- Quarterly Report (10-Q)

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)

 

Registrant’s Telephone Number, Including Area Code:   [phone]

 

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 issuer’s classes of common stock, as of the latest practicable date:  20,186,213 as of November 6, 2008.

 

 

 

 

---

Table of Contents

 

Table of Contents

 

Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements - Unaudited
	Condensed consolidated balance sheets as of September 27, 2008 and December 29, 2007	3
	Condensed consolidated statements of income for the quarters and nine months ended September 27, 2008 and September 29, 2007	4
	Condensed consolidated statements of cash flows for the nine months ended September 27, 2008 and September 29, 2007	5
	Notes to unaudited condensed consolidated financial statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
Item 5.	Other Information	21
Item 6.	Exhibits	21

 

---

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 Bob’s Texas Style® potato chip brand) of Tejas Snacks, L.P. (“Tejas”), a Texas-based potato chip manufacturer.  In October 1999, the Company acquired Wabash Foods, LLC (“Wabash”) including the Tato Skins®, O’Boisies®, and Pizzarias® trademarks 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. Friday’s® brand snacks pursuant to a license agreement with TGI Friday’s 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. Friday’s® brand snacks under license from TGI Friday’s 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®, Bob’s 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. Friday’s® 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 Company’s 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 Company’s accounting policies and other financial information is included in the audited financial statements filed with the Company’s 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 entity’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s Arizona snack food distributors.  The Company’s reportable segments offer different products and services.  The majority of the Company’s 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 Company’s 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 Company’s 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.  Management’s 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 Company’s current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including specifically the possibility that the Company will need additional financing due to future operating losses or in order to implement the Company’s business strategy, the possible diversion of management resources from the day-to-day operations of the Company as a result of strategic acquisitions, potential difficulties resulting from the integration of acquired businesses with the Company’s business, other acquisition-related risks, lack of consumer acceptance of existing and future products, dependence upon key license agreements, dependence upon major customers, significant competition, risks related to the food products industry, volatility of the market price of the Company’s common stock, par value $.01 per share (the “Common Stock”), the possible de-listing of the Common Stock from the Nasdaq 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 Company’s 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.

 

13

---

Table of Contents

 

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 year’s 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.

 

14

---

Table of Contents

 

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 Company’s 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 Company’s 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.

 

15

---

Table of Contents

 

In August 2007, the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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.

 

Management’s Plans

 

In connection with the implementation of the Company’s 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

---

Table of Contents

 

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 Company’s future revenue levels and expenditures, industry and general economic conditions and other conditions.  If any of these factors change, the Company may require future debt or equity financings to meet its business requirements. There can be no assurance that any required financings will be available or, if available, on terms attractive to the Company.

 

17

---

Table of Contents

 

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 Company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  The Company believes that the following accounting policies fit this definition:

 

Allowance for Doubtful Accounts.  The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.  If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

Inventories.   The Company’s inventories are stated at the lower of cost (first-in, first-out) or market.  The Company identifies slow moving or obsolete inventories and estimates appropriate loss provisions related thereto.  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 Company’s Bob’s 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 Bob’s Texas Style trademark has a carrying value of approximately $0.3 million.

 

· The Company’s 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 Company’s 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 Company’s 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. Management’s 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 Company’s Branded Snack Products business segment.  The Rader Farms frozen berry business is included in the Company’s 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

 

18

---

Table of Contents

 

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. Sam’s 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 Company’s accounting policies.  In many cases the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application.  See the Company’s audited financial statements and notes thereto included in the Company’s 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 Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms.

 

The Company’s Chief Executive Officer and Chief Financial Officer do not expect that the Company’s 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 Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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).

31.2 — Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a).

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.

 

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:	November  11, 2008		THE INVENTURE GROUP, INC.
			By:			/s/	Terry McDaniel
							Terry McDaniel
							Chief Executive Officer
							(Principal Executive Officer)

 

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).
31.2 — Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a).
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.

 

---