POORE BROTHERS INC, 10KSB, 1998-03-30

POORE BROTHERS INC
10KSB, 1998-03-30
MISCELLANEOUS FOOD PREPARATIONS & KINDRED PRODUCTS

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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 31, 1997

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from ________ to ___________

Commission File Number: 1-14556; 0-21857

POORE BROTHERS, INC.
(Name of Small Business issuer in its charter)
<TABLE>
<S> <C>
Delaware 86-0786101
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>

3500 South La Cometa Drive
Goodyear, Arizona 85338
(602) 932-6200
(Address, zip code and telephone number of principal executive offices)

---------------------------

Securities registered pursuant to Section 12(b)
of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)

Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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______

Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

The Registrant's revenues for the most recent fiscal year were
$15,731,796.

At March 24, 1998, the aggregate market value of the Registrant's
common stock held by non-affiliates of the Registrant was approximately
$8,089,619.

At March 24, 1998, the number of issued and outstanding shares of
common stock of the Registrant was 7,126,657.

Transitional Small Business Disclosure Format (check one):
Yes _____ No __X___
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement relating to the Registrant's
1998 Annual Meeting of Stockholders, which the Registrant anticipates filing
with the Securities and Exchange Commission (the "Commission") on or about April
10, 1998, are incorporated by reference in Part III of this Annual Report on
Form 10-KSB.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-KSB, including all documents incorporated
by reference, includes "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 12E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995, and Poore Brothers, Inc. (the
"Company") desires to take advantage of the "safe harbor" provisions thereof.
Therefore, the Company is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all of
such forward-looking statements. In this Annual Report on Form 10-KSB, the words
"anticipates," "believes," "expects," "intends," "estimates," "projects," "will
likely result," "will continue," "future" and similar terms and expressions
identify forward-looking statements. The forward-looking statements in this
Annual Report on Form 10-KSB 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 Company's
brief operating history and significant operating losses to date, the
probability that the Company will need additional financing due to continued
operating losses or in order to implement the Company's business strategy,
significant competition, volatility of the market price of the Common Stock and
those other risks and uncertainties discussed herein, that could cause actual
results to differ materially from historical results or those anticipated. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this Annual Report on Form 10-KSB will
in fact transpire or prove to be accurate. Readers are cautioned to consider the
specific risk factors described herein and in "Risk Factors," and not to place
undue reliance on the forward-looking statements contained herein, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
may arise after the date hereof. All subsequent written or oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by this section.
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Item 1. Description of Business

Business

Poore Brothers, Inc. (the "Company") is engaged in the production,
marketing and distribution of salty snack food products that are sold primarily
throughout the southwestern United States. The Company manufactures and sells
its own brand of potato chips under the Poore BrothersTM logo, manufactures
private label potato chips for grocery store chains, and distributes snack food
products that are manufactured by others. For the year ended December 31, 1997,
revenues totaled $15,731,796. Approximately 64% of sales were attributable to
the Company's Poore BrothersTM brand potato chips; approximately 29% of sales
were attributable to the distribution by the Company of snack food products
manufactured by other companies; and approximately 7% of sales were attributable
to potato chips produced by the Company for sale under the private labels of
customers. The Company generally sells its products to retailers through
independent distributors.

Poore Brothers (TM) brand potato chips are produced with a batch frying
process that the Company believes results in potato chips with enhanced
crispness and flavor. They are currently offered in ten flavors: Original, Salt
& Vinegar, Jalapeno, Barbecue, Parmesan & Garlic, Cajun, Dill Pickle, Grilled
Steak & Onion, Tangy Calypso and Unsalted. The Company also manufactures potato
chips for sale on a private label basis using a continuous frying process. The
Company currently has one California and two Arizona grocery chains as customers
for its private label potato chips. See "Products."

The Company, a Delaware corporation, was organized in February 1995 as
a holding company to acquire, on May 31, 1995, (i) substantially all of the
assets, subject to certain liabilities, of Poore Brothers' Foods, Inc. ("PB
Foods"); (ii) a 100% equity interest in Poore Brothers Distributing, Inc. ("PB
Distributing"); and (iii) an equity interest (which, with related purchases,
constituted 80%) in Poore Brothers of Texas, Inc. ("PB Texas"). The Company also
acquired substantially all of the outstanding shares of Poore Brothers
Southeast, Inc. ("PB Southeast") in an exchange transaction consummated
concurrently with the acquisition of PB Foods, PB Distributing and PB Texas.
Such acquisitions are sometimes referred to collectively herein as the "PB
Acquisition."

As a result of the consummation of the PB Acquisition, the Company
became a holding company with two manufacturing subsidiaries, Poore Brothers
Arizona, Inc. ("PB Arizona"), which had acquired the assets of PB Foods, and PB
Southeast, as well as two distribution subsidiaries, PB Distributing and PB
Texas. Subsequent to the PB Acquisition, the Company purchased the remaining
equity of PB Texas, increasing its equity ownership to 100%. Prior to their
acquisition by the Company, PB Foods, PB Distributing and PB Texas were owned
and operated by Donald and James Poore (since 1986, 1990 and 1991,
respectively). The Company, PB Arizona, PB Southeast, PB Distributing and PB
Texas are hereinafter sometimes collectively referred to as the "PB Companies."

In December 1996, the Company completed an initial public offering of
its Common Stock. See "Company History" and "Item 6. Management's Discussion and
Analysis of Results of Operations and Financial Condition."

In June 1997, the Company sold the operations of PB Texas. In September
1997, the Company closed the PB Southeast manufacturing operation in LaVergne,
Tennessee and consolidated all of the Company's manufacturing operations into a
new facility in Goodyear, Arizona. The land and building comprising the
Company's new Arizona facility is owned by a wholly owned subsidiary, La Cometa
Properties, Inc., which was formed by the Company in May 1997.

As used herein, the term "Company" refers to Poore Brothers, Inc. and
its subsidiaries, except where the context indicates otherwise.

The Company's executive offices are located at 3500 South La Cometa
Drive, Goodyear, Arizona 85338, and its telephone number is (602) 932-6200.

Risk Factors

Brief Operating History; Significant Losses to Date; Accumulated
Deficit. Although certain of the PB Companies have operated for several years,
the Company as a whole has a relatively brief operating history upon which an
evaluation of its prospects can be made. Such prospects are subject to the
substantial risks, expenses and difficulties frequently encountered in the
establishment and growth of a new business in the snack food industry, which is
characterized by a significant number of market entrants and intense
competition. The Company has had significant operating losses to date and has
never made a profit. The Company incurred losses of $691,678 and $3,034,097 for
the fiscal years ended December 31, 1996 and 1997, respectively. At December 31,
1997, the Company had an accumulated deficit of $5,461,933 and net working
capital of $1,423,643. See "Item 6. Management's Discussion and Analysis of
Results of Operations and Financial Condition."

Even if the Company is successful in expanding the production and
distribution of its products and in increasing net sales, it may be expected to
incur substantial additional expense, including advertising and promotional
costs and "slotting" expenses (i.e., the cost of obtaining shelf space in
certain grocery stores). Accordingly, the Company may incur additional
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losses in the future as a result of the implementation of the Company's business
strategy, even if net sales increase significantly. There can be no assurance
that the Company's business strategy will prove successful or that the Company
will ever become profitable.

Possible Need for Additional Financing. Continued operating losses or
expansion of the Company's business may each result in requirements for funds in
excess of cash flow generated from operations, the Company's existing cash
balances and its available borrowing facilities. Accordingly, the Company may
require future debt or equity financing to meet its business requirements. There
can be no assurance that such financing will be available or, if available, on
terms attractive to the Company. Any such financing may dilute the equity
interests of the Company's stockholders.

Non-Compliance with Financial Covenants; Possible Acceleration of 9%
Convertible Debentures. At December 31, 1997 the Company had outstanding 9%
Convertible Debentures due July 1, 2002 (the "9% Convertible Debentures") in the
aggregate principle amount of $2,299,591. The Company is required to maintain
certain financial ratios pursuant to the Debenture Loan Agreement (as defined
herein) so long as the 9% Convertible Debentures are outstanding. Should the
Company be in default under any of these requirements, the holders of the 9%
Convertible Debentures have the right, upon written notice and after a thirty
day period during which such default may be cured, to demand immediate payment
of all the then unpaid principal and accrued but unpaid interest under the 9%
Convertible Debentures. While the Company is not in compliance with certain of
these requirements, the holders of the 9% Convertible Debentures have granted
the Company a waiver effective through June 1999. There can be no assurance that
the Company will attain a sufficient level of profitability, be in compliance
with the financial ratios upon the expiration of the waivers, or be able to
obtain an extension or renewal of the waivers. Any acceleration under the 9%
Convertible Debentures prior to their maturity on July 1, 2002 could have a
material adverse effect upon the Company. See "Item 6. Management's Discussion
and Analysis of Results of Operations and Financial Condition--Liquidity and
Capital Resources."

Competition. The market for salty snack foods, such as those sold by
the Company, including potato chips, tortilla chips, popcorn and pretzels, is
large and intensely competitive. Competitive factors in the salty snack food
industry include product quality and taste, brand awareness among consumers,
access to supermarket shelf space, price, advertising and promotion, variety of
snacks offered, nutritional content, product packaging and package design. The
Company competes in that market principally on the basis of product quality and
taste.

The snack food industry is primarily dominated by Frito-Lay, Inc.,
which has substantially greater financial and other resources than the Company
and sells brands that are more widely recognized than are the Company's
products. Numerous other companies that are actual or potential competitors of
the Company, many with greater financial and other resources (including more
employees and more extensive facilities) than the Company, offer products
similar to those of the Company. In addition, many of such competitors offer a
wider range of products than that offered by the Company. Local or regional
markets often have significant smaller competitors, many of whom offer batch
fried products similar to those of the Company. Expansion of Company operations
into new markets has and will continue to encounter significant competition from
national, regional and local competitors that may be greater than that
encountered by the Company in its existing markets. In addition, such
competitors may challenge the Company's position in its existing markets. While
the Company believes that its products and method of operations will enable it
to compete successfully, there can be no assurance of its ability to do so.

Promotional and Shelf Space Costs. Successful marketing of food
products generally depends upon obtaining adequate retail shelf space for
product display, particularly in supermarkets. Frequently, food manufacturers
and distributors, such as the Company, incur additional costs in order to obtain
additional shelf space. Whether or not the Company incurs such costs in a
particular market is dependent upon a number of factors, including existing
demand for the Company's products, relative availability of shelf space and
general competitive conditions. The Company may incur significant shelf space or
other promotional costs as a necessary condition of entering into competition in
particular markets or stores. If incurred, such costs may materially affect the
Company's financial performance.

No Assurance of Consumer Acceptance of Company's Existing and Future
Products. Consumer preferences for snack foods are continually changing and are
extremely difficult to predict. The ability of the Company to develop successful
operations in new markets will depend upon customer acceptance of, and the
Company's ability to manufacture, its products. There can be no assurance that
the Company's products will achieve a significant degree of market acceptance,
that acceptance, if achieved, will be sustained for any significant period or
that product life cycles will be sufficient to permit the Company to recover
start-up and other associated costs. In addition, there can be no assurance that
the Company will succeed in the development of any new products or that any new
products developed by the Company will achieve market acceptance or generate
meaningful revenue for the Company.
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Uncertainties and Risks of Food Product Industry. The food product
industry in which the Company is engaged is subject to numerous uncertainties
and risks outside of the Company's control. Profitability in the food product
industry is subject to adverse changes in general business and economic
conditions, oversupply of certain food products at the wholesale and retail
levels, seasonality, the risk that a food product may be banned or its use
limited or declared unhealthful, the risk that product tampering may occur that
may require a recall of one or more of the Company's products, and the risk that
sales of a food product may decline due to perceived health concerns, changes in
consumer tastes or other reasons beyond the control of the Company.

Fluctuations in Prices of Supplies; Dependence Upon Availability of
Supplies and Performance of Suppliers. The Company's manufacturing costs are
subject to fluctuations in the prices of potatoes and oil, the two major
ingredients used in the manufacture of potato chips, as well as other
ingredients of the Company's products. Potatoes are widely available year-round,
either freshly harvested or from storage during winter months. TrisunR, a
sunflower oil low in saturated fat that is used by the Company in the production
of Poore BrothersTM brand potato chips, is supplied by one company. The Company
believes that alternative cooking oils that are low in saturated fat are readily
abundant and available. The Company is dependent on its suppliers to provide the
Company with products and ingredients in adequate supply and on a timely basis.
Although the Company believes that its requirements for products and ingredients
are readily available, and that its business success is not dependent on any
single supplier, the failure of certain suppliers to meet the Company's
performance specifications, quality standards or delivery schedules could have a
material adverse effect on the Company's operations. In particular, a sudden
scarcity, a substantial price increase, or an unavailability of product
ingredients could materially adversely affect the Company's operations. There
can be no assurance that alternative ingredients would be available when needed
and on commercially attractive terms, if at all.

Lack of Proprietary Manufacturing Methods. The taste and quality of
Poore BrothersTM brand potato chips is largely due to two elements of the
Company's manufacturing process: its use of batch frying and its use of
distinctive seasonings to produce a variety of flavors. The Company does not
have exclusive rights to the use of either element; consequently, competitors
may incorporate such elements into their own processes.

Dependence Upon Major Customers. Two customers of the Company, Fry's
Food Stores (a subsidiary of Kroger, Inc.) and Safeway, Inc., accounted for 14%
and 10%, respectively, of the Company's 1997 net sales, with the remainder of
the Company's net sales being derived from sales to a limited number of
additional customers, either grocery chains or regional distributors, none of
which individually accounted for more than 10% of the Company's sales for 1997.
A decision by any major customers to cease or substantially reduce their
purchases could have a material adverse effect on the Company's business.

Reliance on Key Employees; Non-Compete Agreements. The Company's
success is dependent in large part upon the abilities of its officers, including
Eric J. Kufel (President and Chief Executive Officer). The inability of the
officers to perform their duties or the inability of the Company to attract and
retain other highly qualified personnel could have a material adverse effect
upon the Company's business and prospects. The Company does not maintain, nor
does it currently contemplate obtaining, "key man" life insurance with respect
to such employees. With the exception of James M. Poore and Wendell T. Jones,
the employment of the officers of the Company is on an "at-will" basis. The
Company has non-compete agreements with all of its officers, except Mr. Jones.
See "Item 9. Directors and Executive Officers of the Company."

Legal Proceedings. In June 1996, a lawsuit was commenced in an Arizona
state court against two directors of the Company, Mark S. Howells and Jeffrey J.
Puglisi, and PB Southeast which alleged, among other things, that James Gossett
had an oral agreement with Mr. Howells to receive a 49% ownership interest in PB
Southeast, that Messrs. Howells and Puglisi breached fiduciary duties and other
obligations to Mr. Gossett and that he was entitled to exchange such alleged
stock interest for shares in the Company. Another plaintiff, PB Pacific
Distributing, Inc., further alleged that Messrs. Howells and Puglisi failed to
honor the terms of an alleged distribution agreement between it and PB Foods.
The complaint seeks unspecified amounts of damages, fees and costs. In February
1997, plaintiffs filed pleadings indicating they are seeking $3 million in
damages; plaintiffs may not be limited by this damage amount at trial. Messrs.
Howells and Puglisi and PB Southeast have filed an answer and counterclaim
against Mr. Gossett, denying the major provisions of the complaint, alleging
various acts of nonperformance and breaches of fiduciary duty on the part of Mr.
Gossett, and seeking various compensatory and punitive damages. The Company has
agreed to indemnify Messrs. Howells and Puglisi in regard to this lawsuit. In
July 1997, summary judgement was granted in favor of all defendants on all
counts of the lawsuit. In its Order, the Maricopa County (Arizona) Superior
Court ruled that there was no oral contract and that the remainder of the
plaintiffs' claims could not support a cause of action against the defendants.
In February 1998, the Court reversed its prior grant of summary judgment on one
of the seven counts and reinstated Mr. Gossett's, claim that Messrs. Howells and
Puglisi breached fiduciary duties to him. The
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Court also set the matter for trial beginning October 5, 1998. The Court's
recent ruling merely preserves Mr. Gossett's claim for trial and does not
adjudicate the merits of the claim. The Company believes that the claim is
without merit and will continue to vigorously defend the lawsuit. See "Item 3.
Legal Proceedings."

Governmental Regulation. The packaged food industry is subject to
numerous federal, state and local governmental regulations, including those
relating to the preparation, labeling and marketing of food products. The
Company is particularly affected by the Nutrition Labeling and Education Act of
1990 ("NLEA"), which requires specified nutritional information to be disclosed
on all packaged foods. The Company believes that the labeling on its products
currently meets these requirements. The Company does not believe that complying
with the NLEA regulations materially increases the Company's manufacturing
costs. There can be no assurance, however, that new laws or regulations will not
be passed that could require the Company to alter the taste or composition of
its products. Such changes could affect sales of the Company's products and have
a material adverse effect on the Company.

Product Liability Claims. As a manufacturer and marketer of food
products, the Company may be subjected to various product liability claims.
There can be no assurance that the product liability insurance maintained by the
Company will be adequate to cover any loss or exposure for product liability, or
that such insurance will continue to be available on terms acceptable to the
Company. Any product liability claim not fully covered by insurance, as well as
any adverse publicity from a product liability claim, could have a material
adverse effect on the financial condition or results of operations of the
Company.

Volatility of Market Price of Common Stock. Recent history relating to
market prices of companies that recently completed an initial public offering
indicates that, from time to time, there is significant volatility in the market
price of the securities of such companies for reasons that may not be related to
such companies' operations or financial conditions. Since the completion of the
initial public offering of the Company's Common Stock in December 1996 at an
offering price of $3.50 per share, the market price of the Common Stock has
experienced a substantial decline. The last reported sales price of the Common
Stock on the NASDAQ SmallCap Market on March 24, 1998 was $1.31 per share. There
can be no assurance as to the future market price of the Common Stock.

NASDAQ Listing Maintenance Requirements; No Assurance of Qualification
for Continued Listing. NASDAQ has implemented rules changes increasing its
quantitative listing standards that make it more difficult for the Company to
maintain compliance with the listing requirements for the NASDAQ SmallCap
Market. One of such requirements is that the bid price on the Common Stock be
equal to or greater than $1. If the Company is unable to meet the NASDAQ
SmallCap listing requirements in the future, its securities will be subject to
being delisted, and trading, if any, would thereafter be conducted in the
over-the-counter market in the so-called "pink sheets" or the "Electronic
Bulletin Board" of the National Association of Securities Dealers, Inc.
("NASD"). As a consequence of such delisting, an investor could find it more
difficult to dispose of, or to obtain accurate quotations as to the price of the
Company's Common Stock.

Under the rules of the Commission, stock priced under $5.00 per share
is classified as "penny stock." Broker-dealers trading in "penny stock" are
subject to burdensome record keeping and disclosure requirements, which can have
the effect of reducing the liquidity and the value of such stock. Pursuant to
one such requirement, broker-dealers involved in a penny stock transaction must
make a special suitability determination for the purchaser and receive the
purchaser's written consent to the transaction prior to the sale. A listing of
securities on the NASDAQ SmallCap Market affords an exemption from those rules,
and because the Common Stock is currently listed on the NASDAQ SmallCap Market,
the "penny stock" rules do not apply to it. If, however, at some time in the
future the Common Stock should become ineligible for continued listing on the
NASDAQ SmallCap Market, those rules would apply.

Certain Anti-takeover Provisions. The Company's Certificate of
Incorporation authorizes the issuance of up to 50,000 shares of "blank check"
Preferred Stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors of the Company. The
Company may issue such shares of Preferred Stock in the future without
stockholder approval. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of discouraging, delaying or
preventing a change of control of the Company, and preventing holders of Common
Stock from realizing a premium on their shares. In addition, under Section 203
of the Delaware General Corporation Law (the "DGCL"), the Company is prohibited
from engaging in any business combination (as defined in the DGCL) with any
interested stockholder (as defined in the DGCL) unless certain conditions are
met. This statutory provision could also have an anti-takeover effect.
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Company History

Messrs. Donald and James Poore (the "Poore Brothers") founded PB Foods
in 1986 after substantial experience in the potato chip industry. The Poore
Brothers also founded PB Distributing in 1990 and PB Texas in 1991, which
provided distribution capabilities for the Company's Poore BrothersTM brand
products. Prior to forming PB Foods, the Poore Brothers co-founded Groff's of
Texas, Inc. in 1983, which also manufactured batch-fried potato chips. The Poore
Brothers had previously been employed for over thirteen years by Mira-Pak, Inc.,
a designer and manufacturer of packaging equipment for the snack food industry.

In May 1993, Mark S. Howells and associated individuals formed PB
Southeast, which acquired a license from PB Foods to manufacture and distribute
Poore BrothersTM brand products. In 1994, PB Southeast opened a manufacturing
plant in LaVergne, Tennessee.

In November 1994, PB Southeast entered into a Purchase Agreement (the
"Purchase Agreement") with PB Foods, the Poore Brothers and Amelia E. Poore,
that provided for the acquisition by PB Southeast of (i) substantially all of
the assets, subject to certain liabilities, of PB Foods; (ii) a 100% equity
interest in PB Distributing; and (iii) an 80% equity interest in PB Texas, after
giving effect to a 32% equity interest to be purchased from other stockholders
of PB Texas not parties to the Purchase Agreement. Thereafter, the Company was
formed as a holding company and the rights and obligations of PB Southeast under
the Purchase Agreement were assigned to the Company. The transactions
contemplated by the Purchase Agreement were consummated on May 31, 1995.
Subsequent to the acquisition date, the Company acquired the remaining 20%
equity interest in PB Texas. The aggregate purchase price paid by the Company in
connection with these transactions was $4,057,163, $3,232,593 of which was paid
in cash, $500,000 of which was payable pursuant to a five-year promissory note
(paid off in January 1997) and the remainder of which was satisfied by the
issuance of 300,000 shares of the Company's Common Stock, par value $.01 per
share (the "Common Stock") to the seller. The Purchase Agreement contains a
non-compete covenant pursuant to which each of the Poore Brothers agreed not to
compete against the Company, directly or indirectly, in various states for a
five-year period expiring on May 31, 2000.

Also in May 1995, the Company entered into an exchange agreement with
certain stockholders of PB Southeast, including Mark S. Howells and Jeffrey J.
Puglisi, directors of the Company, pursuant to which the Company agreed to
acquire from them more than 99% of the outstanding shares of the capital stock
of PB Southeast, in exchange for the issuance to them of 1,560,000 shares of
Common Stock, concurrently with and subject to the consummation of the closing
under the Purchase Agreement. Such exchange was consummated on May 31, 1995.
James Gossett owns the remaining shares of PB Southeast. See "Item 3. Legal
Proceedings."

In December 1996, the Company completed an initial public offering of
its Common Stock, pursuant to which 2,250,000 shares of Common Stock were
offered and sold to the public at an offering price of $3.50 per share. Of such
shares, 1,882,652 shares were sold by the Company and 367,348 shares were sold
by the holders of the 9% Convertible Debentures (Renaissance Capital Growth &
Equity Income Fund III, Inc. and Wells Fargo Small Business Investment Company,
Inc., formerly Wells Fargo Equity Capital, Inc.), which acquired such shares
upon the conversion of $400,409 principal amount of the 9% Convertible
Debentures. The initial public offering was underwritten by Paradise Valley
Securities, Inc. (the "Underwriter"). The net proceeds to the Company from the
sale of the 1,882,652 shares of Common Stock, after deducting underwriting
discounts and commissions and the expenses of the offering payable by the
Company, were approximately $5,300,000. On January 6, 1997, 337,500 additional
shares of Common Stock were sold by the Company upon the exercise by the
Underwriter of an over-allotment option granted to it in connection with the
initial public offering. After deducting applicable underwriting discounts and
expenses, the Company received net proceeds of approximately $1,000,000 from the
sale of such additional shares.

On June 4, 1997, PB Texas sold its Houston, Texas distribution business
to Mr. David Hecht (the "Buyer"), pursuant to an Asset Purchase, Licensing and
Distribution Agreement effective June 1, 1997. Under the Agreement, the Buyer
was sold certain assets of PB Texas (including inventory, vehicles and capital
equipment) and became the Company's distributor in the Houston, Texas market.

In September 1997, the Company consolidated its entire manufacturing
operations into its new facility in Goodyear, Arizona. As part of the
consolidation, the Company closed its PB Southeast facility in LaVergne,
Tennessee on September 30, 1997.

Business Strategy

The Company's business objective is to become a leading regional
manufacturer and distributor of branded premium potato chips and other salty
snack foods by providing high quality products at competitive prices that are
superior in taste to comparable products. The Company plans to achieve growth
primarily through increased distribution and sales volume in existing markets,
development of new products and acquisitions. The key elements of the Company's
business strategy are as follows:
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Increase Consumer Acceptance of Poore BrothersTM Brand Products. The
Company's Poore BrothersTM brand products have achieved significant
market penetration in Arizona, Colorado, West Texas, New Mexico, Kansas
and St. Louis, Missouri. The Company attributes the success of its
products in these markets to the taste resulting from its batch frying
process and the variety of flavors, sizes and types of products offered
by the Company. To increase awareness and acceptance of its products,
the Company is increasing its advertising and distribution efforts in
certain key regional markets, including Arizona, Southern California,
Colorado, New Mexico and West Texas. These efforts include, among other
things, joint advertising with supermarkets and other manufacturers,
radio and outdoor advertising, product sampling, event sponsorship,
coupon distribution and in-store advertisements and displays.

Continue Improvement in Operating Efficiencies. During 1997, the
Company's management team focused its efforts on reducing costs and
improving product quality. These actions included consolidating the
Arizona operations and the Tennessee manufacturing operation into a
single modern facility in Arizona, selling the unprofitable Texas
distribution business, and discontinuing unprofitable pricing and
promotion practices. The consolidation and the Company's investments in
new machinery and manufacturing processes have resulted in
significantly increased manufacturing efficiencies beginning in the
fourth quarter of 1997. The Company also invested in a new quality
assurance lab and personnel to improve the Company's ability to
consistently produce products within a narrow specification range. The
Company's plans include continued operating efficiency improvements and
negotiated reductions in raw material costs in 1998.

Develop and Distribute New Products. The Company intends to develop new
products that leverage its expertise in manufacturing, marketing and
distributing snack food products. The Company believes it can develop
new snack food products that consumers perceive to be superior in
taste, texture, appearance and brand personality, resulting in
increased consumer demand and shelf space for the Company's products.
In addition, the Company plans to grow its Arizona snack food
distribution business through increasing its emphasis on growing
selective core brands, such as Snyder's pretzels.

Expand Private Label Business. The Company has arrangements with one
California and two Arizona grocery chains for the manufacture and
distribution by the Company of their respective private label potato
chips. The Company manufactures potato chips for these customers in
various types and flavors as specified by them. The Company believes
that opportunities exist for the Company to expand this segment of its
business. Consequently, in July 1997 the Company expanded its private
label production capacity by purchasing and installing a continuous
fryer in its new Arizona facility that can produce approximately 2,100
pounds of potato chips per hour. The Company intends to seek additional
private label customers in the southwestern United States who demand
exceptional product quality at a reasonable price.

Products

Potato Chips. Poore BrothersTM brand potato chips were first introduced
by the Poore Brothers in 1986 and have accounted for substantially all of the
Company's manufacturing sales to date. The potato chips are marketed by the
Company as a premium product based on their distinctive combination of cooking
method and variety of distinctive flavors. The potato chips are currently
offered in ten flavors: Original, Salt & Vinegar, Jalapeno, Barbecue, Parmesan &
Garlic, Cajun, Dill Pickle, Grilled Steak & Onion, Tangy Calypso and Unsalted.
The Company has agreements with one California and two Arizona grocery chains
pursuant to which the Company produces their respective private label potato
chips in the styles and flavors specified by such grocery chains. From June 1996
until September 1997, the Company marketed low-fat potato chips in various
flavors that were processed by a third party, Great Snaxx of AZ L.L.C. ("Great
Snaxx"). See "Manufacturing."

Other Snack Food Products. Through its Arizona distribution subsidiary,
PB Distributing, the Company purchases and resells throughout Arizona snack food
products manufactured by others. Such products include pretzels, tortilla chips,
crackers, snack nuts and meat snacks.

Manufacturing

The Company believes that a key element of the product's success to
date has been its use of certain cooking techniques and key ingredients in the
manufacturing process to produce potato chips with improved flavor. These
techniques currently involve two elements: the Company's use of a batch frying
process for its brand name products, as opposed to the conventional continuous
line cooking method, and the Company's use of distinctive seasonings to produce
potato chips in a variety of flavors. Although it produces less volume, the
Company believes that its batch frying process is superior to conventional
continuous line cooking methods because it enhances crispness and flavor through
greater control over temperature and other cooking conditions.
8
<PAGE>
Production Facilities. In August 1997, the Company completed the
transition of all Arizona manufacturing operations into its newly constructed
Goodyear, Arizona facility. The new Goodyear facility has the capacity to
produce approximately 3,000 pounds of potato chips per hour, with approximately
2,100 pounds of such capacity being produced using a continuous frying method
and the remainder being produced using the Company's batch frying method. In
September 1997, the Company closed its PB Southeast manufacturing operation in
LaVergne, Tennessee and consolidated all of the Company's manufacturing
operations into the Company's new facility in Goodyear, Arizona. In connection
with the PB Southeast closure, the Company sold certain equipment and moved the
remaining equipment (with an aggregate production capacity of approximately 360
pounds of potato chips per hour) to the new facility for storage. If needed,
this equipment could be installed in the Arizona facility without significant
time or cost.

Private Label Products. In order to meet potential demand for private
label products, the Company installed a continuous fryer potato chip line in its
new facility that has the capacity to produce approximately 2,100 pounds of
potato chips per hour. In July 1997, the Company began producing private label
potato chips with the new continuous fryer. There can be no assurance that the
Company will obtain sufficient business to recoup the costs of its investment
in, and alterations of its facilities.

Low-Fat Potato Chips. In 1996, the Company signed an agreement with
Great Snaxx pursuant to which Great Snaxx granted the Company rights in a
limited geographic region to market low-fat potato chips processed by Great
Snaxx. The Company marketed low-fat potato chips processed by Great Snaxx from
June 1996 until September 1997. Sales of the low-fat potato chips were not
significant and during 1997 and 1996 accounted for less than 2.5% and 1.7%,
respectively, of the Company's net sales. On September 3, 1997, Great Snaxx
notified the Company that it had ceased operations related to its processing of
low-fat potato chips. Under its terms, the cessation of business by Great Snaxx
automatically terminated the agreement.

The Company may in the future consider producing low-fat potato chips
using an alternative production method, such as baking or the use of alternative
cooking oils. There can be no assurance, however, that the Company would be
successful in utilizing an alternative method or that low-fat potato chips
produced by the Company would be accepted in the marketplace.

Marketing and Distribution

The Company sells its products primarily in the southwest, but also in
targeted markets in the western, southern and midwestern United States. The
Company's products are distributed through a select group of independent
distributors.

The Company's Arizona distribution subsidiary operates throughout
Arizona, with 30 independently operated service routes. Each route is operated
by an independent distributor who merchandises as many as 100 items at major
grocery store chains in Arizona, such as Albertson's, ABCO, Basha's, Fry's,
Megafoods, Safeway, Smith's, and Smitty's Food Stores. In addition to servicing
major supermarket chains, the Company's distributors service many independent
grocery stores, club stores (including Price/Costco and Sam's), and military
facilities throughout Arizona. In addition to Poore BrothersTM brand products,
the Company distributes throughout Arizona a wide variety of items manufactured
by other companies, including pretzels, tortilla chips, crackers, snack nuts and
meat snacks. The Company also sells Poore BrothersTM brand potato chips to
America West Airlines and Trans World Airlines for passenger service and to
several vending companies in the southwest.

Outside of Arizona, the Company selects distributors primarily on the
basis of quality of service, call frequency on customers, financial capability
and relationships they have with supermarkets, including access to shelf space
in the store's snack aisles. As of December 31, 1997, the Company had
arrangements with over 35 distributors in a number of major cities, including
St. Louis, Denver, San Diego, Los Angeles, San Antonio, El Paso, Albuquerque,
Cincinnati, Houston, Wichita, Honolulu, Boise, Tampa, and Minneapolis.

Successful marketing of the Company's products depends, in part, upon
obtaining adequate retail shelf space for such products, particularly in
supermarkets. Frequently, the Company incurs additional marketing costs in order
to obtain additional shelf space. Whether or not the Company will continue to
incur such costs in the future will depend upon a number of factors, including
existing demand for the Company's products, relative availability of shelf space
and general competitive conditions. The Company may incur significant shelf
space or other promotional costs as a necessary condition of entering into
competition in particular markets or stores. Any such costs may materially
affect the Company's financial performance.

Suppliers

The principal raw materials used by the Company are potatoes, oil and
packaging material. The Company believes that the raw materials it needs to
produce its products are readily available from numerous suppliers on
commercially reasonable terms. Potatoes are widely available year-round, either
freshly harvested or from storage during the winter months. The Company uses
both sunflower oil and cottonseed oil in the production of potato chips. The
Company believes that
9
<PAGE>
alternative cooking oils for the production of Poore BrothersTM brand and
private label potato chips are readily abundant and available. The Company also
uses seasonings in its manufacturing process.

The Company chooses its suppliers based primarily on price,
availability and quality and does not have any long-term arrangements with any
supplier, except its 3-year arrangement with Printpack Inc. for packaging
material. Although the Company believes that its required products and
ingredients are readily available, and that its business success is not
dependent on any single supplier, the failure of certain suppliers to meet the
Company's performance specifications, quality standards or delivery schedules
could have a material adverse effect on the Company's operations. In particular,
a sudden scarcity, a substantial price increase, or an unavailability of product
ingredients could materially adversely affect the Company's operations. There
can be no assurance that alternative ingredients would be available when needed
and on commercially attractive terms, if at all.

Customers

Two customers of the Company, Fry's Food Stores (a subsidiary of
Kroger, Inc.) and Safeway, Inc. accounted for 14% and 10%, respectively, of the
Company's 1997 net sales. The remainder of the Company's revenues were derived
from sales to a limited number of additional customers, either grocery chains or
regional distributors, none of which individually accounted for more than 10% of
the Company's sales for 1997. A decision by any of the Company's major customers
to cease or substantially reduce their purchases could have a material adverse
effect on the Company's business.

Market Overview and Competition

According to the Snack Food Association ("SFA"), the U.S. market for
salty snack foods reached $16.0 billion at retail in 1996 with potato chips
accounting for approximately 33% of the market, and tortilla chips, pretzels,
popcorn and other products accounting for the balance. Per capita snack
consumption, in dollar terms, has increased every year during the past six
years, ranging from an increase of 6.0% (in 1990) to 0.4% (in 1994), with a 1996
increase of 4.4% to a rate of $60.42 per person per annum. Potato chip sales
have similarly increased steadily over the same period, with 1996 retail sales
of $5.3 billion (a 9.3% increase over 1995) contrasted to 1990 sales of $4.3
billion.

The Company's products compete generally against other salty snack
foods, including potato chips, tortilla chips, popcorn and pretzels. The salty
snack food industry is large and highly competitive and is dominated primarily
by Frito-Lay, Inc., a subsidiary of PepsiCo, Inc. Frito-Lay, Inc. possesses
substantially greater financial, production, marketing, distribution and other
resources than the Company and brands that are more widely recognized than the
Company's products. Numerous other companies that are actual or potential
competitors of the Company, many with greater financial and other resources
(including more employees and more extensive facilities) than the Company, offer
products similar to those of the Company. In addition, many of such competitors
offer a wider range of products than offered by the Company. Local or regional
markets often have significant smaller competitors, many of whom offer batch
fried or low-fat products similar to those of the Company. Expansion of Company
operations to other areas of the United States has and will continue to
encounter significant competition from national, regional and local competitors
that may be greater than that encountered by the Company in its existing
markets. In addition, such competitors may challenge the Company's position in
its existing markets. While the Company believes that its specialized products
and method of operations will enable it to compete successfully, there can be no
assurance of its ability to do so.

The principal competitive factors affecting the market of the Company's
products include product quality and taste, brand awareness among consumers,
access to supermarket shelf space, price, advertising and promotion, variety of
snacks offered, nutritional content, product packaging and package design. The
Company competes in the market principally on the basis of product quality and
taste.

Government Regulation

The manufacture, labeling and distribution of the Company's products
are subject to the rules and regulations of various federal, state and local
health agencies, including the FDA. In May 1994, regulations under the NLEA
concerning labeling of food products, including permissible use of nutritional
claims such as "fat-free" and "low-fat," became effective. The Company is
complying with the NLEA regulations and closely monitors the fat content of its
products through various testing and quality control procedures. The Company
does not believe that compliance with the NLEA regulations materially increases
the Company's manufacturing costs. There can be no assurance that new laws or
regulations will not be passed that could require the Company to alter the taste
or composition of its products. Such changes could affect sales of the Company's
products and have a material adverse effect on the Company.

In addition to laws relating to food products, the Company's operations
are governed by laws relating to environmental matters, workplace safety and
worker health, principally the Occupational Safety and Health Act. The Company
believes that it presently complies in all material respects with such laws and
regulations.
10
<PAGE>
Employees

As of December 31, 1997, the Company had 73 full-time employees,
including 56 in manufacturing and distribution, 6 in sales and marketing and 11
in administration and finance. The Company's employees are not represented by
any collective bargaining organization and the Company has never experienced a
work stoppage. The Company believes that its relations with its employees are
good.

Item 2. Description of Property

The Company owns a new 60,000 square foot facility located on 7.7 acres
of land in Goodyear, Arizona, approximately 15 miles west of Phoenix, Arizona.
Construction of this new facility was completed in June 1997. In August 1997,
the Company completed the transition of all of its Arizona operations into the
new facility. The site will enable the Company to expand its facilities in the
future to a total building size of 120,000 square feet. The facility is financed
by a mortgage with Morgan Guaranty Trust Company of New York that matures in
June 2012.

On February 28, 1997, the Company sold three 12,000 square foot
buildings in Goodyear, Arizona, which previously housed the Company's Arizona
operations and were replaced by the new facility. The net proceeds from the sale
of the properties, which approximated $710,000 were used to repay mortgages
which encumbered the properties and to repay the $500,000 principal amount of a
promissory note issued by the Company to the Poore Brothers in 1995 in
connection with the PB Acquisition. The Company leased the properties from the
buyer on a month-to-month basis until the Company's relocation to its new
facility was completed in August 1997. The total amount of such lease payments
was $56,000.

Until December 31, 1997, PB Southeast leased a 16,900 square foot
manufacturing facility located in LaVergne, Tennessee, approximately 15 miles
south of Nashville, Tennessee. The facility was leased under a lease agreement
that by its terms expired in November 1998. In September 1997, the Company
closed its PB Southeast operation and consolidated its operations into its new
Arizona facility. In December 1997, the Company completed negotiations with the
landlord for the early termination of the lease effective December 31, 1997.

The Company believes that its facilities are adequately covered by
insurance.

Item 3. Legal Proceedings

In June 1996, a lawsuit was commenced in an Arizona state court against
two directors of the Company, Mark S. Howells and Jeffrey J. Puglisi, and PB
Southeast which alleged, among other things, that James Gossett had an oral
agreement with Mr. Howells to receive a 49% ownership interest in PB Southeast,
that Messrs. Howells and Puglisi breached fiduciary duties and other obligations
to Mr. Gossett and that he was entitled to exchange such alleged stock interest
for shares in the Company. Another plaintiff, PB Pacific Distributing, Inc.,
further alleged that Messrs. Howells and Puglisi failed to honor the terms of an
alleged distribution agreement between it and PB Foods. The complaint seeks
unspecified amounts of damages, fees and costs. In February 1997, plaintiffs
filed pleadings indicating they are seeking $3 million in damages; plaintiffs
may not be limited by this damage amount at trial. Messrs. Howells and Puglisi
and PB Southeast have filed an answer and counterclaim against Mr. Gossett
denying the major provisions of the complaint, alleging various acts of
nonperformance and breaches of fiduciary duty on the part of Mr. Gossett and
seeking various compensatory and punitive damages. The Company has agreed to
indemnify Messrs. Howells and Puglisi in regard to this lawsuit. In July 1997,
summary judgement was granted in favor of all defendants on all counts of the
lawsuit. In its Order, the Maricopa County (Arizona) Superior Court ruled that
there was no oral contract and that the remainder of the plaintiffs' claims
could not support a cause of action against the defendants. In February 1998,
the Court reversed its prior grant of summary judgment on one of the seven
counts and reinstated Mr. Gossett's claim that Messr. Howells and Puglisi
breached fiduciary duties to him. The Court also set the matter for trial
beginning October 5, 1998. The Court's recent ruling merely preserves Mr.
Gossett's claim for trial and does not adjudicate the merits of the claim. The
Company believes that the claim is without merit and will continue to vigorously
defend the lawsuit.

In September 1997, a lawsuit was commenced against PB Distributing by
Chris Ivey and his company, Shelby and Associates (collectively "Ivey"). The
complaint alleges, among other things, that PB Distributing defrauded Ivey as
part of Ivey's purchase of a distributing company from Walter Distributing
Company and James Walter and that as a result, Ivey has suffered damages of at
least $390,000. Ivey is also seeking punitive damages. PB Distributing and the
Company have denied the allegations and believe that the claim is without merit
and will continue to vigorously defend the lawsuit.

The Company is 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 will not have a material effect on
the financial statements taken as a whole.

Item 4. Submission of Matters to a Vote of Security Holders

None.
11
<PAGE>
PART II

Item 5. Market for Common Equity and Related Stockholder Matters

The common stock, $.01 par value, of the Company (the "Common Stock")
began trading on the NASDAQ SmallCap Market tier of the NASDAQ Stock Market on
December 6, 1996 under the symbol "POOR." The following table sets forth, for
the periods indicated, the high and low reported sales prices for the Common
Stock on the NASDAQ SmallCap Market. The trading market in the Company's
securities may at times be relatively illiquid due to low trading volume. The
Company's initial public offering became effective on December 6, 1996. Before
this date, there was no public market for the Company's securities.
<TABLE>
<CAPTION>
Sales Prices
------------
Period of Quotation High Low
------------------- ---- ---
<S> <C> <C>
Fiscal 1996:
Fourth Quarter (December 6, 1996 to December 31, 1996) $5.13 $3.25

Fiscal 1997:
First Quarter $4.25 $2.88
Second Quarter $3.25 $1.94
Third Quarter $2.75 $1.28
Fourth Quarter $1.69 $0.94
</TABLE>

On March 24, 1998, there were 7,126,657 shares of Common Stock
outstanding. As of such date, the shares of Common Stock were held of record by
approximately 2,600 stockholders.

The Company has never declared or paid any dividends on the shares of
Common Stock. Management intends to retain any future earnings for the operation
and expansion of the Company's business and does not anticipate paying any
dividends at any time in the foreseeable future. In any event, certain debt
agreements of the Company limit the Company's ability to declare and pay
dividends.

Item 6. Management's Discussion and Analysis of Results of Operations and
Financial Condition

Results of Operations

Year ended December 31, 1997 compared to the year ended December 31,
1996

Net sales decreased to $15,731,796 for the year ended December 31, 1997
from $17,960,484 for the year ended December 31, 1996. This represents a
decrease of $2,228,688, or 12%. Kettle chip sales for 1997 were $9,758,977, down
$485,900, or 5%, from $10,244,877 in 1996. The decrease was caused by (i)
$750,000 in lower sales by the Company's Texas distribution business (sold in
June 1997), (ii) $486,000 in lower sales attributed to the discontinuance of
unprofitable pricing and promotion programs, and (iii) offset by $750,000 of
increased sales by the Arizona operation. For 1997, net sales from private label
potato chips were $1,079,398, up $166,126 or 18% from $913,272 in 1996 primarily
as a result of adding one new private label customer in September 1997. Net
sales from low-fat potato chips were $382,713, up $84,818, or 28%, from $297,895
in 1996 (sales of which began in June 1996 and ceased in September 1997). Sales
of products manufactured by others for 1997 were $4,510,708, down $1,993,732, or
31%, from $6,504,440 in 1996. The decrease was attributable to the sale of the
Company's Texas distribution business ($1.3 million) and the discontinuance in
Arizona of several unprofitable product lines manufactured by others ($0.7
million). For 1997 and 1996, sales of products manufactured by the Company
accounted for 71% and 64%, respectively, of total sales, and sales of products
manufactured by others accounted for 29% and 36%, respectively, of total sales.
The decrease in the percentage of sales attributable to products manufactured by
others was primarily due to the resignation of non-snack food distribution
products from the Company's Arizona distribution business and the sale of the
Company's Texas distribution business.

Gross profit for the year ended December 31, 1997 was $2,021,817, or
13% of net sales, as compared to $2,974,110, or 17% of net sales, for the year
ended December 31, 1996. The $952,293 decrease in gross profit was driven by
higher manufacturing costs and lower revenues. Gross profit decreased by
approximately $380,000 as a result of reduced manufacturing efficiencies due to
lower sales volume at the now closed Tennessee manufacturing facility. Lower
sales volumes contributed approximately $370,000 with the remainder resulting
from increased manufacturing costs in the Arizona
12
<PAGE>
manufacturing operation due to inefficiencies related to the transition to the
new facility and new equipment, along with higher fixed costs associated with
the Company's higher production capacity.

Selling, general and administrative expenses increased to $3,982,428 in
1997 up $707,106, or 22%, from $3,275,322 in 1996. Included in selling, general
and administrative expenses in 1997 were approximately $280,000 of restructuring
expenses related to severance, relocation, moving and equipment write-downs. In
addition, the Company incurred higher professional service costs of $323,000
(legal, accounting, insurance and printing) associated with being a public
company. Advertising and promotional expense for 1997 was up $100,000 over 1996
reflecting a $200,000 investment in consumer marketing programs, including
radio, billboards, event sponsorship and coupons, launched during the fourth
quarter of 1997.

The "Sale of Texas distribution business" in the Statement of
Operations reflects one-time restructuring charges of $164,383 related to the
sale in June 1997. These charges include amounts related to asset write-downs of
$97,000, salaries and benefits of $57,000 and lease termination expenses of
$10,000.

The "Closing of Tennessee manufacturing operation" in the Statement of
Operations reflects one-time restructuring charges of $581,492 in connection
with the closure of the PB Southeast manufacturing operation in September 1997.
These charges included amounts related to asset write-downs of $381,000, lease
termination expenses of $55,000, other facility shutdown expenses of $33,000,
freight associated with equipment transfers of $47,000 and severance and related
benefits of $65,000.

Net interest expense decreased to $327,611 for the year ended December
31, 1997 from $390,466 for the year ended December 31, 1996. This decrease was
due primarily to $115,000 of increased interest income generated from investment
of the proceeds of the initial public offering that occurred in December 1996.
There was a $52,000 increase in interest expense due principally to the
permanent financing on the Company's new Arizona facility and additional
equipment leases.

The Company's net losses for the years ended December 31, 1997 and
December 31, 1996 were $3,034,097 and $691,678, respectively. The increase in
net loss was due to a $1,453,000 increase in operating expenses and a $952,000
decrease in gross profit. The increased operating expenses were primarily
attributable to restructuring costs associated with the closure of the Company's
Tennessee manufacturing operation and the sale of the Company's Texas
distribution business. The reduction in gross profit was principally
attributable to reduced manufacturing efficiencies at the now-closed Tennessee
manufacturing facility and lost revenue from the Company's now-closed Texas
distribution business.

Liquidity and Capital Resources

Net working capital was $1,423,643 at December 31, 1997, with a current
ratio of 1.6:1. At December 31, 1996, the Company's net working capital was
$4,185,602, with a current ratio of 2.2:1. The $2,761,959 decrease in working
capital was primarily attributable to the Company's use of cash for operating
activities of approximately $2,064,000.

Completion of the new manufacturing, distribution and headquarters
facility, along with the purchase and installation of equipment, required funds
of $2,950,812 during 1997. These capital expenditures were funded by the
refinancing of the Company's $1 million short-term construction loan into a
permanent $2 million mortgage financing arrangement, financing of $862,961 under
equipment financing leases and proceeds from the Company's initial public
offering.

In connection with the Company's sale of the Texas distribution
business in June 1997 and the closure of the Tennessee manufacturing operation
in September 1997, $478,000 of the $746,000 in total charges represents non-cash
asset write-downs. Of the $268,000 which required cash payments, $187,000 was
paid in 1997, and the remaining $81,000 was paid in January 1998. In connection
with the Company's closure of the Tennessee manufacturing operation and the
relocation of certain assets to Arizona, the $160,000 outstanding balance on the
Commercial Development Block Grant from the State of Tennessee was paid off
using working capital in January 1998.

Construction of the Company's new Arizona manufacturing, distribution
and headquarters facility was initially financed with a $2.4 million
construction loan from the National Bank of Arizona, secured by a first deed of
trust on the land and the building. Interest on the construction loan was at the
prime rate plus 2% (10.25% at December 31, 1996). On June 4, 1997, the Company
refinanced the $1 million remaining balance on the construction loan with a $2
million mortgage loan arrangement with Morgan Guaranty Trust Company of New
York. The fixed rate note bears interest at 9.03% and is secured by the land and
the building. The note matures on July 1, 2012, however monthly principal and
interest installments of $18,425 are determined based on a twenty-year
amortization period.
13
<PAGE>
The Company has entered into a variety of capital and operating leases
for the acquisition of equipment and vehicles. The leases generally have
five-year terms. In June 1997, the Company entered into five-year capital leases
at 9.06% with FINOVA Capital Corporation for new production equipment installed
at the new Arizona facility. In 1997, the Company entered into leases for
equipment with an aggregate fair market value of $863,000.

On February 28, 1997, in connection with the construction of its
Arizona manufacturing facility, the Company sold existing land and buildings for
net proceeds of approximately $710,000. The carrying value of the disposed
property approximated the net proceeds and the sale had an immaterial impact on
the results of operations. Proceeds from the sale were used primarily to pay off
related mortgage debt and notes payable totaling approximately $650,000.

In December 1996, the Company completed an initial public offering
resulting in the sale of 2,250,000 shares of its Common Stock, $.01 par value,
to the public at $3.50 per share. The net proceeds to the Company from the sale
of 1,882,652 shares (the balance of the shares having been sold by the 9%
Convertible Debenture holders), after deducting expenses of the offering, were
approximately $5.3 million. In January 1997, the Company sold 337,500 additional
shares of Common Stock pursuant to an over-allotment option granted to the
underwriter of the initial public offering. Net proceeds from the sale
approximated $1,000,000. In connection with the initial public offering, the
underwriter was granted a warrant to purchase 225,000 shares of Common Stock at
$4.38 per share, which is exercisable through December 6, 2001.

On July 26, 1996, the Company entered into a $1,000,000 Receivable
Financing Agreement to provide working capital, with First Community Financial
Corporation (the "Credit Agreement") pursuant to which it initially borrowed
$675,000, a portion of which was used to retire the Company's previous working
capital line. The Credit Agreement, as amended, was renewed in November 1997 for
a six month period with automatic renewals from year to year, unless terminated
by either party on the anniversary date of the agreement by written notice given
not less than 30 days prior to the anniversary date. The Credit Agreement bears
interest at the prime rate plus 3.50% (12.00% at December 31, 1997), with
minimum monthly interest of $2,500. The Company may borrow up to an amount equal
to 75% of eligible receivables, representing accounts receivable outstanding
less than 60 days, subject to concentration limits. At December 31, 1997, the
Company had approximately $262,000 available under the working capital line of
credit. There can be no assurance that the working capital line will be renewed.
If the working capital line is not renewed and no alternative funding is
obtained, the Company would implement cost reduction measures and reduce planned
capital expenditures. Non-renewal of the working capital line could have a
material adverse effect on the Company.

On May 31, 1995, the Company issued $2,700,000 of its 9% Convertible
Debentures, with monthly principal payments of approximately $20,000 beginning
in July 1998 through July 1, 2002, in connection with the PB Acquisition. In
December 1996, in connection with the Company's initial public offering, the
holders of the 9% Convertible Debentures converted $400,409 principal amount of
the 9% Convertible Debentures into 367,348 shares of Common Stock. As of
December 31, 1997, $2,299,591 principal amount of the 9% Convertible Debentures
remained outstanding. As of December 31, 1997, the Company was not in compliance
with a financial ratio, that the Company is required to maintain while the 9%
Convertible Debentures are outstanding, related to a required interest coverage
ratio of 1.5:1(actual of -5.7:1). As a result of an event of default, the
holders of the 9% Convertible Debentures have the right, upon written notice and
after a thirty-day period during which such default may be cured, to demand
immediate payment of the then unpaid principal and accrued but unpaid interest
under the Debentures. The holders of the 9% Convertible Debentures have granted
the Company a waiver effective through June 30, 1999. After that time, the
Company will be required to be in compliance with the following financial
ratios, so long as the 9% Convertible Debentures remain outstanding: working
capital of at least $1,000,000; minimum shareholders' equity (net worth); an
interest coverage ratio of at least 2.0:1; and a current ratio at the end of any
fiscal quarter of at least 1.1:1. The Company is currently in compliance with
the minimum shareholders' equity, working capital and current ratio
requirements. Management believes that the achievement of the Company's plans
and objectives will enable the Company to attain a sufficient level of
profitability to remain in compliance with the financial ratios or
alternatively, that the Company will be able to obtain an extension or renewal
of the waivers. There can be no assurance, however, that the Company will attain
any such profitability and be in compliance with the financial ratios upon the
expiration of the waivers or be able to obtain an extension or renewal of the
waivers. Any acceleration under the 9% Convertible Debentures prior to their
maturity on July 1, 2002 could have a material adverse effect upon the Company.

At December 31, 1997, the Company had net operating losses available
for federal and state income taxes of approximately $4,548,000. The Company's
ability to utilize its net operating losses to offset future taxable income may
be limited under the Internal Revenue Code Section 382 change in ownership
rules. A valuation allowance has been provided since the Company believes the
realizability of the deferred tax asset does not meet the more likely than not
criteria under
14
<PAGE>
SFAS 109, "Accounting for Income Taxes." The Company's accumulated net operating
losses expire in varying amounts between 2010 and 2012.

Management's Plans

In connection with the implementation of the Company's business
strategy, the Company may incur additional operating losses in the future.
Expenditures relating to market and territory expansion and new product
development may adversely affect selling, general and administrative expenses
and consequently may adversely affect operating and net income. These types of
expenditures are expensed for accounting purposes as incurred, while revenue
generated from the result of such expansion may benefit future periods.

Management believes that existing working capital, together with
available line of credit borrowings, and anticipated cash flows from operations,
will be sufficient to finance the operations of the Company for the next twelve
months. The belief is based on current operating plans and certain assumptions,
including those relating to the Company's future revenue levels and
expenditures, industry and general economic conditions and other conditions. If
any of these factors change, the Company may require future debt or equity
financings to meet its business requirements. There can be no assurance that
such financings will be available or, if available, on terms attractive to the
Company.

Inflation

While inflation has not had a significant effect on operations in the
last year, management recognizes that inflationary pressures may have an adverse
effect on the Company as a result of higher asset replacement costs and related
depreciation and higher material costs. Additionally, the Company may be subject
to seasonal price increases for raw materials. The Company attempts to minimize
the fluctuation in seasonal costs by entering into purchase commitments in
advance, which have the effect of smoothing out price volatility. The Company
will attempt to minimize overall price inflation, if any, through increased
sales prices and productivity improvements.

Item 7. Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Reports

Report of independent accountants with respect to financial statements for the year ended December 31, 1997 23
Report of independent accountants with respect to financial statements for the year ended December 31, 1996 24

Financial Statements

Consolidated balance sheets as of December 31, 1997 and 1996 25
Consolidated statements of operations for the years ended December 31, 1997 and 1996 26
Consolidated statement of shareholders' equity for the years ended December 31, 1997 and 1996 27
Consolidated statements of cash flows for the years ended December 31, 1997 and 1996 28
Notes to financial statements 29
</TABLE>

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Information with respect to this Item 8 is hereby incorporated by
reference from the Company's "Current Report on Form 8-K" filed by the Company
with the Commission on January 7, 1998.
15
<PAGE>
PART III

Item 9. Directors and Executive Officers of the Company

The executive officers and Directors of the Company, and their ages,
are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Eric J. Kufel............................... 31 President, Chief Executive Officer, Director
Thomas W. Freeze............................ 46 Vice President, Chief Financial Officer, Treasurer, and
Secretary
Scott D. Fullmer............................ 34 Vice President -- Sales and Marketing
Glen E. Flook............................... 39 Vice President -- Manufacturing
James M. Poore.............................. 51 Vice President
Wendell T. Jones............................ 57 Director of Sales -- Arizona
Mark S. Howells............................. 44 Chairman, Director
Jeffrey J. Puglisi.......................... 39 Director
Robert C. Pearson........................... 62 Director
Aaron M. Shenkman........................... 57 Director
</TABLE>

Eric J. Kufel. Mr. Kufel has served as President, Chief Executive Officer and a
Director of the Company since February 1997. From November 1995 to January 1997,
Mr. Kufel was Senior Brand Manager at The Dial Corporation and was responsible
for the operating results of Purex Laundry Detergent. From June 1995 to November
1995, Mr. Kufel was Senior Brand Manager for The Coca-Cola Company where he was
responsible for the marketing and development of Minute Maid products. From
November 1994 to June 1995 Mr. Kufel was Brand Manager for The Coca-Cola
Company, and from June 1994 to November 1994, Mr. Kufel was Assistant Brand
Manager for The Coca-Cola Company. From January 1993 to June 1994, Mr. Kufel was
employed by The Kellogg Company in various capacities including being
responsible for introducing the Healthy Choice line of cereal and executing the
marketing plan for Kellogg's Frosted Flakes cereal. Mr. Kufel earned a Masters
of International Management from the American Graduate School of International
Management in December 1992.

Thomas W. Freeze. Mr. Freeze has served as Vice President, Chief Financial
Officer, Secretary and Treasurer of the Company since April 1997. From April
1994 to April 1997, Mr. Freeze served as Vice President, Finance and
Administration -- Retail of New England Business Service, Inc. From October 1989
to April 1994, Mr. Freeze served as Vice President, Treasurer and Secretary of
New England Business Service, Inc.

Scott D. Fullmer. Mr. Fullmer has served as Vice President-Sales and Marketing
of the Company since February 1997. From September 1993 to February 1997, Mr.
Fullmer served in various capacities with The Dial Corporation, including Senior
Brand Manager, where he was responsible for managing the sales and advertising
for Dial Soap. From February 1992 to September 1993, Mr. Fullmer was Product
Manager for Sara Lee Corp. From April 1989 to February 1992, Mr. Fullmer served
in various capacities with Borden, Inc. including Product Manager, Snack Foods,
where he was responsible for managing the merchandising of selected snack food
products including potato chips. From May 1986 to April 1989, Mr. Fullmer was in
sales management at Frito-Lay, Inc.

Glen E. Flook. Mr. Flook has served as Vice President-Manufacturing since March
1997. From January 1994 to February 1997, Mr. Flook was employed by The Dial
Corporation as a Plant Manager for a manufacturing operation that generated $40
million in annual revenues. From January 1983 to January 1994, Mr. Flook served
in various capacities with Frito-Lay, Inc., including Plant Manager and
Production Manager.

James M. Poore. Mr. Poore has served as a Vice President of the Company since
June 1995. Mr. Poore co-founded PB Foods in 1986 and served as its Vice
President, Secretary, Treasurer and Director until the PB Acquisition in May
1995. In addition, Mr. Poore served as the Secretary and a Director of PB
Distributing, a subsidiary of the Company, from January 1990 to May 1995, and as
Chairman of the Board and a Director of PB Texas, a subsidiary of the Company,
from May 1991 to May 1995. In 1983, he co-founded Groff's of Texas, Inc., a
potato chip manufacturer in Brookshire, Texas, and served as its President until
January 1986.

Wendell T. Jones. Mr. Jones has been the Director of Sales -- Arizona since
February 1997. Previously, Mr. Jones was National Sales Manager of the Company
from January 1996 to February 1997. From 1969 to 1996, Mr. Jones served in
various capacities at Frito-Lay, Inc., including Director of Sales, Operations
Manager and Manager-Trade Development.
16
<PAGE>
Mark S. Howells. Mr. Howells has served as Chairman of the Board of the Company
since March 1995. For the period from March 1995 to August 1995, Mr. Howells
also served as President and Chief Executive Officer of the Company. He has
served as the Chairman of the Board of PB Southeast, a subsidiary of the
Company, since its inception in May 1993 and served as its President and Chief
Executive Officer from May 1993 to August 1994. Since 1988, Mr. Howells has
devoted a majority of his time to serving as the President and Chairman of
Arizona Securities Group, Inc., a registered securities broker-dealer.

Jeffrey J. Puglisi. Mr. Puglisi has served as a Director of the Company since
March 1995. From March 1996 to August 1996, Mr. Puglisi also served as Vice
Chairman of the Company. For the period from August 1995 to March 1996, Mr.
Puglisi served as Chief Executive Officer of the Company. For the period from
March 1995 to August 1995, Mr. Puglisi served as Executive Vice President, Chief
Operating Officer, Secretary and Treasurer of the Company. He also served as
President, Chief Executive Officer and a Director of PB Southeast from August
1994 to August 1995. Since 1988, Mr. Puglisi has also served as the Senior Vice
President of Arizona Securities Group, Inc., a registered securities
broker-dealer. In addition, since August 1997 Mr. Puglisi has served as the
investment manager for Puglisi Capital Partners, LP, a private investment
partnership.

Robert C. Pearson. Mr. Pearson has served as a Director of the Company since
March 1996. Mr. Pearson has been Senior Vice President -- Corporate Finance for
Renaissance Capital Group, Inc. since April 1997. Previously, Mr. Pearson had
been an independent financial and management consultant specializing in
investments with emerging growth companies. He has performed services for
Renaissance Capital Partners ("RCP") in connection with the Company and other
RCP investments. RCP is the operating manager of Renaissance Capital Growth &
Income Fund III, Inc. ("Renaissance"), the owner of a 9% Convertible Debenture.
From 1990 to 1994, Mr. Pearson served as Executive Vice President and Chief
Financial Officer of Thomas Group, Inc., a publicly traded consulting firm.
Prior to 1990, Mr. Pearson was Vice President -- Finance of Texas Instruments,
Incorporated.

Pursuant to the Debenture Loan Agreement dated May 31, 1995 among the
Company, Renaissance and Wells Fargo Small Business Investment Company, Inc.
(formerly Wells Fargo Equity Capital, Inc., and hereinafter referred to as
"Wells Fargo"), so long as the 9% Convertible Debentures issued by the Company
have not been fully converted into shares of Common Stock or redeemed or paid by
the Company, Renaissance shall be entitled to designate a nominee to the
Company's Board of Directors subject to election by the Company's stockholders.
Renaissance designated Mr. Pearson as a nominee to the Board of Directors.

Aaron M. Shenkman. Mr. Shenkman has served as a Director of the Company since
June 1997. He has served as the General Partner of Managed Funds LLC since
October 1997. He served as the Vice-Chairman of Helen of Troy Corp., a
distributor of personal care products from March 1997 to October 1997. From
February 1984 to February 1997, Mr. Shenkman was the President of Helen of Troy
Corp. From 1993 to 1996, Mr. Shenkman also served as a Director of Craftmade
International, a distributor of ceiling fans.

Items 9-12. Documents Incorporated by Reference

Information with respect to a portion of Item 9 and Items 10, 11 and 12
of Form 10-KSB is hereby incorporated by reference into this Part III of the
Annual Report on Form 10-KSB from the Company's Proxy Statement relating to the
Company's 1998 Annual Meeting of Stockholders to be filed by the Company with
the Commission on or about April 10, 1998.
17
<PAGE>
Item 13. Exhibits and Reports of Form 8-K

The following documents are filed as part of this Annual Report on Form
10-KSB:

(a) The following exhibits as required by Item 601 of Regulation S-B:
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------- -----------
<S> <C> <C>
3.1 -- Certificate of Incorporation of the Company filed with the
Secretary of State of the State of Delaware on February 23, 1995.
(1)
3.2 -- Certificate of Amendment to the Certificate of Incorporation of
the Company filed with the Secretary of State of the State of
Delaware on March 3, 1995. (1)
3.3 -- By-Laws of the Company. (1)
4.1 -- Specimen Certificate for shares of Common Stock. (2)
4.2 -- Form of Underwriter's Warrant issued by the Company to Paradise
Valley Securities, Inc. on December 11, 1996. (3)
4.3 -- Convertible Debenture Loan Agreement dated May 31, 1995 (the
"Debenture Loan Agreement") by and among the Company, PB Arizona,
PB Distributing, PB Texas, PB Southeast, Renaissance and Wells
Fargo. (2)
4.4 -- 9.00% Convertible Debenture dated May 31, 1995, issued by the
Company to Renaissance. (1)
4.5 -- 9.00% Convertible Debenture dated May 31, 1995, issued by the
Company to Wells Fargo. (1)
10.1 -- Employment Agreement dated March 11, 1996, by and between the
Company and David J. Brennan. (1)
10.2 -- Employment Agreement dated July 21, 1995, by and between the
Company and Jeffrey H. Strasberg, as amended. (1)
10.3 -- Employment Agreement dated May 31, 1995, by and between PB Arizona
and James M. Poore (1)
10.4 -- Employment Agreement dated May 20, 1996, by and between the
Company and Wendell T. Jones. (1)
10.5 -- Non-Qualified Stock Option Agreements dated August 1, 1995, August
31, 1995 and February 29, 1996, by and between the Company and
Mark S. Howells. (1)
10.6 -- Non-Qualified Stock Option Agreements dated August 1, 1995, August
31, 1995 and February 29, 1996, by and between the Company and
Jeffrey J. Puglisi. (1)
10.7 -- Non-Qualified Stock Option Agreement dated August 1, 1995, by and
between the Company and Parris H. Holmes, Jr. (1)
10.8 -- Accounts Receivable Security Agreement dated July 26, 1996, by and
between PB Arizona and First Community Financial Corporation
("First Community"). (1)
10.9 -- Guaranty and Subordination dated July 26, 1996, issued by PB
Arizona to First Community. 10.10 -- Multiple Advance Promissory
Note dated July 26, 1996, issued by PB Arizona to First Community.
(1)
10.11 -- Accounts Receivable Security Agreement dated July 26, 1996, by and
between PB Distributing and First Community, with exhibits. (1)
10-12 -- Guaranty and Subordination Agreement dated July 26, 1996, issued
by PB Distributing to First Community. (1)
10.13 -- Multiple Advance Promissory Note dated July 26, 1996, issued by PB
Distributing to First Community. (1)
10.14 -- Security Agreement dated July 26, 1996, by and between PB
Southeast and First Community. (1)
10.15 -- Security Agreement dated July 26, 1996, by and between PB Texas
and First Community. (1)
10.16 -- Form of Security Agreements dated May 31, 1995, by and among
Renaissance, Wells Fargo and each of the Company, PB Arizona, PB
Southeast, PB Texas and PB Distributing. (1)
10.17 -- Master Equipment Lease Agreement dated September 22, 1995, by and
between Banc One Arizona Leasing Corporation and PB Arizona ("Banc
One Lease Agreement"), with equipment schedules. (1)
10.18 -- Corporate Guaranty dated September 25, 1995, issued by PB
Distributing to Banc One Arizona Leasing Corporation in connection
with the Banc One Lease Agreement. (1)
10.19 -- Equipment Lease Agreement dated December 12, 1995, by and between
PB Arizona and FINOVA Capital Corporation. (1)
10.20 -- Guaranty dated December 12, 1995, issued by the Company to FINOVA
Capital Corporation. (1)
10.21 -- Master Lease Agreement (the "LCA Lease Agreement") dated February
1, 1996, by and between PB Arizona and LCA Capital Corp. (also
known as LCA, a Division of Associates Commercial Corporation)
("LCA"). (1)
10.22 -- Purchase Agreement dated February 1, 1996, by and between PB
Arizona and LCA in connection with the LCA Lease Agreement. (1)
10.23 -- Corporate Guaranty dated as of February 1, 1996, issued by the
Company to LCA in connection with LCA Lease Agreement. (1) Exhibit
Number Description
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------- -----------
<S> <C> <C>
10.24 -- Loan Agreement dated September 11, 1996, by and between the
Company and National Bank of Arizona ("NBA"). (1)
10.25 -- Promissory Note dated September 11, 1996, in the principal amount
of $2,400,000, issued by the Company to NBA. (1)
10.26 -- Deed of Trust, Security Agreement and Financing Statement dated
September 11, 1996, by and between the Company and NBA. (1)
10.27 -- Assignment of Permits, Licenses, Approvals, Deposits, Contracts
and Documents dated September 11, 1996, by and between the Company
and NBA. (1)
10.28 -- Specific Assignment of Development Agreement dated September 11,
1996, by and between the Company and NBA. (1)
10.29 -- Development Agreement dated May 14, 1996, by and between the
Company and the City of Goodyear, Arizona. (1)
10.30 -- Agreement dated August 29, 1996, by and between the Company and
Westminster Capital, Inc. ("Westminster"), as amended. (1)
10.31 -- Secured Promissory Note dated September 11, 1996, in the principal
amount of $1,250,000, issued by the Company to Westminster. (1)
10.32 -- Unsecured Environmental Indemnity Agreement dated September 11,
1996, by the Company in favor of Westminster. (1)
10.33 -- Commercial Pledge and Security Agreement dated September 11, 1996,
by and among the Company, NBA and Westminster. (1)
10.34 -- Subordinated Deed of Trust, Security Agreement, Assignment of
Leases and Rents and Fixture Filing dated September 11, 1996, by
and among the Company, First American Title Insurance Company and
Westminster. (1)
10.35 -- Standard Form of Agreement between Owner and Contractor dated
August 8, 1996, between the Company and Newcon, Inc. (1)
10.36 -- Agreement for the Purchase and Sale of Assets and Assumption and
Liabilities dated November 11, 1994, by and between PB Arizona, PB
Foods, James Poore, Donald Poore and Amelia Poore. (1)
10.37 -- Form of Independent Distributor Agreement by and between PB
Distributing and independent distributors. (1)
10.38 -- Agreement for the Exclusive Right to Purchase, Package, Distribute
and Sell "Low Fat" Snack Foods dated September 11, 1996, by and
between the Company and Great Snaxx. (Certain portions of this
document are omitted pursuant to a confidential treatment
request.) (2)
10.39 -- Amendment No. 1 dated October 14, 1996, to Warrant dated September
11, 1996, issued by the Company to Westminster. (2)
10.40 -- Waiver Letter dated August 1. 1996, from Renaissance, in
connection with the Debenture Loan Agreement. (2)
10.41 -- Waiver Letter dated August 27, 1996, from Wells Fargo, in
connection with the Debenture Loan Agreement. (2)
10.42 -- Letter Agreement dated November 5, 1996, amending the
Non-Qualified Stock Option Agreement dated February 29, 1996, by
and between the Company and Mark S. Howells. (2)
10.43 -- Letter Agreement dated November 5, 1996, amending the
Non-Qualified Stock Option Agreement dated February 29, 1996, by
and between the Company and Jeffrey J. Puglisi. (2)
10.44 -- Non-Qualified Stock Option Agreement dated as of October 22, 1996,
by and between the Company and Mark S. Howells. (2)
10.45 -- Letter Agreement dated as of November 5, 1996, by and between the
Company and Jeffrey J. Puglisi. (2)
10.46 -- Letter Agreement dated as of November 5, 1996, by and between the
Company and David J. Brennan. (2)
10.47 -- Stock Option Agreement dated October 22, 1996, by and between the
Company and David J. Brennan. (3)
10.48 -- Amendment to Accounts Security Receivable Agreement dated November
1, 1996, by and between PB Arizona and First Community. (2)
10.49 -- Amendment to Accounts Receivable Security Agreement dated November
1, 1996, by and between PB Distributing and First Community. (2)
10.50 -- Letter Agreement dated November 1, 1996, by and among the Company,
Mark S. Howells, Jeffrey J. Puglisi, David J. Brennan and Parris
H. Holmes, Jr. (2)
10.51 -- Letter Agreement dated December 4, 1996, by and between the
Company and Jeffrey J. Puglisi, relating to stock options. (3)
10.52 -- Letter Agreement dated December 4, 1996, by and between the
Company and Mark S. Howells, relating to stock options. (3)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------- -----------
<S> <C> <C>
10.53 -- Letter Agreement dated December 4. 1996, by and between the
Company and Parris H. Holmes, Jr., relating to stock options. (3)
10.54 -- Letter Agreement dated December 4, 1996, by and between the
Company and David J. Brennan, relating to stock options. (3)
10.55 -- Letter Agreement dated December 4, 1996, by and between the
Company and Jeffrey H. Strasberg, relating to stock options. (3)
10.56 -- Form of Underwriting Agreement entered into on December 6, 1996,
by and between the Company, Paradise Valley Securities, Inc.,
Renaissance and Wells Fargo. (Incorporated by reference to
Amendment No. 4 to the Company's Registration Statement on Form
SB-2, Registration No. 333-5594-LA.)
10.57 -- Employment Agreement dated January 24, 1997, by and between the
Company and Eric J. Kufel. (4)
10.58 -- First Amendment to Employment Agreement dated February 2, 1997, by
and between the Company and David J. Brennan. (4)
10.59 -- Employment Agreement dated February 4, 1997, by and between the
Company and Scott D. Fullmer. (4)
10.60 -- Employment Agreement dated February 14, 1997, by and between the
Company and Glen E. Flook. (4)
10.61 -- Amendment dated January 28, 1997, amending Employment Agreement by
and between the Company and Wendell T. Jones. (4)
10.62 -- Second Loan Modification Agreement dated January 10, 1997, by and
between the Company and NBA. (4)
10.63 -- Amendment to Accounts Receivable Security Agreement dated December
30, 1996, by and between PB Distributing and First Community. (4)
10.64 -- Amendment to Accounts Receivable Security Agreement dated December
30, 1996, by and between PB Arizona and First Community. (4)
10.65 -- Promissory Note Modification Agreement dated December 30, 1996, by
and between PB Distributing and First Community. (4)
10.66 -- Promissory Note Modification Agreement dated December 30, 1996, by
and between PB Arizona and First Community. (4)
10.67 -- Commercial Real Estate Purchase Contract and Receipt for Deposit
dated January 22, 1997, by and between the Company and D.F.
Properties, Inc. (4)
10.68 -- Separation Agreement and Release of All Claims dated March 10,
1997, by and between the Company and Jeffrey H. Strasberg.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1997, File No.
001-14556.)
10.69 -- Employment Agreement dated April 10, 1997, by and between the
Company and Thomas W. Freeze. (Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1997, File No. 001-14556.)
10.70 -- Asset Purchase, Licensing and Distribution Agreement dated as of
June 1, 1997, by and between PB Texas and David Hecht.
(Incorporated by reference to the Company's Current Report on Form
8-K dated June 4, 1997, File No. 001-14556.)
10.71 -- Fixed Rate Note dated June 4, 1997, by and between La Cometa
Properties, Inc. and Morgan Guaranty Trust Company of New York.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1997, File No.
001-14556.)
10.72 -- Deed of Trust and Security Agreement dated June 4, 1997, by and
between La Cometa Properties, Inc. and Morgan Guaranty Trust
Company of New York. (Incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30,
1997, File No. 001-14556.)
10.73 -- Guaranty Agreement dated June 4, 1997, by and between the Company
and Morgan Guaranty Trust Company of New York. (Incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1997, File No. 001-14556.)
10.74 -- Equipment Lease Agreement dated June 9, 1997, by and between PB
Arizona and FINOVA Capital Corporation. (Incorporated by reference
to the Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1997, File No. 001-14556.)
10.75 -- Poore Brothers, Inc. 1995 Stock Option Plan, as amended
(Incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1997, File No.
001-14556.)
10.76 -- Fixed Rate Note dated June 4, 1997, by and between La Cometa
Properties, Inc. and Morgan Guaranty Trust Company of New York.
(5)
10.77 -- Deed of Trust and Security Agreement dated June 4, 1997, by and
between La Cometa Properties, Inc. and Morgan Guaranty Trust
Company of New York. (5)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------- -----------
<S> <C> <C>
10.78 -- Guaranty Agreement dated June 4, 1997, by and between the Company
and Morgan Guaranty Trust Company of New York. (5)
10.79 -- Equipment Lease Agreement dated June 9, 1997, by and between PB
Arizona and FINOVA Capital Corporation. (5)
21.1 -- List of Subsidiaries of the Company. (6)
27.1 -- Restated Financial Data Schedule for 1997 (6)
27.2 -- Restated Financial Data Schedule for 1996 (6)
</TABLE>

- ---------------------------------

(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, Registration No. 333-5594-LA.
(2) Incorporated by reference to Amendment No. 1 to Company's Registration
Statement on Form SB-2, Registration No. 333-5594-LA.
(3) Incorporated by reference to Amendment No. 3 to the Company's Registration
Statement on Form SB-2, Registration No. 333-5594-LA.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the three-month period ended June 30, 1997.
(6) Filed herewith.

(b) Reports on Form 8-K.

(1) Current Report on Form 8-K, reporting the consolidation of the
Company's manufacturing operations into the Company's new
facility in Goodyear, Arizona and the related closure of the
Company's manufacturing operation in LaVergne, Tennessee
(filed with the Commission on October 2, 1997).
21
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: March 30, 1998 POORE BROTHERS, INC.

By: /s/ Eric J. Kufel
-------------------------------------
Eric J. Kufel
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant, in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Eric J. Kufel President, Chief Executive Officer, and Director March 30, 1998
- --------------------------------------------- (Principal Executive Officer)
Eric J. Kufel

/s/ Thomas W. Freeze Vice President, Chief Financial Officer, Treasurer March 30, 1998
- --------------------------------------------- and Secretary
Thomas W. Freeze (Principal Financial Officer and
Principal Accounting Officer)

/s/ Mark S. Howells Chairman of the Board of Directors March 30, 1998
- ---------------------------------------------
Mark S. Howells

/s/ Jeffrey J. Puglisi Director March 30, 1998
- ---------------------------------------------
Jeffrey J. Puglisi

/s/ Robert C. Pearson Director March 30, 1998
- ---------------------------------------------
Robert C. Pearson

/s/ Aaron M. Shenkman Director March 30, 1998
- ---------------------------------------------
Aaron M. Shenkman
</TABLE>
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
Poore Brothers, Inc.

We have audited the accompanying consolidated balance sheet of Poore Brothers,
Inc. and subsidiaries as of December 31, 1997, and the related consolidated
statements of operation, shareholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Poore
Brothers, Inc. and subsidiaries as of December 31, 1997, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP

Phoenix, Arizona,
February 12, 1998.
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
Poore Brothers, Inc.

We have audited the accompanying consolidated balance sheet of Poore Brothers,
Inc. and Subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Poore
Brothers, Inc. and Subsidiaries as of December 31, 1996, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.

/s/ COOPERS & LYBRAND L.L.P.

COOPERS & LYBRAND L.L.P.

Phoenix, Arizona
March 4, 1997
24
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 1,622,751 $ 3,603,850
Restricted certificate of deposit ....................................... -- 1,250,000
Accounts receivable, net of allowance of $174,000 in 1997 and $121,000
in 1996 ............................................................... 1,528,318 1,912,064
Note receivable ......................................................... 78,414 --
Inventories ............................................................. 473,025 863,309
Other current assets .................................................... 175,274 193,581
------------ ------------
Total current assets .................................................. 3,877,782 7,822,804

Property and equipment, net ................................................ 6,602,435 4,032,343
Intangible assets, net ..................................................... 2,294,324 2,470,231
Other assets, net .......................................................... 100,673 15,067
------------ ------------
Total assets .......................................................... $ 12,875,214 $ 14,340,445
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 824,129 $ 1,318,952
Accrued liabilities ..................................................... 502,793 500,192
Current portion of long-term debt ....................................... 1,127,217 1,818,058
------------ ------------
Total current liabilities ............................................. 2,454,139 3,637,202

Long-term debt, less current portion ....................................... 5,017,724 3,355,651
Other liabilities .......................................................... -- 6,000
------------ ------------
Total liabilities ..................................................... 7,471,863 6,998,853
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $100 par value; 50,000 shares authorized; none issued
and outstanding at December 31, 1997 and 1996, respectively ........... -- --
Common stock, $.01 par value; 15,000,000 shares authorized; 7,051,657 and
6,648,824 shares issued and outstanding at December 31, 1997 and 1996,
respectively ......................................................... 70,516 66,488
Additional paid-in capital .............................................. 10,794,768 9,702,940
Accumulated deficit ..................................................... (5,461,933) (2,427,836)
------------ ------------
Total shareholders' equity ............................................ 5,403,351 7,341,592
------------ ------------
Total liabilities and shareholders' equity ............................ $ 12,875,214 $ 14,340,445
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31,
----------------------------
1997 1996
------------ ------------

Net sales .................................. $ 15,731,796 $ 17,960,484

Cost of sales .............................. 13,709,979 14,986,374
------------ ------------

Gross profit ............................ 2,021,817 2,974,110

Selling, general and administrative expenses 3,982,428 3,275,322

Closing of Tennessee manufacturing operation 581,492 --

Sale of Texas distribution business ........ 164,383 --
------------ ------------

Operating loss .......................... (2,706,486) (301,212)
------------ ------------

Interest income ............................ 128,205 13,211

Interest expense ........................... (455,816) (403,677)
------------ ------------
(327,611) (390,466)
------------ ------------
Net loss ............................... $ (3,034,097) $ (691,678)
============ ============

Net loss per common share:
Basic .................................. $ (0.43) $ (0.16)
============ ============
Diluted ................................ $ (0.43) $ (0.16)
============ ============

Weighted average number of common shares:
Basic .................................. 7,018,324 4,352,263
============ ============
Diluted ................................ 7,018,324 4,352,263
============ ============

The accompanying notes are an integral part of these financial statements.
26
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ............ 3,598,924 $ 35,989 $ 2,516,466 $ (1,736,158) $ 816,297
Repurchases of common stock ........ (50,100) (501) (56,209) -- (56,710)
Conversion of convertible debentures 367,348 3,674 396,735 -- 400,409
Sales of common stock .............. 2,732,652 27,326 6,215,948 -- 6,243,274
Issuance of warrants ............... -- -- 630,000 -- 630,000
Net loss ........................... -- -- -- (691,678) (691,678)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 ............ 6,648,824 66,488 9,702,940 (2,427,836) 7,341,592
Sale of common stock ............... 337,500 3,375 1,020,300 -- 1,023,675
Exercise of common stock options ... 65,333 653 71,528 -- 72,181
Net loss ........................... -- -- -- (3,034,097) (3,034,097)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 ............ 7,051,657 $ 70,516 $ 10,794,768 $ (5,461,933) $ 5,403,351
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows used in operating activities:
Net loss .................................................................. $(3,034,097) $ (691,678)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ............................................................ 409,962 284,409
Amortization ............................................................ 175,907 175,788
Bad debt expense ........................................................ 72,489 60,230
Loss on disposition of businesses ....................................... 478,377 --
Change in operating assets and liabilities:
Accounts receivable ................................................... 253,718 (767,179)
Inventories ........................................................... 233,456 (181,518)
Other assets and liabilities .......................................... (37,518) (172,786)
Accounts payable and accrued liabilities .............................. (616,580) 724,687
----------- -----------
Net cash used in operating activities .............. (2,064,286) (568,047)
----------- -----------
Cash flows used in investing activities:
Proceeds on disposal of property .......................................... 773,309 --
Sale of Texas distribution business ....................................... 78,414 --
Purchase of property and equipment ........................................ (2,950,812) (675,620)
----------- -----------
Net cash used in investing activities ............... (2,099,089) (675,620)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock .................................... 1,253,431 7,635,781
Payments on purchase of common stock ...................................... -- (56,709)
Stock issuance costs ...................................................... (157,575) (1,392,508)
Proceeds from issuance of debt ............................................ 1,734,627 --
Sale/(purchase) of restricted certificate of deposit ...................... 1,250,000 (1,250,000)
Payments made on long-term debt ........................................... (2,133,034) (267,920)
Net increase (decrease) in working capital line of credit ................. 234,827 (21,730)
----------- -----------
Net cash provided by financing activities ........... 2,182,276 4,646,914
----------- -----------
Net increase (decrease) in cash and cash equivalents ......................... (1,981,099) 3,403,247
Cash and cash equivalents at beginning of year ............................... 3,603,850 200,603
----------- -----------
Cash and cash equivalents at end of year ..................................... $ 1,622,751 $ 3,603,850
=========== ===========

Supplemental disclosures of cash flow information:
Cash paid during the year for interest, net of amounts capitalized ........ $ 474,648 $ 416,764
Summary of noncash investing and financing activities:
Capital lease obligation incurred - equipment acquisition ............. 100,077 186,220
Construction loan for new facility ...................................... 998,746 1,248,117
Mortgage impounds for interest, taxes and insurance ..................... 35,990 --
Note received for sale of Texas distribution business ................... 78,414 --
Warrants issued ...................................................... -- 630,000
Conversion of debt to common stock ................................... -- 400,409
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

1. Organization, Business and Summary of Significant Accounting Policies:

Poore Brothers, Inc., (the "Company"), a Delaware corporation, was
organized in February 1995 as a holding company and on May 31, 1995 acquired
substantially all of the equity of Poore Brothers Southeast, Inc. ("PB
Southeast") in an exchange transaction pursuant to which 1,560,000 previously
unissued shares of the Company's common stock, par value $.01 per share (the
"Common Stock"), were exchanged for 150,366 issued and outstanding shares of PB
Southeast's common stock. The exchange transaction with PB Southeast has been
accounted for similar to a pooling-of-interests since both entities had common
ownership and control immediately prior to the transaction.

On May 31, 1995, the Company acquired (i) substantially all of the assets,
subject to certain liabilities of Poore Brothers Foods, Inc.; (ii) a 100% equity
interest in Poore Brothers Distributing, Inc.; and (iii) an 80% equity interest
in Poore Brothers of Texas, Inc. ("PB Texas"). During the remainder of 1995, the
Company acquired an additional equity interest in PB Texas, bringing the
Company's total equity interest to 94%. The total purchase price for these
acquisitions was $4,052,631, and the assets acquired were primarily property and
equipment, accounts receivable and inventory. The purchases were financed with
$500,000 of notes payable, 300,000 shares of Common Stock issued to the sellers,
and by the issuance of Convertible Debentures and the sale of Common Stock in a
private offering. In 1997, the Company acquired the remaining 6% equity interest
in PB Texas for $4,532 in cash. These acquisitions have been accounted for as
purchases in accordance with Accounting Principals Board No. 16. Accordingly,
only the results of their operations subsequent to acquisition have been
included in the Company's results. In connection with the acquisitions, the
Company recorded goodwill of $2,482,494, which is being amortized on a
straight-line basis over a twenty-year period.

During 1997, the Company sold its PB Texas distribution business and closed
its PB Southeast manufacturing operation.

Business Objectives, Risks and Plans

The Company manufactures and distributes potato chips and other snack food
products under the Poore Brothers (TM) brand name, as well as private label
potato chips, and also distributes a wide variety of other independently
manufactured snack food items. The Company sells its products primarily in the
southwestern United States. The Company's business objective is to become a
leading regional manufacturer and distributor of branded premium potato chips
and other salty snack foods by providing high quality products at competitive
prices that are superior in taste to comparable products. The Company plans to
achieve growth primarily through increased distribution and sales volume in
existing markets, development of new products and acquisitions.

Although certain of the Poore Brothers companies have operated for several
years, the Company as a whole has a relatively brief operating history. The
Company has had significant operating losses to date and has never made a
profit. Successful future operations are subject to certain risks,
uncertainties, expenses and difficulties frequently encountered in the
establishment and growth of a new business in the snack food industry. The
market for salty snack foods, such as potato chips, tortilla chips, popcorn and
pretzels, is large and intensely competitive. The industry is dominated by one
significant competitor and includes many other competitors with greater
financial and other resources than the Company.

During 1997, the Company identified and implemented a number of
restructuring actions to reposition the Company in the intensely competitive
snack food industry. These actions included significant organizational changes,
discontinuance of unprofitable product lines, sale of its unprofitable
distribution business in Texas, and closure of its unprofitable Tennessee
manufacturing operation. See Note 2. In addition, the Company completed the
construction of a modern manufacturing facility, negotiated new raw material
contracts and purchased new processing and packaging equipment to improve
manufacturing efficiencies.

These actions have reduced the Company's fixed selling, general and
administrative costs and significantly reduced cost of sales, despite the loss
of revenues resulting from the closure of the Tennessee operation and sale of
its Texas distribution business. In addition, management is testing various
marketing programs for the first time (e.g. radio and outdoor advertising,
coupons, promotions and event sponsorship) to determine which programs are most
cost effective in generating revenue growth. As a result, management believes
that the Company will generate positive cash flow in 1998 and therefore, its
existing working capital and borrowing facilities as well as cash flow from
operations should enable the Company to meet its operating cash requirements
through 1998.
29
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

1. Organization, Business and Summary of Significant Accounting Policies:
(continued)

Principles of Consolidation

The consolidated financial statements include the accounts of Poore
Brothers, Inc. and all of its controlled subsidiaries. In all situations, the
Company owns from 99% to 100% of the voting interests of its subsidiaries. All
significant intercompany amounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Fair value of Financial Instruments

At December 31, 1996 and 1997, the carrying value of cash and cash
equivalents, accounts receivable, note receivable, accounts payable, and accrued
liabilities approximate fair values since they are short-term in nature. The
carrying value of the long-term debt approximates fair-value based on the
borrowing rates currently available to the Company for long-term borrowings with
similar terms.

The Company estimates fair values of financial instruments by using
available market information. Considerable judgement is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
may not be indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions or valuation
methodologies could have a material effect on the estimated fair value amounts.

Basis of Presentation

Certain expenses relating to manufacturing costs and promotional expenses
have been reclassified for the previously reported periods shown as part of this
current filing in order to conform to the current financial statement
classifications and to those that are preferred in the industry. The current and
previously reported amounts are shown in the table below.

Year ended
December 31, 1996
----------------------------
Previously Current
Reported Filing
------------ ------------
Net sales ..................................... $ 17,219,641 $ 17,960,484
Cost of sales ................................. 13,091,194 14,986,374
Gross profit .................................. 4,128,447 2,974,110
Selling, general and administrative expenses .. 4,429,659 3,275,322
Operating (loss) .............................. (301,212) (301,212)

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with an original
maturity of three months or less when purchased. Cash at December 31, 1997
includes $100,000 of restricted cash held in escrow in connection with the sale
of the Company's former facilities located in Goodyear, Arizona.

Restricted Certificate of Deposit

Restricted certificate of deposit at December 31, 1996 represents amounts
segregated as collateral for a construction loan. The construction loan was paid
in full in 1997. See Note 6.
30
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

1. Organization, Business and Summary of Significant Accounting Policies:
(continued)

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or
market.

Property and Equipment

Property and equipment are recorded at cost. Cost includes expenditures
for major improvements and replacements. Maintenance and repairs are charged to
operations when incurred. When assets are retired or otherwise disposed of, the
related costs and accumulated depreciation are removed from the appropriate
accounts, and the resulting gain or loss is recognized. Depreciation expense is
computed using the straight-line method over the estimated useful lives of the
assets, ranging from 2 to 30 years.

During construction, the Company capitalized interest in accordance with
Statement of Financial Accounting Standards (SFAS) No. 34, "Capitalization of
Interest Cost." Capitalized interest totaled $30,492 and $687,177 during 1997
and 1996, respectively. Total interest costs incurred were $486,308 and
$1,090,854 during 1997 and 1996, respectively.

Intangible Assets

Organizational costs are recorded at cost and amortized using the
straight-line method over a five-year period. Goodwill is amortized using the
straight-line method over twenty years. Accumulated amortization was $315,819
and $191,463 at December 31, 1997 and 1996, respectively. The Company assesses
the recoverability of goodwill at each balance sheet date by determining whether
amortization of the assets over their original estimated useful life can be
recovered through estimated future undiscounted cash flow.

Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-based Compensation", which defines a fair value based
method of accounting for employee stock options or similar equity instruments.
However, it also allows an entity to continue to account for these plans
according to APB 25, provided pro forma disclosures of net income (loss) and
earnings (loss) per share are made as if the fair value based method of
accounting defined by SFAS 123 had been applied. The Company has elected to
continue to measure compensation expense related to employee (including
directors) stock purchase options using APB 25.

Revenue Recognition

Sales and related cost of sales are recognized upon shipment of products.

Income Taxes

Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in the financial statements
or income tax returns. Deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax bases of assets and
liabilities using enacted rates expected to apply to taxable income in the years
in which those differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date.

Loss Per Share

During 1997, the Company adopted SFAS 128, "Earnings Per Share". Pursuant
to SFAS 128, basic earnings per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the year. Exercises of outstanding stock options and conversion of
convertible debentures were not assumed for purposes of calculating diluted
earning per share for the years ended December 31, 1997 and 1996, as their
effect was anti-dilutive.
31
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

1. Organization and Summary of Significant Accounting Policies: (continued)

Loss Per Share (continued)

Years Ended
December 31,
--------------------------
1997 1996
----------- -----------
Basic loss per share:
Loss available to common shareholders $(3,034,097) $ (691,678)
Weighted average common shares 7,018,324 4,352,263
----------- -----------
Loss per share-basic $ (0.43) $ (0.16)
=========== ===========
Diluted loss per share:
Loss available to common shareholders $(3,034,097) $ (691,678)
Weighted average common shares 7,018,324 4,352,263
Common stock equivalents -- --
----------- -----------
Loss per share-diluted $ (0.43) $ (0.16)
=========== ===========

2. Restructuring Actions

On June 4, 1997, PB Texas sold its Houston, Texas distribution business to
Mr. David Hecht (the "Buyer"), pursuant to an Asset Purchase, Licensing and
Distribution Agreement (the "Agreement") effective June 1, 1997. Under the
Agreement, the Buyer was sold certain assets of PB Texas (including inventories,
vehicles and capital equipment) and became the Company's distributor in the
Houston, Texas market. The purchase price for the assets sold by PB Texas was
approximately $157,000, 50% of which was paid by the Buyer in cash at the
closing and 50% of which will be paid pursuant to a one year, non-interest
bearing promissory note issued by the Buyer to the Company. As a result of this
transaction, the PB Texas distribution operation has been dissolved. The Company
incurred one-time restructuring charges of approximately $164,000 related to the
sale. These charges include amounts related to asset write-downs of $97,000,
salaries and benefits of $57,000, and lease termination costs of $10,000.

In September 1997, the Company consolidated all of its manufacturing
operations into its new 60,000 square foot Goodyear, Arizona facility. As part
of the consolidation, the Company closed its LaVergne, Tennessee (PB Southeast)
facility on September 30, 1997 resulting in the termination of 30 employees. The
Company incurred one-time restructuring charges of approximately $581,000 in
connection with the closure of its PB Southeast manufacturing operation. These
charges included amounts related to asset write-downs of $381,000, lease
termination expenses of $55,000, other facility shutdown expenses of $33,000,
freight associated with equipment transfers of $47,000 and severance and related
benefits of $65,000.

In connection with the Company's sale of the Texas distribution business in
June 1997 and the closure of the Tennessee manufacturing operation in September
1997, $478,000 of the $746,000 in total restructuring charges represents
non-cash asset write-downs. Of the remaining $268,000 which required cash
payments, $187,000 was paid in 1997, and the remaining $81,000 was paid in
January 1998. As a result of the closure of the Tennessee operation and the
relocation of certain assets to Arizona, the $160,000 Commercial Development
Block Grant from the State of Tennessee was paid off using working capital in
January 1998.
32
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

2. Restructuring Actions (continued)

Pro forma unaudited information has been provided below for the year ended
December 31, 1997 assuming the events discussed in this note took place at the
beginning of the period presented. The pro forma results of operation include
adjustments to eliminate the PB Texas distribution business and the PB Southeast
manufacturing operation, as well as the related restructuring charges described
above. The pro forma data does not purport to be indicative of the results that
would have been obtained had these events actually occurred at the beginning of
the periods presented nor does it project the Company's results of operations
for any future period.

PRO FORMA STATEMENTS OF OPERATIONS

Year ended December 31, 1997
----------------------------
As Reported Pro Forma
------------ ------------
(unaudited)
Net sales $ 15,731,796 $ 13,719,444
Cost of sales 13,709,979 11,292,796
------------ ------------
Gross profit 2,021,817 2,426,648
Selling, general and administrative expenses 3,982,428 3,578,334
Loss on disposition of businesses 745,875 --
------------ ------------
Operating income (loss) (2,706,486) (1,151,686)
Net interest expense (327,611) (323,446)
------------ ------------
Net income (loss) $ (3,034,097) $ (1,475,132)
============ ============
Net loss per common share - basic $ (0.43) $ (0. 21)
============ ============

3. Concentrations of Credit Risk:

The Company's cash and cash equivalents are placed with major banks. The
Company, in the normal course of business, maintains balances in excess of
Federal insurance limits. The balance in excess of the insurance limit was
$542,957 and $4,376,179 at December 31, 1997 and 1996, respectively.

Financial instruments subject to credit risk consist primarily of trade
accounts receivable. In the normal course of business, the Company extends
unsecured credit to its customers. Substantially all of the Company's customers
are distributors whose sales are concentrated to retailers in the grocery
industry in the southwest United States. The Company investigates a customer's
credit worthiness before extending credit.

4. Inventories:

Inventories consisted of the following:

December 31,
-------------------
1997 1996
-------- --------
Finished goods $226,298 $609,918
Raw materials 246,727 253,391
-------- --------
$473,025 $863,309
======== ========
33
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

5. Property and Equipment:

Property and equipment consisted of the following:

December 31,
--------------------------
1997 1996
----------- -----------
Buildings and improvements $ 3,378,988 $ 2,652,548
Equipment 3,296,134 1,307,417
Land 272,006 401,842
Vehicles 81,333 251,559
Furniture and office equipment 207,242 118,965
----------- -----------
7,235,703 4,732,331
Less accumulated depreciation and amortization (633,268) (699,988)
----------- -----------
$ 6,602,435 $ 4,032,343
=========== ===========

Included in equipment are assets held under capital leases with an
original cost of $1,315,657 and accumulated amortization of $162,126 at December
31, 1997, and original cost of $463,857 and accumulated amortization of $33,888
at December 31, 1996.

Depreciation expense was $409,962 and $284,409 in 1997 and 1996,
respectively.

At December 31, 1996, the Company was completing the construction of a new
manufacturing facility in Arizona. Included in land, buildings and improvements
was the carrying value of the old facility. At December 31, 1996, the Company
reflected a charge of $30,000 in cost of sales to reduce the carrying value of
the old facility to its net realizable value of $710,000. On February 28, 1997,
the land and buildings were sold for approximately $710,000 and the proceeds
from the sale were used to pay off related mortgage debt and notes payable
totaling approximately $650,000.

In the event that facts and circumstances indicate that the cost of the
property and equipment may be impaired, an evaluation of recoverability would be
performed. This evaluation would include the comparison of the future estimated
undiscounted cash flows associated with the assets to the carrying amount of
these assets to determine if a writedown is required.
34
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

6. Long-Term Debt:

Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Convertible Debentures; interest at 9%; interest and
principal due in monthly installments through 2002;
collateralized by land, buildings, equipment and intangibles ... $2,299,591 $2,299,591
Construction loan due June 11, 1997; interest at bank prime
rate plus 2% (10.25% at December 31, 1996); collateralized
by first deed of trust on land and building and certificate
of deposit totaling $1,250,000 ................................. -- 1,248,117
Notes payable to former owners due May 31, 2000; interest at
bank prime rate plus 1.75% (10.00% at December 31, 1996) ....... -- 500,000
Notes payable; due in monthly installments through December
2000; interest rates ranging from 3% to 11.75%;
collateralized by equipment and vehicles and guaranteed by
the Chairman of the Board ...................................... 162,201 234,071
Working capital line (up to 75% of eligible receivables);
interest at bank prime rate plus 4.50% (12.75%) at December
31, 1996 and at prime plus 3.50% (12.0%) at December 31,
1997; collaterized by accounts receivable and inventories;
due May 31, 1998 ............................................... 586,097 351,270
Mortgage loan due in monthly installments through July 2012;
interest at 9.03%; collaterized by land and building ........... 1,989,147 --
Mortgage loans due 1997 to 1998; interest at bank prime rate
plus 1.75% (10.00% at December 31, 1996); collateralized by
land and buildings ............................................. -- 156,740
Capital lease obligations due in monthly installments through 2002;
interest rates ranging from 8.19% to 11.3%; collateralized by
equipment ...................................................... 1,107,905 383,920
---------- ----------
6,144,941 5,173,709

Less current portion .............................................. 1,127,217 1,818,058
---------- ----------
$5,017,724 $3,355,651
========== ==========
</TABLE>
Annual maturities of long-term debt are as follows:

December 31,
1997
-----------

1998 ............................................... $ 1,127,217
1999 ............................................... 499,485
2000 ............................................... 535,880
2001 ............................................... 516,478
2002 ............................................... 436,427
Thereafter............................................ 3,029,454
-----------
$ 6,144,941
===========
35
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

6. Long-Term Debt: (continued)

In September 1996, the Company entered into a $2,400,000 loan agreement
with National Bank of Arizona, to finance the construction of its new 60,000
square foot manufacturing, distribution and headquarters facility in Goodyear,
Arizona collateralized by a first deed of trust on the land and building and
additionally collateralized by U.S. treasury bills provided by an independent
investor. As consideration for providing the U.S. treasury bills as collateral,
the Company issued to the investor a warrant which, as amended, entitles the
investor to purchase 300,000 shares of Common Stock at an exercise price of
$1.40 per share and expires September 11, 2006. In connection with the warrant,
the Company recorded an increase to additional paid-in capital and building
costs of $630,000 which represents the fair value of the warrant at the date of
award. In December 1996, the U.S treasury bills provided by the investor as
collateral were replaced by the Company with a $1,250,000 restricted certificate
of deposit.

On June 4, 1997, the Company refinanced the balance of the construction
loan, $998,746, with permanent financing. The new permanent financing, provided
by Morgan Guaranty Trust Company of New York, is a $2 million, 15-year mortgage
at 9.03%. Monthly principal and interest payments of $18,425 are required to be
made by the Company. In addition, the Company obtained financing during 1997 of
$862,961 from FINOVA Capital Corporation under 5-year, 9.06% equipment financing
leases for new production equipment installed in the Company's new facility (see
Note 7).

At December 31, 1997, the Company had outstanding 9% Convertible Debentures
due July 1, 2002 (the "9% Convertible Debentures") in the principal amount of
$2,299,591. Interest on the 9% Convertible Debentures is paid by the Company on
a monthly basis. Monthly principal payments of approximately $20,000 are
required to be made by the Company beginning in July 1998 through July 2002 (see
Note 8).

Various debt agreements of the Company contain covenants requiring the
maintenance of certain financial ratios. The most restrictive covenants require
the Company to maintain an interest coverage ratio of 1.5:1, minimum working
capital of $1,000,000 and a calculated minimum amount of shareholders' equity.
The Company was not in compliance with a 9% Convertible Debenture provision
requiring an interest coverage ratio of 1.5:1 (actual of -5.7:1). As a result of
an event of default, the holders of the 9% Convertible Debentures have the
right, upon written notice and after a thirty-day period during which such
default may be cured, to demand immediate payment of the then unpaid principal
and accrued but unpaid interest under the Debentures. The holders of the 9%
Convertible Debentures have granted the Company a waiver effective through June
30, 1999. After that time, the Company will be required to be in compliance with
the following financial ratios, so long as the 9% Convertible Debentures remain
outstanding: working capital of at least $1,000,000; minimum shareholders'
equity (net worth); an interest coverage ratio of at least 2.0:1; and a current
ratio at the end of any fiscal quarter of at least 1.1:1. The Company is
currently in compliance with the minimum shareholders' equity, working capital
and current ratio requirements. Management believes that the achievement of the
Company's plans and objectives will enable the Company to attain a sufficient
level of profitability to remain in compliance with the financial ratios or
alternatively, that the Company will be able to obtain an extension or renewal
of the waivers. There can be no assurance, however, that the Company will attain
any such profitability and be in compliance with the financial ratios upon the
expiration of the waivers or be able to obtain an extension or renewal of the
waivers. Any acceleration under the 9% Convertible Debentures prior to their
maturity on July 1, 2002 could have a material adverse effect upon the Company.

The Company's $1.0 million working capital line of credit was renewed in
November 1997 for a six month period with automatic renewals from year to year,
unless terminated by either party on the anniversary date of the agreement by
written notice given not less than 30 days prior to the anniversary date. At
December 31, 1997, the Company had approximately $262,000 available under the
working capital line of credit. There can be no assurance that the working
capital line will be renewed. If the working capital line is not renewed and no
alternative funding is obtained, the Company would implement cost reduction
measures and reduce planned capital expenditures. Non-renewal of the working
capital line could have a material adverse effect on the Company.
36
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

7. Commitments and Contingencies:

Rental expense under operating leases was $34,632 and $171,612 for the
years 1997 and 1996, respectively. Minimum future rental commitments under
non-cancelable leases as of December 31, 1997 are as follows:

Capital Operating
Leases Leases Total
------ ------ -----
1998 .................................. $ 340,718 $ 34,632 $ 375,350
1999 .................................. 327,597 34,632 362,229
2000 .................................. 307,651 25,974 333,625
2001 .................................. 230,318 230,318
2002 .................................. 131,378 131,378
---------- --------- ----------
Total .................................. 1,337,662 $ 95,238 $1,432,900
========= ==========
Less amount representing interest........ 229,757
----------
Present value............................ $1,107,905

8. Capital Stock:

In connection with the acquisition of the Poore Brothers companies (see
Note 1), the Company issued 300,000 shares of Common Stock to the sellers of the
companies. The Company has the right to repurchase these shares for an aggregate
purchase price of $500,000 by May 31, 1998.

At issuance, the Company's 9% Convertible Debentures (see Note 6) were
convertible into 2,477,065 shares of Common Stock at an effective price of $1.09
per share, subject to anti-dilution adjustments. In December 1996, $400,409 of
such debentures were converted into 367,348 shares of Common Stock, leaving a
debenture balance convertible into 2,109,717 shares of Common Stock.

In December 1996, the Company completed an initial public offering
resulting in the sale of 2,250,000 shares of its Common Stock, $.01 par value,
to the public at $3.50 per share. The net proceeds to the Company from the sale
of 1,882,652 shares (the balance of the shares having been sold by the 9%
Convertible Debenture holders), after deducting expenses of the offering, were
approximately $5.3 million. In January 1997, the Company sold 337,500 additional
shares of Common Stock pursuant to an over-allotment option granted to the
underwriter of its initial public offering. Net proceeds from the sale
approximated $1,000,000. In connection with the initial public offering, the
underwriter was granted a warrant to purchase 225,000 shares of common stock at
$4.38 per share, which is exercisable through December 6, 2001.

9. Stock Options:

The Company's 1995 Stock Option Plan (the "Plan"), as amended in June
1997, provides for the issuance of options to purchase 1,500,000 shares of
Common Stock. The options granted pursuant to the Plan expire over a five-year
period and generally vest over three-year periods. In addition to options
granted under the Plan, the Company also issued non-qualified options to
purchase Common Stock to certain Directors which were exercisable on issuance
and expire ten years from date of grant. All options are issued at fair market
value and are noncompensatory. Fair market value is determined based on the
price of sales of Common Stock occurring at or near the time of the option
award. Outstanding options have exercise prices ranging from $1.08 to $3.94 per
share.
37
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

9. Stock Options: (continued)

Stock option activity was as follows:
<TABLE>
<CAPTION>
Plan Options Non-Plan Options
------------ ----------------
Weighted Weighted
Options Average Options Average
Outstanding Exercise Price Outstanding Exercise Price
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 ........... 485,000 $1.08 600,000 $1.08
Granted ........................... 420,000 1.69 220,000 1.46
Canceled .......................... (250,000) 1.08 -
------------ ------------
Balance, December 31, 1996 ........... 655,000 1.47 820,000 1.18
Granted ........................... 871,950 3.24 -
Canceled .......................... (393,999) 1.58 -
Exercised ......................... (65,333) 1.10 -
------------ ------------
Balance, December 31, 1997 ........... 1,067,618 2.90 820,000 1.18
============ ============
</TABLE>

At December 31, 1997, outstanding Plan options had an average remaining
term of 4.0 years. Plan options that were exercisable at December 31, 1997
totaled 239,668 with a weighted average exercise price per share of $1.64. At
December 31, 1996, there were 122,334 Plan options that were exercisable at a
weighted average exercise price of $1.88 per share. Non-Plan options at December
31, 1997 had an average remaining term of 7.6 years. On January 28, 1998, the
Company granted an additional 270,000 options under the Plan at a price of
$1.02.

Had compensation cost for the Company's stock options been determined
based on the fair value at the date of grant for awards in 1995 through 1997
consistent with the provisions of SFAS 123, the Company's net loss and net loss
per share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Net loss - as reported $(3,034,097) $ (691,678)
Net loss - pro forma (3,438,253) (907,000)
Basic net loss per share of common stock - as reported (0.43) (0.16)
Basic net loss per share of common stock - pro forma (0.49) (0.21)
</TABLE>

The assumption regarding the stock options issued was that 100% of such
options vested when granted, rather than the 56% vested as required by the
awards as of December 31, 1997. The fair value of options granted prior to the
Company's initial public offering was computed using the minimum value
calculation method. For all other options, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: dividend yield of 0%; expected
volatility of 72% and 102%; risk-free interest rate of 6.20% and 6.14%; and
expected lives of 3 and 5 years for 1997 and 1996, respectively. Under this
method, the weighted average fair value of the options granted was $1.68 and
$0.53 per share in 1997 and 1996, respectively.

10. Income Taxes:

There was no current or deferred benefit for income taxes for the years
ended December 31, 1997 and 1996. The following table provides a reconciliation
between the amount determined by applying the statutory federal income tax rate
to the pretax loss and benefit for income taxes:

Years ended December 31,
--------------------------
1997 1996
----------- -----------
Benefit at statutory rate $ 1,031,593 $ 235,170
Valuation allowance ..... (1,190,000) (265,000)
State income tax, net ... 158,407 29,830
=========== ===========
$ 0 $ 0
=========== ===========
38
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

10. Income Taxes: (continued)

The income tax effects of loss carryforwards and temporary differences
between financial and income tax reporting that give rise to the deferred income
tax assets and liabilities are as follows:

Years ended December 31,
--------------------------
1997 1996
----------- -----------
Net operating loss carryforward .....................$ 1,830,000 $ 658,000
Bad debt expense .................................... 70,000 48,000
Accrued liabilities ................................. 10,000 14,000
----------- -----------
Gross deferred tax assets ...................... 1,910,000 720,000
Deferred tax asset valuation allowance .............. (1,910,000) (655,000)
Gross deferred tax liabilities (depreciation and
Amortization) ............................... 0 (65,000)
----------- -----------
Net deferred tax assets .............................$ 0 $ 0
=========== ===========

Gross deferred tax assets are reduced by a valuation allowance based on
management's estimate that it is more likely than not that the tax benefits will
not be realized.

At December 31, 1997, the Company had net operating losses available for
federal and state income taxes of approximately $4,548,000. The Company's
ability to utilize its net operating losses to offset future taxable income may
be limited under the Internal Revenue Code Section 382 change in ownership
rules. A valuation allowance has been provided since the Company believes the
realizability of the deferred tax asset does not meet the more likely than not
criteria under SFAS 109. The Company's accumulated net operating losses expire
in varying amounts between 2010 and 2012.

11. Major Customers:

For the year ended December 31, 1997, two Arizona grocery chain customers
of the Company accounted for $2,255,000, or 14%, and $1,579,000, or 10%, of the
Company's consolidated net sales. One Arizona grocery chain comprised
$2,820,000, or 16%, of the Company's consolidated net sales for the year ended
December 31, 1996.

12. Litigation:

On June 19, 1996, James Gossett and an associated entity commenced a
lawsuit in an Arizona state court against two directors of the Company, Messrs.
Mark Howells and Jeffrey Puglisi, and the Company's subsidiary, PB Southeast,
alleging, inter alia, that Mr. Gossett had an oral agreement with Mr. Howells to
receive up to a 49% ownership interest in PB Southeast, that Messrs. Howells and
Puglisi breached fiduciary duties and other obligations to Mr. Gossett and that
he is entitled to exchange such alleged stock interest for shares in the
Company. Mr. Gossett further alleges that PB Southeast and Messrs. Howells and
Puglisi failed to honor the terms of an alleged distribution agreement between
Poore Brothers Foods, Inc. and Mr. Gossett's associated entity, whereby such
entity was granted exclusive distribution rights to Poore Brothers products in
California. The complaint seeks unspecified amounts of damages, fees and costs.
In February 1997, plaintiffs filed pleadings indicating their seeking $3.0
million in damages; plaintiffs may not be limited by this damage amount at
trial. Messrs. Howells and Puglisi and PB Southeast have filed an answer and
counterclaim against Mr. Gossett, denying the major provisions of the complaint,
alleging various acts of nonperformance and breaches of fiduciary duty on the
part of Mr. Gossett and seeking various compensatory and punitive damages. The
Company has agreed to indemnify Messrs. Howells and Puglisi in connection with
this lawsuit. In July 1997, summary judgement was granted in favor of all
defendants, including PB Southeast, on all counts of the lawsuit. In its Order,
the Maricopa County (Arizona) Superior Court ruled that there was no oral
contract and that the remainder of plaintiffs' claims could not support a cause
of action against the defendants. In February 1998, the Court reversed its prior
grant of summary judgment on one of the seven counts and reinstated Mr.
Gossett's claim that the defendants breached fiduciary duties to Mr. Gossett.
The Court also set the matter for trial beginning October 5, 1998. The Court's
recent ruling merely preserves Mr. Gossett's claim for trial and does not
adjudicate the merits of the claim. The Company believes that the claim is
without merit and will continue to vigorously defend the lawsuit.
39
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)

12. Litigation: (continued)

The Company is 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 will not have a material effect on the financial
statements taken as a whole.

13. Related Parties:

In connection with the sale of Common Stock and 9% Convertible Debentures
in the May 31, 1995 acquisitions of the Poore Brothers companies, the Company
paid Arizona Securities Group, Inc. $120,000 in sales commissions and $22,000 as
reimbursement of expenses incurred in its services as Placement Agent. In
connection with a sale of stock in March 1996, Arizona Securities Group, Inc.
received a fee of $46,875. Arizona Securities Group, Inc. is managed and owned
by Messrs. Howells and Puglisi, directors of the Company.

From February 1997 to October 1997, the Company paid $67,600 to a company
owned by the brother of the Company's Chairman, for construction management
services related to the Company's new Arizona manufacturing facility.
40
<PAGE>
EXHIBIT INDEX

21.1 List of subsidiaries of Poore Brothers, Inc.
27.1 Restated Financial Data Schedule for 1997
27.2 Restated Financial Data Schedule for 1996
41

EXHIBIT 21.1
LIST OF SUBSIDIARIES OF POORE BROTHERS, INC.

Company State of Incorporation
- --------------------------------------------------------------------------------
Poore Brothers of Arizona, Inc. Arizona
Poore Brothers Distributing, Inc. Arizona
Poore Brothers of Texas, Inc. Texas
Poore Brothers Southeast, Inc. Arizona
La Cometa Properties, Inc. Arizona
42

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997, JUNE 30, 1997, SEPTEMBER 30,
1997, AND DECEMBER 31, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. THE INFORMATION PROVIDED FOR THE THREE MONTHS ENDED MARCH 31, 1997,
THE SIX MONTHS ENDED JUNE 30, 1997, THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
THE TWELVE MONTHS ENDED DECEMBER 31, 1997 HAS BEEN RESTATED PURSUANT TO
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE ("SFAS
NO. 128").
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars

<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<EXCHANGE-RATE> 1 1 1 1
<CASH> 2,145,509 953,473 937,407 1,622,751
<SECURITIES> 980,420 2,003,436 1,022,439 0
<RECEIVABLES> 1,976,288 2,325,806 1,995,492 1,702,318
<ALLOWANCES> 120,000 136,000 176,000 174,000
<INVENTORY> 836,589 475,880 518,720 473,025
<CURRENT-ASSETS> 5,953,329 5,700,209 4,545,844 3,877,782
<PP&E> 5,563,456 7,009,345 7,568,478 7,235,703
<DEPRECIATION> 570,772 586,485 976,328 633,268
<TOTAL-ASSETS> 13,387,380 14,615,115 13,587,960 12,875,214
<CURRENT-LIABILITIES> 2,774,148 1,989,248 2,522,813 2,454,139
<BONDS> 2,725,384 5,242,598 4,946,020 5,017,724
0 0 0 0
0 0 0 0
<COMMON> 69,863 70,516 70,516 70,516
<OTHER-SE> 7,811,985 7,312,753 6,048,611 5,332,835
<TOTAL-LIABILITY-AND-EQUITY> 13,387,380 14,615,115 13,587,960 12,875,214
<SALES> 4,945,733 9,324,599 12,658,902 15,731,796
<TOTAL-REVENUES> 4,945,733 9,324,599 12,658,902 15,731,796
<CGS> 4,261,900 8,127,646 11,139,582 13,709,979
<TOTAL-COSTS> 4,261,900 8,127,646 11,139,582 13,709,979
<OTHER-EXPENSES> 1,115,216 2,133,927 3,579,313 4,655,814
<LOSS-PROVISION> 9,000 21,500 61,000 72,489
<INTEREST-EXPENSE> 38,037 90,706 197,328 327,611
<INCOME-PRETAX> (478,420) (1,049,180) (2,318,321) (3,034,097)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (478,420) (1,049,180) (2,318,321) (3,034,097)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (478,420) (1,049,180) (2,318,321) (3,034,097)
<EPS-PRIMARY> (0.07) (0.15) (0.33) (0.43)
<EPS-DILUTED> (0.07) (0.15) (0.33) (0.43)

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996, AND DECEMBER 31, 1996 AND
THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE INFORMATION PROVIDED FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND THE TWELVE MONTHS ENDED DECEMBER
31, 1996 HAS BEEN RESTATED PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 128, EARNINGS PER SHARE ("SFAS NO. 128").
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars

<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 DEC-31-1996
<EXCHANGE-RATE> 1 1
<CASH> 180,340 3,603,850
<SECURITIES> 0 1,250,000
<RECEIVABLES> 2,136,640 2,033,064
<ALLOWANCES> 94,816 121,000
<INVENTORY> 807,057 863,309
<CURRENT-ASSETS> 3,175,788 7,822,804
<PP&E> 2,881,608 4,732,331
<DEPRECIATION> 489,420 699,988
<TOTAL-ASSETS> 8,832,285 14,340,445
<CURRENT-LIABILITIES> 3,080,874 3,637,202
<BONDS> 3,783,984 3,355,651
0 0
0 0
<COMMON> 43,988 66,488
<OTHER-SE> 1,917,439 7,275,104
<TOTAL-LIABILITY-AND-EQUITY> 8,832,285 14,340,445
<SALES> 13,549,778 17,960,484
<TOTAL-REVENUES> 13,549,778 17,960,484
<CGS> 11,345,613 14,986,374
<TOTAL-COSTS> 11,345,613 14,986,374
<OTHER-EXPENSES> 2,264,663 3,215,092
<LOSS-PROVISION> 35,068 60,230
<INTEREST-EXPENSE> 284,466 390,466
<INCOME-PRETAX> (380,032) (691,678)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (380,032) (691,678)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (380,032) (691,678)
<EPS-PRIMARY> (0.09) (0.16)
<EPS-DILUTED> (0.09) (0.16)

</TABLE>