business. Management believes, based on discussions with
legal counsel, that the resolution of such lawsuits, 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 not yet made any specific demands. Settlement discussions
are underway and the Company has begun accruing an amount to cover the
potential liability that could result.
Item 1A. Risk Factors
During the quarter ended September 27, 2008,
there were no material changes from the risk factors as previously disclosed in
the Companys Annual Report on Form 10-K for the fiscal year ended December 29,
2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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. Kufel, 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 the transaction.
20
Table of Contents
Item 3. Defaults Upon Senior
Securities
None.
Item 4. Submission of Matters
to a Vote of Security Holders
None.
Item 5. Other Information
Pursuant to the above described stock re-purchase
program adopted in August 2007, on July 29, 2008, we repurchased
90,000 shares at $1.80 per share for a total cost of $162,000 from Eric J.
Kufel, 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 the transaction.
Item 6. Exhibits
(a)
Exhibits:
31.1
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15(d)-14(a).
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31.2
Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) or Rule 15(d)-14(a).
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32.1
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.
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21
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:
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November 11, 2008
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THE INVENTURE GROUP, INC.
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By:
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/s/
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Terry McDaniel
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Terry McDaniel
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Chief Executive Officer
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(Principal Executive Officer)
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22
Table of Contents
EXHIBIT
INDEX
31.1 Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) or Rule 15(d)-14(a).
|
|
|
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31.2 Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) or Rule 15(d)-14(a).
|
|
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32.1
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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.
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