POORE BROTHERS INC, 10KSB, 1999-03-30

POORE BROTHERS INC
10KSB, 1999-03-30
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, 1998

[ ] 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

POORE BROTHERS, INC.
(Name of Small Business issuer in its charter)

Delaware 86-0786101
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)

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 $13,167,993.

At March 19, 1999, the aggregate market value of the Registrant's common
stock held by non-affiliates of the Registrant was approximately $5,152,919.

At March 19, 1999, the number of issued and outstanding shares of common
stock of the Registrant was 7,832,997. Transitional Small Business Disclosure
Format (check one): Yes [ ] No [X]
<PAGE>
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, the
possible diversion of management resources from the day-to-day operations of the
Company as a result of the Company's pursuit of strategic acquisitions;
potential difficulties resulting from the integration of acquired businesses
with Company's business, other acquisition-related risks, significant
competition, risks related to the food products industry, volatility of the
market price of the Company's common stock, par value $.01 per share (the
"Common Stock"), the possible de-listing of the Common Stock from the Nasdaq
SmallCap Market 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. and its subsidiaries (collectively, the "Company") are
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 brands of batch-cooked potato chips under
the Poore Brothers(R) and the Bob's Texas Style(TM) trademarks, manufactures
private label potato chips for grocery store chains, and distributes and
merchandises snack food products that are manufactured by others. For the year
ended December 31, 1998, revenues totaled $13,167,993. Approximately 78% of
sales were attributable to products manufactured by the Company (65% branded
potato chips sales and 13% private label potato chip sales) and approximately
22% of sales were attributable to the distribution by the Company of snack food
products manufactured by other companies. The Company generally sells its
products to retailers through independent distributors.

Poore Brothers(R) and Bob's Texas Style(TM) potato chips are manufactured
with a batch frying process that the Company believes produces potato chips with
enhanced crispness and flavor. They are currently produced in twelve flavors:
Original, Salt & Vinegar, Jalapeno, Barbecue, Parmesan & Garlic, Cajun, Dill
Pickle, Grilled Steak & Onion, Habanero, Unsalted, Hot Ranch and Vinegar & Dill.
Poore Brothers(R) potato chips are currently offered in ten of those flavors and
Bob's Texas Style(TM) potato chips are currently offered in seven of those
flavors. The Company also manufactures potato chips for sale on a private label
basis using a continuous frying process. The Company currently has two
California and three Arizona grocery chains as customers for its private label
potato chips. See "PRODUCTS" and "MARKETING AND DISTRIBUTION."

The Company also sells Poore Brothers(R) brand tortilla chips and dips
(both of which were introduced in May 1998), as well as Bob's Texas Style(TM)
brand tortilla chips and puffs, all of which are manufactured by third parties.
The Poore Brothers(R) brand tortilla chips are offered in four flavors
(Original, Jalapeno, Roasted Red Pepper and Sun Dried Tomato) and the dips are
offered in three flavors (Sour Cream & Jalapeno, Roasted Red Pepper and Santa Fe
Black Bean). Sales of these products have not been material to date. See
"PRODUCTS" and "MARKETING AND DISTRIBUTION."

The Company's business objective is to be a leading regional manufacturer,
marketer and distributor of premium branded and private label potato chips and
other salty snack foods by providing high quality products at competitive prices
that are superior in taste, texture, flavor variety and brand personality to
comparable products. The Company's philosophy is to compete in the market niches
not served by the dominant national competition. A significant element of the
Company's growth strategy is to pursue additional strategic acquisition
opportunities. The Company plans to acquire snack food brands that provide
strategic fit and possess strong brand equity in a geographic region or channel
of distribution in order to expand, complement or diversify the Company's
business. In August 1998, the Company retained Everen Securities, Inc.
("Everen"), a major full-service brokerage firm, as the Company's financial
advisor to assist the Company in connection with strategic acquisitions. In
addition, the Company plans to increase sales of its existing products, increase
distribution and merchandising revenues and continue to improve its
manufacturing capacity utilization. See "BUSINESS STRATEGY."

All products currently manufactured by the Company (including Poore
Brothers(R) and Bob's Texas Style(TM) brand potato chips, as well as private
label potato chips) are produced at the Company's recently constructed
manufacturing facility in Goodyear, Arizona. The land and building comprising
the facility are owned by La Cometa Properties, Inc., a wholly-owned subsidiary
of the Company.

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 Company's subsidiaries 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, $3,034,097 and
$874,091 for the fiscal years ended December 31, 1996, 1997 and 1998,
respectively. At December 31, 1998, the Company had an accumulated deficit of
$6,336,024 and net working capital of $768,155. See "ITEM 6. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION."

Even if the Company is successful in making strategic acquisitions,
increasing distribution and sales volume of the Company's existing products and
developing new products, it may be expected to incur substantial additional
expenses, including integration costs of acquisitions, 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
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.

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NEED FOR ADDITIONAL FINANCING. A significant element of the Company's
business strategy is to pursue selected strategic acquisition opportunities for
the purpose of expanding, complementing and/or diversifying the Company's
business. In connection with the acquisition of the business and certain assets
of Tejas Snacks, L.P. ("Tejas") in November 1998, the Company needed to borrow
funds from Norwest Business Credit, Inc. ("Norwest") pursuant to a Credit and
Security Agreement (the "Norwest Credit Agreement"), in order to satisfy a
portion of the cash consideration payable to Tejas. See "BUSINESS -- COMPANY
HISTORY" and "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL Resources." It is
likely that in the future the Company will require funds in excess of cash flow
generated from operations in order to consummate any additional acquisitions
involving cash consideration to the sellers. Any such funds would most likely be
obtained through third-party financing (debt or equity). In addition, the
Company may, in the future, require third party financing (debt or equity) as a
result of continued operating losses or expansion of the Company's business
through non-acquisition means. There can be no assurance that any such required
financing will be available or, if available, on terms attractive to the
Company. Any third party financing obtained by the Company may result in
dilution of the equity interests of the Company's shareholders.

RISKS ASSOCIATED WITH ACQUISITIONS. A significant element of the Company's
business strategy is to pursue selected strategic acquisition opportunities for
the purpose of expanding, complementing and/or diversifying the Company's
business; however, no assurance can be given that the Company will be able to
identify, finance and complete additional suitable acquisitions on acceptable
terms, or that future acquisitions, if completed, will be successful. Any future
acquisitions could divert management's attention from the daily operations of
the Company and otherwise require additional management, operational and
financial resources. Moreover, there is no assurance that the Company would
successfully integrate acquired companies or their management teams into the
Company's operating structure, retain management teams of acquired companies on
a long-term basis, or operate acquired companies profitably. Acquisitions may
also involve a number of other risks, including adverse short-term effects on
the Company's operating results, dependence on retaining key personnel and
customers, amortization of acquired intangible assets, and risks associated with
unanticipated liabilities or contingencies.

LEVERAGE; FINANCIAL COVENANTS PURSUANT TO 9% CONVERTIBLE DEBENTURES AND
PURSUANT TO NORWEST CREDIT AGREEMENT; NON-COMPLIANCE WITH FINANCIAL COVENANTS
AND POSSIBLE ACCELERATION OF INDEBTEDNESS. At December 31, 1998 the Company had
outstanding 9% Convertible Debentures due July 1, 2002 (the "9% Convertible
Debentures") in the aggregate principal amount of $2,229,114 and outstanding
indebtedness under the Norwest Credit Agreement in the aggregate principal
amount of $1,319,235. The indebtedness under the 9% Convertible Debentures and
the Norwest Credit Agreement is secured by substantially all of the Company's
assets. The Company is required to maintain certain financial ratios pursuant to
the loan agreement pursuant to which the 9% Convertible Debentures were issued
(the "Debenture Loan Agreement") so long as the 9% Convertible Debentures are
outstanding and pursuant to the Norwest Credit Agreement so long as borrowings
from Norwest thereunder remain outstanding. Should the Company be in default
under any of such requirements, the holders of the 9% Convertible Debentures and
Norwest, as applicable, shall have the right, upon written notice and after the
expiration of any applicable period during which such default may be cured, to
demand immediate payment of all of the then unpaid principal and accrued but
unpaid interest under the 9% Convertible Debentures or pursuant to the Norwest
Credit Agreement, respectively. At December 31, 1998, the Company was not in
compliance with an interest coverage ratio requirement of 1:1 (actual of 0.92:1)
under the Debenture Loan Agreement, a minimum debt service coverage ratio
requirement of 0.50 to 1 (actual of 0.30 to 1) under the Norwest Credit
Agreement, and a maximum quarterly net loss limitation of $50,000 (actual net
loss of $146,366) under the Norwest Credit Agreement. Such non-compliance has
not to date resulted in an event of default under either agreement because the
holders of the 9% Convertible Debentures have granted the Company a series of
waivers, including a current waiver effective through June 30, 1999, and Norwest
has granted the Company a waiver for the period ended December 31, 1998 and
agreed to modify the financial ratio requirements for future periods. The
Company is currently in compliance with the other financial ratios under the
Debenture Loan Agreement (including working capital, minimum shareholders'
equity and current ratio requirements) and the Norwest Credit Agreement
(including minimum quarterly and annual operating results, and minimum quarterly
and annual changes in book net worth). There can be no assurance that the
Company will be in compliance with the financial ratios in the future (and, in
the case of the financial ratios under the Debenture Loan Agreement, upon the
expiration of the waivers) or be able to obtain additional waivers or an
extension or renewal of existing waivers. Any acceleration of the 9% Convertible
Debentures or the borrowings under the Norwest Credit Agreement prior to their
respective maturities 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."

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

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Common Stock on the NASDAQ SmallCap Market on March 19, 1999 was $0.75 per
share. There can be no assurance as to the future market price of the Common
Stock. See "NASDAQ LISTING MAINTENANCE REQUIREMENTS; POSSIBLE DE-LISTING."

NASDAQ LISTING MAINTENANCE REQUIREMENTS; POSSIBLE DE-LISTING. Nasdaq
recently implemented rules changes increasing its quantitative listing standards
that make it more difficult for companies to maintain compliance with the
listing requirements for the Nasdaq SmallCap Market. One of such requirements is
that the bid price of listed securities be equal to or greater than $1. As of
November 9, 1998, the closing bid price of the Company's Common Stock had
remained below $1.00 per share for thirty consecutive trading days. As a result,
the Company received a notice from the Nasdaq Stock Market, Inc. ("Nasdaq") that
the Company was not in compliance with the closing bid price requirements for
continued listing of the Common Stock on the Nasdaq SmallCap Market and that
such Common Stock would be de-listed after February 15, 1999 if the closing bid
price was not equal to or greater than $1.00 per share for a period of at least
ten consecutive trading days during the ninety-day period ending February 15,
1999. On February 9, 1999, the Company submitted to Nasdaq a request for a
hearing to discuss the possibility of obtaining an extension of such ninety-day
period. The Company's hearing request was granted by Nasdaq and is scheduled for
April 16, 1999; the de-listing of the Common Stock has been stayed pending a
determination by Nasdaq after the hearing. If Nasdaq denies the Company's
request, or if the Company's request is granted but the Company's Common Stock
fails to comply with the minimum closing bid price requirement for at least ten
consecutive trading days during such extension period, then the Common Stock
will likely be de-listed from the Nasdaq SmallCap Market. Upon any such
de-listing, trading, if any, in the Common Stock would thereafter be conducted
in the over-the-counter market 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 de-listing, an investor could find it more
difficult to dispose of, or to obtain accurate quotations as to the price of the
Company's Common Stock. See "VOLATILITY OF MARKET PRICE OF COMMON STOCK" AND
"RISK OF LOW-PRICED STOCK."

RISK OF LOW-PRICED 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.
See "NASDAQ LISTING MAINTENANCE REQUIREMENTS; POSSIBLE DE-LISTING."

COMPETITION. The market for salty snack foods, such as those sold by the
Company, including potato chips, tortilla chips, dips, pretzels and meat snacks,
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 methods of operation 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

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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.

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. A sunflower oil
that is low in saturated fat is used by the Company in the production of Poore
Brothers(R) and Bob's Texas Style(TM) brand potato chips, and is available from
various suppliers. 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
Brothers(R) and Bob's Texas Style(TM) brand potato chips is largely due to two
elements of the Company's manufacturing process: its use of batch frying and its
use of distinctive seasonings to produce a variety of flavors. The Company does
not have exclusive rights to the use of either element; consequently,
competitors may incorporate such elements into their own processes.

DEPENDENCE UPON MAJOR CUSTOMERS. One customer of the Company, Fry's Food
Stores (a subsidiary of Kroger, Inc.), accounted for 16% of the Company's 1998
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 1998. A decision by any major customer to cease or
substantially reduce its 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, Glen E. Flook, Vice
President-Manufacturing, and Thomas W. Freeze, Vice President and Chief
Financial 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 Thomas
G. Bigham, Wendell T. Jones, Kevin M. Kohl and James M. Poore, 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."

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.

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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.

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
shareholder approval. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of discouraging, delaying or
preventing a change of control of the Company, and preventing holders of Common
Stock from realizing a premium on their shares. In addition, under Section 203
of the Delaware General Corporation Law (the "DGCL"), the Company is prohibited
from engaging in any business combination (as defined in the DGCL) with any
interested shareholder (as defined in the DGCL) unless certain conditions are
met. This statutory provision could also have an anti-takeover effect.

YEAR 2000 COMPLIANCE. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to identify the
applicable year. For example, computer programs that utilize date-sensitive
information may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failures or miscalculations.

The Company processes much of its data using licensed computer programs
form third parties, including its accounting software. Such third parties have
advised the Company that they have made all necessary programming changes to
such computer programs to address the Year 2000 issue. The Company tested its
systems for Year 2000 compliance during the first half of 1998 and discovered
that certain database information utilized by the Company for purposes of order
entry, billing and accounts receivable is not Year 2000 compliant, although the
underlying database software is Year 2000 compliant. The Company intends to
implement corrective measures with respect to such database information prior to
the end of the third quarter of 1999. The Company has not, and does not expect
to incur significant expenses in connection with such corrective measures. In
addition, the Company believes that, notwithstanding the foregoing, it has no
material internal risk in connection with the potential impact of the Year 2000
issue on the processing of date-sensitive information by the Company's
computerized information systems.

The Company is in the process of determining the effect of the Year 2000
issue on its vendors' and customers' systems. There can be no assurance that the
systems of such third parties will be Year 2000 compliant on a timely basis, or
that the Company's results of operations will not be adversely affected by the
failure of systems operated by third parties to properly operate in the Year
2000.

COMPANY HISTORY

Messrs. Donald and James Poore (the "Poore Brothers") founded Poore
Brothers Foods, Inc. ("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 Brothers(R) brand products. In 1983, prior to the formation of PB Foods,
the Poore Brothers co-founded Groff's of Texas, Inc. (a predecessor business to
Tejas, previous owner of the Bob's Texas Style(TM) potato chip brand acquired by
the Company in November 1998), which also manufactured batch fried potato chips.

In May 1993, Mark S. Howells, the Company's Chairman, and associated
individuals formed PB Southeast, which acquired a license from PB Foods to
manufacture and distribute Poore Brothers(R) 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 shareholders
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

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(that was repaid in January 1997) and the remainder of which was satisfied by
the issuance of 300,000 shares of the Company's 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 shareholders of PB Southeast, including Mark S. Howells and Jeffrey J.
Puglisi, a former director 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. The remaining shares of PB Southeast were purchased by the Company in
November 1998 in connection with the settlement of litigation involving PB
Southeast and Messrs. Howells and Puglisi. 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. ("Renaissance Capital") and Wells Fargo Small Business
Investment Company, Inc. ("Wells Fargo"), 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.

In 1997, the Company implemented a restructuring program pursuant to which
a number of actions were taken in order to improve the Company's cost structure
and provide greater strategic focus, including:

(i) The Company hired a new management team.

(ii) On June 4, 1997, the Company sold the Houston, Texas distribution
business of PB Texas (which was unprofitable and which the Company viewed as
having little prospects for generating future sales growth or profits) to Mr.
David Hecht ("Hecht") pursuant to an Asset Purchase, Licensing and Distribution
Agreement effective June 1, 1997. Under the agreement, Hecht was sold certain
assets of PB Texas (including inventory, vehicles and capital equipment) and
became the Company's distributor in the Houston, Texas market.

(iii) In September 1997, the Company consolidated its entire manufacturing
operations into a newly constructed 60,000 square foot manufacturing,
distribution and headquarter facility in Goodyear, Arizona and, as a result, the
Company closed its unprofitable PB Southeast manufacturing facility in LaVergne,
Tennessee on September 30, 1997. In addition, the Company purchased new
processing and packaging equipment. These actions were taken in order to improve
the Company's overall manufacturing efficiency.

(iv) The Company discontinued the distribution of non-snack food items
(such as coffee and candy) in order to permit the Company to focus its resources
on its core snack food product lines.

In August 1998, the Company retained Everen, a major full-service brokerage
firm, as the Company's financial advisor to assist the Company in connection
with strategic acquisitions, a major component of the Company's business
strategy. See "BUSINESS STRATEGY."

On November 4, 1998, the Company acquired the business and certain assets
of Tejas, a Texas-based potato chip manufacturer. The assets, which were
acquired through a newly formed wholly-owned subsidiary of the Company, Tejas PB
Distributing, Inc., included the Bob's Texas Style(TM) potato chips brand,
inventories and certain capital equipment. In consideration for these assets,
the Company issued 523,077 unregistered shares of Common Stock with a fair value
of $450,000 and paid approximately $1,180,000 in cash. The Company utilized
available cash as well as funds available pursuant to the Norwest Credit
Agreement to satisfy the cash portion of the consideration. Tejas had sales of
approximately $2.8 million for the nine months ended September 30, 1998. In
connection with the acquisition, production of Bob's Texas Style(TM) brand
potato chips was transferred to the Company's Goodyear, Arizona facility.

BUSINESS STRATEGY

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PURSUE STRATEGIC ACQUISITIONS IN THE BRANDED SNACK FOOD CATEGORY. A
significant element of the Company's growth strategy is to pursue
additional strategic acquisition opportunities. The Company's plan is to
acquire snack food brands that provide strategic fit and possess strong
brand equity in a geographic region or channel of distribution in order to
expand, complement or diversify the Company's business. The acquisition of
the business and certain assets of Tejas in November 1998, including the
Bob's Texas Style(TM) potato chips brand, was the first such strategic
acquisition. The Company is continuing to search for other companies with
strong, differentiated snack food brands. The Company has retained Everen
Securities, Inc., a major full-service brokerage firm as the Company's
financial advisor to assist the Company in pursuit of strategic
acquisitions.

BUILD POORE BROTHERS(R) AND BOB'S TEXAS STYLE(TM) BRANDs. The Company
plans to build market share through continued trade advertising and
promotion activity in certain core markets, including Arizona and Texas, as
well as by new product innovations. Marketing efforts include, among other
things, joint advertising with supermarkets and other manufacturers,
in-store advertisements and in-store displays. The Company is also
participating in selected event sponsorships, such as the Arizona
Diamondbacks baseball team and the Phoenix Open golf tournament. The
Company believes that these events offer opportunities to conduct mass
sampling to motivate consumers to try its branded products. Opportunities
to achieve distribution in new grocery chains or markets will continue to
be targeted.

In order to reinforce the Company's positioning regarding innovative
products and flavor variety, the Company plans to introduce a new Habanero
("pure heat") flavor for both its Poore Brothers(R) and Bob's Texas
Style(TM) potato chip brands during the first half of 1999. In addition,
the Company plans to re-launch the Bob's Texas Style(TM) brand with new
packaging and new products, including new potato chip flavors and a new
line of tortilla chips.

EXPAND THE PRIVATE LABEL BUSINESS. The Company currently has
arrangements with two California and three 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, utilizing a
continuous fryer purchased and installed by the Company in mid-1997. The
Company grew its private label business by 60% in 1998 and believes that
contract manufacturing opportunities exist. While they are extremely price
competitive and can be short in duration, the Company believes that they
provide a profitable opportunity for the Company to improve the capacity
utilization of the continuous fryer. The Company intends to seek additional
private label customers in the southwestern United States who demand
superior product quality at a reasonable price.

INCREASE DISTRIBUTION AND MERCHANDISING REVENUES. The Company believes
that its Arizona distribution operation provides it with a key competitive
advantage in its home market. The Company plans to grow its Arizona snack
food distribution business by growing its stable of core brands, which
include Snyder's pretzels, Lance crackers, Guiltless Gourmet tortilla chips
and Slim Jim meat snacks. The Company believes that an opportunity also
exists to grow the Company's Texas merchandising business through
additional product lines. The merchandising operation offers retailers and
manufacturers cost effective merchandising support for their products in
south/central Texas.

IMPROVE MANUFACTURING CAPACITY UTILIZATION. In 1998, the Company
achieved significant improvements in gross profit margins, increasing to
25% from 13% in 1997, primarily as a result of the Company's 1997
manufacturing consolidation and equipment modernization. The Company
believes that additional improvements to manufactured products' gross
profit margins are possible with the achievement of the business strategies
discussed above. Depending on product mix, the existing manufacturing
facility could produce twice the current volume and thereby further reduce
manufacturing product costs.

PRODUCTS

MANUFACTURED SNACK FOOD PRODUCTS. Poore Brothers(R) brand potato chips were
first introduced by the Poore Brothers in 1986 and have accounted for
substantially all of the sales of Poore Brothers(R) brand products 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, Habanero and Unsalted.

In November 1998, the Company acquired certain assets of Tejas, including
the Bob's Texas Style(TM) potato chips brand. Tejas was a successor business to
Groff's of Texas, Inc. (co-founded by the Poore Brothers in 1983). Bob's Texas
Style(TM) potato chips are also 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 seven flavors:
Original, Vinegar & Dill, Jalapeno, Hot Ranch, Barbecue, Cajun, and Unsalted.

The Company currently has agreements with two California and three 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. In September
1997, sales of the low-fat potato chips were discontinued when the third party
processor ceased operations. Sales of the low-fat potato chips were not material
and approximated 2.5% and 1.7% of sales in 1996 and 1997, respectively.

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DISTRIBUTED 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, dips, crackers and meat snacks. Through its Texas
subsidiary, Tejas PB Distributing, Inc. ("Tejas Distributing"), the Company
merchandises, but does not purchase and resell, snack food products for a major
grocery retailer in south/central Texas. In addition to the Company's Bob's
Texas Style(TM) brand products, Tejas Distributing merchandises such products as
private label potato chips, tortilla chips, pretzels and cheese puffs
manufactured by other companies.

The Company also sells Poore Brothers(R) brand tortilla chips and dips
(both of which were introduced in May 1998), as well as Bob's Texas Style(TM)
brand tortilla chips and puffs, all of which are manufactured by third parties.
The Poore Brothers(R) brand tortilla chips are offered in four flavors
(Original, Jalapeno, Roasted Red Pepper and Sun Dried Tomato) and the dips are
offered in three flavors (Sour Cream & Jalapeno, Roasted Red Pepper and Santa Fe
Black Bean. Sales of these products have not been material to date.

MANUFACTURING

The Company believes that a key element of the success to date of the Poore
Brothers(R) and Bob's Texas Style(TM) brand potato chips has been the Company's
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.

In September 1997, the Company consolidated all of its manufacturing
operations into its present facility in Goodyear, Arizona, which was newly
constructed at the time. The Goodyear facility has the capacity to produce
approximately 3,000 pounds of potato chips per hour, with approximately 900
pounds of such capacity used to batch fry the Company's branded products and
2,100 pounds of such capacity used to continuous fry the Company's private label
products. Prior to the consolidation, the Company had two older less-efficient
manufacturing facilities, one of which was in LaVergne, Tennessee and the other
of which was in Goodyear, Arizona. In connection with the closure of the
LaVergne, Tennessee facility, 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 without significant time or cost. There can be
no assurance that the Company will obtain sufficient business to recoup the
costs of its investment in its manufacturing facility. See "ITEM 2. DESCRIPTION
OF PROPERTY."

DISTRIBUTION AND MARKETING

The Company's Poore Brothers(R) brand potato chip products have achieved
significant market presence in Arizona, New Mexico, Southern California, Hawaii,
Denver, Colorado and St. Louis, Missouri. The Company's Bob's Texas Style(TM)
brand potato chip products have achieved significant market presence in
south/central Texas, including Houston, San Antonio and Austin. The Company
attributes the success of its products in these markets to consumer loyalty. The
Company believes this loyalty results from the products' differentiated taste,
texture and flavor variety which result from its batch frying process. The
Company sells its Poore Brothers(R) brand products primarily in the southwest,
but also in targeted markets in the western, southern and midwestern United
States. Substantially all of the Company's Bob's Texas Style(TM) products are
sold in south/central Texas. The Company's products are primarily distributed
through a select group of independent distributors.

The Company's Arizona distribution business 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, Safeway,
Smith's, and Fred Myers 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 Brothers(R) brand products, the Company
distributes throughout Arizona a wide variety of snack food items manufactured
by other companies, including pretzels, tortilla chips, dips, crackers and meat
snacks. The Company also sells Poore Brothers(R) brand potato chips to several
vending and food service companies in the southwest.

Through its Texas subsidiary, Tejas PB Distributing, Inc. ("Tejas
Distributing"), the Company merchandises, but does not purchase and resell,
snack food products for a major grocery retailer in south/central Texas. In
addition to the Company's Bob's Texas Style(TM) brand products, Tejas
Distributing merchandises such products as private label potato chips, tortilla
chips, pretzels and cheese puffs manufactured by other companies.

Outside of Arizona and south/central Texas, the Company selects
distributors to distribute Poore Brothers(R) and Bob's Texas Style(TM) products
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 stores' snack aisles. As of December 31, 1998, the
Company had arrangements with over 35 distributors in a number of major cities,
including Honolulu, San Diego, Los Angeles, Las Vegas, Denver, Albuquerque, El
Paso, San Antonio, Houston, Wichita, St. Louis, Cincinnati, and Grand Rapids.

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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.

The Company's marketing programs are designed to increase product trial and
build brand awareness in core markets. Most of the Company's marketing spending
is focused on trade advertising and trade promotions designed to attract new
consumers to the products at a reduced retail price. The Company's marketing
programs also include selective event sponsorship designed to increase brand
awareness and to provide opportunities to mass sample branded products.
Sponsorship of the Arizona Diamondbacks and the Phoenix Open in 1998 and 1999
typify the Company's efforts to reach targeted consumers and provide them with a
sample of the Company's products to encourage new and repeat purchases.

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 alternative cooking oils for the production of Poore
Brothers(R), Bob's Texas Style(TM) 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 a 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

One customer of the Company, Fry's Food Stores (a subsidiary of Kroger,
Inc.), accounted for 16% of the Company's 1998 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 in 1998. 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 $16.4 billion at retail in 1997 with potato chips accounting
for approximately 32% 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 eight years, ranging from
an increase of 6.0% (in 1990) to 0.4% (in 1994), with a 1997 increase of 2.5% to
a rate of $61.94 per person per annum. Potato chip sales have similarly
increased steadily over the same period, with 1997 retail sales of $5.2 billion
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 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 methods of
operation 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

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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.

EMPLOYEES

As of December 31, 1998, the Company had 98 full-time employees, including
81 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.

TRADEMARKS

The Company owns the following trademarks, which are registered in the
United States: "Poore Brothers" and "An Intensely Different Taste." In addition,
the trademark "Texas Style" has been assigned to the Company by Tejas in
connection with the Tejas acquisition. The assignment has been filed with the
U.S. Trademark Office for recording. Once recorded, the record owner of the
trademark will be the Company. The Company considers its trademarks to be of
significant importance in the Company's business. The Company is not aware of
any circumstances that would have a material adverse effect on the Company's
ability to use its trademarks.

ITEM 2. DESCRIPTION OF PROPERTY

The Company owns a 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. The Company believes that its facility is adequately covered by
insurance.

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, the Company's PB Southeast subsidiary 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.

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. Messrs. Howells and Puglisi and PB Southeast filed a
counterclaim against Mr. Gossett alleging various acts of nonperformance and
breaches of fiduciary duty on the part of Mr. Gossett. In November 1998, the
lawsuits were settled and all claims dismissed with prejudice. The Company
incurred no expense in the settlement other than its own legal fees.

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In September 1997, a lawsuit was commenced against PB Distributing by Chris
Ivey and his company, Shelby and Associates (collectively, "Ivey"). The
complaint alleged, 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 suffered damages of at least
$390,000. In July 1998, the Company settled the litigation with Ivey. The
$13,000 settlement included the release of all claims and the dismissal of 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.

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.

SALES PRICES
-----------------
PERIOD OF QUOTATION HIGH LOW
------------------- ---- ---
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

Fiscal 1998:
First Quarter $1.44 $0.97
Second Quarter $1.63 $1.09
Third Quarter $1.44 $0.75
Fourth Quarter $1.06 $0.41

Nasdaq recently implemented rules changes increasing its quantitative
listing standards that make it more difficult for companies to maintain
compliance with the listing requirements for the Nasdaq SmallCap Market. One of
such requirements is that the bid price of listed securities be equal to or
greater than $1.00. As of November 9, 1998, the closing bid price of the
Company's Common Stock had remained below $1.00 per share for thirty consecutive
trading days. As a result, the Company received a notice from Nasdaq that the
Company was not in compliance with the closing bid price requirements for
continued listing of the Common Stock on the Nasdaq SmallCap Market and that
such Common Stock would be de-listed after February 15, 1999 if the closing bid
price was not equal to or greater than $1.00 per share for a period of at least
ten consecutive trading days during the ninety-day period ending February 15,
1999. On February 9, 1999, the Company submitted to Nasdaq a request for a
hearing to discuss the possibility of obtaining an extension of such ninety-day
period. The Company's hearing request was granted by Nasdaq and is scheduled for
April 16, 1999; the de-listing of the Common Stock has been stayed pending a
determination by Nasdaq after the hearing. If Nasdaq denies the Company's
request, or if the Company's request is granted but the Company's Common Stock
fails to comply with the minimum closing bid price requirement for at least ten
consecutive trading days during such extension period, then the Common Stock
will likely be de-listed from the Nasdaq SmallCap Market. Upon any such
de-listing, trading, if any, in the Common Stock would thereafter be conducted
in the over-the-counter market 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 de-listing, an investor could find it more
difficult to dispose of, or to obtain accurate quotations as to the price of the
Company's Common Stock. See "ITEM 1. RISK FACTORS -- RISK OF LOW-PRICED STOCK."

On March 19, 1999, there were 7,832,997 shares of Common Stock outstanding.
As of such date, the shares of Common Stock were held of record by approximately
2,800 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

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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.

In December 1996, the Company completed an initial public offering of its
common stock, par value $.01 per share (the "Common Stock"), pursuant to which
2,250,000 shares of Common Stock were offered and sold to the public. Of such
shares, 1,882,652 shares were sold by the Company at an aggregate offering price
of $6,589,282 and 367,348 shares were sold by the holders of the 9% Convertible
Debentures at an aggregate offering price of $1,285,718. 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
($659,000), the expense of the Underwriter paid by the Company ($198,000) and
the other expenses of the offering paid by the Company (approximately $432,000),
were approximately $5,300,000. On January 6, 1997, an additional 337,500 shares
of Common Stock were sold by the Company at an aggregate offering price of
$1,181,250 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 commissions ($118,000), the expense of the
Underwriter paid by the Company ($35,000) and the other expenses paid by the
Company (approximately $9,000), the Company received net proceeds of
approximately $1,019,000 from the sale of such additional shares. As of December
31, 1998, all of the proceeds of the offering had been utilized by the Company
for the following purposes: construction of the Company's Goodyear, Arizona
manufacturing facility which was completed in August 1997 ($2,683,000), purchase
and installation of new machinery and equipment in 1997 ($2,072,000), purchase
of real estate ($19,000) and working capital ($1,545,000).

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997

Net sales for the year ended December 31, 1998 were $13,168,000, down
$2,564,000, or 16%, from $15,732,000 for 1997. Sales of products manufactured by
the Company accounted for 78% and 71% of the total sales in 1998 and 1997,
respectively, while sales of products manufactured by others accounted for 22%
and 29% in 1998 and 1997, respectively. The sale of the Texas distribution
business in June 1997 represented approximately $1,452,000 of the total sales
decline, consisting of $1,213,000 in sales of products manufactured by others
and $239,000 in sales of Poore Brothers manufactured potato chips. An additional
$697,000 decrease occurred in sales of products manufactured by others due to
the elimination of several unprofitable product lines during the second quarter
of 1997. These decreases were partially offset by increased revenue from other
product lines of $282,000, or 11%. Manufactured potato chip sales for the year
ended December 31, 1998 were $10,286,000, down $696,000, or 6%, from $10,982,000
(excluding PB Texas) for the year ended December 31, 1997. This decrease was
driven principally by lower volume as a result of the Company's discontinuance
of unprofitable promotion programs with certain customers and the shutdown of
the Tennessee manufacturing facility in the third quarter of 1997. Sales of
private label potato chips increased $649,000, or 60%, to $1,728,000 primarily
as a result of sales to a new customer beginning in late 1997, helping to offset
the overall decrease in manufactured potato chips.

Gross profit for the year ended December 31, 1998, was $3,244,000, or 25%
of net sales, as compared to $2,022,000, or 13% of net sales, for 1997. The
$1,222,000 increase in gross profit, or 60%, occurred despite 16% lower sales.
This increase is a result of the restructuring actions implemented in 1997,
benefits from negotiated raw material cost savings and a continued improvement
in manufacturing and operating efficiencies at the Company's Goodyear, Arizona
facility.

Operating expenses decreased to $3,603,000, or 27% of net sales for the
year ended December 31, 1998, from $4,728,000, or 30% of net sales for 1997.
This represented a $1,125,000 decrease, or 24%, compared to 1997. The decrease
was primarily attributable to $164,000 in charges recorded by the Company in
1997 related to severance, equipment write-downs and lease termination costs in
connection with the sale of the Company's Texas distribution business in June
1997; $581,000 in charges recorded by the Company in 1997 in connection with the
closure of the LaVergne, Tennessee manufacturing facility in September 1997; and
a decrease in selling, general and administrative expenses. Selling, general and
administrative expenses decreased $380,000, or 10%, to $3,603,000 for the year
ended December 31, 1998 from $3,982,000 for 1997 despite a $29,000 increase in
depreciation and amortization and a $169,000, or 13%, increase in marketing,
advertising and promotional spending. Offsetting these increases were a 21%
decrease in payroll costs and $344,000 in lower sales-related expenses, office
expenses and occupancy costs resulting from 1997's restructuring actions.

Net interest expense increased to $515,000 for the year ended December 31,
1998 from $328,000 for 1997. This was due primarily to an increase in interest
expense of $105,000 related to a full year of interest expense on the permanent
financing of the Company's Arizona manufacturing facility and production
equipment in 1998, and an $82,000 decrease in interest income generated from
investment of the remaining proceeds of the initial public offering.

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The Company's net losses for the years ended December 31, 1998 and 1997
were $874,000 and $3,034,000, respectively. The reduction in net loss was
attributable primarily to the increased gross profit and lower operating
expenses, offset by higher net interest expense.

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%. Poore Brothers(R) potato 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 Company's Arizona operations. 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 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" 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" 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 $768,155 (a current ratio of 1.4:1) and $1,423,643
(a current ratio of 1.6:1) at December 31, 1998 and 1997, respectively. During
1998, the Company used $0.1 million of cash for operating activities,
principally growth in receivables, invested $1.4 million in new equipment and
the purchase of Tejas, and increased its debt financing by $0.2 million,
resulting in an overall decrease in cash and cash equivalents of $1.3 million.

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On November 4, 1998, the Company signed the new $2.5 million Norwest Credit
Agreement which includes a $2.0 million working capital line of credit (the
"Norwest Line of Credit") and a $0.5 million term loan (the "Norwest Term
Loan"). Borrowings under the Norwest Credit Agreement have been used to pay off
borrowings under the Company's $1,000,000 Line of Credit with First Community
Financial Corporation, to finance a portion of the consideration paid by the
Company in connection with the Tejas acquisition, and for general working
capital needs. The Norwest Line of Credit bears interest at an annual rate of
prime plus 1.5% and matures in November 2001 while the Norwest Term Loan bears
interest at an annual rate of prime plus 3% and requires monthly principal
payments of approximately $28,000, plus interest, until maturity on May 1, 2000.
The Norwest Credit Agreement is secured by receivables, inventories, equipment
and general intangibles. Borrowings under the Norwest Line of Credit are based
on 85% of eligible receivables and 60% of eligible inventories. As of December
31, 1998, the Company had a borrowing base of approximately $1,374,000 under the
Norwest Line of Credit. The Norwest Credit Agreement requires the Company to be
in compliance with certain financial performance criteria, including minimum
debt service coverage ratio, minimum quarterly and annual operating results, and
minimum quarterly and annual changes in book net worth. At December 31, 1998,
the Company was not in compliance with a maximum quarterly net loss limitation
of $50,000 (actual net loss of $146,366) and a minimum debt service coverage
ratio requirement of not less than 0.50 to 1 (actual of 0.30 to 1) under the
Norwest Credit Agreement. Such non-compliance has not to date resulted in an
event of default under the Norwest Credit Agreement because Norwest granted the
Company a waiver for the period ended December 31, 1998 and agreed to modify the
financial ratio requirements for future periods. Management believes that the
fulfillment of the Company's plans and objectives will enable the Company to
attain a sufficient level of profitability to be in compliance with the
financial performance criteria; however, there can be no assurance that the
Company will attain any such profitability or be in compliance. Any acceleration
under the Norwest Credit Agreement could have a material adverse effect upon the
Company. As of December 31, 1998, there was an outstanding balance of $847,013
on the Norwest Line of Credit and $472,222 on the Norwest Term Loan. On November
4, 1998, pursuant to the terms of the Norwest Credit Agreement, the Company
issued to Norwest a warrant (the "Norwest Warrant") to purchase 50,000 shares of
Common Stock for an exercise price of $0.93375 per share. The Norwest Warrant is
exercisable until November 3, 2003, the date of termination of the Norwest
Warrant, and provides the holder thereof certain demand and piggyback
registration rights.

The Company's previous $1.0 million working capital line of credit from
First Community Financial Corporation was renewed as of May 31, 1998 for a
six-month period. In November 1998, the outstanding balance was paid off from
borrowings under the Norwest Credit Agreement.

In connection with the Company's sale of the Texas distribution business in
June 1997 and the closure of the LaVergne, Tennessee manufacturing operation in
September 1997, $478,000 of the $746,000 in total charges represented 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 LaVergne, Tennessee manufacturing operation
and the relocation of certain assets to Arizona, the outstanding balance
($160,000) on a Commercial Development Block Grant from the State of Tennessee
was paid off using working capital in January 1998.

Completion of the Company's Goodyear, Arizona 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 a short-term construction loan into a
permanent $2.0 million mortgage financing arrangement, financing of $862,961
under equipment financing leases and proceeds from the Company's 1996 initial
public offering. The $2.0 million mortgage loan, from Morgan Guaranty Trust
Company of New York, bears interest at 9.03% per annum and is secured by the
building and the land on which it is located. The loan matures on July 1, 2012;
however monthly principal and interest installments of $18,425 are determined
based on a twenty-year amortization period.

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
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 the Goodyear, Arizona facility, the Company sold
existing land and buildings (comprising the Company's previous Arizona
manufacturing facility) 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 January 1997, the Company sold 337,500 additional shares of Common Stock
pursuant to an over-allotment option granted to the Underwriter in the Company's
December 1996 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.

At December 31, 1998, the Company had outstanding 9% Convertible Debentures
due July 1, 2002 in the principal amount of $2,229,114. The 9% Convertible
Debentures are secured by land, building, equipment and intangibles. 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 November 1999 through June 2002. For the period November 1,
1998 through October 31, 1999, Renaissance Capital (the holder of $1,718,094 of
9% Convertible Debentures) agreed to waive all mandatory principal redemption
payments and to accept 183,263 unregistered shares of the Company's Common Stock

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in lieu of cash interest payments. Also in connection with such waiver, the
Company agreed to decrease the conversion price of the 9% Convertible Debentures
from $1.09 to $1.00. As of December 31, 1998, 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 1.0:1(actual of .92:1). However, the holders of the 9% Convertible
Debentures had previously granted the Company a waiver as to such financial
ratio effective through June 30, 1999. As consideration for the granting of such
waiver, as of February 1998 the Company issued warrants to Renaissance Capital
and Wells Fargo, the holders of the 9% Convertible Debentures, representing the
right to purchase 25,000 and 7,143 shares of the Company's Common Stock,
respectively, at an exercise price of $1.00 per share. Each warrant became
exercisable upon issuance and expires on July 1, 2002. 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 Company is currently in compliance
with the other financial ratios, including working capital of at least $500,000;
a minimum of $4,500,000 shareholders' equity; and a current ratio at the end of
any fiscal quarter of at least 1.1:1. 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. 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. 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, 1998, the Company had net operating losses available
for federal and state income taxes of approximately $5,510,000. 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, "Accounting for Income Taxes." The Company's
accumulated net operating losses expire in varying amounts between 2010 and
2018.

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MANAGEMENT'S PLANS

In connection with the implementation of the Company's business strategy,
the Company may incur additional operating losses in the future and is likely to
require future debt or equity financings (particularly in connection with future
strategic acquisitions). Expenditures relating to acquisition-related
integration costs, 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. As a
result of the 1997 restructuring actions and the 1998 Tejas acquisition,
management believes that the Company will generate positive cash flow from
operations in 1999, which, along with its existing working capital and borrowing
facilities, should enable the Company to meet its operating cash requirements
through 1999. 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 any
required financings will be available or, if available, on terms attractive to
the Company.

INFLATION AND SEASONALITY

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.

YEAR 2000 COMPLIANCE

The Year 2000 issue is the result of computer programs being written using
two digits rather than four to identify the applicable year. For example,
computer programs that utilize date-sensitive information may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations.

The Company processes much of its data using licensed computer programs
from third parties, including its accounting software. Such third parties have
advised the Company that they have made all necessary programming changes to
such computer programs to address the Year 2000 issue. The Company tested its
systems for Year 2000 compliance during the first half of 1998 and discovered
that certain database information utilized by the Company for purposes of order
entry, billing and accounts receivables is not Year 2000 compliant, although the
underlying database software is Year 2000 compliant. The Company intends to
implement corrective measures with respect to such database information during
the third quarter of 1999. The Company does not expect to incur significant
expenses in connection with such corrective measures. In addition, the Company
believes that, notwithstanding the foregoing, it has no material internal risk
in connection with the potential impact of the Year 2000 issue on the processing
of date sensitive information by the Company's computerized information systems.

ITEM 7. FINANCIAL STATEMENTS
PAGE
----
REPORTS

Report of independent public accountants with respect to
financial statements for the years ended December 31, 1998
and 1997 31

FINANCIAL STATEMENTS

Consolidated balance sheets as of December 31, 1998 and 1997 32
Consolidated statements of operations for the years ended
December 31, 1998 and 1997 33
Consolidated statements of shareholders' equity for the years
ended December 31, 1998 and 1997 34
Consolidated statements of cash flows for the years ended
December 31, 1998 and 1997 35
Notes to consolidated financial statements 36

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.

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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:

NAME AGE POSITION
---- --- --------
Eric J. Kufel 32 President, Chief Executive Officer, Director
Glen E. Flook 40 Vice President-Manufacturing
Thomas W. Freeze 47 Vice President, Chief Financial Officer,
Treasurer, and Secretary
Thomas G. Bigham 45 Vice President of Sales-Texas
Wendell T. Jones 58 Vice President of Sales-Arizona
Kevin M. Kohl 43 Vice President of Sales-Texas
James M. Poore 52 Vice President
Mark S. Howells 45 Chairman, Director
James W. Myers 64 Director
Robert C. Pearson 63 Director
Aaron M. Shenkman 58 Director

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.

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.

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.

THOMAS G. BIGHAM. Mr. Bigham has been Vice President of Sales - Texas since
November 1998. From December 1996 to November 1998, Mr. Bigham was President of
Tejas, whose business and certain assets were purchased by the Company in
November 1998. From 1994 to December 1996, Mr. Bigham was President of Eagle
Brands of Houston, Inc.

WENDELL T. JONES. Mr. Jones has been the Vice President of Sales-Arizona since
August 1998. From February 1997 to August 1998, Mr. Jones served as Director of
Sales-Arizona. 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.

KEVIN M. KOHL. Mr. Kohl has been Vice President of Sales - Texas since November
1998. From July 1996 to November 1998, Mr. Kohl was Executive Vice President of
Tejas, whose business and certain assets were purchased by the Company in
November 1998. From July 1994 to June 1996, Mr. Kohl was President of Mighty
Eagle, Inc. d/b/a Atlanta Eagle. From June 1992 to July 1994, Mr. Kohl was a
Regional Director of Eagle Snacks, Inc.

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,

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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.

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. d/b/a Puglisi Howells & Co., a registered
securities broker-dealer.

JAMES W. MYERS. Mr. Myers has served as a Director since January 1999. Mr. Myers
has been President of Myers Management & Capital Group, Inc., a consulting firm
specializing in strategic, organizational and financial advisory services to
CEO's, since January 1996. From December 1989 to December 1995, Mr. Myers served
as President of Myers, Craig, Vallone & Francois, Inc., a management and
corporate finance consulting firm. Previously, Mr. Myers was an executive with a
variety of consumer goods companies. Mr. Myers is currently a director of ILX
Resorts, Inc., a publicly traded time-share sales and resort property company.

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 Capital"), 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. Mr. Pearson is currently a director of Tava
Technologies, Inc. (a publicly traded information technology services company),
Dexterity Surgical, Inc. (a publicly traded surgical instruments manufacturer
and distributor), and Interscience Computer, Inc. (a distributor of consumables
for laser printers).

Pursuant to the Debenture Loan Agreement, so long as the 9% Convertible
Debentures have not been fully converted into shares of Common Stock or redeemed
or paid by the Company, Renaissance Capital shall be entitled to designate a
nominee to the Company's Board of Directors subject to election by the Company's
stockholders. Renaissance Capital 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.

Effective December 31, 1998, Jeffrey J. Puglisi resigned as a Director of
the Company.

INFORMATION REGARDING BOARD OF DIRECTORS AND COMMITTEES

The Board of Directors conducts its business through meetings of the Board
of Directors and through its standing committees. As of the date of this Proxy
Statement, two committees have been established, an Audit Committee and a
Compensation Committee. The Board of Directors does not currently utilize a
Nominating Committee or committee performing similar functions.

The Audit Committee: (i) makes recommendations to the Board of Directors as
to the independent accountants to be appointed by the Board of Directors; (ii)
reviews with the independent accountants the scope of their examinations; (iii)
receives the reports of the independent accountants for the purpose of reviewing
and considering questions relating to their examination and such reports; (iv)
reviews, either directly or indirectly or through independent accountants, the
internal accounting and auditing procedures of the Company; (v) reviews related
party transactions; and (vi) performs such other functions as may be assigned to
it from time to time by the Board of Directors. The Audit Committee is comprised
of three members of the Board of Directors, Messrs. Pearson, Howells and Myers.
The Chairman of the Audit Committee is Mr. Pearson. The Audit Committee was
established on October 22, 1996.

The Compensation Committee reviews and recommends the compensation of
executive officers and key employees. The Compensation Committee is comprised of
three members of the Board of Directors, Messrs. Howells, Shenkman and Myers.

20
<PAGE>
The Chairman of the Compensation Committee is Mr. Shenkman. The Compensation
Committee was established on June 12, 1997.

COMPENSATION OF DIRECTORS

In May 1998, the Company granted options to purchase 10,000 shares of the
Company's Common Stock to each person who was elected to the Board of Directors
at the 1998 Annual Meeting of Shareholders. Such options, which have an exercise
price of $1.3125 per share, will vest on June 18, 1999 and have a term of five
years. In addition, Mr. Myers, who was newly elected to the Board of Directors
on January 12, 1999, was granted an option to purchase 10,000 shares of Common
Stock at an exercise price of $0.59375 per share with a term of five years and
exercisable on the date of grant.

In the future, in order to attract and retain highly competent persons as
Directors and as compensation for Directors' service on the Board, the Company
may, from time to time, grant additional stock options or issue shares of Common
Stock to Directors.

Directors are reimbursed for out-of-pocket expenses incurred in attending
meetings of the Board of Directors and for other expenses incurred in their
capacity as directors.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years, as applicable, to the
Company's Chief Executive Officer and those other executive officers of the
Company whose salary and bonuses, if any, exceeded $100,000 for the Company's
fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
AWARDS
NAME AND OTHER ANNUAL STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED COMPENSATION
------------------ ---- ------- ------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Eric J. Kufel (1) 1998 $119,423 -- $6,975(4) 390,000(5) --
President, Chief Executive 1997 $ 99,519 -- $7,381(4) 350,000(5) --
Officer and Director 1996 -- -- -- -- --
Glen E. Flook (2) 1998 $ 98,654 $15,000 $ 350(4) 130,000(5) --
Vice President- 1997 $ 74,904 $30,000 -- 105,000(5) $63,143(6)
Manufacturing 1996 -- -- -- -- --
Thomas W. Freeze (3)
Vice President,
Chief Financial 1998 $109,038 -- -- 195,000(5) --
Officer, Secretary and 1997 $ 71,481 -- -- 155,000(5) --
Treasurer 1996 -- -- -- -- --
</TABLE>
- ----------
(1) Mr. Kufel has served as President, Chief Executive Officer and a Director
of the Company since February 1997.
(2) Mr. Flook has served as Vice President-Manufacturing since March 1997.
(3) Mr. Freeze has served as Vice President, Chief Financial Officer, Secretary
and Treasurer since April 1997.
(4) Represents the value of company automobiles provided to Mr. Kufel and Mr.
Flook for their exclusive use.
(5) Stock options to purchase 300,000, 75,000 and 125,000 shares of Common
Stock were granted to Messrs. Kufel, Flook and Freeze, respectively, in
September 1998 for the purpose of effecting a repricing of stock options
for the same numbers of shares granted to them by the Company in 1997. In
connection therewith, the 1997 stock options were cancelled. See "OPTION
GRANTS IN LAST FISCAL YEAR."
(6) Represents payments made to, and expenses paid on behalf of, Mr. Flook in
connection with his relocation to Arizona upon obtaining employment with
the Company.

21
<PAGE>
The following table sets forth information concerning stock options granted
during the fiscal year ended December 31, 1998 for the individuals shown in the
Summary Compensation Table. No stock appreciation rights ("SARs") were granted
in connection with any such stock options during the fiscal year ended December
31, 1998.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)

NUMBER OF SHARES OF PERCENT OF TOTAL OPTIONS
COMMON STOCK UNDERLYING GRANTED TO EMPLOYEES EXERCISE PRICE
NAME OPTIONS GRANTED(1) IN FISCAL YEAR (5) PER SHARE EXPIRATION DATE
- ---- ------------------ ------------------ --------- ---------------
<S> <C> <C> <C> <C>
Eric J. Kufel 90,000 11.0% $1.015625 January 28, 2003
300,000(2) 36.8% $1.25 (6) September 14, 2003
Glen E. Flook 55,000 6.8% $1.105625 January 28, 2003
75,000(3) 9.2% $1.25 (6) September 14, 2003
Thomas W. Freeze 70,000 8.6% $1.015625 January 28, 2003
125,000(4) 15.3% $1.25 (6) September 14, 2003
</TABLE>
- ----------
(1) All listed stock options vest over a three-year period from the date of
grant.
(2) Granted to Mr. Kufel for the purpose of effecting a repricing of a stock
option to purchase 300,000 shares of Common Stock granted to him by the
Company in 1997. In connection therewith, the 1997 stock option (with an
exercise price of $3.5625 per share) was cancelled. The new stock option
vests over a period of three years from the date of grant in September
1998. See "REPRICING OF STOCK OPTIONS."
(3) Granted to Mr. Flook for the purpose of effecting a repricing of a stock
option to purchase 75,000 shares of Common Stock granted to him by the
Company in 1997. In connection therewith, the 1997 stock option (with an
exercise price of $3.9375 per share) was cancelled. The new stock option
vests over a period of three years from the date of grant in September
1998. See "REPRICING OF STOCK OPTIONS."
(4) Granted to Mr. Freeze for the purpose of effecting a repricing of a stock
option to purchase 125,000 shares of Common Stock granted to him by the
Company in 1997. In connection therewith, the 1997 stock option (with an
exercise price of $2.8750 per share) was cancelled. The new stock option
vests over a period of three years from the date of grant in September
1998. See "REPRICING OF STOCK OPTIONS."
(5) For purposes of calculating these percentages, stock options to purchase an
aggregate of 40,000 shares of Common Stock granted to non-employee
Directors during fiscal 1998 were excluded from Total Options Granted to
Employees in Fiscal Year.
(6) The average last sale price for the 30 consecutive trading days immediately
prior to the grant date was $0.97 per share.

The following table sets forth information concerning the number and value
of unexercised stock options at December 31, 1998 held by the individuals shown
in the Summary Compensation Table. None of such persons held any SARs at
December 31, 1998 or exercised any SARs during 1998.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE NUMBER OF SHARES OF COMMON VALUE OF UNEXERCISED
SHARES VALUE STOCK UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
RECEIVED REALIZED OPTIONS AT DECEMBER 31, 1998 DECEMBER 31, 1998 (1)
UPON UPON ----------------------------- -----------------------------
NAME EXERCISE EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Eric J. Kufel -- -- 16,667 423,333 -- --
Glen E. Flook -- -- 10,000 150,000 -- --
Thomas W. Freeze -- -- 10,000 215,000 -- --
</TABLE>
- ----------
(1) Value is the difference between the market value of the Company's Common
Stock on December 31, 1998, which was $0.59 per share (based upon the last
sales price of the Common Stock on the Nasdaq SmallCap Market), and the
exercise price.

22
<PAGE>
STOCK OPTION PLAN

The Company's 1995 Poore Brothers, Inc. Stock Option Plan (the "Stock
Option Plan") is designed to attract and retain highly competent persons as
directors, officers and key employees of the Company and its subsidiaries by
providing them with opportunities to acquire shares of Common Stock. The Stock
Option Plan is administered by the Company's Board of Directors or a committee
appointed by the Board, which determines the persons to whom options are
granted, and the number and terms of the options, including the exercise price.
The Stock Option Plan is currently administered by the Board of Directors and no
stock option committee has been appointed to date. Options granted under the
Stock Option Plan have such vesting and exercise periods as the Board of
Directors may determine; provided that no option may be exercisable earlier than
six months after the date of grant and no option may have a term longer than ten
years. 1,500,000 shares of Common Stock are currently reserved for issuance
under the Stock Option Plan. As of March 19,1999, options to purchase 1,152,850
shares of Common Stock were granted and outstanding under the Stock Option Plan
and a total of 206,817 remained eligible for future grants. The number of shares
underlying options granted under the Stock Option Plan are subject to adjustment
under certain circumstances.

STOCK OPTIONS GRANTED OUTSIDE THE STOCK OPTION PLAN

In addition to stock options granted under the Stock Option Plan, the
Company has granted stock options to purchase an aggregate of 820,000 shares of
Common Stock to Mr. Howells (385,000), a Director of the Company, as well as
Messrs. Jeffrey J. Puglisi (385,000) and Parris H. Holmes, Jr. (50,000), former
Directors of the Company. The options vested on their respective dates of grant
and expire ten years from the dates of grant.

REPRICING OF STOCK OPTIONS

Each of Messrs. Kufel, Freeze and Flook joined the Company in the first
half of 1997. Upon commencement of employment, each person was granted an option
(each, an "Employment Agreement Stock Option") to purchase shares of the
Company's Common Stock pursuant to the 1995 Poore Brothers, Inc. Stock Option
Plan (the "Stock Option Plan") pursuant to the terms of his employment
agreement: Mr. Kufel was granted an option to purchase 300,000 shares of Common
Stock at an exercise price of $3.5625; Mr. Freeze was granted an option to
purchase 125,000 shares of Common Stock at an exercise price of $2.875 per
share; and Mr. Flook was granted an option to purchase 75,000 shares of Common
Stock at an exercise price of $3.9375 per share.

In 1997 and 1998, during which the Company implemented and completed its
restructuring program and refocused its efforts on expanding the Company's
business, the market value of the Company's Common Stock experienced a
substantial decline. As a result, by the latter part of 1998, all of the
Employment Agreement Stock Options were "out-of-the-money" (i.e., the exercise
prices of the options were higher than the current market price of the Common
Stock), in each case by a large amount. At the same time, due to the strength of
the national and local economies, competition for qualified management and other
key employees intensified.

In light of the contributions of Messrs. Kufel, Freeze and Flook to the
Company in connection with the restructuring and the implementation of the
Company's business plan, and in order to encourage each such person to remain in
the employ of the Company, on September 14, 1998 the Company's Board of
Directors (acting without Mr. Kufel) authorized the Company to offer each such
person the right to cancel his out-of-the-money Employment Agreement Stock
Option in exchange for a replacement stock option to purchase the same number of
shares of Common Stock with an exercise price of $1.25 per share. The average
last sale price of the Common Stock for the 30 consecutive trading days
immediately prior to the grant date was $0.97 per share. In addition, the term
and exercisability of the replacement options were reset such that the
measurement periods commenced on the grant date of the replacement options.
Otherwise, the replacement option terms remained the same as the terms of the
Employment Agreement Stock Options.

Each of Messrs. Kufel, Freeze and Flook elected to participate in the
repricing. The total number of shares of Common Stock subject to outstanding
stock options was not impacted by the repricing, since the number of shares of
Common Stock underlying the Employment Agreement Stock Options and the
replacement options was the same.

EMPLOYMENT AGREEMENTS

Mr. Eric J. Kufel was appointed as President and Chief Executive Officer
and elected to the Board of Directors of the Company effective February 3, 1997.
Mr. Kufel is employed under an "at will" employment agreement which provides for
a base salary of $115,000 per year, use of a Company automobile and
participation in Company bonus plans, the terms of which are yet to be
determined. Mr. Kufel's salary is subject to increases at the discretion of the
Company's Board of Directors. Pursuant to his employment agreement, on January
24, 1997 Mr. Kufel was granted a stock option to purchase 300,000 shares of
Common Stock at a price of $3.5625 per share. In September 1998, the stock
option was cancelled and a new stock option for the same number of shares was
issued to Mr. Kufel in order to effect a repricing. The exercise price of the

23
<PAGE>
new stock option is $1.25 per share. The stock option vests over a three-year
period and expires five years from the date of grant. See "OPTION GRANTS IN LAST
FISCAL YEAR" and "REPRICING OF STOCK OPTIONS." Mr. Kufel's employment agreement
contains a non-compete covenant.

Mr. Glen E. Flook has served as Vice President-Manufacturing since March 3,
1997. Mr. Flook is employed under an "at will" employment agreement that
provides for a base salary of $95,000 per year and for participation in Company
bonus plans, the terms of which are yet to be determined. Mr. Flook's salary is
subject to increases at the discretion of the Company's Board of Directors.
Pursuant to his employment agreement, on February 14, 1997 Mr. Flook was granted
a stock option to purchase 75,000 shares of Common Stock at a price of $3.9375
per share. In September 1998, the stock option was cancelled and a new stock
option for the same number of shares was issued to Mr. Flook in order to effect
a repricing. The exercise price of the new stock option is $1.25 per share. The
stock option vests over a three-year period and expires five years from the date
of grant. See "OPTION GRANTS IN LAST FISCAL YEAR" and "REPRICING OF STOCK
OPTIONS." In addition, the Company made payments to and paid expenses on behalf
of Mr. Flook in 1997 in an aggregate amount of $63,143 for expenses incurred by
him in connection with his relocation to Arizona upon the commencement of his
employment with the Company. Mr. Flook's employment agreement contains a
non-compete covenant.

Mr. Thomas W. Freeze has served as Vice President, Chief Financial Officer,
Secretary and Treasurer since April 10, 1997. Mr. Freeze is employed under an
"at will" employment agreement that provides for a base salary of $105,000 per
year and for participation in Company bonus plans, the terms of which are yet to
be determined. Mr. Freeze's salary is subject to increases at the discretion of
the Company's Board of Directors. Pursuant to his employment agreement, on April
10, 1997 Mr. Freeze was granted a stock option to purchase 125,000 shares of
Common Stock at a price of $2.875 per share. In September 1998, the stock option
was cancelled and a new stock option for the same number of shares was issued to
Mr. Freeze in order to effect a repricing. The exercise price of the new stock
option is $1.25 per share. The stock option vests over a three-year period and
expires five years from the date of grant. See "OPTION GRANTS IN LAST FISCAL
YEAR" and "REPRICING OF STOCK OPTIONS."

In addition to Mr. Kufel, Mr. Flook and Mr. Freeze, certain other executive
officers of the Company have entered into employment agreements with the
Company.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the Record Date by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each director and nominee for director of the
Company, (iii) each executive officer of the Company listed in the Summary
Compensation Table set forth in "Executive Compensation" above, and (iv) all
executive officers and directors of the Company as a group, as of the Record
Date.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF SHARES OF
BENEFICIAL OWNERSHIP COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER OF COMMON STOCK (1) BENEFICIALLY OWNED (2)
------------------------------------ -------------------- ----------------------
<S> <C> <C>
Mark S. Howells....................................... 768,137 (3) 9.3%
2390 E. Camelback Road
Suite 203
Phoenix, AZ 85016
Eric J. Kufel......................................... 51,667 (4) 0.7
3500 S. La Cometa Drive
Goodyear, AZ 85338
James W. Myers........................................ 10,000 (5) 0.1
5050 N. 40th Street
Suite 100
Phoenix, AZ 85018
Robert C. Pearson..................................... 15,000 (6) 0.2
8080 North Central Expressway
Suite 210/LB59
Dallas, TX 75206
Aaron M. Shenkman..................................... 35,000 (7) 0.4
716 Gary Lane
El Paso, TX 79922
</TABLE>

24
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Glen E. Flook......................................... 29,333 (8) 0.4
3500 S. La Cometa Drive
Goodyear, AZ 85338
Thomas W. Freeze...................................... 35,333 (9) 0.4
3500 S. La Cometa Drive
Goodyear, AZ 85338
Jeffrey J. Puglisi.................................... 825,001 (10) 10.0
2390 E. Camelback Road
Suite 203
Phoenix, AZ 85016
Renaissance Capital Growth & Income Fund III, Inc..... 1,926,357 (11) 19.7
8080 North Central Expressway
Suite 210/LB59
Dallas, TX 75206
Tejas Snacks, L.P. ................................... 400,000 (12) 5.1
Rt. 1, Box 66A
Brookshire, TX 77423
Wells Fargo Small Business Investment Company, Inc.... 511,020 (13) 6.2
One Montgomery Street
West Tower, Suite 2530
San Francisco, CA 94104
All executive officers and directors as
a group (11 persons) (14)......................... 1,398,303 (14) 17.4
</TABLE>
- ----------
(1) Unless otherwise indicated, each of the persons named has sole voting and
investment power with respect to the shares reported.
(2) Shares of Common Stock which an individual or group has a right to acquire
within 60 days pursuant to the exercise of options or warrants are deemed
to be outstanding for the purpose of computing the percentage ownership of
such individual or group, but are not deemed to be outstanding for the
purpose of computing the ownership percentage of any other person shown in
the table. On the Record Date, the date as of which these percentages are
calculated, there were 7,832,997 shares of Common Stock issued and
outstanding.
(3) Includes 400,000 shares of Common Stock issuable upon the exercise of stock
options (385,000 of which were granted outside of the Stock Option Plan by
Mr. Howells that are exercisable within 60 days. Excludes (i) 40,000 shares
of Common Stock held of record by trusts with Jeannie L. Howells, the
former wife of Mr. Howells, for the benefit of Mr. Howells' children, and
(ii) 10,000 shares of Common Stock issuable upon the exercise of stock
options which have not yet vested and which are not exercisable within 60
days.
(4) Includes 46,667 shares of Common Stock issuable upon the exercise of stock
options by Mr. Kufel that are exercisable within 60 days. Excludes 393,333
shares of Common Stock issuable upon the exercise of stock options which
have not yet vested and which are not exercisable within 60 days.
(5) Includes 10,000 shares of Common Stock issuable upon the exercise of stock
options by Mr. Myers that are exercisable within 60 days.
(6) Includes 15,000 shares of Common Stock issuable upon the exercise of stock
options by Mr. Pearson that are exercisable within 60 days. Excludes 10,000
shares of Common Stock issuable upon the exercise of stock options by Mr.
Pearson which have not yet vested and that are not exercisable within 60
days.
(7) Includes 25,000 shares of Common Stock issuable upon the exercise of stock
options by Mr. Shenkman that are exercisable within 60 days. Excludes
10,000 shares of Common Stock issuable upon the exercise of stock options
by Mr. Shenkman which have not yet vested and that are not exercisable
within 60 days.
(8) Includes 28,333 shares of Common Stock issuable upon the exercise of stock
options by Mr. Flook that are exercisable within 60 days. Excludes 131,667
shares of Common Stock issuable upon the exercise of stock options which
have not yet vested and which are not exercisable within 60 days.
(9) Includes 33,333 shares of Common Stock issuable upon the exercise of stock
options by Mr. Freeze that are exercisable within 60 days. Excludes 191,667
shares of Common Stock issuable upon the exercise of stock options which
have not yet vested and which are not exercisable within 60 days.
(10) Includes 400,000 shares of Common Stock issuable upon the exercise of stock
options (385,000 of which were granted outside of the Stock Option Plan) by
Mr. Puglisi that are exercisable within 60 days.
(11) Reflects 1,718,094 shares of Common Stock that would be issued upon the
conversion of the 9% Convertible Debentures, assuming that such conversion
was effected at the conversion price; 25,000 shares of Common Stock that
would be issued upon exercise of a warrant; and 183,263 shares already
issued by the Company in lieu of cash interest for the period November 1,

25
<PAGE>
1998 through October 31, 1999. Russell Cleveland exercises control over the
9% Convertible Debenture owned by Renaissance.
(12) Reflects shares of Common Stock issued by the Company in connection with
the acquisition of the Tejas Snacks, L.P. business and certain assets in
November 1998. Thomas G. Bigham and Kevin M. Kohl are the beneficial owners
of 210,000 and 86,000 shares, respectively.
(13) Reflects 511,020 shares of Common Stock that would be issued upon the
conversion of the 9% Convertible Debentures, assuming that such conversion
was effected at the conversion price, and 7,143 shares of Common Stock that
would be issued upon exercise of a warrant. John P. Whaley is the
designated representative of Wells Fargo and, as such, exercises control
over the 9% Convertible Debenture held by Wells Fargo.
(14) Includes (i) 994,866 shares of Common Stock which are issuable upon the
exercise of stock options that are exercisable within 60 days (224,866 of
which were granted pursuant to the Stock Option Plan and 770,000 of which
were granted outside of the Stock Option Plan). Excludes 733,134 shares of
Common Stock issuable upon the exercise of stock options which have not yet
vested and which are not exercisable within 60 days.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Paragraph Section 16(a) of the Exchange Act requires that the Company's
directors, executive officers and persons who own more than 10% of the Company's
Common Stock, file with the Commission initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company. Officers, directors and greater than 10% shareholders are required by
Commission regulation to furnish the Company with copies of all Section 16(a)
reports they file. To the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company and written representations,
during the fiscal year ended December 31, 1998, all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with, except that Renaissance Capital did not
file in a timely manner a report pertaining to its receipt as of February 1998
of a warrant to purchase 25,000 shares of Common Stock. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -
LIQUIDITY AND CAPITAL RESOURCES."

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

From February 1997 to October 1997, a construction company owned by Matthew
Howells, a brother of Mark S. Howells, provided construction management services
to the Company in connection with the Company's Arizona manufacturing facility.
The Company paid $67,600 for these services.

As of February 1998, the Company issued warrants to Renaissance Capital and
Wells Fargo, the holders of the Company's 9% Convertible Debentures,
representing the right to purchase 25,000 and 7,143 shares of the Company's
Common Stock, respectively, at an exercise price of $1.00 per share. Each
warrant became exercisable upon issuance and expires on July 1, 2002. The
warrants were issued in consideration for the waiver by Renaissance Capital and
Wells Fargo, through June 30, 1999, of a financial covenant that the Company is
subject to so long as the 9% Convertible Debentures remain outstanding.

In November 1998, the Company purchased the business and certain assets of
Tejas. See "BUSINESS - COMPANY HISTORY." Thomas G. Bigham and Kevin M. Kohl are
beneficial owners of Tejas and, upon the consummation of the transaction, became
executive officers of the Company. The Company issued 400,000 shares of Common
Stock to Tejas in satisfaction of a portion of the consideration payable to
Tejas.

In October 1998, Renaissance Capital agreed for the period November 1, 1998
through October 31, 1999, to waive all mandatory principal redemption payments
due under the 9% Convertible Debentures held by Renaissance Capital and to
accept 183,263 unregistered shares of Common Stock in lieu of $154,628 of cash
interest payments. In consideration for these changes, the conversion price of
all outstanding 9% Convertible Debentures was decreased from $1.09 to $1.00 per
share.

26
<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:

EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Certificate of Incorporation of the Company filed with the Secretary of
State of the State of Delaware on February 23, 1995. (1)
3.2 Certificate of Amendment to the Certificate of Incorporation of the
Company filed with the Secretary of State of the State of Delaware on
March 3, 1995. (1)
3.3 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 by and among
the Company, Poore Brothers Arizona, Inc. ("PB Arizona"), PB
Distributing, PB Texas, PB Southeast, Renaissance Capital and Wells
Fargo. (2)
4.4 9.00% Convertible Debenture dated May 31, 1995, issued by the Company
to Renaissance Capital. (1)
4.5 9.00% Convertible Debenture dated May 31, 1995, issued by the Company
to Wells Fargo. (1)
4.6 Form of Warrant issued as of February 1998 to Renaissance Capital and
Wells Fargo. (5)
4.7 Warrant dated November 4, 1998, issued by the Company to Norwest. (6)
10.1 Employment Agreement dated May 31, 1995, by and between PB Arizona and
James M. Poore. (1)
10.2 Employment Agreement dated May 20, 1996, by and between the Company and
Wendell T. Jones. (1)
10.3 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)
10.4 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)
10.5 Non-Qualified Stock Option Agreement dated August 1, 1995, by and
between the Company and Parris H. Holmes, Jr. (1)
10.6 Form of Security Agreements dated May 31, 1995, by and among
Renaissance Capital, Wells Fargo and each of the Company, PB Arizona,
PB Southeast, PB Texas and PB Distributing. (1)
10.7 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)
10.8 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)
10.9 Equipment Lease Agreement dated December 12, 1995, by and between PB
Arizona and FINOVA Capital Corporation. (1)
10.10 Guaranty dated December 12, 1995, issued by the Company to FINOVA
Capital Corporation. (1)
10.11 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)
10.12 Purchase Agreement dated February 1, 1996, by and between PB Arizona
and LCA in connection with the LCA Lease Agreement. (1)
10.13 Corporate Guaranty dated as of February 1, 1996, issued by the Company
to LCA in connection with LCA Lease Agreement. (1)
10.14 Development Agreement dated May 14, 1996, by and between the Company
and the City of Goodyear, Arizona. (1)
10.15 Agreement dated August 29, 1996, by and between the Company and
Westminster Capital, Inc. ("Westminster"), as amended. (1)
10.16 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)
10.17 Form of Independent Distributor Agreement by and between PB
Distributing and independent distributors. (1)
10.18 Amendment No. 1 dated October 14, 1996, to Warrant dated September 11,
1996, issued by the Company to Westminster. (2)
10.19 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)
10.20 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)
10.21 Non-Qualified Stock Option Agreement dated as of October 22, 1996, by
and between the Company and Mark S. Howells. (2)
10.22 Letter Agreement dated as of November 5, 1996, by and between the
Company and Jeffrey J. Puglisi. (2)
10.23 Letter Agreement dated as of November 5, 1996, by and between the
Company and David J. Brennan. (2)
10.24 Stock Option Agreement dated October 22, 1996, by and between the
Company and David J. Brennan. (3)
10.25 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)

27
<PAGE>
10.26 Letter Agreement dated December 4, 1996, by and between the Company and
Jeffrey J. Puglisi, relating to stock options. (3)
10.27 Letter Agreement dated December 4, 1996, by and between the Company and
Mark S. Howells, relating to stock options. (3)
10.28 Letter Agreement dated December 4, 1996, by and between the Company and
Parris H. Holmes, Jr., relating to stock options. (3)
10.29 Letter Agreement dated December 4, 1996, by and between the Company and
David J. Brennan, relating to stock options. (3)
10.30 Form of Underwriting Agreement entered into on December 6, 1996, by and
between the Company, Paradise Valley Securities, Inc., Renaissance
Capital 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.)
10.31 Employment Agreement dated January 24, 1997, by and between the Company
and Eric J. Kufel. (4)
10.32 First Amendment to Employment Agreement dated February 2, 1997, by and
between the Company and David J. Brennan. (4)
10.33 Employment Agreement dated February 14, 1997, by and between the
Company and Glen E. Flook. (4)
10.34 Amendment dated January 28, 1997, amending Employment Agreement by and
between the Company and Wendell T. Jones. (4)
10.35 Commercial Real Estate Purchase Contract and Receipt for Deposit dated
January 22, 1997, by and between the Company and D.F. Properties, Inc.
(4)
10.36 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 three-month period ended March
31, 1997.)
10.37 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.)
10.38 Fixed Rate Note dated June 4, 1997, by and between La Cometa
Properties, Inc. and Morgan Guaranty Trust Company of New York. (5)
10.39 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)
10.40 Guaranty Agreement dated June 4, 1997, by and between the Company and
Morgan Guaranty Trust Company of New York. (5)
10.41 Equipment Lease Agreement dated June 9, 1997, by and between PB Arizona
and FINOVA Capital Corporation. (5)
10.42 Poore Brothers, Inc. 1995 Stock Option Plan, as amended. (5)
10.43 Separation Agreement and Release of All Claims dated August 14, 1998,
by and between the Company and Scott D. Fullmer. (6)
10.44 Letter Agreement dated August 18, 1998, by and between the Company and
Everen. (6)
10.45 Credit and Security Agreement dated October 23, 1998, by and between
the Company (and certain of its subsidiaries) and Norwest. (6)
10.46 Patent and Trademark Security Agreement dated October 23, 1998, by and
between the Company (and certain of its subsidiaries) and Norwest. (6)
10.47 Agreement for Purchase and Sale of Assets dated October 29, 1998, by
and among the Company, Tejas, Kevin M. Kohl and Thomas G. Bigham. (6)
10.48 Employment Agreement dated November 12, 1998, by and between Tejas PB
Distributing, Inc. and Thomas G. Bigham. (6)
10.49 Employment Agreement dated November 12, 1998, by and between Tejas PB
Distributing, Inc. and Kevin M. Kohl. (6)
21.1 List of Subsidiaries of the Company. (7)
27.1 Financial Data Schedule for 1998. (7)
- ----------
(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.

28
<PAGE>
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the three-month period ended June 30, 1997.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the three-month period ended September 30, 1998.
(7) Filed herewith.

(b) Reports on Form 8-K.

None.

29
<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, 1999

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.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Eric J. Kufel President, Chief Executive March 30, 1999
- ------------------------ Officer, and Director
Eric J. Kufel (Principal Executive Officer)

/s/ Thomas W. Freeze Vice President, Chief Financial March 30, 1999
- ------------------------ Officer, Treasurer and Secretary
Thomas W. Freeze (Principal Financial Officer and
Principal Accounting Officer)

/s/ Mark S. Howells Chairman, Director March 30, 1999
- ------------------------
Mark S. Howells

/s/ James W. Myers Director March 30, 1999
- ------------------------
James W. Myers

/s/ Robert C. Pearson Director March 30, 1999
- ------------------------
Robert C. Pearson

/s/ Aaron M. Shenkman Director March 30, 1999
- ------------------------
Aaron M. Shenkman

30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Poore Brothers, Inc.

We have audited the accompanying consolidated balance sheets of Poore Brothers,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the years 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 audits.

We conducted our audits 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 audits provide 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP

Phoenix, Arizona,
February 18, 1999.

31
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
----------------------------
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents ................... $ 270,295 $ 1,622,751
Accounts receivable, net of allowance of
$24,000 in 1998 and $174,000 in 1997 ...... 1,712,955 1,528,318
Note receivable ............................. -- 78,414
Inventories ................................. 465,038 473,025
Other current assets ........................ 281,994 175,274
------------ ------------
Total current assets ...................... 2,730,282 3,877,782

Property and equipment, net ................... 6,270,374 6,602,435
Intangible assets, net ........................ 3,723,906 2,294,324
Other assets, net ............................. 214,327 100,673
------------ ------------
Total assets .............................. $ 12,938,889 $ 12,875,214
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................ $ 870,204 $ 824,129
Accrued liabilities ......................... 439,404 502,793
Current portion of long-term debt ........... 652,519 1,127,217
------------ ------------
Total current liabilities ................. 1,962,127 2,454,139

Long-term debt, less current portion .......... 5,720,247 5,017,724
------------ ------------
Total liabilities ......................... 7,682,374 7,471,863
------------ ------------
Commitments and contingencies

Shareholders' equity:
Preferred stock, $100 par value; 50,000
shares authorized; no shares issued or
outstanding at December 31, 1998 and
1997, respectively ........................... -- --
Common stock, $.01 par value; 15,000,000
shares authorized; 7,832,997 and 7,051,657
shares issued and outstanding at
December 31, 1998 and 1997, respectively ..... 78,329 70,516
Additional paid-in capital .................... 11,514,210 10,794,768
Accumulated deficit ........................... (6,336,024) (5,461,933)
------------ ------------
Total shareholders' equity ................ 5,256,515 5,403,351
------------ ------------
Total liabilities and shareholders'
equity .................................. $ 12,938,889 $ 12,875,214
============ ============

The accompanying notes are an integral
part of these consolidated financial statements.

32
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997
---- ----

Net sales ...................................... $ 13,167,993 $ 15,731,796

Cost of sales .................................. 9,923,890 13,709,979
------------ ------------

Gross profit .............................. 3,244,103 2,021,817

Selling, general and administrative expenses ... 3,603,156 3,982,428

Closing of Tennessee manufacturing operation ... -- 581,492

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

Operating loss ............................ (359,053) (2,706,486)
------------ ------------

Interest income ................................ 46,371 128,205

Interest expense ............................... (561,409) (455,816)
------------ ------------
(515,038) (327,611)
------------ ------------
Net loss .................................. $ (874,091) $ (3,034,097)
============ ============

Net loss per common share:
Basic ...................................... $ (0.12) $ (0.43)
============ ============
Diluted .................................... $ (0.12) $ (0.43)
============ ============

Weighted average number of common shares:
Basic ...................................... 7,210,810 7,018,324
============ ============
Diluted .................................... 7,210,810 7,018,324
============ ============

The accompanying notes are an integral
part of these consolidated financial statements.

33
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>

COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
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
Exercise of common stock
options ....................... 75,000 750 80,366 -- 81,116
Issuance of financing warrants . -- -- 48,703 -- 48,703
Issuance of common stock ....... 706,340 7,063 590,373 -- 597,436
Net loss ....................... -- -- -- (874,091) (874,091)
--------- ------- ----------- ----------- -----------
Balance, December 31, 1998 ....... 7,832,997 $78,329 $11,514,210 $(6,336,024) $ 5,256,515
========= ======= =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these
consolidated financial statements.

34
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,
---------------------------
1998 1997
---- ----
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss ........................................ $ (874,091) $(3,034,097)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation .................................. 580,674 409,962
Amortization .................................. 248,490 175,907
Bad debt expense .............................. 79,000 72,489
Loss on disposition of businesses ............. -- 478,377
Change in operating assets and liabilities,
net of effect of business acquired:
Accounts receivable ......................... (263,637) 253,718
Note receivable ............................. 78,414 --
Inventories ................................. 37,790 233,456
Other assets and liabilities ................ 22,067 (37,518)
Accounts payable and accrued liabilities .... (17,314) (616,580)
----------- -----------
Net cash used in operating activities ..... (108,607) (2,064,286)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from sale of equipment and property .... 27,267 773,309
Purchase of property and equipment .............. (225,780) (2,950,812)
Acquisition of Tejas Snacks assets .............. (1,251,564) --
Sale of Texas distribution business ............. -- 78,414
----------- -----------
Net cash used in investing activities ......... (1,450,077) (2,099,089)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .......... 81,116 1,253,431
Stock and debt issuance costs ................... (102,713) (157,575)
Proceeds from issuance of debt .................. 500,000 1,734,627
Sale of restricted certificate of deposit ....... -- 1,250,000
Payments made on long-term debt ................. (533,091) (2,133,034)
Net increase in working capital line of credit .. 260,916 234,827
----------- -----------
Net cash provided by financing activities ..... 206,228 2,182,276
----------- -----------

Net decrease in cash and cash equivalents ..... (1,352,456) (1,981,099)
Cash and cash equivalents at beginning of year 1,622,751 3,603,850
----------- -----------
Cash and cash equivalents at end of year ...... $ 270,295 $ 1,622,751
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest,
net of amounts capitalized .................... $ 539,843 $ 474,648
Summary of noncash investing and financing
activities:
Financing warrants issued ................... 48,703 --
Common stock issued for acquisition
of Tejas Snacks assets .................... 450,000 --
Common stock issued in lieu of interest
payments .................................. 154,629 --
Capital lease obligation incurred -
equipment acquisition ..................... -- 100,077
Construction loan for new facility .......... -- 998,746
Mortgage impounds for interest, taxes
and insurance ............................. -- 35,990
Note received for sale of Texas distribution
business .................................. -- 78,414

The accompanying notes are an integral
part of these consolidated financial statements.

35
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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. The exchange transaction with PB Southeast was 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
also 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"). Subsequently, the Company acquired the remaining
20% equity interest in PB Texas. These businesses had no common ownership with
the Company and therefore these acquisitions were accounted for as purchases in
accordance with Accounting Principals Board ("APB") Opinion No. 16. Accordingly,
only the results of their operations subsequent to acquisition have been
included in the Company's results.

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

On November 5, 1998, the Company acquired the business and certain assets
(including the Bob's Texas Style(TM) potato chips brand) of Tejas Snacks, L.P.
("Tejas"), a Texas-based potato chip manufacturer. See Note 2.

BUSINESS OBJECTIVES, RISKS AND PLANS

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 brands of batch-cooked
potato chips under the Poore Brothers(R) and Bob's Texas Style(TM) potato chips
brand names, manufactures private label potato chips for grocery store chains,
and distributes and merchandises snack food products that are manufactured by
others. The Company's business objective is to be a leading regional
manufacturer, marketer and distributor of premium branded and private label
potato chips and other salty snack foods by providing high quality products at
competitive prices that are superior in taste, texture, flavor variety and brand
personality to comparable products. The Company's philosophy is to compete in
the market niches not served by the dominant national competition. The Company
plans to achieve growth in manufactured product sales by acquiring other snack
food brands and increasing sales of existing products. In addition, the Company
plans to increase distribution and merchandising revenues, and continue to
improve its manufacturing capacity utilization.

Although certain of the Company's subsidiaries 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 the Company's unprofitable
distribution business in Texas, closure of its unprofitable Tennessee
manufacturing operation (see Note 3) and the consolidation of all manufacturing
operations into its newly constructed modern manufacturing facility with new
processing and packaging equipment to improve manufacturing efficiencies. These
actions 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 the Company's Texas
distribution business.

The acquisition of the Bob's Texas Style(TM) brand potato chips business in
November 1998 and the addition of that production volume has assisted in
lowering unit costs of the Company's manufactured products. As a result of the
1997 restructuring actions and the 1998 acquisition, management believes that
the Company will generate positive cash flow from operations in 1999, which,
along with its existing working capital and borrowing facilities, should enable
the Company to meet its operating cash requirements through 1999.

36
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 wholly owned 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, 1998 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.

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, 1998 and
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.

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 of the Company's Goodyear, Arizona facility in 1997,
the Company capitalized interest in accordance with Statement of Financial
Accounting Standards (SFAS) No. 34, "Capitalization of Interest Cost."
Capitalized interest totaled $30,492 during 1997. Total interest costs incurred
were $561,409 and $486,308 during 1998 and 1997, respectively.

INTANGIBLE ASSETS

Organization costs are recorded at cost and are amortized using the
straight-line method over a five-year period. Total organizational costs are
$257,051 at December 31, 1998 and 1997. Accumulated amortization is $185,420 and
$133,988 at December 31, 1998 and 1997, respectively. In accordance with
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," the
unamortized portion of organizational costs totaling $71,631 must be expensed in
the first quarter of 1999.

37
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)

INTANGIBLE ASSETS (CONTINUED)

Goodwill is recorded at cost and amortized using the straight-line method
over a twenty-year period. 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 flows. Total goodwill was $2,608,742 and $2,487,080 at
December 31, 1998 and 1997, respectively, including $121,662 from the November
1998 Tejas acquisition (see Note 2). Accumulated amortization was $445,356 and
$315,819 at December 31, 1998 and 1997, respectively.

Trademarks are recorded at cost and are amortized using the straight-line
method over a fifteen-year period. The Company allocated $1,500,000 of the Tejas
purchase price to trademarks. Accumulated amortization was $11,111 at December
31, 1998.

REVENUE RECOGNITION

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

ADVERTISING COSTS

The Company expenses production costs of advertising the first time the
advertising takes place, except for cooperative advertising costs which are
accrued and expensed when the related sales are recognized. Costs associated
with obtaining shelf space (i.e., "slotting fees") are expensed in the year in
which such costs are incurred by the Company. Advertising expenses were
approximately $469,000 and $345,000 in 1998 and 1997, respectively.

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

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 to be exercised for purposes of calculating diluted
earning per share for the years 1998 and 1997, as their effect was
anti-dilutive.

YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997
---- ----
Basic loss per share:
Loss available to common shareholders .... $ (874,091) $(3,034,097)
Weighted average common shares ........... 7,210,810 7,018,324
----------- -----------
Loss per share - basic ................ $ (0.12) $ (0.43)
=========== ===========
Diluted loss per share:
Loss available to common shareholders .... $ (874,091) $(3,034,097)
Weighted average common shares ........... 7,210,810 7,018,324
Common stock equivalents ................. -- --
----------- -----------
Loss per share - diluted .............. $ (0.12) $ (0.43)
=========== ===========

38
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)

NEW ACCOUNTING PRONOUNCEMENTS

SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities", was issued in July 1998 and is effective for years beginning after
June 15, 1999. SFAS No. 133 requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. Upon adoption in the first quarter of 2000, the Company expects
there will be no impact on its financial condition or results of operations.

2. ACQUISITION

On November 5, 1998, the Company acquired the business and certain assets
of Tejas Snacks, L. P., a Texas-based potato chip manufacturer. The assets,
which were acquired through a newly formed wholly owned subsidiary of the
Company, Tejas PB Distributing, Inc., included the Bob's Texas Style(TM) potato
chips trademark, inventories and certain capital equipment. In exchange for
these assets, the Company issued 523,077 unregistered shares of Common Stock
with a fair value of $450,000 and paid $1.25 million in cash, or a total
purchase price of $1.7 million. The Company utilized available cash as well as
funds available pursuant to the Norwest Credit Agreement to satisfy the cash
portion of the consideration. Tejas had sales of approximately $2.8 million for
the nine months ended September 30, 1998. In connection with the acquisition,
the Company transferred production of the Bob's Texas Style(TM) brand potato
chips to its Arizona facility. The acquisition was accounted for using the
purchase method of accounting in accordance with APB Opinion No. 16.
Accordingly, only the results of operations subsequent to the acquisition date
have been included in the Company's results. In connection with the acquisition,
the Company recorded goodwill of $121,662, which is being amortized on a
straight-line basis over a twenty-year period.

3. RESTRUCTURING ACTIONS

Effective June 1, 1997, the Company sold its Texas distribution business to
Mr. David Hecht ("Hecht"), pursuant to an Asset Purchase, Licensing and
Distribution Agreement (the "Agreement"). Under the Agreement, Hecht 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 Hecht in cash at the closing and 50% of which was to be
paid pursuant to a one year, non-interest bearing promissory note issued by
Hecht to the Company (paid in May 1998). As a result, the PB Texas distribution
operation has been dissolved. The Company incurred one-time restructuring
charges of approximately $164,000 related to the sale, including 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 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 the 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 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 represented 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, a $162,000 State of Tennessee Commercial Development
Block Grant was paid off using working capital in January 1998.

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.

39
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

4. RESTRUCTURING ACTIONS: (CONTINUED)

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)
=========== ===========
4. 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
$106,165 and $542,957 at December 31, 1998 and 1997, 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. The Company buys back trade accounts
receivable of Arizona-based retailers from its distributors in settlement of
their obligations to the Company.

5. INVENTORIES:

Inventories consisted of the following:

DECEMBER 31,
--------------------------
1998 1997
---- ----
Finished goods ......................... $193,624 $226,298
Raw materials .......................... 271,414 246,727
-------- --------
$465,038 $473,025
======== ========
6. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following:

DECEMBER 31,
-----------------------------
1998 1997
---- ----
Buildings and improvements ............ $ 3,430,572 $ 3,378,988
Equipment ............................. 3,490,140 3,296,134
Land .................................. 272,006 272,006
Vehicles .............................. 75,376 81,333
Furniture and office equipment ........ 204,432 207,242
----------- -----------
7,472,526 7,235,703
----------- -----------
Less accumulated depreciation
and amortization .................... (1,202,152) (633,268)
----------- -----------
$ 6,270,374 $ 6,602,435
=========== ===========

Depreciation expense was $580,674 and $409,962 in 1998 and 1997,
respectively.

40
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

6. PROPERTY AND EQUIPMENT: (CONTINUED)

Included in equipment are assets held under capital leases with an original
cost of $1,315,657 at December 31, 1998 and 1997 and accumulated amortization of
$407,756 and $162,126 at December 31, 1998 and 1997, respectively.

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.

7. LONG-TERM DEBT:

Long-term debt consisted of the following:

DECEMBER 31,
-------------------------
1998 1997
---- ----
Convertible Debentures due in monthly
installments through July 1, 2002; interest
at 9%; collateralized by land, buildings,
equipment and intangibles .................... $ 2,229,114 $ 2,299,591
Term loan due in monthly installments
through May 1, 2000; interest at prime
rate plus 3% (10.75% at December 31, 1998);
collateralized by accounts receivable,
inventories, equipment and general
intangibles .................................. 472,222 --
Working capital line of credit due November 4,
2001; interest at prime rate plus 1.50%
(9.25% at December 31, 1998); collateralized
by accounts receivable, inventories, equipment
and general intangibles ...................... 847,013 --
Working capital line of credit; paid in full
in 1998 ...................................... -- 586,097
Notes payable; paid in full in 1998 ............ -- 162,201
Mortgage loan due in monthly installments
through July 2012; interest at 9.03%;
collateralized by land and building .......... 1,965,921 1,989,147
Capital lease obligations due in monthly
installments through 2002; interest rates
ranging from 8.19% to 11.3%; collateralized
by equipment ................................. 858,496 1,107,905
----------- -----------
6,372,766 6,144,941
Less current portion ........................... (652,519) (1,127,217)
----------- -----------
$ 5,720,247 $ 5,017,724
=========== ===========

Annual maturities of long-term debt are as follows:

DECEMBER 31, 1998
-----------------
1999................................... $ 652,519
2000................................... 650,984
2001................................... 1,310,475
2002................................... 1,909,790
2003................................... 36,419
Thereafter............................. 1,812,579
-----------
$ 6,372,766
===========

On June 4, 1997, the Company refinanced the balance of the construction
loan ($998,746) for its Goodyear, Arizona facility with permanent financing. The
permanent financing, provided by Morgan Guaranty Trust Company of New York, is a
$2.0 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 8).

41
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

7. LONG-TERM DEBT: (CONTINUED)

At December 31, 1998, the Company had outstanding 9% Convertible Debentures
due July 1, 2002 in the principal amount of $2,229,114. 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 November 1999 through June 2002. For the period November 1,
1998 through October 31, 1999, Renaissance Capital (the holder of $1,718,094 of
9% Convertible Debentures) agreed to waive all mandatory principal redemption
payments and to accept 183,263 unregistered shares of the Company's Common Stock
in lieu of cash interest payments. As of December 31, 1998, 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 1.0:1(actual of .92:1). However, the holders of the
9% Convertible Debentures had previously granted the Company a waiver as to such
financial ratio effective through June 30, 1999. As consideration for the
granting of such waiver, as of February 1998 the Company issued warrants to
Renaissance Capital and Wells Fargo, the holders of the 9% Convertible
Debentures, representing the right to purchase 25,000 and 7,143 shares of the
Company's Common Stock, respectively, at an exercise price of $1.00 per share.
Each warrant became exercisable upon issuance and expires on July 1, 2002. In
the 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 Company is currently
in compliance with the other financial ratios, including working capital of at
least $500,000; a minimum of $4,500,000 shareholders' equity; and a current
ratio at the end of any fiscal quarter of at least 1.1:1. Management believes
that the achievement of the Company's plans and objectives will enable the
Company to attain a sufficient level of profitability to be in compliance with
the financial ratios. 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. Any acceleration under the 9% Convertible
Debentures prior to their maturity on July 1, 2002 could have a material adverse
effect upon the Company.

On November 4, 1998, the Company signed the new $2.5 million Norwest Credit
Agreement which includes a $2.0 million working capital line of credit (the
"Norwest Line of Credit") and a $0.5 million term loan (the "Norwest Term
Loan"). Borrowings under the Norwest Credit Agreement have been used to pay off
borrowings under the Company's $1,000,000 Line of Credit with First Community
Financial Corporation, to finance a portion of the consideration paid by the
Company in connection with the Tejas acquisition, and for general working
capital needs. The Norwest Line of Credit bears interest at an annual rate of
prime plus 1.5% and matures in November 2001 while the Norwest Term Loan bears
interest at an annual rate of prime plus 3% and requires monthly principal
payments of approximately $28,000, plus interest, until maturity on May 1, 2000.
The Norwest Line of Credit is secured by receivables, inventories, equipment and
general intangibles. Borrowings under the Norwest Line of Credit are based on
85% of eligible receivables and 60% of eligible inventories. As of December 31,
1998, the Company had a borrowing base of approximately $1,374,000 under the
Norwest Line of Credit. The Norwest Credit Agreement requires the Company to be
in compliance with certain financial performance criteria, including minimum
debt service coverage ratio, minimum quarterly and annual operating results, and
minimum quarterly and annual changes in book net worth. At December 31, 1998,
the Company was not in compliance with a maximum quarterly net loss limitation
of $50,000 (actual net loss of $146,366) and a minimum debt service coverage
ratio requirement of not less than 0.50 to 1 (actual of 0.30 to 1) under the
Norwest Credit Agreement. Such non-compliance has not to date resulted in an
event of default under the Norwest Credit Agreement because Norwest granted the
Company a waiver for the period ended December 31, 1998 and agreed to modify the
financial ratio requirements for future periods. Management believes that the
fulfillment of the Company's plans and objectives will enable the Company to
attain a sufficient level of profitability to be in compliance with the
financial performance criteria; however, there can be no assurance that the
Company will attain any such profitability or be in compliance. Any acceleration
under the Norwest Credit Agreement could have a material adverse effect upon the
Company. As of December 31, 1998, there was an outstanding balance of $847,013
on the Norwest Line of Credit and $472,222 on the Norwest Term Loan. On November
4, 1998, pursuant to the terms of the Norwest Credit Agreement, the Company
issued to Norwest a warrant (the "Norwest Warrant") to purchase 50,000 shares of
Common Stock for an exercise price of $0.93375 per share. The Norwest Warrant is
exercisable until November 3, 2003, the date of termination of the Norwest
Warrant, and provides the holder thereof certain demand and piggyback
registration rights.

The Company's $1.0 million working capital line of credit from First
Community Financial Corporation was renewed as of May 31, 1998 for a six-month
period. In November 1998, the outstanding balance was paid off from borrowings
under the Norwest Credit Agreement.

42
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

8. COMMITMENTS AND CONTINGENCIES:

Rental expense under operating leases was $34,632 for each of the years 1998
and 1997. Minimum future rental commitments under non-cancelable leases as of
December 31, 1998 are as follows:

CAPITAL OPERATING
LEASES LEASES TOTAL
------ ------ -----
1999 ............................ $ 328,862 $34,632 $ 363,494
2000 ............................ 307,410 25,974 333,384
2001 ............................ 230,837 -- 230,837
2002 ............................ 131,309 -- 131,309
------- ------- ----------
Total ........................... 998,418 $60,606 $1,059,024
======= ==========
Less amount representing
interest....................... (139,922)
---------
Present value ................... $ 858,496
=========

9. CAPITAL STOCK:.

In January 1997, the Company sold 337,500 shares of Common Stock pursuant
to an over-allotment option granted to the underwriter of its initial public
offering in December 1996. 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.

The Company's 9% Convertible Debentures (see Note 7) are convertible into
2,229,114 shares of Common Stock at a conversion price of $1.00 per share,
subject to anti-dilution adjustments.

In connection with the Company's facility construction loan in September
1996, an independent investor provided collateral. As consideration for
providing the 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. Certain other
warrants have been issued in connection with financings (see Note 7).

As of August 19, 1998, the Company issued a warrant to Everen Securities,
Inc, the Company's acquisitions and financial advisor, representing the right to
purchase 296,155 unregistered shares of Common Stock at an exercise price of
$.875 per share and expiring in August 2003. The warrant provides the holder
thereof certain anti-dilution and piggyback registration rights. The warrant is
exercisable as to 50% of the shares when the Company's pro forma annual sales
reach $50 million and as to the remaining 50% when the Company's pro forma
annual sales reach $100 million.

10. 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 years. 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. At December 31,
1998, outstanding options have exercise prices ranging from $1.08 to $3.94 per
share.

43
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

10. STOCK OPTIONS: (CONTINUED)

During 1997 and 1998, 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, 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
Granted................... 855,400 1.18 --
Canceled.................. (625,334) 3.20 --
Exercised................. (75,000) 1.08 --
--------- -------
Balance, December 31, 1998..... 1,222,684 1.66 820,000 1.18
========= =======
</TABLE>
At December 31, 1998, outstanding Plan options had exercise prices ranging
from $1.01 to $3.88 and a weighted average remaining term of 4.0 years. Plan
options that were exercisable at December 31, 1998 totaled 330,650 with a
weighted average exercise price per share of $2.47. All Non-Plan options were
exercisable at December 31, 1998 and had an average remaining term of 6.5 years.

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.

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 1998
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:

YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---- ----
Net loss - as reported ............. $ (874,091) $(3,034,097)
Net loss - pro forma ............... (1,163,000) (3,438,253)
Basic net loss per share of
common stock - as reported ....... (0.12) (0.43)
Basic net loss per share of
common stock - pro forma ......... (0.16) (0.49)

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 121% and 72%;
risk-free interest rate of 4.93% and 6.20%; and expected lives of 3 years for
1998 and 1997, respectively. Under this method, the weighted average fair value
of the options granted was $.72 and $1.68 per share in 1998 and 1997,
respectively.

44
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

11. INCOME TAXES:

There was no current or deferred benefit for income taxes for the years
ended December 31, 1998 and 1997. 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,
----------------------------
1998 1997
---- ----
Benefit at statutory rate ........ $ 297,191 $ 1,031,593
State income tax, net ............ 47,809 158,407
Valuation allowance .............. (345,000) (1,190,000)
========= ===========
$ 0 $ 0
========= ===========

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,
----------------------------
1998 1997
---- ----
Net operating loss carryforward .... $ 2,215,000 $ 1,830,000
Bad debt expense ................... 10,000 70,000
Accrued liabilities ................ 30,000 10,000
----------- -----------
2,255,000 1,910,000
Valuation allowance ................ (2,255,000) (1,910,000)
----------- -----------
Net deferred tax assets ....... $ 0 $ 0
=========== ===========

At December 31, 1998, the Company had net operating losses available for
federal and state income taxes of approximately $5,510,000. 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 No. 109. The Company's accumulated net operating losses
expire in varying amounts between 2010 and 2018.

12. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS:

For the year ended December 31, 1998, one Arizona grocery chain customer of
the Company accounted for $2,067,000, or 16% of the Company's consolidated net
sales. 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 for the year ended December 31, 1997.

The Company's operations consist of two segments: manufactured products and
distributed products. The manufactured products segment produces potato chips
for sale to snack food distributors. The distributed products segment sells
other snack food products manufactured by other companies to the Company's
Arizona snack food distributors and also merchandises in Texas for a fee, but
does not purchase and resell, snack food products for manufacturers. The
Company's reportable segments offer different products and services. All of the
Company's revenues are attributable to external customers in the United States
and all of its assets are located in the United States. The Company does not
allocate assets based on its reportable segments.

The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies (Note 1). The Company does not
allocate selling, general and administrative expenses, income taxes or unusual
items to segments and has no significant non-cash items other than depreciation
and amortization.

45
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

12. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS: (CONTINUED)

MANUFACTURED DISTRIBUTED
PRODUCTS PRODUCTS CONSOLIDATED
-------- -------- ------------
1998
- ----
Revenues from external customers ...... $10,285,805 $2,882,188 $13,167,993
Depreciation and amortization
included in segment gross profit .... 577,413 -- 577,413
Segment gross profit .................. 2,897,374 346,729 3,244,103

1997
- ----
Revenues from external customers ...... 11,221,088 4,510,709 15,731,797
Depreciation and amortization
included in segment gross profit .... 363,385 -- 363,385
Segment gross profit .................. 1,723,547 298,270 2,021,817

The following table reconciles reportable segment profit to the Company's
consolidated loss before income taxes:

1998 1997
---- ----
Segment gross profit ......................... $ 3,244,103 $ 2,021,817
Unallocated amounts:
Selling, general and administrative expenses 3,603,156 3,982,428
Loss on disposition of businesses .......... -- 745,875
Interest expense, net ...................... 515,038 327,611
----------- -----------
Loss before income taxes ..................... $ (874,091) $(3,034,097)
=========== ===========

13. LITIGATION:

In September 1997, a lawsuit was commenced against PB Distributing by Chris
Ivey and his company, Shelby and Associates (collectively, "Ivey"). The
complaint alleged, 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 suffered damages of at least
$390,000. In July 1998, the Company settled the litigation with Ivey. The
$13,000 settlement included the release of all claims and the dismissal of the
lawsuit.

14. RELATED PARTIES:

The Company paid $67,600 to a company owned by the brother of Mark S.
Howells, the Company's Chairman, for construction management services related to
the Company's Goodyear, Arizona manufacturing facility from February 1997 to
October 1997.

46
<PAGE>
EXHIBIT INDEX

21.1 List of subsidiaries of Poore Brothers, Inc.
27.1 Financial Data Schedule for 1998

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
Tejas PB Distributing, Inc. Arizona

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE RELATED CONSOLIDATED
STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 270,295
<SECURITIES> 0
<RECEIVABLES> 1,736,955
<ALLOWANCES> 24,000
<INVENTORY> 465,038
<CURRENT-ASSETS> 2,730,282
<PP&E> 7,472,526
<DEPRECIATION> 1,202,152
<TOTAL-ASSETS> 12,938,889
<CURRENT-LIABILITIES> 1,962,127
<BONDS> 5,720,247
0
0
<COMMON> 78,329
<OTHER-SE> 5,178,186
<TOTAL-LIABILITY-AND-EQUITY> 12,938,889
<SALES> 13,167,993
<TOTAL-REVENUES> 13,167,993
<CGS> 9,923,890
<TOTAL-COSTS> 9,923,890
<OTHER-EXPENSES> 3,603,156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 515,038
<INCOME-PRETAX> (874,091)
<INCOME-TAX> 0
<INCOME-CONTINUING> (874,091)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (874,091)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)

</TABLE>