10-K 1 c68419e10-k.txt ANNUAL REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 Commission File Number 1-13747 ATLANTIC PREMIUM BRANDS, LTD. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 36-3761400 (STATE OF INCORPORATION) (I.R.S. EMPLOYER ID NO.) 650 Dundee Road, Suite 370, Northbrook, Illinois 60062 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (847) 412-6200 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- Common Stock, $.01 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO | | Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. | | The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant, based upon the last reported closing price of the registrant's Common Stock on March 14, 2002: $16,768,634 The number of shares outstanding of the registrant's Common Stock, par value $.01, as of March 14, 2002: 6,734,391. DOCUMENTS INCORPORATED BY REFERENCE None. ================================================================================ PART I ITEM 1. BUSINESS GENERAL Our company, through our subsidiaries' operations in Texas, Louisiana and Oklahoma, processes, markets and distributes branded and unbranded food products for customers in a nineteen state region. Our subsidiaries are: Carlton Foods Corp. ("Carlton"), Grogan's Farm, Inc. ("Grogan's"), Potter Sausage Co. ("Potter"), Prefco Corp. ("Prefco"), and Richard's Cajun Foods Corp. ("Richard's"). Through Carlton, we process a variety of smoked sausage products. Approximately 50% of the total volume processed is sold through Prefco under the Blue Ribbon(R) brand name. Approximately 13% of the total volume processed is sold through Potter under the J.C. Potter(R) brand name. Approximately 26% of the total volume processed reflects private label products processed for other regional sausage brands and retail grocery chains, or is sold by Carlton under the brand names Carlton and Country Boy(TM). These branded products are marketed on a regional basis, principally in south and west Texas. Through Prefco, we engage in the marketing and distribution of branded and unbranded meats to the retail grocery trade. We market and distribute our branded meat products under the brand name Blue Ribbon(R) and Blue Ribbon Texas Traditions. These products, which include ready to eat entrees, smoked sausages, bacon and packaged, sliced luncheon meats, account for approximately 29% of the sales of Prefco and are processed by Carlton as well as by third party contract processing companies. Blue Ribbon(R) is currently the best selling brand of bacon in the Houston market. In addition to marketing our own branded products, we are also a leading regional distributor of unbranded products including boxed beef, pork, chicken and related items. Through Potter, we process, market and distribute premium, branded breakfast sausage, primarily in Oklahoma, Arkansas and Texas. These products are sold under the J.C. Potter brand name and are generally delivered to the retail grocery trade through our distribution system. In addition, Potter processes products for other branded food companies on a private-label basis. Potter is a supplier to Prefco and a customer of Carlton. Through Richard's, we process, market and distribute Cajun-style, cooked, pork sausage products and specialty foods for customers in Louisiana under the brand name Richard's(TM) and Richard's Cajun Favorites(TM). CORPORATE HISTORY In September 1991, Maryland Beverage, L.P. (the "Partnership") was formed with our company and Strategic Investment Corporation ("Strategic"), a wholly owned subsidiary of T. Rowe Price Strategic Partners Fund, L.P., as its sole partners. In September 1993, our company was reincorporated in Delaware and adopted the name "Atlantic Beverage Company, Inc." In November 1993, in connection with our initial public offering, Strategic (whose only asset was its interest in the Partnership) merged with and into us. In the first quarter of 1996, a newly formed, wholly-owned subsidiary of our company, Prefco, acquired the outstanding common stock of Prefco, Inc. Also in the first quarter of 1996, Carlton Foods, Inc. was merged into another newly formed, wholly-owned subsidiary of our company, Carlton. In August 1996, a newly formed, wholly-owned subsidiary of our company, Richard's, acquired certain of the assets of Richard's Cajun Country Food Processors. In October 1996, Grogan's Merger Corp. ("GMC"), our newly formed, wholly-owned subsidiary, acquired and merged with the distribution and processing business of Grogan's Sausage, Inc. and Grogan's Farm, Inc., respectively, based in Arlington, Kentucky. In February 2002, we sold substantially all of this subsidiary's assets which remained after the October 13, 2000 fire as discussed more fully in Note 16 to our Consolidated Financial Statements. In March 1998, our company and Potter, a newly-formed subsidiary, acquired substantially all of the assets of J.C. Potter Sausage Company, a branded food processing company based in Durant, Oklahoma. During the end of the fourth quarter of 1998 and the beginning of the first quarter of 1999, we completed the sale of substantially all the assets of our beverage division. We classified the beverage division's historic results of operations and the loss incurred upon the disposal of assets as a discontinued operation. As a result of the disposition of our beverage division, our operations now consist solely of the food businesses. INDUSTRY Following the disposition of our beverage division, our operations have consisted of two business segments: food processing and food distribution. Note 17 to our Consolidated Financial Statements provides summarized financial information by business segment for continuing operations for the last three fiscal years. We participate in these two segments of the food industry through our Carlton, Prefco, Richard's and Potter subsidiaries. The food processing segment, which includes cooking, slicing, mixing, grinding and similar functions, is generally capital intensive. Unbranded raw material typically comes from packing companies. In some instances in the packaged meat industry, packing and processing are vertically integrated. In other instances, as is the case with our company, processing and distribution are vertically integrated. Because of the cost of transportation and shelf-life of the products, processing facilities tend to serve a regional clientele. Large national meat companies therefore tend to establish strategically located processing facilities in different geographic regions. The food distribution segment, which serves several different classes of customers including retail, restaurant and institutional customers, is generally not capital intensive but provides lower gross margins and is subject to intense price competition. Product is generally invoiced and priced according to weight. Successful distributors typically distinguish themselves through customer service and lower prices. Price, product selection, reliability, in-stock rate, promptness of delivery and weekend delivery options are among the benefits which are most highly valued. It is not uncommon for a grocery retailer to have one primary supplier in addition to one or more secondary suppliers. Food distribution companies typically serve a local or regional clientele. We market our branded packaged meat business. The branded packaged meat business is generally not capital intensive. Strong retail brands exist at local, regional or national levels and include bacon, hot dogs, cooked and uncooked sausage, cooked hams, chicken and turkey products. Advertising and promotion are generally critical to the maintenance of brand equity. Companies which market branded meat products can exist on a stand-alone basis as well as be vertically integrated with processing and/or distribution. We reflect, to a limited extent, both forms of vertical integration. STRATEGY Our operating strategy is to grow our food businesses profitably, while identifying and exploiting synergies among them. Key elements of this operating strategy include increasing sales to existing customers, adding new customers and identifying opportunities to add new products. In addition, we may acquire businesses which are complementary to our existing subsidiaries. PRODUCTS Through Prefco, we distribute a wide variety of unbranded, boxed meat products. We maintain an inventory of over 200 different stock keeping units of unbranded products, which include beef, turkey, pork and chicken. Products are stored in our refrigerated warehouses in Houston and are delivered on refrigerated vehicles to several hundred customers including chain and independent supermarkets and discount clubs. We purchase products from approximately ten meat packing companies. Purchases of the same products may be spread among several suppliers over the course of a year, and purchasing decisions are frequently driven by price and availability, both of which are likely to vary. Two suppliers accounted for approximately 15.9% and 10.7% of our boxed meat purchases during 2001 and 11.6% and 10.8% of such purchases during 2000. No other supplier accounted for more than 10% of such purchases during either year. Also through Prefco, we market and distribute our own branded dinner entrees, sausage, bacon and packaged, sliced luncheon meats. These products are stored in our refrigerated warehouses in Houston. Products are delivered on our refrigerated trucks, and customers typically include the same retail establishments that purchase our unbranded meat products. The majority of Blue Ribbon(R) sausage product is processed by Carlton. The balance of the sausage product as well as the dinner entrees, bacon and luncheon meats are purchased from a number of other contract food processing companies. In addition to processing product for Prefco, Carlton processes, markets and distributes its own branded smoked sausage products for the retail grocery trade. Carlton processes similar products on a private label basis for other branded food companies. Through Richard's, we process, market and distribute Cajun-style, cooked pork sausage products and specialty foods for customers in Louisiana under the brand names Richard's(TM) and Richard's Cajun Favorites(TM). Through our Potter subsidiary, we process, market and distribute premium, branded breakfast sausage, primarily in Oklahoma, Arkansas and Texas. These products are sold under the J.C. Potter brand name and are generally delivered to the retail grocery trade through our distribution system. In addition, Potter processes products for other branded food companies on a private-label basis. Potter is a supplier to Prefco and a customer of Carlton. SALES, MARKETING AND DISTRIBUTION Prefco distributes unbranded boxed beef, pork, and poultry to chain and independent retail grocery customers, most of whom are located in the Houston metropolitan area, and all of whom are within a 400-mile radius of our distribution facilities. We serve several hundred customers as either their primary or secondary fresh meat supplier. Prefco's direct sales force contacts its customers on a daily basis. We deliver product using refrigerated trucks, generally within one to three days of receiving an order. Prefco also markets and distributes its own Blue Ribbon(R) and Blue Ribbon Texas Traditions dinner entrees, bacon, sausage and sliced luncheon meats to the retail grocery trade. Orders are received by the direct sales force and from the sales force managing the route sales vehicles. The business has historically engaged in significant radio and television advertising in the Houston market. Carlton solicits and receives customer orders for branded product through direct salespeople as well as through third-party food brokers and by telephone and facsimile transmission. Relationships with private label customers are generally established at the senior management level, although recurring orders from these customers are normally received over the telephone or facsimile machine by clerical staff. Branded and private label orders are generally filled within one to seven days and are either delivered on one of Carlton's refrigerated vehicles, by common carrier, or are picked up by customers. Richard's employs a route delivery sales force. Orders are taken by the route salespeople and filled immediately from stock on board the route sales trucks. Richard's engages in promotions, including in-store sampling, as well as print advertising. All customers are located within the state of Louisiana. Potter also employs a route delivery sales force. Orders are taken by the route salespeople and filled immediately from stock on board the route sales trucks. Potter engages in promotions, including in-store sampling, as well as in print, radio and television advertising. Customers are located in Arkansas, Oklahoma and Texas. One food distribution customer, Sam's Club Inc., accounted for approximately 30% of our total net sales during 2000 and 1.1% during 2001. Another customer accounted for 14% of our total net sales during 2001. No other customer accounted for more than 10% of total net sales during either year. On August 22, 2000, we announced the termination of our distribution arrangement with Sam's Club Inc. While Sam's Club Inc. accounted for a significant percentage of net sales in 2000 and prior years, the gross margin on sales to Sam's has been significantly lower than our sales to other customers. ASSET MANAGEMENT Accounts Receivable. Sales are made almost exclusively on account, and accounts receivable typically average 15 to 20 days. Inventory. We maintain our inventory at our distribution and processing facilities operated by Prefco in Houston, Texas, by Carlton in New Braunfels, Texas, by Richard's in Church Point, Louisiana and by Potter in Durant, Oklahoma, and Malvern, Arkansas. We generally maintain an average of 7 to 9 days of inventory on hand, which reflects approximately 4 to 6 days of inventory at Prefco, approximately 10 to 12 days of inventory at Carlton, approximately 14 to 16 days of inventory at Richard's and approximately 12 to 14 days of inventory at Potter. We typically place purchase orders with our suppliers by telephone and by facsimile on a daily basis. Orders are placed both on an as-needed basis and on a scheduled basis in anticipation of future demand. Orders are usually filled within one to ten days, and products are transported to our warehouses by common carrier. COMPETITION Food Distribution. Through Prefco, we believe that we are the second largest of four major boxed meat distributors in the Houston market. Although this segment of the food industry is extremely competitive, we believe that we have generally succeeded in distinguishing ourselves through a high level of customer service. Food Processing. Through Potter, Prefco, Carlton and Richard's, we compete with several branded meat companies, and our brands compete with a wide variety of both regional and national brands. Among the competitive brands are Decker, J. Bar B., Hilshire Farms, Hormel, Bryan, Bob Evans and Jimmy Dean. Our Carlton(TM) and Country Boy(TM) brands of smoked sausage are sold principally in the Dallas, San Antonio and Austin markets and currently have limited market share. The Company's Blue Ribbon(R) brand currently represents the best selling brand of bacon in the Houston market. Our packaged, sliced luncheon meats and entrees were introduced to the Houston market in 1995 and 1998, respectively, and currently have limited market share. Our Richard's(TM) and Richard's Cajun Favorites brands enjoy a strong regional share within their respective markets. Through Carlton and Potter, we process smoked sausage and meat products on a private label basis for other branded food companies and, on a limited basis, for supermarkets and restaurants. We believe that we enjoy a strong reputation for innovation and responsiveness in creating original recipes for these customers. We compete with a wide variety of processors, many of whom are significantly larger and may have greater processing capacity and capital. GOVERNMENT REGULATION We are subject to various federal, state and local statutes, including federal occupational safety and health laws. Furthermore, we and our suppliers are subject to various rules and regulations including those of the United States Department of Agriculture, the United States Food and Drug Administration and similar state agencies that relate to processing, nutritional disclosure, labeling requirements and product names. PRODUCT LIABILITY AND INSURANCE We believe that our present insurance coverage is sufficient for our current level of business operations, although there is no assurance that the present level of coverage will be available in the future or at a reasonable cost. Further, there can be no assurance that such insurance will be available in the future as we expand our operations, that insurance, if available, will be sufficient to cover one or more large claims, or that the applicable insurer will be solvent at the time of any covered loss. EMPLOYEES We currently have a total of approximately 497 employees, including five corporate employees, 55 employees at Prefco, 65 employees at Carlton, 93 employees at Richard's and 276 employees at Potter. In addition, we use temporary employees from time to time. We believe that our relations with employees are good. We have never suffered a material work stoppage or slow down. RISK FACTORS In addition to other information contained in this Form 10-K, the following factors should be considered in evaluating our company and our business. These factors may have a significant impact on our business, operating results and financial condition. INDUSTRY RISK Commodity price fluctuations have a significant impact on our business. We are a purchaser of pork and other meat products. Pork prices have a significant impact on our cost of goods sold. We buy pork and other meat products based upon market prices that are established with the vendor as part of the purchase process. The market price is determined in the marketplace based on factors outside our control. We may not be able to pass the effect of raw material price increases onto our customers for any extended period of time, if at all. As a result, increases in pork prices may have a materially adverse effect on our operating results. We do not use commodity financial instruments to hedge pork and other meat product prices. As a participant in the food industry, we are subject to various risks which may affect our business. The food industry, and the markets within the food industry in which we compete, are subject to various risks, including: - federal, state and local food inspection and processing controls; - the limited shelf life of food products; - evolving consumer preferences; - nutritional and health-related concerns; - risks of product tampering; - consumer product liability claims; - the availability and expense of liability insurance; and - adverse changes in general economic conditions. We may not compete effectively with competitors that have more resources and greater market share than us. Our business is highly competitive. We compete with a wide variety of processors, many of whom are significantly larger and may have greater processing capacity and financial resources. Our brands also compete with a wide variety of both regional and national brands. Some of our larger national, regional and local competitors have multiple product lines and greater brand name recognition. Competition in the markets we serve is based primarily on quality, service and price. There can be no assurance that we can compete successfully with other competitor companies and maintain adequate market share. We do not have long term contracts with any of our customers. Competitive pressures or other factors could cause our products to lose market share or result in significant price erosion, which would have a material adverse effect on our results of operations. As a participant in the food industry, we are subject to extensive governmental regulations. Our production facilities and products are subject to numerous federal, state and local laws and regulations concerning among other things, health and safety matters, food processing, product labeling, advertising and the environment. There can be no assurance that we will be able to maintain compliance with existing laws or regulations or that we will be able to comply with any future laws or regulations. Our failure to comply with applicable laws and regulations would subject us to civil remedies, including withdrawal of the necessary United States Department of Agriculture approvals, inspection, fines, injunctions, recalls or seizures, as well as potential criminal sanctions, any of which would have a material adverse affect on us. Consumer demand for our products is reduced when there are outbreaks of illness associated with meat or poultry products. The meat and poultry industries have recently been subject to increasing scrutiny due to the association of meat and poultry products with recent outbreaks of illness, and on rare occasions even death, caused by foodborne pathogens such as E. coli, Salmonella and others which are found in raw and improperly cooked meat. Consumer demand for meat and poultry fluctuates as the result of such outbreaks of illness. Product recalls are sometimes required in the meat and poultry industries to withdraw contaminated products from the market. Product recalls would cause our expenses to be higher and the reduction in demand for our products would adversely affect our results of operations and financial condition. COMPANY RISK If consumers do not like our products, our prospects for growth will be limited. Our business is dependent upon continued growth in consumer interest in our products. There can be no assurance that the demand for our products can be sustained in the future. In addition, part of our operating strategy is to identify opportunities to add new products. There can be no assurance that consumers will accept new products we develop or that we can attain sufficient market share for our products. Customer and supplier concentration subjects our company to risks related to these third parties. We derive most of our sales from retail grocery customers situated near our local and regional operations. Adverse developments affecting these customers or a decision by a corporate owner or franchisor to revoke its approval of us as a distributor of branded or unbranded meat products could have a material adverse effect on our operating results. In addition, our continued growth is dependent in part 8 on the continued growth and expansion of our customers. The loss of any of our major customers could have a material adverse effect on our business. We purchase product from approximately ten meat packing companies. There can be no assurance that meat availability will be maintained at a sufficient level or that any of our suppliers will make timely delivery of their products to us. Failure to receive products in a timely manner for these or other reasons could have a material adverse effect on us. We do not have long-term contracts with our suppliers. Loss of services of principal members of management could make it difficult to implement our business plan. We are highly dependent on the principal members of our management. The loss of certain key management personnel, in particular Alan F. Sussna and Thomas M. Dalton, could have a material adverse effect on us. Our ability to integrate acquired businesses will impact our ability to grow. We have achieved a significant portion of our growth through acquisitions and may continue to pursue acquisitions. We will have to integrate acquired businesses into our existing business, including our prior acquisitions. There can be no assurance that we will be able to meet performance expectations or successfully integrate these businesses on a timely basis without disruption in the quality and reliability of service to our customers or diversion of management resources. INVESTMENT RISK A large percentage of our common stock is concentrated in a small number of stockholders who can influence matters requiring stockholder approval. Our directors and officers, and persons related to them, hold in excess of 35% of the outstanding shares of our common stock. Accordingly, these stockholders have the ability to substantially influence the outcome of all corporate actions requiring stockholder approval, including the election of the directors, and to influence our policies and direction. It may be difficult for a stockholder to sell his or her stock due to the illiquid market for our stock. Because there are relatively few stockholders and a substantial percentage of the shares of our common stock are held by a few persons, our common stock is relatively illiquid. As a result, a stockholder wishing to sell may find it difficult to do so expeditiously. In addition, no predictions can be made as to stability or volatility of our stock price. If our common stock is delisted from the American Stock Exchange, the liquidity, visibility and price of our common stock may decrease. Since December 31, 1997, our common stock has been listed on the American Stock Exchange (AMEX). Shares of our common stock could be delisted from AMEX if we fail to satisfy the continued listing requirements of AMEX. If our common stock is delisted from AMEX, we would be forced to list our common stock on the OTC Bulletin Board or some other quotation medium, depending on our ability to meet the specific listing requirements of those quotation systems. If this happens, an investor might find it more difficult to buy and sell, or to obtain accurate price quotations for, shares of our common stock. This lack of visibility and liquidity could further decrease the price of our common stock. In addition, delisting from AMEX might negatively impact our reputation and, as a consequence, our business. Our financial condition depends on our ability to comply with the terms of our bank debt. Our ability to fund our working capital requirements and capital expenditures will depend in large part on our ability to comply with covenants in our agreements with our lenders, Fleet Capital Corporation and Banc One Capital Partners, LLC. If we fail to comply with any covenants in the future and our lenders fail to waive non-compliance, it would have a materially adverse effect on us. It is unlikely that any cash dividends will be paid on our common stock. We anticipate that future earnings, if any, will be retained for use in the business or for other corporate purposes, and it is not anticipated that any cash dividends on our common stock will be paid in the foreseeable future. ITEM 2. PROPERTIES Prefco. We lease a 20,000 square foot refrigerated warehouse in Houston. The lease for this facility expires in November 2002. In addition, Prefco also leases a 5,000 square foot office facility, the lease for which expires March 31, 2003. Carlton. We lease a 20,000 square foot processing facility and a 2,000 square foot office facility in New Braunfels, Texas. The lease on the processing facility expires in September 2005, with one five-year renewal option, and the lease on the office facility is on a month to month basis. Richard's. We own a 12,500 square foot processing facility in Church Point, Louisiana. Potter. We own a 120,000 square foot rendering, processing, distribution, warehouse and administrative facility in Durant, Oklahoma. In addition, we own a 6,800 square foot distribution facility in Malvern, Arkansas. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2001. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is principally traded on the American Stock Exchange ("AMEX") under the symbol "ABR." The following table sets forth, for the periods indicated, the high and low closing sales prices of our common stock as reported by AMEX.

As of March 14, 2002, there were approximately 150 shareholders of record of our common stock. We have not paid any cash dividends since our initial public offering. We anticipate that earnings, if any, will be retained for use in the business or for other corporate purposes, and it is not anticipated that any cash dividends on the common stock will be paid in the foreseeable future. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial data is based on our consolidated financial statements. Our financial statements as of December 31, 2000 and 2001 and for each of the years in the three-year period ended December 31, 2001, including the notes thereto and the related report of KPMG LLP, independent certified public accountants, are included elsewhere in this Form 10-K. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements contained elsewhere in this Form 10-K.

During the fourth quarter of 1998, we decided to dispose of our beverage division. This disposition was completed in 1999. The beverage division has been treated as a discontinued operation and prior years' financial statements have been restated. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL In 1996 we implemented a new corporate strategy that resulted in the acquisition of five food businesses. Each of these businesses represented a preeminent local or regional branded processed meat company. In addition to significantly increasing our size, the newly acquired businesses created a broader platform for future growth. In order to acquire and operate our food businesses, we formed four new subsidiaries during 1996: Prefco Corp., Carlton Foods Corp., Richard's Cajun Foods Corp., and Grogan's Farm, Inc. In 1998, we formed a fifth new subsidiary, Potter Sausage Company, to acquire the business of J.C. Potter Sausage Company and affiliates. In 2002, we sold substantially all the assets of Grogan's that remained after the October 13, 2000 fire that destroyed the plant and equipment located in Arlington, Kentucky. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Net Sales. Net sales decreased by $43.1 million or 24.3% from $177.7 million for the year ended December 31, 2000 to $134.6 million for the year ended December 31, 2001. The decrease in net sales during the year was primarily due to the loss of a major customer (Sam's Club) that built and began using its own warehouse and distribution system in August 2000. Sam's Club accounted for approximately 30% of our total net sales for fiscal 2000 as compared to 1.1% of our total net sales during fiscal 2001. Gross Profit. Gross profit decreased by approximately $0.7 million or 2.8% from $24.7 million for the year ended December 31, 2000 to approximately $24.0 million for the year ended December 31, 2001. Gross profit as a percentage of net sales increased from 13.9% for the year ended December 31, 2000 to 17.8% for the year ended December 31, 2001. Both the decrease in gross profit dollars and the increase in the gross profit percentage margin are primarily attributable to the loss of the Sam's Club distribution business discussed in Net Sales. That business earned a gross margin percentage significantly lower than our sales to other customers. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $0.4 million or 1.8% from $22.7 million for the year ended December 31, 2000 to $22.3 million for the year ended December 31, 2001. This decrease reflects a reduction in our costs resulting from the loss of the Sam's Club distribution business discussed in Net Sales. This cost reduction was offset by higher salaries and benefits, and a $1 million goodwill adjustment resulting from our decision to dispose of the Grogan's business after the fire. As a percentage of net sales, selling, general and administrative expenses increased from 12.8% for the year ended December 31, 2000 to 16.6% for the year ended December 31, 2001. In addition to the specific items discussed above, this increase was partially attributable to the fact that the Sam's Club distribution business did not incur the same level of selling, general and administrative expenses per sales dollar as our other customers. Income from Operations. Income from operations decreased $0.3 million from $2.0 million for the year ended December 31, 2000 to $1.7 million for the year ended December 31, 2001. This decrease is attributable to factors discussed above. Interest Expense. Interest expense decreased $0.4 million from $2.8 million for the year ended December 31, 2000 to $2.4 million for the year ended December 31, 2001. This decrease was primarily due to a decrease in our cost of variable-rate borrowings and the related outstanding balances. We issued warrants with a put option in conjunction with the debt incurred at the time of the Potter acquisition. Commencing on January 1, 2001 we are required to mark-to-market the estimated fair value of the put option. Any change to such value is charged or credited to earnings as a fair value adjustment to put warrants. For purposes of these calculations, the fair value of the warrants is estimated using a Black-Scholes option-pricing model. During the year ended December 31, 2001, we recorded additional expense of $0.3 million as a fair value adjustment to put warrants. Other Income. Other income increased by $4.8 million to $4.8 million for the year ended December 31, 2001. On October 13, 2000, the Grogan's manufacturing plant located in Arlington, Kentucky was totally destroyed by fire and the impacted assets net book value of $1.2 million was written off. At December 31, 2000, we recorded a $1.4 million receivable from the insurance carrier for the net book value of the plant and equipment destroyed plus other related costs incurred. During fiscal 2001, the insurance settlement on the building and equipment destroyed in the fire was finalized at $6.8 million and the Company recorded a pretax gain, net of additional costs incurred, in the amount of $4.8 million. Income (Loss) from Continuing Operations before Income Taxes. Income (loss) from continuing operations before income taxes increased $4.5 million from a loss of $(0.7 million) for the year ended December 31, 2000 to income of $3.8 million for the year ended December 31, 2001. This increase is attributable to the factors discussed above. Income Taxes. The effective tax rate differs from the statutory rate primarily because of state income taxes and the non-deductibility of a portion of the goodwill amortization. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Net Sales. Net sales decreased by $19.3 million or 9.8% from $197.0 million for the year ended December 31, 1999 to $177.7 million for the year ended December 31, 2000. The decrease in net sales during the year was primarily due to the loss of a major customer (Sam's Club) that built and began using its own warehouse and distribution system in August 2000. Sam's Club accounted for approximately 30% of our total net sales for fiscal 2000 as compared to 43% of our total net sales during fiscal 1999. Gross Profit. Gross profit decreased by approximately $1.5 million or 5.7% from $26.2 million for the year ended December 31, 1999 to approximately $24.7 million for the year ended December 31, 2000. Gross profit as a percentage of net sales increased from 13.3% for the year ended December 31, 1999 to 13.9% for the year ended December 31, 2000. Both the decrease in gross profit dollars and the increase in the gross profit percentage margin are primarily attributable to the loss of the Sam's Club distribution business discussed in Net Sales. That business earned a gross margin percentage significantly lower than our sales to other customers. The decrease in gross profit dollars also reflects the increase in the prices of certain of our raw materials over those paid in fiscal 1999 for both the food processing segment and the food distribution segment. Pork prices have a significant impact on our cost of goods sold and higher pork prices in fiscal 2000 negatively impacted gross profit as compared to 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.3 million or 6.0% from $21.4 million for the year ended December 31, 1999 to $22.7 million for the year ended December 31, 2000. This increase reflects an increase in the size of the direct store delivery fleet, higher salaries and benefits, the costs incurred in the launch phase of a new product line and increases in the costs of distributing our products, primarily related to the cost of fuel. As a percentage of net sales, selling, general and administrative expenses increased from 10.9% for the year ended December 31, 1999 to 12.8% for the year ended December 31, 2000. In addition to the increased costs discussed, this increase was partially attributable to the fact that the Sam's Club distribution business did not incur the same level of selling, general and administrative expenses per sales dollar as our other customers. Income from Operations. Income from operations decreased $2.8 million from $4.8 million for the year ended December 31, 1999 to $2.0 million for the year ended December 31, 2000. This decrease is attributable to factors discussed above. Interest Expense. Interest expense increased $0.3 million from $2.5 million for the year ended December 31, 1999 to $2.8 million for the year ended December 31, 2000. This increase was primarily due to an increase in our cost of variable-rate borrowings and the related outstanding balances. Income (Loss) from Continuing Operations. Income (loss) from continuing operations decreased from $2.3 million for the year ended December 31, 1999 to a loss of $(0.7 million) for the year ended December 31, 2000. This decrease is attributable to the factors discussed above. Income Taxes. The effective tax rate differs from the statutory rate primarily because of state income taxes and the non-deductibility of a portion of the goodwill amortization. CHANGES IN ACCOUNTING PRINCIPLES During the year ended December 31, 2000, we changed our method of accounting for production parts inventory from expensing upon purchase to capitalizing upon purchase and expensing upon installation. The $141,000 cumulative effect of the change on prior years is included in the net loss for the year ended December 31, 2000. On January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("the Statement"). On adoption of the Statement, the Company recorded a cumulative effect of change in accounting principle in the amount of $1.402 million (net of zero income taxes). The cumulative effect of change in accounting principle was recorded to reduce the carrying value of the liability related to the put warrants to fair value. The fair value of the warrants is estimated using a Black-Scholes option-valuation model. Subsequent changes in the fair value of the put warrants are recorded as a component of net income. The Company does not have any other derivative instruments. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities for the year ended December 31, 1999 was $5.0 million. This amount was principally the result of income from continuing operations, depreciation and amortization, an increase in accounts payable and a decrease in accounts receivable. This was partially offset by an increase in inventory and a decrease in accrued expenses. Net cash used in operating activities for the year ended December 31, 2000 was $1.3 million. This was principally the result of a loss from continuing operations and a decrease in accounts payable that was partially offset by depreciation and amortization and a decrease in accounts receivable. Net cash provided by operating activities for the year ended December 31, 2001 was $4.9 million. This amount was principally the result of net income, depreciation and amortization and a non-cash adjustment to goodwill. This was partially offset by an increase in prepaid expenses and other current assets and the non-cash change in accounting principle to record the put warrants at fair value. Cash used in investing activities for the years ended December 31, 1999, 2000 and 2001 was $1.9 million, $1.7 million and $1.6 million, respectively, which was primarily related to capital expenditures. Cash used in financing activities in the year ended December 31, 1999 was $4.1 million, principally affected by the payments of term debt and notes payable under the line of credit, the repurchase of our common stock and a decrease in the bank overdraft. Cash provided by financing activities in the year ended December 31, 2000 was $2.0 million, principally affected by borrowings under the line of credit which were partially offset by the payments of term debt and the repurchase of our common stock. Cash used in financing activities in the year ended December 31, 2001 was $3.7 million, principally affected by the payments of term debt and other notes payable, and a decrease in the bank overdraft. In the first quarter of 1998, we borrowed approximately $6.5 million in senior subordinated debt ("Senior Subordinated Note") from Banc One Capital Partners, LLC ("BOCP"). In connection with this Senior Subordinated Note we issued detachable common stock warrants with a put option. We also refinanced our line of credit and term debt ("Fleet Facility") through Fleet Capital ("Fleet"). As of December 31, 2000 and 2001, we had outstanding under the Fleet Facility approximately $7.2 million and $4.9 million, respectively, in term debt and approximately $5.1 million and $5.0 million, respectively, in line-of-credit borrowings. The Company owed $6.5 million to BOCP and Sterling BOCP, LLC, an entity owned by some of our directors, officers and 5% shareholders, under the Senior Subordinated Note, and approximately $2.7 million of subordinated debt to former owners of Prefco, Richard's, Grogan's and Partin's. The interest on the Senior Subordinated Note was 10% per annum for the years ended December 31, 1999 and 2000. Under the terms of an amendment to the Senior Subordinated Note dated April 13, 2001 and effective January 17, 2001, this interest rate was increased to 15% per annum. The incremental increase of 5% is accrued, compounded monthly and payable in full on June 30, 2003. The subordinated debt owed to former owners bears interest at an average rate of approximately 9.7% per annum. The term debt and line of credit agreement under the Fleet Facility bear annual interest at either the bank's prime rate plus 1% (9.75% and 5.75% at December 31, 2000 and 2001, respectively) or adjusted LIBOR plus 2.5%, at our option. In 2002 we received $5 million as part of the Grogan's fire insurance settlement. These monies will be used to pay the federal and state taxes and other expenses associated with the settlement and the remainder will be applied to the Fleet Facility. Warrants issued in conjunction with the Senior Subordinated Note provide that on the occurrence of a Put Trigger Event (defined below), if the average trading volume of our stock for four consecutive weeks is less than 15% of the number of shares issuable to the holder of the put warrants, such holders would have a thirty day right to require us to redeem the warrants for a cash amount equal to the greater of a cash flow formula (defined in the Warrant Agreement) or the fair market value of the underlying shares based upon an appraisal, in each case, net of an exercise price of $3.38 per share. For these purposes, a "Put Trigger Event" would occur upon the earlier of certain events, including the fifth anniversary of the warrants, a sale of all or substantially all of our assets, or a business combination in which we are not the surviving corporation. If the holder of the warrants exercises the put option, our ability to satisfy such obligation will depend on our ability to raise additional capital. Our ability to secure additional capital at such time will depend upon our overall operating performance, which will be subject to general business, financial, competitive and other factors affecting us and the processed meat distribution industry, certain of which factors are beyond our control. No assurance can be given that we will be able to raise the necessary capital on terms acceptable to us, if at all, to satisfy the put obligation in a timely manner. If we are unable to satisfy such obligation, our business, financial condition and operations will be materially and adversely effected. During fiscal year 2000, we were in violation of some of the financial ratios we are required to maintain under the terms of the Fleet Facility and the Senior Subordinated Note. Both Fleet and BOCP waived the non-compliance and revised our financial covenants. As conditions to the waiver by BOCP, and the revision to our financial covenants, we agreed to continue the default rate of interest (effective as of January 17, 2001 and payable as described above) of 15% per annum, which went into effect when we violated the financial covenants, to obtain the approval of BOCP prior to any renewal of the employment agreement with our chief executive officer, to terminate our management agreement with Sterling Advisors, and to use commercially reasonable efforts, subject to our board of directors' fiduciary duties, to obtain replacement financing for the Senior Subordinated Note. In addition, Sterling BOCP, LLC purchased 10% of BOCP's interest in the Senior Subordinated Note and the related warrants with a put option. Subsequently, as part of BOCP's release of security interests in the assets of Grogan's in February, 2002, BOCP agreed to amend its warrants with the put option to provide that BOCP's warrants expire if we obtain BOCP's replacement financing for the Senior Subordinated Note prior to September 30, 2002. A junior subordinated note to a former owner in the principal amount of $1.4 million was due on March 31, 2001, but was not paid because of restrictions under the Fleet Facility and the Senior Subordinated Note. Two additional junior subordinated notes to former owners, one in the amount of $0.9 million and another in the amount of $0.2 million, became due on July 31, 2001 and September 30, 2001, respectively. Payment on each of these notes will be made when such payment will not violate the covenants under our credit facilities. Under the terms of an inter-creditor subordination agreement, the former owners are prohibited from exercising any remedy with respect to this debt until the Fleet Facility and the Senior Subordinated Note obligations are paid in full; however, the interest rates of 9%, 6.35% and 8%, respectively, on each note increased by 2% per annum after its due date because the principal was not paid. We believe that cash generated from operations and bank borrowings will be sufficient to fund our debt service, working capital requirements and capital expenditures as currently contemplated for 2002. However, our ability to fund our working capital requirements and capital expenditures will depend in large part on our ability to continue to comply with debt covenants. Our ability to continue to comply with these covenants will depend on a number of factors, certain of which are beyond our control, including but not limited to, implementation of our business strategy, prevailing economic conditions, uncertainty as to evolving consumer preferences, sensitivity to such factors as weather and raw material costs, the impact of competition and the effect of each of these factors on our future operating performance. No assurance can be given that we will remain in compliance with such covenants throughout the term of both the Fleet Facility and the Senior Subordinated Note. We, from time to time, review the possible acquisition of other products or businesses. Our ability to expand successfully through acquisition depends on many factors, including the successful identification and acquisition of products or businesses and our ability to integrate and operate the acquired products or businesses successfully. There can be no assurance that we will be successful in acquiring or integrating any such products or businesses. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are subject to certain market risks. These risks relate to commodity price fluctuations, interest rate changes, fluctuations in the value of the warrants with the put option, and credit risk. We are a purchaser of pork and other meat products. We buy pork and other meat products based upon market prices that are established with the vendor as part of the purchase process. The operating results of our Company are significantly impacted by pork prices. We do not use commodity financial instruments to hedge pork and other meat product prices. Our exposure to interest rate risk relates primarily to our debt obligations and temporary cash investments. We do not use, and have not in the past year used, any derivative financial instruments relating to the risk associated with changes in interest rates. We issued warrants with a put option in conjunction with the debt incurred at the time of the Potter acquisition. Commencing on January 1, 2001 we are required to mark-to-market the estimated fair value of the put option. Any change to such value is charged or credited to earnings as a fair value adjustment to put warrants. For purposes of these calculations, the fair value of the warrants is estimated using a Black-Scholes option-pricing model. We are exposed to credit risk on certain assets, primarily accounts receivable. We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. We currently believe our allowance for doubtful accounts is sufficient to cover customer credit risks. CRITICAL ACCOUNTING POLICIES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. On an on-going basis, we evaluate our estimates and judgments, including those related to bad debts, inventories, investments, intangible assets, income taxes, financing operations, and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Our critical accounting policies are as follows: - valuation of accounts receivable; - valuation of inventories; - valuation of the warrants with a put option; - accounting for income taxes; and - valuation of long-lived, intangible assets and goodwill. VALUATION OF ACCOUNTS RECEIVABLE. We must make estimates of the uncollectability of our accounts receivable. We specifically analyze accounts receivable and analyze historical bad debts, customer concentrations, customer credit-worthiness, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse impact on the collectibility of our accounts receivable and future operating results. Our accounts receivable balance was $7.2 million, net of allowance for doubtful accounts of $0.2 million, as of December 31, 2001. VALUATION OF INVENTORIES. We must make estimates as to the amount of the obsolete or excess inventory. We specifically analyze historical write-offs, the age and condition of the inventory, and current economic trends when assessing the valuation of inventory. Significant management judgments and estimates must be made and used in connection with valuing these inventories in any accounting period. Material differences may result in the amount and timing of our expenses for any period if we made different judgments or utilized different assumptions. VALUATION OF THE WARRANTS WITH A PUT OPTION. We issued warrants with a put option in conjunction with the debt incurred at the time of the Potter acquisition. Commencing on January 1, 2001 we are required to mark-to-market the estimated fair value of the put option. Any change to such value is charged or credited to earnings as a fair value adjustment to put warrants. For purposes of these calculations, the fair value of the warrants is estimated using a Black-Scholes option-pricing model. Fluctuations in the assumptions of the Black-Scholes option pricing model can result in significant fluctuations in profit or loss. Such assumptions include the risk free interest rate, time to maturity and the standard deviation of the company's stock price. During the year ended December 31, 2001, we recorded additional expense of $0.3 million as a fair value adjustment to the put warrants. ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. In the event that actual results differ from our estimates of future taxable income or we adjust those estimates in future periods, we may need to revise the valuation allowance which could materially impact our financial position and results of operations. VALUATION OF LONG-LIVED ASSETS, INTANGIBLE ASSETS AND GOODWILL. We assess the potential impairment of long-lived assets, intangible assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following: - significant underperformance relative to expected historical or projected future operating results; - significant changes in the manner of our use of the acquired assets or the strategy for our overall business and; - significant negative long term industry or economic trends. When we determine that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in our current business model. Net long-lived assets, intangible assets and goodwill amounted to $22.8 million as of December 31, 2001. In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" became effective and as a result, we will cease to amortize approximately $11.4 million of goodwill. We had recorded approximately $0.4 million of amortization of this goodwill during 2001 and would have recorded approximately $0.4 million of amortization during 2002. In lieu of amortization, we are required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. We expect to complete our initial review during the second quarter of 2002. We currently do not expect to record an impairment charge upon completion of the initial impairment review. However, there can be no assurance that at the time the review is completed a material impairment charge will not be recorded. RELATED PARTY TRANSACTIONS In connection with the amendment dated April 13, 2001 to the Senior Subordinated Note, Sterling BOCP, LLC, an entity owned by certain directors and stockholders of the Company, purchased a 10% interest in the Senior Subordinated Note, including a corresponding 10% interest in the detachable put warrants which were issued in connection with the Senior Subordinated Note. COMMERCIAL COMMITMENTS The future maturities of long-term debt as of December 31, 2001, are as follows: 2002 $ 5,127 2003 5,264 2004 3,896 2005 1,061 ------- $15,348 =======

As of December 31, 2001, future minimum lease payments under operating leases are as follows: 2002 $ 955 2003 165 2004 100 2005 23 2006 and thereafter - ------ $1,243 ======

We have issued letters of credit totaling $0.5 million, all of which expire in less than 1 year, all in the ordinary course of business to various vendors and regulatory agencies. These letters of credit are routinely renewed upon expiration. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," supersedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this statement are to be accounted for using the purchase method. The provisions of this statement apply to all business combinations initiated after June 30, 2001, as well as all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. The Company will apply this statement to any acquisitions occurring after July 1, 2001. SFAS No. 142, "Goodwill and Other Intangible Assets," which supercedes APB Opinion No. 17, "Intangible Assets," establishes financial accounting and reporting standards for acquired goodwill and other intangible assets. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company's intangible assets represent principally deferred financing costs and goodwill from businesses acquired. The Company is evaluating the new statement's provisions to assess the impact on its consolidated results of operations and financial position. The Company plans to adopt the new standard in fiscal year 2002 as required. SFAS No. 144, "Accounting for the Impairment and the Disposal of Long-Lived Assets," addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", it retains many of the fundamental provisions of that Statement. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. However, it retains the requirement in Opinion 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company is in the process of evaluating the impact that adoption of SFAS No. 144 may have on the financial statements; however, such impact, if any, is not known or reasonably estimable at this time. FORWARD LOOKING STATEMENTS We want to provide stockholders and investors with meaningful and useful information. Therefore, this Annual Report on Form 10-K contains forward-looking information and describes our belief concerning future business conditions and our outlook based on currently available information. Whenever possible, we have identified these forward looking statements by words such as "believe," "expect," "will depend" and similar expressions. These forward-looking statements are subject to risks and uncertainties that would cause our actual results or performance to differ materially from those expressed in these statements. These risks and uncertainties include the following: risks associated with acquisitions, including integration of acquired businesses; new product development and other aspects of our business strategy; uncertainty as to evolving consumer preferences; customer and supplier concentration; the impact of competition; the impact of change in the valuation of the warrants with the put option on our net income and effective tax rate; our ability to raise additional capital; sensitivity to such factors as weather and raw material costs and the factors discussed above under the caption "Quantitative and Qualitative Disclosures About Market Risk." Readers are encouraged to review information in Item 1 under the heading "Risk Factors" and our Current Report on Form 8-K dated June 4, 1997 filed with the Securities and Exchange Commission for a more complete description of these factors. We assume no obligation to update the information contained in this Annual Report on Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See discussion under the caption "Quantitative and Qualitative Disclosures about Market Risk" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our 2001 Financial Statements and the related Report of Independent Auditors are set forth on pages F-1 through F-21 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS CLASS III -- DIRECTORS TO BE ELECTED AT THE 2002 ANNUAL MEETING: John A. Miller. Mr. Miller, age 48, has served as a director of our company since September 1993 and is currently a member of the Audit Committee and the Compensation Committee. Mr. Miller has served as President of North American Paper Company since 1988. Mr. Miller has been a director of Network Services Inc. since 1991, where he is a member of the Compensation Committee and Audit Committee, and he has been a director of the Becker Group, Ltd., a privately-held company in the mall decorations business ("Becker Group"), since 1998. Franklin M. Roth. Franklin M. Roth, age 60, was elected to our board of directors in August 2001. Mr. Roth was employed by Blue Ribbon Packing Co. in Houston, Texas, for 23 years. In 1986, Mr. Roth resigned as executive vice president of Blue Ribbon Packing Co. to become founder and president of Prefco Inc., a meat distribution company in Houston. In 1996, Mr. Roth was appointed president of Prefco. Corp. in connection with our acquisition of Prefco, Inc. Alan F. Sussna. Mr. Sussna, age 45, has served as a director, President and Chief Executive Officer of our company since March 1996. From 1991 through 1995, Mr. Sussna was a director of Bain & Company, a consulting firm. Through his association with Bain & Company and as a partner in the consulting firm of McKinsey & Company, he has opened offices as well as led those firms' Consumer Goods practices. In 1999, Mr. Sussna was elected to the board of directors of StartSampling, Inc. In 2000, Mr. Sussna was elected to the board of directors of Opto-Lynx, an Indiana based high technology start-up. Mr. Sussna has also held industry positions as Executive Vice President -- Sales and Marketing for Jim Beam Brands and in product management at Frito-Lay, Inc. CLASS I -- DIRECTORS SERVING UNTIL 2003 ANNUAL MEETING: Eric D. Becker. Mr. Becker, age 38, served as Chairman of our company from September 1993 through July 1996, and he has been a director since 1991, the year our Company's business was purchased from a predecessor. Mr. Becker is also a co-founder and Managing Principal of Sterling Capital, Ltd., a private investment firm which was founded in 1984 ("Sterling Capital"), and since 1984, Mr. Becker has also been Chairman and Vice President of Sterling Group, Inc., an affiliate of Sterling Capital ("Sterling Group"). Mr. Becker is also Chairman of Becker Group. Mr. Becker has also been a Principal of Sterling Advisors, LP ("Sterling Advisors") since 1984 and Managing Principal of Sterling Venture Partners since 1999. Additionally, Mr. Becker currently serves as a director and member of the compensation committee of Argent Trading, a venture backed private company. Brian Fleming. Mr. Fleming, age 56, has served as a director of our company since December 1997 and is currently a member of the Compensation Committee. Mr. Fleming is Vice Chairman of Knauss Foods, a privately-held processor of meat products specializing in dried beef and meat snacks, a position he has held since June 2001. From 1998 to 2001, Mr. Fleming was the President of Knauss Foods. Prior to 1998, Mr. Fleming was the President and Chief Operating Officer of Knauss Snack Food Company, a privately-held meat snack company. Mr. Fleming is presently a director of The Decal Source, which designs and distributes decals for use in Nascar motor sports, a position he has held since 1998. G. Cook Jordan, Jr. Mr. Jordan, age 50, has served as a director of our company since September 1993 and he is a member of the Audit Committee and the Compensation Committee. Mr. Jordan is a co-founder and managing principal of Jordan, Knauff & Company, a private investment bank. From 1998 to 1999, Mr. Jordan was a general partner at CID Equity Partners, a venture capital investment fund. From 1996 through 1998, Mr. Jordan was a principal at C3 Holdings, LLC, a private investment firm. From 1988 through 1996, Mr. Jordan served as a Manager of Allstate Venture Capital, which was affiliated with Allstate Insurance Company. Mr. Jordan has also been a director at Day's Molding and Machinery, a plastic injection molder, since 1998, and he was a director at ACR Systems, Inc., a systems developer, from 1997 to 2001. CLASS II -- DIRECTORS SERVING UNTIL 2004 ANNUAL MEETING: Merrick M. Elfman. Mr. Elfman, age 43, is Chairman of our company, a position he has held since July 1996, and he has been a director of our company since 1993. Mr. Elfman has been Chairman of Ecom Group, Inc., a privately-held distributor of specialty lighting products ("Ecom"), since 1998. He is also a Managing Partner of Sterling Capital Partners L.P., a private investment firm with which he has been involved since 1987. John T. Hanes. Mr. Hanes, age 65, has served as a director of our company since December 1997 and is a member of the Audit Committee. From 1994 to the present, Mr. Hanes has served as President of The John T. Hanes Company, a management consulting firm, and he has been a director of Premier Valley Foods, a privately-held processor and marketer of the DelMonte brand of dried fruits, since 1998. From 1991 to 1994, Mr. Hanes served as the Chairman and President of Doskocil Companies/Wilson Foods Corporation, Incorporated, a publicly-held processor of pizza and other processed meat products, and he retired as its Chief Executive Officer. Steven M. Taslitz. Mr. Taslitz, age 43, has served as a director of our company since 1991. Mr. Taslitz is a co-founder and Managing Principal of Sterling Capital and Sterling Group, as well as a partner of Sterling Advisors. He has served as the President of Sterling Group since 1984. Mr. Taslitz is a director of Ecom and Becker Group. EXECUTIVE OFFICERS In addition to Merrick M. Elfman, Alan F. Sussna and Franklin M. Roth, whose biographies are listed in the directors section above, our company has the following two executive officers: Thomas M. Dalton. Mr. Dalton, age 52, has served our company as Chief Financial Officer and Senior Vice President since April 1998. In March 2001, he was also elected to the additional position of Chief Operating Officer. From 1994 through 1998, Mr. Dalton served as a director, Chief Executive Officer and Chief Financial Officer of SNA Inc., a food processing and distribution company, and he has been a director of Duo-Fast Corporation, a privately-held processor and distributor of tools and fasteners since 1997. Mr. Dalton also served as a director, Executive Vice President and Chief Financial Officer of the Richelieu Group, a privately-held company with nine operating subsidiaries in food processing and distribution from 1985 to 1993. Steven E. Englander. Mr. Englander, age 46, has served as our Senior Vice President - Marketing since August 1998. Prior to his employment with our company, Mr. Englander was Vice President of Marketing with Morningstar Foods, a position he held from September 1995 through March 1998. From September 1991 through June 1995, he was Vice President of Marketing and Sales at Eagle Snacks, a division of Anheuser Busch. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the 1934 Act requires our officers, directors and certain beneficial holders of our common stock to file reports about their beneficial ownership of our common stock. Specific due dates for these reports have been established and we are required to disclose in this Form 10-K any failure to file by these dates during 2001. All of these filing requirements were timely satisfied, except Mr. Miller failed to timely report four transactions and Mr. Taslitz failed to timely report one transaction. In making these disclosures, we have relied solely upon written representations of our directors and executive officers and copies of the reports they filed with the SEC. ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth annual and long-term compensation for the fiscal years ended December 31, 1999, 2000 and 2001 for services in all capacities to our company of (i) our chairman, (ii) our chief executive officer, and (iii) our next three most highly compensated executive officers (collectively, the "Named Officers"). No other executive officer of our company received total annual salary and bonus in excess of $100,000 during 2001. SUMMARY COMPENSATION TABLE

---------- (1) Effective October 1, 2000, we entered into an employment agreement with Mr. Elfman pursuant to which Mr. Elfman is compensated for his services. Prior to October 1, 2000, Mr. Elfman was a non-employee director and was compensated for his services as director and chairman in the same manner as other non-employee directors. (2) These amounts represent $1,523, $5,250 and $5,100 contributed by us in 1999, 2000 and 2001 respectively, to our 401(k) Plan on behalf of Mr. Sussna; $39,000, $39,000 and $39,000 paid to Mr. Sussna in 1999, 2000 and 2001, respectively, as an allowance for transportation costs and health related benefits; $18,000, $19,500 and $19,500 paid to Mr. Dalton in 1999, 2000 and 2001, respectively, as an allowance for transportation costs and health related benefits; $12,000, $12,000 and $12,000 paid to Mr. Englander in 1999, 2000 and 2001, respectively, as an allowance for transportation costs and health related benefits; $11,862, $10,556 and $6,592 paid to Mr. Roth in 1999, 2000 and 2001, respectively, as an allowance for transportation costs and health related benefits; $2,854, $2,060 and $3,964 contributed by us in 1999 to our 401(k) Plan on behalf of Mr. Dalton, Mr. Englander and Mr. Roth, respectively; $4,125, $3,724 and $4,510 contributed by us in 2000 to our 401(k) Plan on behalf of Mr. Dalton, Mr. Englander and Mr. Roth, respectively; and $5,337, $3,911 and $4,849 contributed by us in 2001 to our 401(k) Plan on behalf of Mr. Dalton, Mr. Englander and Mr. Roth, respectively. OPTION GRANTS The following table sets forth certain information concerning option grants to the Named Officers during 2001: OPTION GRANTS IN 2001

---------- (1) These options vest 2,500 each quarter so long as the holder remains a director of our company. As a result, by December 31 of the year in which they were granted, all 10,000 of theses options are exercisable. (2) These options vest one-fourth at the end of each calendar quarter in the year in which they were granted so long as the holder remains a director of our company. As a result, by December 31 of the year in which they were granted, all of these options are exercisable. (3) These options are immediately exercisable. (4) Based on 145,000 options granted to all of our employees. (5) Based on the market price on the date of grant. There were no option exercises by our Named Officers in 2001. Shown below is information with respect to outstanding options held by our Named Officers as of December 31, 2001. All options reflected in the chart below were granted under our Option Plan. AGGREGATED 2001 YEAR-END OPTION VALUES

---------- (1) Based on the closing price of $2.40 per share of our Common Stock on December 31, 2001, as reported by the American Stock Exchange. DIRECTORS' FEES Under our option plan, non-employee directors receive options to purchase 10,000 shares of common stock on January 1 of each year. In addition, in 2001, the members of our Audit Committee each received options to purchase 1,500 shares, the members of our Compensation Committee each received options to purchase 2,500 shares and the members of our Executive Committee each received options to purchase 9,000 shares. On October 1, 2000, we entered into an employment agreement with our chairman, Merrick M. Elfman. Mr. Elfman's compensation for his services as chairman pursuant to this agreement are included above in the "Summary Compensation Table" and a description of the material terms of this agreement are set forth below. EMPLOYMENT AGREEMENTS We have employment agreements with the following Named Officers: Mr. Elfman, Mr. Sussna, Mr. Dalton and Mr. Englander. Mr. Elfman's employment agreement is currently in effect until April 30, 2003, and extends for additional one year periods thereafter, unless terminated by written notice given by either party to the other three months prior to each April 30th. The employment agreement provides for a signing bonus of $42,500 which was paid upon execution of the employment agreement in October 2000, and a salary of $115,000 per year, which increases by 5% on May 1 of each year, beginning May 1, 2002. If Mr. Elfman's employment terminates for any reason prior to a scheduled expiration date, we remain obligated to pay all amounts and provide all benefits provided for in his employment agreement through the scheduled expiration date. In addition, all amounts due under Mr. Elfman's employment agreement will be immediately due in the event that our company is sold, whether through a change of control or a sale of substantially all of our assets, or we are taken private. Mr. Sussna's employment agreement remains in effect until terminated by either party and provides for base compensation of $367,593 and eligibility to receive a bonus of up to 50% of base compensation to be determined by the Compensation Committee of the Board of Directors based on standards and criteria they establish. If Mr. Sussna's employment is terminated either (1) by us without cause, or (2) by the executive due to a reduction in responsibility without his consent, a reduction in his base salary, relocation of his office from Chicago, Illinois, our failure to comply with the terms of the employment agreement, or certain changes of control of our company, then the executive will receive $183,796.50 payable over six months in accordance with our payroll policies (the "Termination Payment"), the annual bonus to which the executive would have been entitled but for the termination, and continued employee benefits for the maximum period permitted by law. These separation benefits are also triggered if the aggregate beneficial ownership of the following individuals is reduced to less than 15% of the number of shares of common stock outstanding: Douglas L. Becker, Eric D. Becker, Merrick M. Elfman, Bruce L. Goldman, Rudolf Christopher Hoehn-Saric and Steven M. Taslitz, as well as their spouses and dependent children or trusts established for their benefit (a "Stockholder Exit"). In addition, Mr. Sussna's employment agreement provides that if there is a change of control of our company during the term of Mr. Sussna's employment with us, or within 120 days after a termination by us without cause, then Mr. Sussna shall receive $367,593, less any amounts already received pursuant to the Termination Payment. Mr. Dalton's employment agreement is currently in effect until April 6, 2003, and extends for additional one year periods unless terminated by written notice given by either party to the other six months prior to April 5 of each year. Pursuant to the employment agreement, Mr. Dalton's base compensation is subject to normal cost of living increases, as well as those increases permitted by our Compensation Committee. Mr. Dalton's employment agreement provides that if his employment is terminated either (1) by us without cause, or (2) by the executive due to a reduction in responsibility without his consent, a reduction in his base salary, relocation of his office from Chicago, Illinois, our failure to comply with the terms of the employment agreement, certain changes of control of our company or a Stockholder Exit, then Mr. Dalton will receive his full base salary, the annual bonus to which the executive would have been entitled but for the termination, and continued employee benefits for the maximum period permitted by law. Mr. Englander's employment agreement may be terminated by Mr. Englander or us at any time, subject in some circumstances to our obligation to pay Mr. Englander's compensation for a period of up to six months after the termination, which period depends upon the reason for the termination and the duration of Mr. Englander's employment with us prior to termination. The employment agreement provides for Mr. Englander's base compensation, which is subject to normal cost of living increases, and an annual bonus of up to 30% of his base salary, 50% of which will be based on our overall performance and 50% of which will be based upon management objectives described by our chief executive officer on an annual basis. The employment agreements for Mr. Sussna, Mr. Dalton, Mr. Elfman and Mr. Englander also contain certain non-competition and confidentiality provisions pursuant to which they agree not to compete with our company for a period of two years following termination of their employment with us, nor will they solicit for employment any director, stockholder or certain employees of our company during such period (except for Mr. Sussna, who may not solicit such persons for three years). The employment agreements also provide that Mr. Sussna, Mr. Dalton, Mr. Elfman and Mr. Englander will not disclose any confidential information concerning our company and our business to any other person or entity except as may be required by law. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of our common stock as of March 14, 2002, by each person known by us to be the beneficial owner of more than five percent (5%) of the outstanding shares of our common stock, each director of our company, each Named Officer, and all executive officers and directors as a group. The information presented in the table is based upon the most recent filings with the Securities and Exchange Commission, the "SEC", by such persons or upon information otherwise provided by such persons to us.

---------- *Less than one percent (1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days are deemed outstanding for purposes of computing the percentage ownership of the person holding such option or warrant but are not deemed outstanding for purposes of computing the percentage ownership of any other person. Except where indicated otherwise, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. (2) Includes 30,000 shares underlying currently exercisable options. The address for this shareholder is c/o 650 Dundee Road, Suite 370, Northbrook, IL 60062. (3) Includes 392,293 shares held by Mr. Becker's wife and 92,500 shares underlying currently exercisable options or options exercisable within 60 days. The address for this shareholder is c/o 650 Dundee Road, Suite 370, Northbrook, IL 60062. (4) Includes 106,000 shares underlying currently exercisable options or options exercisable within 60 days. Of the remaining 454,359 shares, 433,805 are held by Mr. Elfman and his wife jointly. The address for this shareholder is c/o 650 Dundee Road, Suite 370, Northbrook, IL 60062. (5) Includes 145,740 shares held by the Glass International Ltd. Profit Sharing Plan and Trust dated July 1, 1983 (the "Trust"). Mr. Glass and his wife, Ellen V. Glass, are co-trustees and also the beneficiaries of the Trust. The remaining 278,528 shares are held by Mr. Glass and his wife jointly, either as joint tenants or tenants in common. The address for this shareholder is 20 N. Wacker, #3400, Chicago, IL 60606-3102. (6) Includes 250,346 shares held by Mr. Goldman and Mr. Taslitz as co-trustees of the KJT Gift Trust. Mr. Goldman disclaims beneficial ownership of the shares held by the KJT Gift Trust. The address for this shareholder is c/o 650 Dundee Road, Suite 370, Northbrook, IL 60062. (7) Includes 24,593 shares held by Mr. Hoehn-Saric as Trustee for the benefit of Gabriella Hoehn-Saric and 21,519 shares held by him as Trustee for the benefit of Rudolph Christopher Hoehn-Saric, Jr. Also includes 30,000 shares underlying currently exercisable options or options exercisable within 60 days. The address for this shareholder is c/o 650 Dundee Road, Suite 370, Northbrook, IL 60062. (8) Includes 175,528 shares held by Mr. Sussna as trustee of the Alan F. Sussna Trust and 9,803 shares held by Mr. Sussna's wife, Brenda B. Sussna, as trustee of the Brenda B. Sussna Trust. Mr. Sussna disclaims beneficial ownership of all 9,803 shares held by his wife as trustee of the Brenda B. Sussna Trust. Also includes 500,000 shares underlying currently exercisable options, or options exercisable within 60 days, which are held by Mr. Sussna as Trustee of the Alan F. Sussna Trust. The address for this shareholder is c/o 650 Dundee Road, Suite 370, Northbrook, IL 60062. (9) Includes 144,923 shares held by Mr. Taslitz as trustee of the Kathy J. Taslitz Trust and 250,346 shares held by Mr. Taslitz and Mr. Goldman as co-trustees of the KJT Gift Trust. Mr. Taslitz disclaims beneficial ownership of the 250,346 shares held by him as co-trustee of the KJT Gift Trust. Also includes 161,195 shares underlying currently exercisable options or warrants or options exercisable within 60 days, of which warrants 66,695 are indirectly held by Mr. Taslitz as the Manager of Sterling BOCP, LLC, the warrant holder. The address for this shareholder is c/o 650 Dundee Road, Suite 370, Northbrook, IL 60062. (10) Includes 320,000 shares underlying currently exercisable options or options exercisable within 60 days. The address for this shareholder is c/o 650 Dundee Road, Suite 370, Northbrook, IL 60062. (11) Includes 30,000 shares underlying currently exercisable options with options exercisable within 60 days. (12) Includes 54,000 shares underlying currently exercisable options or options exercisable within 60 days. (13) Includes 53,000 shares underlying currently exercisable options or options exercisable within 60 days. (14) Includes 71,000 shares underlying currently exercisable options or options exercisable within 60 days. Also includes 19,607 shares held by Mr. Jordan's IRA. (15) Includes 71,000 shares underlying currently exercisable options or options exercisable within 60 days. (16) Includes 75,000 shares underlying currently exercisable options or options exercisable within 60 days. (17) Includes 1,533,695 shares underlying currently exercisable options or options exercisable within 60 days. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On October 1, 2000, we entered into a management agreement with Sterling Advisors pursuant to which Sterling Advisors was to provide us with management and advisory services, including assisting our executives in making management, financial and strategic decisions, during the initial term ending April 30, 2002. Messrs. Douglas Becker (a 5% beneficial owner of our common stock), Eric Becker (a director and 5% beneficial owner), Rudolph Christopher Hoehn-Saric (a 5% beneficial owner), and Steven Taslitz (a director and 5% beneficial owner) own Sterling Advisors. During the initial term of the management agreement, we were to pay Sterling Advisors a consulting fee of $36,000 per month. Additionally, we were to pay $200,000 to Sterling Advisors on the date of execution of the management agreement. The management agreement also contains certain non-competition and confidentiality provisions pursuant to which Sterling Advisors agrees not to compete with us or disclose any confidential information for a period of two years following termination of the agreement, nor will it solicit for employment any director, stockholder or certain employees of our company during such period. In connection with the April 2001 restructuring of our senior subordinated debt to Banc One Capital Partners, described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, this management agreement was terminated and all amounts payable thereunder were waived. Also in connection with the April 2001 restructuring of our senior subordinated debt to Banc One Capital Partners, Sterling BOCP, LLC purchased a 10% interest in the senior subordinated debt from Banc One Capital Partners, including a corresponding 10% interest in the warrants with a put option which were issued in connection with the senior subordinated debt. These warrants with a put option are described in the "Liquidity and Capital Resources" section of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Sterling BOCP is owned by Messrs. Douglas Becker (a 5% beneficial owner), Eric Becker (a director and 5% beneficial owner), Merrick Elfman (an executive officer, director and 5% beneficial owner), Bruce Goldman (a 5% beneficial owner), John Miller (a director) and Steven Taslitz (a director and 5% beneficial owner). Our Company, Sterling Group and Messrs. Eric Becker, Steven Taslitz, Douglas Becker and Christopher Hoehn-Saric entered into a non-compete and non-disclosure agreement containing certain non-competition and confidentiality provisions pursuant to which Sterling Group and Messrs. E. Becker, Taslitz, D. Becker and Hoehn-Saric agreed not to compete with us for a period ending one year after Sterling Group's consulting relationship with our Company is terminated, nor will they solicit for employment any director, stockholder or certain employees of our Company during such period. This agreement also provides that neither Sterling Group nor these individuals will disclose any confidential information concerning us and our business to any other person or entity except as may be required by law. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K: 1. The consolidated financial statements of the Company and its subsidiaries, together with the applicable reports of independent public accountants:

2. The following exhibits are filed with this report or incorporated by reference as set forth below:

4.5 8% Subordinated Non-Negotiable Promissory Note due December 31, 2003 made by Grogan's Farm, Inc. in favor of Jefferson Davis and Roger Davis in the original principal amount of $219,593 (4) 4.6 Secured Promissory Note dated as of March 20, 1998 of the Company and certain of its subsidiaries payable to Fleet Capital Corporation in the original principal amount of $11,000,000 (4) 4.7 Loan and Security Agreement dated as of March 20, 1998 among Fleet Capital Corporation, the Company and certain of its subsidiaries (4) 4.8 First Amendment to Loan and Security Agreement dated as of December 20, 1999 among Fleet Capital Corporation, the Company and certain of its subsidiaries (9) 4.9 Second Amendment to Loan and Security Agreement dated as of April 13, 2001 among Fleet Capital Corporation, the Company and certain of its subsidiaries (9) 4.10 Stock Pledge Agreement dated as of March 20, 1998 between the Company and Fleet Capital Corporation (4) 4.11 Atlantic Premium Brands, Ltd. and Subsidiaries Senior Subordinated Note and Warrant Purchase Agreement dated as of March 20, 1998 among the Company, certain of its subsidiaries and Banc One Capital Partners, LLC ("Banc One") (4) 4.12 Limited Waiver of Covenants Under and Amendment to Senior Subordinated Note and Warrant Purchase Agreement dated as of April 13, 2001 among the Company, certain of its subsidiaries and Banc One (9) 4.13 Note and Warrant Purchase Agreement dated as of April 13, 2001 among the Company, certain of its subsidiaries, Banc One, Sterling BOCP, LLC ("Sterling") and Fleet Capital Corporation (9) 4.14 Intercreditor and Collateral Agency Agreement dated April 13, 2001 among Banc One, Sterling, the Company and certain of its subsidiaries (9) 4.15 Senior Subordinated Note due March 31, 2005 of the Company payable to Banc One dated as of April 13, 2001 in the original principal amount of $5,850,000 (9) 4.16 Senior Subordinated Note due March 31, 2005 of the Company payable to Sterling dated as of April 13, 2001 in the original principal amount of $650,000 (9) 4.17 Atlantic Premium Brands, Ltd. Amended and Restated Warrant Certificate Common Stock Purchase Warrant of Banc One dated as of February 1, 2002 (*) 4.18 Atlantic Premium Brands, Ltd. Warrant Certificate Common Stock Purchase Warrant to Sterling dated as of April 13, 2001 (9) 4.19 Atlantic Premium Brands, Ltd. Amended and Restated Warrant Certificate Contingent Common Stock Purchase Warrant of Banc One dated as of February 1, 2002 (*) 4.20 Atlantic Premium Brands, Ltd. Warrant Certificate Contingent Common Stock Purchase Warrant of Sterling dated as of April 13, 2001 (9)

4.21 Amended and Restated Put Option Agreement dated as of April 13, 2001 among the Company, Banc One and Sterling (9) 4.22 Amended and Restated Registration Rights Agreement dated as of April 13, 2001 among the Company, Banc One and Sterling (9) 4.23 Amended and Restated Shareholders Agreement dated as of April 13, 2001 among the Company, certain of its shareholders, Banc One and Sterling (9) 4.24 Amended and Restated Preemptive Rights Agreement dated as of April 13, 2001 among the Company, Banc One and Sterling (10) 4.25 Debt Subordination Agreement dated as of March 20, 1998 among Banc One Capital Partners, LLC, the Company, certain of its subsidiaries and Fleet Capital Corporation (4) 4.26 Lien Subordination Agreement dated as of March 20, 1998 between Fleet Capital Corporation and Banc One Capital Partners, LLC (4) 10.1 Non-Compete and Non-Disclosure Agreement dated September 24, 1993 among the Company, Sterling Group, Inc., Eric D. Becker, Steven M. Taslitz, Douglas L. Becker and R. Christopher Hoehn-Saric (1) 10.2 Form of Tax Indemnification Agreement (1) 10.3 Stock Purchase Agreement dated April 23, 1999 among the Company and Bobby L. Grogan and Betty Ruth Grogan (5) 10.4 Atlantic Premium Brands, Ltd. Employee Stock Purchase Plan dated November 1, 1997 (2) 10.5 The Company's 1999 Amended and Restated Stock Option Plan (6) 10.6 Amended and Restated Employment Agreement dated January 10, 2002 between the Company and Alan. F. Sussna (*). 10.7 Employment Agreement dated as of April 6, 1998 between the Company and Thomas M. Dalton (7) 10.8 Employment Agreement dated August 10, 1998 between the Company and Steven Englander (8) 10.9 Employment Agreement dated October 1, 2000 between the Company and Merrick M. Elfman. (9) 10.10 Management Agreement dated October 1, 2000 by and between the Company and Sterling Advisors, L.P. (9) 21 Subsidiaries of the Company (*) 23 Consent of KPMG LLP (*)

---------- *Filed herewith (1) Filed as an exhibit to the Company's Registration Statement No. 33-69438 or the amendments thereto and incorporated herein by reference. (2) Filed as an exhibit to the Company's Registration Statement No. 33-39561 and incorporated herein by reference. (3) Filed as an exhibit to the Company's Current Report on Form 8-K dated March 15, 1996, filed with the Securities and Exchange Commission on April 1, 1996, and incorporated herein by reference. (4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. (5) Filed as an exhibit to the Company's Current Report on Form 8-K dated May 21, 1999, filed with the Securities and Exchange Commission on May 24, 1999, and incorporated herein by reference. (6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and incorporated herein by reference. (7) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference. (8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, and incorporated herein by reference. (9) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, and incorporated herein by reference. (b) Reports on Form 8-K: None. 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. ATLANTIC PREMIUM BRANDS, LTD. By: /s/ Thomas M. Dalton ------------------------------------- Thomas M. Dalton Chief Operating Officer, Senior Vice President and Chief Financial Officer Dated as of March 25, 2002. 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 and in the capacities and on the dates indicated.

Independent Auditors' Report To the Stockholders of Atlantic Premium Brands, Ltd.: We have audited the accompanying consolidated balance sheets of Atlantic Premium Brands, Ltd. (a Delaware Corporation) and subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 financial position of Atlantic Premium Brands, Ltd. and subsidiaries as of December 31, 2000 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 13 to the consolidated financial statements, the Company changed its method of accounting for production parts inventory in 2000 and for derivative instruments in 2001. /s/ KPMG LLP Chicago, Illinois March 20, 2002 F-1 ATLANTIC PREMIUM BRANDS, LTD. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)

The accompanying notes are an integral part of these consolidated financial statements. F-2 ATLANTIC PREMIUM BRANDS, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)

The accompanying notes are an integral part of these consolidated financial statements. F-3 ATLANTIC PREMIUM BRANDS, LTD. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)

The accompanying notes are an integral part of these consolidated financial statements. F-4 ATLANTIC PREMIUM BRANDS, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

The accompanying notes are an integral part of these consolidated financial statements. F-5 ATLANTIC PREMIUM BRANDS, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 1. BASIS OF PRESENTATION AND DESCRIPTION OF COMPANY: The accompanying consolidated financial statements present the accounts of Atlantic Premium Brands, Ltd. and subsidiaries (the Company). All significant inter-company transactions have been eliminated in consolidation. The Company is engaged in the processing, marketing and distribution of packaged meat and other food products in Texas, Louisiana, Oklahoma and surrounding states. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: REVENUE RECOGNITION The Company records sales when product is delivered to the customers. Discounts provided, principally based on volume, are recorded as reductions of sales at the time of the sale. SHIPPING AND HANDLING COSTS Shipping and handling costs are included in salaries and benefits and other operating expenses. These costs totaled $3,874, $3,944 and $3,075 for the years ended December 31, 1999, 2000 and 2001, respectively. CASH Cash consists of cash held in various deposit accounts with financial institutions. INVENTORY Inventory is stated at the lower of cost or market and is comprised of raw materials, finished goods, production parts and packaging supplies. Cost is determined using the first-in, first-out method. See Note 13 for information concerning the change in accounting for production parts in 2000. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, net of applicable depreciation. Depreciation is computed using the straight-line method at annual rates of 3% to 20% for buildings and building improvements, and 10% to 20% for equipment, furniture and vehicles. Leasehold improvements are amortized over the lesser of the lease term or asset life. Additions and improvements that substantially extend the useful life of a particular asset are capitalized. Repair and maintenance costs are charged to expense. Upon sale, the cost and related accumulated depreciation are removed from the accounts. OTHER ASSETS Other assets consist of deferred acquisition costs, cash surrender value of life insurance, and deferred financing costs. Deferred acquisition costs are being amortized over 5 years. Deferred financing costs are being amortized over 5 to 7 years, representing the term of the related debt, using the effective interest method. INTANGIBLE ASSETS The excess of cost over the fair market value of tangible net assets of acquired businesses is amortized on a straight-line basis over the period of expected benefit which is 40 years. Amortization expense for the years ended December 31, 1999, 2000 and 2001 was $366 per year. Additionally, in fiscal 2001 an adjustment to reduce goodwill by $1,044 was recognized (see Note 16). Accumulated amortization as of December 31, 2000 and 2001 was $1,680 and $2,046, respectively. Subsequent to an acquisition, the Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of an intangible asset may warrant revision or whether the remaining balance of an intangible asset may not be recoverable. When factors indicate that an intangible asset should be evaluated for possible impairment, the Company uses an estimate of the related business' undiscounted future cash flows over the remaining life of the asset in measuring whether the intangible asset is recoverable. F-6 ADVERTISING Advertising expenditures are expensed in the period in which the advertising occurs. Advertising expenditures for each of the years ended December 31, 1999, 2000 and 2001 were approximately $2,700 per year. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary 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 income in the period that includes the enactment date. INCOME PER COMMON SHARE Basic income per common share is based upon the weighted-average number of common shares outstanding. Diluted income per common share assumes the exercise of all options which are dilutive, whether exercisable or not. The dilutive effect of stock options is measured under the treasury stock method. DERIVATIVE FINANCIAL INSTRUMENTS The Company does not use nor hold derivative positions for trading purposes. In 1998, however, the Company entered into a derivative financial instrument in connection with the issuance of put warrants to purchase shares of common stock. On January 1, 2001, the Company was required to adopt the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("the Statement"). On adoption of the Statement, the Company recorded a cumulative effect of change in accounting principle of $1,402 (net of zero income taxes) to reduce the carrying value of the liability related to the put warrants to fair value. Subsequent changes in the fair value of the put warrants estimated using the Black-Scholes option valuation model have been and will be recorded as components of net income. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," supersedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". All business combinations in the scope of this statement are to be accounted for using the purchase method. The provisions of this statement apply to all business combinations initiated after June 30, 2001, as well as all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. The Company will apply this statement to any acquisitions occurring after July 1, 2001. SFAS No. 142, "Goodwill and Other Intangible Assets," which supersedes APB Opinion No. 17, "Intangible Assets," establishes financial accounting and reporting standards for acquired goodwill and other intangible assets. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company's intangible assets represent principally deferred financing costs and goodwill from businesses acquired. The Company is evaluating the new statement's provisions to assess the impact on its consolidated results of operations and financial position. The Company plans to adopt the new standard in fiscal year 2002 as required. SFAS No. 144, "Accounting for the Impairment and the Disposal of Long-Lived Assets," addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", it retains many of the fundamental provisions of that Statement. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. However, it retains the requirement in Opinion 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company is in the process of evaluating the impact the adoption of SFAS No. 144 may have on the financial statements; however, such impact, if any, is not known or reasonably estimable at this time. STOCK-BASED COMPENSATION The Company applies the intrinsic value-based method of accounting for its fixed plan stock options. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. F-7 SUPPLEMENTAL CASH FLOW INFORMATION

USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of 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. RECLASSIFICATIONS Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the current year's presentation. 3. DISCONTINUED OPERATIONS: During the fourth quarter of 1998, the Company decided to sell substantially all the assets of its beverage division. The beverage division has been accounted for as a discontinued operation. The loss from discontinued operations for the years ended December 31, 1999 and 2000 in the amounts of $72 and $153, respectively, relate to current assets that were determined not to be realizable. 4. INVENTORY: Inventory consisted of the following as of December 31:

F-8 5. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment as of December 31, 2000 and 2001 are summarized as follows: 2000 2001 -------- -------- Land $ 664 $ 664 Buildings and building improvements 6,627 7,277 Equipment and furniture 5,493 6,468 Leasehold improvements 507 507 Vehicles 2,242 2,325 Construction in process 524 82 -------- -------- 16,057 17,323 Less - accumulated depreciation and amortization (4,764) (6,171) -------- -------- Property, plant and equipment, net $ 11,293 $ 11,152 ======== ======== Depreciation expense for the years ended December 31, 1999, 2000 and 2001 was $1,563, $1,760 and $1,555, respectively. 6. OTHER ASSETS: Other assets are comprised of the following as of December 31, 2000 and 2001: 2000 2001 ---- ---- Deferred financing and acquisition costs, and other intangible assets $ 572 $ 715 Cash surrender value of life insurance and other assets 121 130 ----- ----- 693 845 Less - accumulated amortization (376) (528) ----- ----- Other assets, net $ 317 $ 317 ===== ===== Amortization of deferred financing and acquisition costs, and other intangible assets of $129, $133, and $152 has been included within depreciation and amortization expense in the accompanying consolidated statements of operations for the years ended December 31, 1999, 2000, and 2001, respectively. 7. SIGNIFICANT SUPPLIERS AND CUSTOMERS: For the year ended December 31, 1999, a single supplier provided approximately 17% of the Company's total product purchases. A single customer accounted for approximately 43% of the Company's net sales. For the year ended December 31, 2000, two suppliers provided approximately 12% and 11%, respectively, of the Company's total product purchases. A single customer accounted for approximately 30% of the Company's net sales. For the year ended December 31, 2001, two suppliers provided approximately 16% and 11%, respectively, of the Company's total product purchases. A single customer accounted for approximately 14% of the Company's net sales. F-9 8. INCOME TAXES: Income tax (expense) benefit for the years ended December 31, 1999, 2000 and 2001, was allocated as follows:

Income tax (expense) benefit of continuing operations consisted of the following:

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2000 and 2001 are presented below:

F-10 As of December 31, 2001, the Company has approximately $1,290 of net operating loss carryforwards for tax purposes, expiring through 2011. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Based upon the level of projected future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences at December 31, 2001. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the net operating loss carryforward periods are reduced. The items which gave rise to differences between income tax expense of continuing operations and income taxes computed at the Federal statutory rate are summarized below: 1999 2000 2001 ---- ---- ---- Statutory Federal income tax rate 34.0% (34.0)% 34.0% State income taxes, net of Federal income tax effect 5.5 20.4 6.8 Nondeductible amortization of goodwill 7.1 26.0 10.3 Other (0.3) 4.7 1.9 ---- ---- ---- Total 46.3% 17.1% 53.0% ==== ==== ==== F-11 9. DEBT: Long-term debt as of December 31, 2000 and 2001, consisted of the following:

The future maturities of long-term debt as of December 31, 2001, are as follows: 2002 $ 5,127 2003 5,264 2004 3,896 2005 1,061 ------ $15,348 =======

F-12 The Company's debt consists of an $11,000 term note, a $15,000 line of credit and $6,500 senior subordinated note with detachable warrants with a put option. The term debt bears interest at either the bank's prime rate plus 1% or adjusted LIBOR plus 2.5%, at the Company's option. This loan is due in varying amounts monthly through March 2003 and is secured by substantially all assets of the Company. The balance at December 31, 2001 was $4.9 million. Under the terms of the line of credit agreement, which expires in March 2003, the Company is permitted to borrow up to $15 million subject to advance formulas based on accounts receivable, inventory and letter of credit obligations outstanding. Amounts borrowed are due on demand and bear interest at either the bank's prime rate plus 1% or adjusted LIBOR plus 2.5%. Interest is payable monthly and amounts are secured by substantially all the assets of the Company. The weighted average interest rates related to the line of credit existing at December 31, 2000 and 2001, were 10.3% and 8.0%, respectively. As of December 31, 2001, approximately $525 of standby letters of credit were outstanding under the line of credit facility. The $6,500 million senior subordinated note, maturing on March 31, 2005, bears interest at 15% per annum. A loan amendment dated April 13, 2001, and effective January 17, 2001, increased the interest rate by 5% to 15% per annum. This incremental amount of interest is accrued on a periodic basis and will be payable on June 30, 2003. The other 10% of interest cost is paid monthly. Principal is payable in quarterly installments beginning June 30, 2003. Concurrent with the signing of the loan amendment, an entity owned by some of our directors, officers and 5% stockholders agreed to purchase 10% of the senior subordinated debt holder's interest in the senior subordinated notes and the related warrants. The senior subordinated note was issued with detachable warrants with a put option to purchase 666,947 shares of nonvoting common stock at $3.38 per share and a contingent warrant to purchase up to a maximum of 428,753 shares of nonvoting common stock at $3.38 per share based upon the equity value of the Company on certain dates. The warrants were recorded at an estimated fair value of $1.435 million and the related discount on the senior subordinated note was recorded for the same amount. This discount is being amortized over the seven year term of the note as additional interest expense. Amortization of the debt discount was $246, $250 and $245 for the years ended December 31, 1999, 2000 and 2001, respectively. Junior subordinated notes in the principal amounts of $1,400, $875 and $200 were due on March 31, 2001, July 31, 2001 and September 30, 2001 respectively, but were not paid because of restrictive covenants under the credit facilities. Payment on each of these notes will be made when such payment will not violate the covenants under the other credit facilities. Under the terms of an inter-creditor subordination agreement, the junior subordinated debt holders are prohibited from exercising any remedy with respect to this debt until the obligations under the credit facilities are paid in full; however, the interest rates of 9%, 6.35% and 8%, respectively, on these notes were increased by 2% per annum after their respective due dates. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts reported in the Consolidated Balance Sheets for accounts receivable and accounts payable approximate fair value because of the short maturity of those instruments. Fair value of the Company's long-term debt is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The aggregate face value of the Company's long-term debt as of December 31, 2000 and 2001, was $17,152 and $15,348, respectively. The face amount of the Company's long-term debt approximated its fair value as of December 31, 2000 and 2001. F-13 11. INCOME PER COMMON SHARE: The weighted average shares used to calculate basic and diluted income per common share for the years ended December 31, 1999, 2000 and 2001 are as follows:

As a result of the loss from continuing operations for the year ended December 31, 2000, the impact of options with an exercise price that was less than the average weighted market price of the common stock during the year was excluded due to their antidilutive effect. Options to purchase 1,199,659, 1,722,042 and 1,654,718 shares of common stock at prices ranging from $1.50 to $6.50 per share were outstanding during 1999, 2000 and 2001, respectively, but were not included in the computation of diluted income per common share because the options' exercise price was greater than the average weighted market price of the common stock during the year. Put warrants to purchase up to a maximum of 1,095,700 shares of common stock at $3.38 per share were outstanding as of December 31, 1999, 2000 and 2001, but were not included in the computation of diluted income per common share because the warrants' exercise price was greater than the weighted average market price of the common stock during the year. 12. STOCK OPTIONS: Prior to April 1999, the Company had a stock option plan (the Old Plan) and a Director's stock option plan (the Director Plan). In April 1999, the Company adopted a 1999 Amended and Restated Stock Option Plan (the Option Plan), which amended and restated both the Old Plan and the Director Plan into the Option Plan. The Option Plan authorizes the Company to grant, to eligible individuals, options for the purchase of shares of the Company's common stock. Under the terms of the Option Plan, the Company may issue up to 3,000,000 options to directors, officers, advisors, full-time employees and other eligible individuals. In general, the option exercise price equals the stock's market price on the date of grant and the options vest during periods of up to ten years. Under the terms of the Option Plan, the Company issues 10,000 options to eligible outside directors at the beginning of each year of service. These options vest quarterly over one year. No compensation expense was recognized for the issuance of options under the Old Plan, the Director Plan or the Option Plan during 1999, 2000 and 2001. The Company has elected to account for its stock-based compensation plans using the intrinsic value method. The Company has computed for pro forma disclosure purposes the value of all options granted subsequent to 1995, using the Black-Scholes option pricing model; the following assumptions were used for option grants:

F-14 Adjustments were made for options forfeited prior to vesting. Had compensation expense for this plan been determined based on the fair value at the grant date, the Company's net income (loss) and income (loss) per common share reflected on the accompanying consolidated statements of operations would have been reduced to the following pro forma amounts:

The following table summarizes option activity and related information.

AVERAGE WEIGHTED RANGE OF REMAINING AVERAGE EXERCISE OPTIONS CONTRACTUAL LIFE EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE ------------- ----------- ----------------- -------- $0.88 - 1.50 555,000 7.6 $1.33 $1.51 - 3.00 1,101,268 6.3 $2.59 $3.01 - 4.50 254,500 6.2 $3.49 $4.51 - 6.00 950 3.5 $4.63 $6.01 - 7.50 28,000 3.5 $6.50 ------------- ----------- ----------------- -------- $0.88 - 7.50 1,939,718 ============ =========== The Company has a Retirement Savings Plan (401(k) plan) whereby employees may contribute up to the limits established by the Internal Revenue Service. Matching contributions are made by the Company equal to 50% of employee contributions, subject to certain limitations. The Company's matching contributions during 1999, 2000 and 2001 were $208, $235 and $194, respectively. During 1997, the Company approved an Employee Stock Purchase Plan (the Stock Purchase Plan). The Stock Purchase Plan qualified as an employee stock purchase plan under Section 423 of the Internal Revenue Code. All regular full-time employees, as defined, of the Company (including officers) are eligible to participate in the Stock Purchase Plan. Directors who are not employees are not eligible. A maximum of 250,000 shares of the Company's common stock is reserved for issuance under the Stock Purchase Plan. The Stock Purchase Plan allows the eligible employees to purchase common stock of the Company, through payroll deductions, at a discounted price from the market price. The exercise price under the plan is 85% of the lesser of the market value of the Company's common stock on two defined dates during the plan year. 13. CHANGES IN ACCOUNTING PRINCIPLES: During the year ended December 31, 2000, the Company changed its method of accounting for production parts inventory from expensing upon purchase to capitalization upon purchase and expensing upon installation. In prior years, the Company had a low level of production parts inventory on hand. However, as production capacity increased, as well as the necessity of reducing equipment down-time, the Company chose to maintain a larger amount of production parts inventory. Accordingly, the Company believes that the capitalization of production parts inventory results in a better measurement of operating results by expensing production parts at the time they are placed into service and start generating revenues. The $141 cumulative effect of the change is included in the Consolidated Statement of Operations for the year ended December 31, 2000. F-15 On January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("the Statement"). On adoption of the Statement, the Company recorded a cumulative effect of change in accounting principle in the amount of $1,402 (net of zero income taxes). The cumulative effect of change in accounting principle was recorded to reduce the carrying value of the liability related to the put warrants to fair value. The fair value of the warrants is estimated using a Black-Scholes option-valuation model. Subsequent changes in the fair value of the put warrants are recorded as a component of net income. The Company does not have any other derivative instruments. 14. COMMITMENTS: OPERATING LEASES The Company leases warehouses, office buildings and most of its delivery vehicles under operating leases. These leases have remaining terms ranging from one to five years. Rental expense under these leases for the years ended December 31, 1999, 2000 and 2001 was $1,734, $1,648 and $1,263, respectively. As of December 31, 2001, future minimum lease payments under these operating leases are as follows: 2002 $ 955 2003 165 2004 100 2005 23 2006 and thereafter - ------ $1,243 ======

It is expected that in the normal course of business most leases that expire will be renewed or replaced by leases on the same or similar properties; thus, it is anticipated that future annual rent expense will not be materially less than the amount shown for 2001. 15. RELATED PARTY TRANSACTIONS: The Company had a consulting agreement (the Agreement) with Elfman Venture Partners, Inc. and Sterling Advisors L.P., a partnership owned by certain stockholders of the Company (the Managers). The term of the Agreement was through December 31, 2001. The Agreement provided that the Company would pay a base fee of $300 per year, which would increase 5% for each year the Agreement remained in effect. The Agreement also stipulated adjustments to the base fee for future acquisitions or sales. During each year the Agreement was in effect, the Company was also required to grant options to purchase 25,000 shares of the Company's $.01 par value common stock. Such options vested on each December 31 at an exercise price equal to the market price on the preceding January 1. The Agreement was amended effective July 1, 1997 in connection with the J.C. Potter Sausage Company (Potter) Acquisition. This amendment (the Potter Amendment) provided for an aggregate payment to the Managers of $750 for services provided in connection with the Potter acquisition and the related financing, in lieu of all other fees that would have been payable under the Agreement for the period July 1, 1997 through December 31, 1998. The Agreement was further amended effective as of December 1, 1998 in connection with the Beverage Division disposition (see Note 3). This amendment (the Beverage Amendment) provided for an aggregate payment to the Managers of $260 for services provided in connection with the disposition of the Beverage Division, in lieu of all other base fees that would have been payable under the Agreement for the period from January 1, 1999 through July 15, 1999. Subsequent to July 15, 1999, and up until October 1, 2000, there was no agreement in place. As of October 1, 2000, the Company entered into a Management Agreement (the Second Agreement) with Sterling Advisors, L.P. (Sterling), which was subsequently rescinded in connection with the amendment to the senior subordinated note dated April 13, 2001 (See Note 9). No expenses were incurred nor payments made to Sterling under the Second Agreement. Also in connection with the amendment dated April 13, 2001 to the senior subordinated note, Sterling BOCP, LLC, an entity owned by certain directors and stockholders of the Company, purchased a 10% interest in the senior subordinated note, including a corresponding 10% interest in the detachable put warrants which were issued in connection with the senior subordinated note. F-16 16. GROGAN'S FIRE and GOODWILL ADJUSTMENT: On October 13, 2000, the Grogan's manufacturing plant located in Arlington, Kentucky was totally destroyed by fire and the impacted assets' net book value of $1,200 was written off. At December 31, 2000, the Company recorded a $1,400 receivable from the insurance carrier for the net book value of the plant and equipment destroyed plus other related costs incurred. During fiscal 2001, the insurance settlement on the building and equipment destroyed in the fire was finalized at $6,800 and the Company recorded a pretax gain, net of costs incurred, in the amount of $4,800. The Company has collected $1,800 of the settlement as of December 31, 2001 and recorded a receivable in the amount of $5,000 which is included in prepaid expenses and other assets at December 31, 2001. This amount was subsequently collected in February 2002. Additionally, the Company has outstanding claims for inventory destroyed, continuing expenses, business interruption and other coverages which are in process. Based on communications with the insurance carrier, management and its insurance consultants believe, with reasonable certainty, that the Company will receive at least $750 in insurance proceeds related to such claims. The receivable for the anticipated proceeds of $750 is included in prepaid expenses and other current assets. As a result of the fire, the Company began to explore its options relative to the Grogan's business. The Company made the decision to divest the Grogan's business which consisted of certain intangible assets, accounts receivable, inventory, fixed assets, and certain liabilities. In connection with this decision, the Company performed a review of the goodwill associated with the Grogan's business for possible impairment. The Company estimated its future cash flows from the sale of the business and compared the future cash flows to the carrying value of the goodwill. The future cash flows utilized in this analysis were realized upon the sale of the Grogan's business in February 2002. This analysis resulted in the write-down of goodwill in the amount of $1,044, which is classified as Goodwill adjustment in the accompanying statement of operations for the year ended December 31, 2001. 17. BUSINESS SEGMENT INFORMATION: The Company's operations have been classified into two business segments: food processing and food distribution. The food processing segment includes the processing and sales of sausage and related food products to distributors and retailers in Oklahoma, Louisiana, Texas, and other surrounding states. The food distribution segment includes the purchasing, marketing and distribution of packaged meat products to retailers and restaurants, primarily in Texas. Summarized financial information, by business segment, for continuing operations in 1999, 2000 and 2001 is as follows (corporate overhead not specifically associated with a segment has been presented separately): F-17

Inter-segment sales and related receivables and payables among the segments during 1999, 2000, and 2001, for the purpose of this presentation, have not been eliminated. F-18 The following are reconciliations of reportable segment revenues, profit or loss, assets, and other significant items to the Company's consolidated totals:

F-19 18. CONTINGENCIES: Lawsuits and claims are filed against the Company from time to time in the ordinary course of business. These actions are in various preliminary stages, and no judgments or decisions have been rendered by hearing boards or courts. Management, after reviewing developments to date with legal counsel, is of the opinion that the outcome of such matters will not have a material adverse effect on the Company's financial position or results of operations. 19. ACCRUED EXPENSES: Accrued expenses consist of the following at December 31: 2000 2001 Compensation and benefits $ 816 $ 783 Other 905 1,505 ------ ------- Total $1,721 $ 2,288 ====== ======= F-20 20. QUARTERLY FINANCIAL DATA (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE DATA):

The sum of the quarterly income per share amounts do not equal the annual income per share amount due to rounding. F-21 INDEX TO EXHIBITS

4.18 Atlantic Premium Brands, Ltd. Warrant Certificate Common Stock Purchase Warrant to Sterling dated as of April 13, 2001 (9) 4.19 Atlantic Premium Brands, Ltd. Amended and Restated Warrant Certificate Contingent Common Stock Purchase Warrant of Banc One dated as of February 1, 2002 (*) 4.20 Atlantic Premium Brands, Ltd. Warrant Certificate Contingent Common Stock Purchase Warrant of Sterling dated as of April 13, 2001 (9) 4.21 Amended and Restated Put Option Agreement dated as of April 13, 2001 among the Company, Banc One and Sterling (9) 4.22 Amended and Restated Registration Rights Agreement dated as of April 13, 2001 among the Company, Banc One and Sterling (9) 4.23 Amended and Restated Shareholders Agreement dated as of April 13, 2001 among the Company, certain of its shareholders, Banc One and Sterling (9) 4.24 Amended and Restated Preemptive Rights Agreement dated as of April 13, 2001 among the Company, Banc One and Sterling (9) 4.25 Debt Subordination Agreement dated as of March 20, 1998 among Banc One Capital Partners, LLC, the Company, certain of its subsidiaries and Fleet Capital Corporation (4) 4.26 Lien Subordination Agreement dated as of March 20, 1998 between Fleet Capital Corporation and Banc One Capital Partners, LLC (4) 10.1 Non-Compete and Non-Disclosure Agreement dated September 24, 1993 among the Company, Sterling Group, Inc., Eric D. Becker, Steven M. Taslitz, Douglas L. Becker and R. Christopher Hoehn-Saric (1) 10.2 Form of Tax Indemnification Agreement (1) 10.3 Stock Purchase Agreement dated April 23, 1999 among the Company and Bobby L. Grogan and Betty Ruth Grogan (5) 10.4 Atlantic Premium Brands, Ltd. Employee Stock Purchase Plan dated November 1, 1997 (2) 10.5 The Company's 1999 Amended and Restated Stock Option Plan (6) 10.6 Amended and Restated Employment Agreement dated January 10, 2002 between the Company and Alan. F. Sussna (*). 10.7 Employment Agreement dated as of April 6, 1998 between the Company and Thomas M. Dalton (7) 10.8 Employment Agreement dated August 10, 1998 between the Company and Steven Englander (8) 10.9 Employment Agreement dated October 1, 2000 between the Company and Merrick M. Elfman. (9) 10.10 Management Agreement dated October 1, 2000 by and between the Company and Sterling Advisors, L.P. (9) 21 Subsidiaries of the Company (*) 23 Consent of KPMG LLP (*)

ATLANTIC PREMIUM BRANDS LTD 10-K