-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EIOzqD6qCBxsOfMzshIF3+/rdpAoYZ6RREEedxUj4/C1MP+cthuAuvWO/hyWmcje L5UUq/k7cNqoAaYAk/PAOQ== 0000950144-01-501510.txt : 20010507 0000950144-01-501510.hdr.sgml : 20010507 ACCESSION NUMBER: 0000950144-01-501510 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20010303 FILED AS OF DATE: 20010504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIERRE FOODS INC CENTRAL INDEX KEY: 0000067494 STANDARD INDUSTRIAL CLASSIFICATION: BAKERY PRODUCTS [2050] IRS NUMBER: 560945643 STATE OF INCORPORATION: NC FISCAL YEAR END: 0306 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07277 FILM NUMBER: 1622307 BUSINESS ADDRESS: STREET 1: 9990 PRINCETON RD CITY: CINCINNATI STATE: OH ZIP: 45246 BUSINESS PHONE: 8283040027 MAIL ADDRESS: STREET 1: 9990 PRINCETON RD CITY: CINCINNATI STATE: OH ZIP: 45246 FORMER COMPANY: FORMER CONFORMED NAME: FRESH FOODS INC DATE OF NAME CHANGE: 19980513 FORMER COMPANY: FORMER CONFORMED NAME: WSMP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN STEER MOM N POPS INC DATE OF NAME CHANGE: 19880719 10-K 1 g68934e10-k.txt PIERRE FOODS, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 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 MARCH 3, 2001 COMMISSION FILE NUMBER--0-7277 PIERRE FOODS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NORTH CAROLINA 56-0945643 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 9990 PRINCETON ROAD, CINCINNATI, OHIO 45246 TELEPHONE: (513) 874-8741 (Address of principal executive offices) Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: COMMON STOCK, NO PAR VALUE 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 twelve months (or for such shorter period that the registrant was required to file such report(s), 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 Regulations S-K is not contained herein and will not be contained, to the best of the 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 number of shares of Pierre Foods, Inc. Common Stock outstanding as of May 2, 2001 was 5,781,480. The aggregate market value of Pierre Foods, Inc. Common Stock held by nonaffiliates of Pierre Foods, Inc. as of May 2, 2001 was $2,531,804. 2 TABLE OF CONTENTS
ITEM NUMBER PAGE PART I Item 1. Description of Business..................................................................... 1 General Development of Business............................................................. 1 Financial Information About Segments........................................................ 1 Narrative Description of Business........................................................... 1 Item 2. Properties.................................................................................. 4 Item 3. Legal Proceedings........................................................................... 4 Item 4. Submission of Matters to a Vote of Security Holders......................................... 4 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters............................................................................ 5 Item 6. Selected Financial Data..................................................................... 5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................... 7 Results of Operations....................................................................... 7 Liquidity and Capital Resources............................................................. 9 Inflation................................................................................... 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 10 Item 8. Financial Statements and Supplementary Data................................................. 11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................................................... 11 PART III Item 10. Directors and Executive Officers of the Registrant.......................................... 12 Item 11. Executive Compensation...................................................................... 13 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 19 Item 13. Certain Relationships and Related Transactions.............................................. 20 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 22
3 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL DEVELOPMENT OF BUSINESS Pierre Foods, Inc. (the "Company" or "Pierre Foods") is a vertically integrated producer and marketer of fully-cooked branded and private label protein and bakery products and microwaveable sandwiches for the foodservice market. The Company's predecessor was founded as a North Carolina corporation in 1966 to own and operate restaurants. The Company's food processing business was originally developed to support its restaurants, but grew independently to become its principal business. In recognition of this fact, in May 1998, the Company, then known as "WSMP, Inc.," changed its name to "Fresh Foods, Inc." In June 1998, the Company consummated the purchase of substantially all of the business in Cincinnati, Ohio, and a portion of the business in Caryville, Tennessee (collectively, "Pierre Cincinnati"), conducted by the Pierre Foods Division of Hudson Foods, Inc. ("Hudson"), a subsidiary of Tyson Foods, Inc. ("Tyson"). Pierre Cincinnati was a value-added food processor selling principally to the foodservice and packaged foods markets. In September 1998, the Company implemented a tax-exempt reorganization of its corporate structure. The reorganization established Fresh Foods, Inc. as a holding company, consolidated 32 subsidiaries into 12 subsidiaries and separated the Company's food processing and restaurant businesses. In July 1999, the Company sold its ham curing business, and in October 1999, the Company disposed of its restaurant segment. The Company now operates solely in the food processing business. In December 1999, the Company implemented another tax-exempt reorganization of its corporate structure to further streamline its operations into one subsidiary. In July 2000, the Company, then known as "Fresh Foods, Inc.," changed its name to "Pierre Foods, Inc." In this document, unless the context otherwise requires, the term "Company" refers to Pierre Foods, Inc. and its current and former subsidiaries. The Company's fiscal year ended March 6, 1999 is referred to as "fiscal 1999," its fiscal year ended March 4, 2000 is referred to as "fiscal 2000," and its fiscal year ended March 3, 2001 is referred to as "fiscal 2001." FINANCIAL INFORMATION ABOUT SEGMENTS During fiscal 2001, the Company operated in the segment of food processing operations, servicing the foodservice industry. In fiscal 2000 and 1999, the food processing and ham curing segments are presented in the financial statements as continuing operations. Due to the disposition of the restaurant segment during fiscal 2000, the results of the restaurant segment are reported as discontinued operations. The ham curing business, which also was disposed of during fiscal 2000, did not qualify for discontinued operations presentation. Information as to revenue, operating profit, identifiable assets, depreciation and amortization expense and capital expenditures for the Company's food processing and ham curing business segments is contained herein by reference to Item 8, "Financial Statements and Supplementary Data," incorporating the information under the caption "Major Business Segments" in Note 13 to the Company's consolidated financial statements. Information as to revenue and operating profit of the restaurant segment is contained herein by reference to Item 8, "Financial Statements and Supplementary Data," incorporating the information under the caption "Disposition of the Restaurant Segment" in Note 1 to the Company's consolidated financial statements. NARRATIVE DESCRIPTION OF THE BUSINESS The Company produces a wide variety of fully-cooked differentiated protein products, hand-held convenience sandwiches and value-added bakery products. The Company's current product line consists of over 800 stock keeping units ("SKUs"). At its Cincinnati facility, the Company produces specialty beef, poultry and pork products that are typically custom-developed to meet specific customer requirements. The Company also offers proprietary product development, special ingredients and recipes as well as custom packaging and marketing programs to its customers. The Company's bakery and sandwich assembly plant is located at the Company's Claremont, North Carolina facility. The Company's primary markets and distribution channels include national restaurant chains, primary and secondary schools, vending, convenience stores, warehouse clubs, and other niche foodservice and packaged foods markets. 1 4 The following table sets forth the Company's revenue and percent of revenue contributed during the past three fiscal years by its various product segments and classes: REVENUES BY SOURCE
FISCAL 2001 FISCAL 2000 FISCAL 1999 ------------- ------------- ------------- REVENUES % REVENUES % REVENUES % ------------- ------- ------------- ------- ------------- ------- (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) Food Processing: Fully-Cooked Protein Products ....... $ 115.3 54.7 $ 107.0 57.7 $ 89.9 57.3 Microwaveable Sandwiches ............ 88.4 41.8 68.5 36.9 52.4 33.4 Bakery and Other Products ........... 7.3 3.5 8.0 4.3 7.5 4.8 ------- ------- ------- ------- ------- ------- Total Food Processing ............... 211.0 100.0 183.5 98.9 149.8 95.5 Ham Curing ............................. 0 0 2.1 1.1 7.0 4.5 ------- ------- ------- ------- ------- ------- Total ............................... $ 211.0 100.0 $ 185.6 100.0 $ 156.8 100.0 ======= ======= ======= ======= ======= =======
Sales and Marketing The Company's team of sales and marketing professionals has significant experience in the Company's markets for fully-cooked protein and bakery products and microwaveable sandwiches. The sales, marketing and new product development functions are organized predominantly by distribution channel. In addition to its direct sales force, the Company utilizes a nationwide network of over 90 independent food brokers, all of whom are compensated solely by payment of sales commissions. The Company's marketing strategy includes distributor and consumer promotions, trade promotions, advertising and participation in trade shows and exhibitions. The Company participates in numerous conferences and is a member of 18 national industry organizations. Company representatives serve on the boards of a number of industry organizations, including the American Meat Institute, the American School Food Service Association, and the National Association of Convenience Stores. Raw Materials The primary materials used in the food processing operations include boneless chicken, beef and pork cuts, flour, yeast, seasonings, breading, soy proteins, and packaging supplies. Meat proteins are generally purchased under seven day payment terms. Historically, raw material costs have remained stable and any price increases have generally been passed on to the customer. The Company does not hedge in the futures markets. The Company purchases all of its raw materials from outside sources. The Company does not depend on a single source for any significant item, believes that its sources of supply for raw materials are adequate for its present needs and does not anticipate any difficulty in acquiring such materials in the future. Trademarks and Licensing The Company markets food products under a variety of brand names, including Pierre and Design(TM), Fast Bites(R), Fast Choice(R), Rib-B-Q(R) and Mom `n' Pop's(R). The Company regards these trademarks and service marks as having significant value in marketing its food products. Pursuant to licenses acquired in fiscal 1998, the Company began producing and marketing microwaveable Checkers, Rally's and Nathan's Famous sandwiches through its existing distribution channels. The term of each such license is subject to renewal and satisfaction of sales volume requirements. The Company has national distribution rights for Rally's and Checkers for vending, as well as distribution rights for Nathan's Famous products. 2 5 Seasonality Except for sales to school districts, which decline significantly during the summer and early January, there is no seasonal variation in the Company's sales. Competition The food production business is highly competitive and is often affected by changes in tastes and eating habits of the public, economic conditions affecting spending habits and other demographic factors. In sales of meat products, the Company faces strong price competition from a variety of large meat processing concerns, including Tyson, Zartic, Inc. and Advance Food Company, and from smaller local and regional operations. In sales of biscuit and yeast roll products, the Company competes with a number of large bakeries in various parts of the country. The sandwich industry is extremely fragmented, with few large direct competitors but low barriers to entry and indirect competition in the form of numerous other products. The Company's competitors in the sandwich industry include Market Fare Foods, Bridgford Foods Corp., Jimmy Dean Foods and E.A. Sween. Research and Development The Company employs six food technologists in the product development department. Ongoing food production research and development activities include development of new products, improvement of existing products and refinement of food production processes. These activities resulted in the launch of over 100 new SKUs in fiscal 2001. Over 20% of fiscal 2001 food processing sales were related to products developed in the last two years, the Company's definition of a new product. In fiscal 2001, 2000 and 1999, the Company spent approximately $465,000, $354,000 and $302,000, respectively, on product development programs. Government Regulation The food production industry is subject to extensive federal, state and local government regulation. The Company's food processing facilities and food products are subject to frequent inspection by the United States Department of Agriculture ("USDA"), Food and Drug Administration ("FDA") and other government authorities. In July 1996, the USDA issued strict new policies against contamination by food-borne pathogens and established the Hazard Analysis and Critical Control Points ("HACCP") system. The Company is in full compliance with all FDA and USDA regulations, including HACCP standards. The Company's operations are governed by laws and regulations relating to workplace safety and worker health that, among other things, establish noise standards and regulate the use of hazardous chemicals in the workplace. The Company also is subject to numerous federal, state and local environmental laws. Under applicable environmental laws, the Company may be responsible for remediation of environmental conditions and may be subject to associated liabilities relating to its facilities and the land on which its facilities are or had been situated, regardless of whether the Company leases or owns the facilities or land in question and regardless of whether such environmental conditions were created by the Company or by a prior owner or tenant. The Company does not believe that compliance with environmental laws will have a material effect upon the capital expenditures, earnings or competitive position of the Company and its subsidiaries. The Company's operations are subject to licensing and regulation by a number of state and local governmental authorities, which include health, safety, sanitation, building and fire agencies. Operating costs are affected by increases in costs of providing health care benefits, the minimum hourly wage, unemployment tax rates, sales taxes and other similar matters over which the Company has no control. The Company is subject to laws governing relationships with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements. Employees As of March 3, 2001, the Company employed approximately 1,200 persons. The Company has experienced no work stoppage attributed to labor disputes and considers its employee relations to be good. 3 6 Restaurant Operations During fiscal 2000, the Company disposed of its restaurant segment. Prior to the disposition, the Company owned and operated 67 restaurants and franchised an additional 36 restaurants operating under the Sagebrush, Western Steer, Prime Sirloin and Bennett's concepts. The Company's restaurants were located in North Carolina, South Carolina, Tennessee and Virginia. Ham Curing Operations During fiscal 2000, the Company sold its ham curing business. Prior to the disposition, the Company produced cured hams and ham products for foodservice and retail grocery customers. The Company's revenues from ham curing operations totaled approximately $2.1 million during fiscal 2000, representing 1.1% of the Company's revenues from continuing operations. ITEM 2. PROPERTIES The Company believes that its facilities are generally in good condition and that they are suitable for their current uses. The Company nevertheless engages periodically in construction and other capital improvement projects as the Company believes is necessary to expand and improve the efficiency of its facilities. Principal Offices. The Company's main office is located in the facility it owns in Cincinnati, Ohio. The Company also leases 6,000 square feet of office space in Hickory, North Carolina as additional executive offices. Food Processing Plants. The Company produces its fully-cooked meat products, packaged sandwiches and specialty bread products at facilities it owns in Cincinnati, Ohio and Claremont, North Carolina. The Cincinnati facility occupies buildings totaling approximately 200,000 square feet. The Claremont facility occupies buildings totaling approximately 220,000 square feet. The Company also owns and uses a 23,000 square foot building in Claremont, North Carolina for additional office space. ITEM 3. LEGAL PROCEEDINGS Pierre Foods and its subsidiaries are parties in various lawsuits arising in the ordinary course of business. In the opinion of management, any ultimate liability with respect to these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of fiscal 2001. 4 7 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the NASDAQ Small Cap Market tier of the NASDAQ Stock Market under the symbol "FOOD". As of May 2, 2001, the Company had approximately 1,458 shareholders of record. The following table sets forth the quarterly high and low closing bid price quotations for the Company's common stock. These quotations represent interdealer prices, without retail mark-up, mark-down or commissions, and do not necessarily reflect actual transactions.
RANGE OF PRICES ------------------ HIGH LOW ------- ------- Fiscal year ended March 4, 2000: First Quarter........................................................................ $ 6.938 $ 5.125 Second Quarter....................................................................... 9.875 6.750 Third Quarter........................................................................ 10.500 6.688 Fourth Quarter....................................................................... 6.375 3.000 Fiscal year ended March 3, 2001: First Quarter........................................................................ $ 4.813 $ 2.875 Second Quarter....................................................................... 3.094 1.750 Third Quarter........................................................................ 2.500 1.125 Fourth Quarter....................................................................... 1.250 0.750
The closing price on May 2, 2001 was $1.19 per share. The Company did not declare a cash dividend during fiscal 2001 or fiscal 2000. The Company's debt instruments restrict its ability to pay dividends. Regardless of the scope of such restrictions, the Company's policy is to reinvest any earnings rather than pay dividends. ITEM 6. SELECTED FINANCIAL DATA The following selected historical financial information has been derived from audited consolidated financial statements of the Company. Such financial information should be read in conjunction with the fiscal 2001 consolidated financial statements of the Company, the notes thereto and the other financial information contained elsewhere herein. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements. 5 8
Fiscal Years Ended --------------------------------------------------------------- March 3 March 4, March 6, Feb. 27, Feb. 28, 2001 2000 1999 1998 1997 --------- --------- --------- -------- -------- (dollars in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues ............................................. $ 211,040 $ 185,598 $ 156,842 $ 66,245 $ 58,615 Cost of goods sold ................................... 133,740 116,025 101,413 59,153 53,821 Selling, general and administrative .................. 62,962 65,319 40,003 10,356 7,630 Loss on sale of Mom `n' Pop's Country Ham, LLC ......................................... -- 2,857 -- -- -- Net (gain) loss on disposition of property, plant and equipment .................................... 27 (22) 1,004 (640) (346) Depreciation and amortization ........................ 6,238 5,662 4,902 1,615 1,401 --------- --------- --------- -------- -------- Operating income (loss) .............................. 8,073 (4,243) 9,520 (4,239) (3,891) Interest expense ..................................... 13,334 14,986 12,332 1,762 1,868 Other income, net .................................... 281 169 409 204 61 Income tax benefit ................................... 767 4,825 613 1,926 2,262 --------- --------- --------- -------- -------- Loss from continuing operations ...................... (4,213) (14,235) (1,790) (3,871) (3,436) Income from discontinued operations .................. -- 2,828 4,285 6,121 5,461 Gain on disposal of discontinued operations .......... -- 6,802 -- -- -- Extraordinary item (1) ............................... (455) (52) (64) -- 415 --------- --------- --------- -------- -------- Net income (loss) .................................... $ (4,668) $ (4,657) $ 2,431 $ 2,250 $ 2,440 ========= ========= ========= ======== ======== NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED: Loss from continuing operations ...................... $ (0.73) $ (2.45) $ (0.30) $ (0.68) $ (0.67) Income from discontinued operations .................. -- 0.49 0.72 1.08 1.07 Gain on disposal of discontinued operations .......... -- 1.17 -- -- -- Extraordinary item ................................... (0.08) (0.01) (0.01) -- 0.08 --------- --------- --------- -------- -------- Net income (loss) .................................... $ (0.81) $ (0.80) $ 0.41 $ 0.40 $ 0.48 ========= ========= ========= ======== ======== OTHER DATA: Capital expenditures ................................. $ 2,764 $ 5,488 $ 15,479 $ 13,252 $ 9,702 BALANCE SHEET DATA: Working capital (deficit) ............................ $ 36,120 $ 36,403 $ 27,126 $ (497) $ 2,114 Total assets ......................................... 160,308 164,727 216,989 71,656 59,571 Total debt ........................................... 115,165 115,479 146,940 20,918 18,208 Shareholders' equity ................................. 26,867 31,533 41,152 39,227 31,348
(1) Reflects an extraordinary loss from early extinguishment of debt in the amount of $455 in fiscal 2001, $52 in fiscal 2000 and $64 in fiscal 1999, and an extraordinary gain from early extinguishment of debt in the amount of $415 in fiscal 1997. 6 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements made in this document are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from expected results. As detailed in Exhibit 99.1 to this Report, with respect to the Company, these risks and uncertainties include: substantial leverage and insufficient cash flow from operations; restrictions imposed by the Company's debt instruments; management control; factors inhibiting takeover; limited secondary market for common stock; price volatility; restriction on payment of dividends; competitive considerations; government regulation; general risks of the food industry; adverse changes in food costs and availability of supplies, dependence on key personnel, potential labor disruptions and the effects of the pending management buyout. This list of risks and uncertainties is not exhaustive. Also, new risk factors emerge over time. Investors should not place undue reliance on the predictive value of forward-looking statements. RESULTS OF OPERATIONS The Company's operations historically have been classified into three business segments: food processing operations, principally fully-cooked protein and sandwich production; restaurant operations, comprised of the Sagebrush, Western Steer, Prime Sirloin and Bennett's concepts; and ham curing operations. As discussed in Note 1 to the Consolidated Financial Statements, the Company sold its ham curing business effective July 2, 1999, and sold its restaurant operations effective October 8, 1999. The results of the restaurant operations are presented as a discontinued operation in the Company's Consolidated Statements of Operations, and are excluded from the table below. In fiscal 2000, the ham curing operations do not qualify for discontinued operations presentation. As a part of the Pierre Cincinnati acquisition, the Company changed its interim fiscal periods to conform with the standard food processing industry interim periods. In line with this, each quarter of the fiscal year will contain 13 weeks except for the infrequent fiscal years with 53 weeks. In order to adopt this interim calendar, the fiscal year ended March 6, 1999 contains 53 weeks. This additional week of activity did not have a material impact on any reported line item on the consolidated statements of earnings when compared with fiscal 2000 and fiscal 2001. Results for fiscal 2001, 2000 and 1999 for each segment are shown below:
FISCAL YEARS ENDED ----------------------------------- MARCH 3, MARCH 4, MARCH 6, 2001 2000 1999 -------- -------- -------- (IN MILLIONS) Revenues: Food processing ................................................. $ 211.0 $ 183.5 $ 149.8 Ham curing ...................................................... -- 2.1 7.0 ------- ------- ------- Total ..................................................... 211.0 185.6 156.8 ------- ------- ------- Cost of goods sold: Food processing ................................................. 133.7 113.9 95.2 Ham curing ...................................................... -- 2.1 6.2 ------- ------- ------- Total ..................................................... 133.7 116.0 101.4 ------- ------- ------- Selling, general and administrative ................................ 63.0 65.3 40.0 Loss on sale of Mom `n' Pop's Country Ham, LLC ..................... -- 2.9 -- Net loss on disposition of property, plant and equipment ........... -- -- 1.0 Depreciation and amortization ...................................... 6.2 5.6 4.9 ------- ------- ------- Operating income (loss) ............................................ 8.1 (4.2) 9.5 Interest and other expense, net .................................... (13.1) (14.8) (11.9) ------- ------- ------- Loss from continuing operations before income tax benefit .......... (5.0) (19.0) (2.4) Income tax benefit ................................................. 0.8 4.8 0.6 ------- ------- ------- Loss from continuing operations .................................... (4.2) (14.2) (1.8) Income from discontinued restaurant segment ........................ -- 2.8 4.3 Gain on disposal of discontinued restaurant segment ................ -- 6.8 -- Extraordinary item ................................................. (0.5) (0.1) (0.1) ------- ------- ------- Net income (loss) .................................................. $ (4.7) $ (4.7) $ 2.4 ======= ======= =======
7 10 Fiscal 2001 Compared to Fiscal 2000 Revenues. Revenues increased by $25.4 million, or 13.7%, due to a $27.5 million (15.0%) increase in the food processing segment, offset by a $2.1 million (100.0%) decrease in the ham curing segment. The increase in food processing revenues was due to an increase in demand in all core customer channels. The decrease in ham curing revenues was due to the Company's strategic decision to exit the ham curing business, which was effective July 2, 1999. Cost of goods sold. Cost of goods sold increased by $17.7 million, or 15.3%, comprised of a $19.8 million (17.4%) increase in the food processing segment, offset by a $2.1 million (100.0%) decrease in the ham curing segment due to the Company's sale of the ham curing business. As a percentage of food processing revenues, food processing cost of goods sold increased from 62.1% to 63.4%. This increase was due to a shift in demand to product categories with lower margins. Selling, general and administrative. Selling, general and administrative expenses decreased by $2.3 million, or 3.5%, primarily due to a decrease in overhead costs following the divestitures of the restaurant operations and ham curing business and subsequent corporate restructuring in fiscal 2000. As a percentage of operating revenues, selling, general and administrative expenses decreased from 35.2% to 29.8% for the same reasons. Depreciation and amortization. Depreciation and amortization increased by $.6 million, or 10.2%, primarily due to routine capital expenditures. As a percentage of operating revenues, depreciation and amortization decreased from 3.1% to 3.0%. Other expense, net. Net other expense decreased by $1.8 million, or 11.9%. This decrease primarily was due to a change in the credit facility and decreased borrowings under that facility (see --- "Liquidity and Capital Resources" below). Other non-operating expenses were not significant. Income tax benefit. The effective tax rate for fiscal 2001 continuing operations was 15.4% compared to 25.3% for fiscal 2000. The decrease in the effective tax rate is due primarily to the change in estimated tax benefit from the prior year in connection with the completion of the income tax return, combined with the effects of permanent timing differences. Fiscal 2000 Compared to Fiscal 1999 Revenues. Revenues increased by $28.8 million, or 18.3%, due to a $33.7 million (22.5%) increase in the food processing segment, offset by a $5.0 million (70.3%) decrease in the ham curing segment. The increase in food processing revenues was due to the Pierre Cincinnati acquisition in fiscal 1999 which contributed four quarters of revenues in fiscal 2000 compared to three quarters of revenue in fiscal 1999. The decrease in ham curing revenues was due to the Company's strategic decision to exit the ham curing business, which was effective July 2, 1999. Cost of goods sold. Cost of goods sold increased by $14.6 million, or 14.4%, comprised of a $18.7 million (19.6%) increase in the food processing segment, offset by a $4.1 million (66.0%) decrease in the ham curing segment. The increase in the food processing segment was due to the Pierre Cincinnati acquisition in fiscal 1999 which contributed four quarters of operations in fiscal 2000 compared to three quarters of operations in fiscal 1999. As a percentage of food processing revenues, food processing cost of goods sold decreased from 63.6% to 62.1% due to a shift in demand to product categories with higher margins. The decrease in ham curing cost of goods sold was due to the Company's strategic decision to exit the ham curing business, effective July 2, 1999. Selling, general and administrative. Selling, general and administrative expenses increased by $24.3 million, or 59.2% primarily due to indirect expenses incurred in the disposition of the restaurant segment, and expenses associated with consulting and non-compete agreements with former shareholders. As a percentage of operating revenues, selling, general and administrative expenses increased from 26.1% to 35.2% for the same reasons. Depreciation and amortization. Depreciation and amortization increased by $.8 million, or 15.5%, primarily due to four quarters of Pierre Cincinnati depreciation and amortization in fiscal 2000 compared to three quarters of Pierre Cincinnati depreciation and amortization in fiscal 1999, offset by a decline in depreciation due to the sale of the assets of the ham curing business. As a percentage of operating revenues, depreciation and amortization was 3.1% for both fiscal years. 8 11 Other expense, net. Net other expense increased by $2.9 million, or 24.3%. This increase primarily was due to an increase in interest expense resulting from four quarters of interest expense in fiscal 2000, compared to three quarters of interest expense resulting from financing of the Pierre Cincinnati acquisition in June 1998 (see -- "Liquidity and Capital Resources" below). Other non-operating expenses were not significant in fiscal 2000 or fiscal 1999. Income tax benefit. The effective tax benefit rate for fiscal 2000 continuing operations was 25.3% compared to 25.5% for fiscal 1999. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $2.1 million for fiscal 2001, compared to cash used in operating activities of $6.7 million in fiscal 2000 and $11.0 million provided by operating activities in fiscal 1999. The increase in net cash provided by operating activities from fiscal 2000 to fiscal 2001 was primarily due to a decrease in overhead costs following the divestitures of the restaurant operations and ham curing business and subsequent corporate restructuring in fiscal 2000. The primary components of net cash provided by operating activities for fiscal 2001 were: 1) a decrease in net loss from continuing operations, 2) income tax refunds received, and 3) an increase in accrued payroll, offset by 4) a decrease in accounts payable and other accrued liabilities and 5) an increase in accounts receivable and inventories. The decrease in net cash provided by operating activities from fiscal 1999 to fiscal 2000 was primarily due to the following factors: 1) indirect expenses incurred in the disposition of the restaurant and ham curing segments 2) payment of estimated income taxes due and 3) a decrease in accounts payable and other accrued liabilities. The Company had positive working capital at March 3, 2001 and March 4, 2000 of $36.1 million and $36.4 million, respectively, as compared to working capital of $27.1 million at March 6, 1999. Cash flows used in investing activities were $2.5 million for fiscal 2001. The primary component was for routine capital expenditures, offset by the collection of a related party note receivable. Cash flows provided by investing activities were $45.2 million in fiscal 2000. The primary components were proceeds from the sales of certain of the Company's assets and the restaurant segment, offset by capital expenditures for the food processing and restaurant segments. Cash flows used in investing activities were $132.7 million in fiscal 1999. The primary components were cash used to purchase Pierre in June 1998 and capital expenditures relating to the opening of thirteen new restaurants in fiscal 1999, offset slightly by collections on notes payable to the Company and proceeds from the sale of assets. Cash acquisitions of fixed assets were $2.8 million for fiscal 2001, compared to $5.5 million for fiscal 2000 and $15.5 million for fiscal 1999. Cash flows used in financing activities were $0.5 million for fiscal 2001. The major components were principal payments on the Company's capital leases and fees associated with the Company's $25 million revolving credit facility secured May 24, 2000. Cash flows provided by (used in) financing activities were $(37.4) million in fiscal 2000 and $120.5 million in fiscal 1999, respectively. The major components of the cash flows used in fiscal 2000 were 1) the early payoff of the Company's industrial revenue bonds, 2) repayment of borrowings under the revolving credit facility with proceeds from the disposition of the restaurant segment, 3) a loan to a principal shareholder, and 4) the repurchase of the Company's common stock. The major components of financing activities in fiscal 1999 included the issuance of $115 million principal amount of 10.75% Senior Notes Due 2006 (the "Notes") and initial borrowings under a five-year, $75.0 million revolving credit facility. The proceeds of these financing activities were used to acquire Pierre, extinguish all existing debt of the Company, with the exception of outstanding industrial revenue bonds and certain lease obligations, and repurchase 110,000 shares of the Company's common stock. Effective May 24, 2000, the Company secured a three-year $25 million revolving credit facility, under which the Company may borrow up to an amount (including standby letters of credit up to $5 million) equal to the lesser of $25 million less required minimum availability or a borrowing base (comprised of eligible accounts receivable and inventory). Funds available under the facility are available for working capital requirements, permitted investments and general corporate purposes. Borrowings under the facility bear interest at floating rates based upon the interest rate option selected from time to time by the Company, and are secured by a first priority security interest in substantially all of the accounts receivable and inventory of the Company. In addition, the Company is required to meet certain financial covenants regarding net worth, cash flow and restricted payments, including limited dividend payments. 9 12 At March 3, 2001, the Company had $1.8 million in cash or cash equivalents on hand, had no outstanding borrowings under the revolving credit facility, and had approximately $20.4 million of additional borrowing availability. At March 3, 2001, the Company was in compliance with the financial covenants under the facility, but continued compliance will depend upon future cash flows and net income, which are not assured. Fiscal 2001 operating cash flows were not sufficient to provide necessary working capital and to service existing debt. These cash requirements were instead satisfied through a combination of funds provided by cash on hand at the end of fiscal 2000 and borrowings under the $25 million revolving credit facility. The Company anticipates that its fiscal 2002 cash requirements for working capital and debt service will be met through a combination of funds provided by operations and borrowings under the $25 million revolving credit facility. The Company has budgeted approximately $4.8 million for capital expenditures in fiscal 2002. These expenditures are devoted to routine food processing capital improvement projects and other miscellaneous expenditures and should be sufficient to maintain current operating capacity. The Company believes that funds from operations and funds from the $25 million revolving credit facility, as well as the Company's ability to enter into capital or operating leases, will be adequate to finance these routine capital expenditures. If Pierre continues its historical revenue growth trend as expected, then the Company will be required to raise and invest additional capital for various plant expansion projects to provide operating capacity to satisfy increased demand. The Company believes that future cash requirements for these plant expansion projects would need to be met through other long-term financing sources, such as an increase in borrowing availability under the $25 million credit facility, the issuance of industrial revenue bonds or equity investment. The incurrence of additional long-term debt is governed and restricted by the Company's existing debt instruments. Furthermore, there can be no assurance that additional long-term financing will be available on advantageous terms (or any terms) when needed by the Company. The Company anticipates continued sales growth in key market areas. As noted above, however, this growth will require capital expansion projects to increase existing plant capacity to satisfy increased demand. Sales growth, improved operating performance and expanded plant capacity - none of which is assured - will be necessary for the Company to continue to service existing debt. INFLATION The Company believes that inflation has not had a material impact on its results of operations for fiscal 1999, fiscal 2000 or fiscal 2001. The Company does not expect inflation to have a material impact on its results of operations for fiscal 2002. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk stemming from changes in interest rates, foreign exchange rates and commodity prices. Changes in these factors could cause fluctuations in the Company's financial condition, results of operations and cash flows. The Company owned no derivative financial instruments or nonderivative financial instruments held for trading purposes at March 3, 2001, March 4, 2000 or March 6, 1999. Certain of the Company's outstanding nonderivative financial instruments at March 3, 2001 are subject to interest rate risk, but not subject to foreign currency or commodity price risk. Interest Rate Risk The Company manages the potential loss on long-term debt from changing interest rates by issuing a combination of fixed and variable-rate debt in amounts and maturities that management considers appropriate. Of the Company's long-term debt outstanding at March 3, 2001, all principal amounts were accruing interest at fixed rates. In the future, should the Company borrow funds under the variable-rate $25 million revolving credit facility, a rise in prevailing interest rates could adversely affect the Company's financial condition, results of operations and cash flows. The following table summarizes the Company's market risks associated with long-term debt outstanding at March 3, 2001. The table presents principal cash outflows and related interest rates by maturity date. 10 13 March 3, 2001 Expected Maturities in Fiscal Years
Long-Term Debt ------------------------------------- Weighted Average Fixed Rate Interest Rate ------------- ---------------- 2002 $ 67,631 9.28% 2003 49,686 9.28 2004 46,066 9.28 2005 1,539 9.28 Thereafter 115,000,000 10.75 ------------- Total $ 115,164,922 10.75 ============= Fair Value $ 41,975,000 10.75%
Foreign Exchange Rate Risk The Company primarily bills customers in foreign countries in US dollars. However, a significant decline in the value of currencies used in certain regions of the world as compared to the US dollar could adversely affect product sales in those regions because the Company's products may be more expensive for those customers to pay for in their local currency. At March 3, 2001, all trade receivables were denominated in US dollars. Commodity Price Risk Certain raw materials used in food processing products are exposed to commodity price changes. Increases in the prices of certain commodity products could result in higher overall production costs. The Company manages this risk through purchase orders, non-cancelable contracts and by passing on such cost increases to customers. The Company's primary commodity price exposures relate to beef, pork, poultry, soy and packaging materials used in food processing products. At March 3, 2001, the Company evaluated commodity pricing risks and determined it was not currently beneficial to use derivative financial instruments to hedge the Company's current positions with respect to such pricing exposures. Fair Value of Financial Instruments The Company's nonderivative financial instruments consist primarily of cash and cash equivalents, trade and note receivables, trade payables, and long-term debt. At March 3, 2001, excluding long-term debt shown above, the book values of each of the nonderivative financial instruments recorded in the Company's balance sheet are considered representative of fair value due to variable interest rates, short terms to maturity and/or short length of time outstanding. Fair value of nonderivative financial instruments are estimated using discounted cash flow analysis, based on current incremental borrowing rates for similar nonderivative financial instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is set forth on pages F-1 through F-28. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 11 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS AND EXECUTIVE OFFICERS JAMES C. RICHARDSON, JR., CHAIRMAN, age 52, has been a director since 1987, and became Chairman of the Board of Directors on December 16, 1999. From 1993 until then he had served as Chief Executive Officer of the Company. From 1996 until becoming Chairman, he had served as Vice Chairman. Mr. Richardson has served the Company as an executive officer since 1987, including Executive Vice President from 1989 to 1993 and President from 1993 to 1996. DAVID R. CLARK, VICE CHAIRMAN, age 44, has been a director since 1996 and Vice Chairman since 1999. He joined the Company as its President and Chief Operating Officer in 1996 and held those positions until he became Vice Chairman. From 1994 to 1996, he served as Executive Vice President and Chief Operating Officer of Bank of Granite, located in Granite Falls, North Carolina. E. EDWIN BRADFORD, DIRECTOR, age 58, has been a director since 1993. In 1977, he founded Bradford Communications, Inc., a Hickory, North Carolina marketing and advertising firm. During fiscal 2001, Mr. Bradford served as a member of the Sensitive Transactions and Special Committees of the Board of Directors. He continues to serve on both Committees. BOBBY G. HOLMAN, DIRECTOR, age 65, has been a director since 1994. He served as the Company's Chief Financial Officer and Treasurer from 1994 until his retirement in 1997. During fiscal 2001, Mr. Holman was a member of the Audit and Special Committees of the Board of Directors. He continues to serve on and chairs both Committees. RICHARD F. HOWARD, DIRECTOR, age 51, has been a director since 1987. He served as Chairman of the Board of Directors from 1993 until Mr. Richardson became Chairman in 1999. Mr. Howard served as Executive Vice President of the Company from 1989 to 1993 and as Chief Financial Officer and Treasurer from 1989 to 1994. During fiscal 2001, Mr. Howard was a member of the Executive Compensation Committee of the Board of Directors, and continues to serve on that Committee. LEWIS C. LANIER, DIRECTOR, age 52, has been a director since 1988. He is a partner in the Orangeburg, South Carolina, law firm of Lanier & Knight, LLC. Until he co-founded that firm in August 1999, he had been a member of the Orangeburg law firm of Horger, Horger, Lanier & Knight, L.L.P., since joining the firm's predecessor in 1985. During fiscal 2001, Mr. Lanier served on the Executive Compensation and Sensitive Transactions Committees of the Board of Directors. He continues to serve on both committees and chairs the Executive Compensation Committee. WILLIAM R. McDONALD III, DIRECTOR, age 67, has been a director since 1991. From 1989 until his retirement in 1999, he was Branch Manager of American Pharmaceutical Services, a subsidiary of Mariner Post-Acute Network, or its predecessors. American Pharmaceutical Services provides pharmaceutical needs and prescription services to nursing homes. Mr. McDonald serves as Mayor of the City of Hickory, North Carolina, an elective office he has held since 1981. During fiscal 2001, he served on the Audit and Sensitive Transactions Committees of the Company's Board of Directors. He continues to serve on both Committees and chairs the Sensitive Transactions Committee. BRUCE E. MEISNER, DIRECTOR, age 51, was elected to the Board of Directors by the Board itself on February 3, 2000 to fill the unexpired term of L. Dent Miller, who had resigned from the Board concurrent with his retirement from the Company. Mr. Meisner is the proprietor of Bruce E. Meisner Appraisal Company in Hickory, North Carolina, a company providing real estate appraisal services. During fiscal 2001, Mr. Meisner served on the Audit, Executive Compensation and Special Committees. He continues to serve on those Committees. 12 15 NORBERT E. WOODHAMS, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR, age 55, a director since 1998, became the Company's President and Chief Executive Officer on December 16, 1999. Immediately prior to his election to those offices, Mr. Woodhams was President of Pierre Foods, LLC, the Company's operating subsidiary, having served in that position since the Company's acquisition of Pierre Cincinnati in June 1998. From 1994 to 1998, he served as President of Hudson Specialty Foods, a food processing division of Hudson. Upon the acquisition of Hudson by Tyson in January 1998, Mr. Woodhams became President of Pierre. PAMELA M. WITTERS, CHIEF FINANCIAL OFFICER, TREASURER AND SECRETARY, age 44, became the Company's Chief Financial Officer on December 16, 1999. She served the Company as Vice President of Finance from 1998 to 1999. From 1994 to 1998, she worked with Deloitte & Touche LLP in Hickory, North Carolina. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers and persons who own ten percent or more of the Company's common stock to file with the SEC initial reports of ownership and reports of changes in ownership of the Company's common stock. Such persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based upon review of the copies of such reports furnished to the Company and written representations that no other reports were required, no persons failed to make timely filings during the Company's fiscal year ended March 3, 2001. William P. Foley II, E. Edwin Bradford, William McDonald III and Bobby G. Holman each filed Form 4 reporting one transaction seven months late. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following information relates to compensation paid by the Company to its Chief Executive Officer and each of the highly compensated Executive Officers (collectively, the "Named Executive Officers").
Long Term Annual Compensation Compensation Name and Fiscal ------------------------------------------ ------------- All Other Principal Position Year Salary Bonus Other Option Awards Compensation ------ ---------- ---------- -------- ------------- ------------ ($) ($) ($)(1) (# of Shares ($) (2) Underlying Options) James C. Richardson, Jr. 2001 (3) $1,775,000(4) $ 0 $ 0 $ 0 Chairman 2000 (3) 1,145,748(4) 795,522 (5) 0 1999 (3) 0 0 215,000(6) 0 David R. Clark 2001 $150,000(7) $ 0 $ 0 $ 0 $3,200 Vice Chairman 2000 150,000(7) 1,261,969(4) 795,522 (5) 3,200 1999 150,000(7) 375,000(8) 0 215,000(6) 3,200 Norbert E. Woodhams 2001 $300,000 $ 0 $ 0 $ 0 $3,200 President and 2000 275,622 355,007 179,100 (5) 3,200 Chief Executive Officer 1999 189,493(9) 62,500 0 200,000(6) 2,200 Pamela M. Witters 2001 $152,500 $ 20,000 $ 0 $ 25,000 $3,200 Chief Financial Officer, 2000 104,438 73,546 0 0 652 Treasurer and 1999 18,750(10) 0 0 12,500 0 Treasurer and
(1) For fiscal 2000, consists of tax "gross up" payments made in connection with the payment of transaction success bonuses. For all periods shown, the value of insurance premiums, company cars and certain other benefits are excluded, as such items did not exceed 10% of the individual's annual salary and bonus. 13 16 (2) Includes matching contributions made by the Company to the Company's 401(k) plan. (3) No salary was paid by the Company to this individual, who was instead compensated by HERTH. The Company paid HERTH $2,550,000 in fiscal 2001, consisting of $1,300,000 pursuant to the HERTH Agreement and an additional $1,250,000 in the aggregate as bonuses paid to Mr. Richardson for his leadership on strategic initiatives. See "Certain Relationships and Related Party Transactions." (4) For fiscal 2001, includes management performance bonuses of $1,250,000 paid directly to HERTH, plus $525,000 paid directly to Mr. Richardson by the Company. For fiscal 2000, includes management performance bonuses and transaction success bonuses. (5) On February 18, 2000, each of the Named Executive Officers, except Ms. Witters, cancelled all outstanding options to purchase common stock that had been issued and were then outstanding, including options not yet exercisable as well as options exercisable as of the date of cancellation. No value was received by any of the Named Executive Officers in connection with the cancellation of their options. (6) Certain options granted under the 1997 Special Stock Option Plan and under the 1997 Incentive Stock Option Plan were repriced on August 27, 1998, reducing the per share option exercise price from $16.00 to $10.50. The repricing was accomplished by canceling old options and granting new options at the reduced exercise price. (7) For each year, excludes $200,000 paid by the Company and offset from amounts owing to HERTH. See "Employment Contracts and Change in Control Agreements" and "Certain Relationships and Related Party Transactions." (8) Includes a one-time bonus of $375,000 paid upon the Company's acquisition of Pierre in June 1998. (9) Mr. Woodhams' employment with the Company began in June 1998. (10) Ms. Witters' employment with the Company began in November 1998. She was appointed Chief Financial Officer on December 1, 1999. OPTION GRANTS IN LAST FISCAL YEAR The following table presents information relating to option grants made during fiscal 2001 to the Named Executive Officers of the Company and the present value of the grant at the date of grant, determined with the Black Scholes Option Pricing Model.
NUMBER OF PERCENTAGE OF GRANT DATE SHARES OPTIONS EXERCISE OR PRESENT VALUE NAME UNDERLYING GRANTED TO BASE PRICE PER EXPIRATION USING BLACK SCHOLES OPTIONS EMPLOYEES IN SHARE DATE OPTION PRICING MODEL GRANTED FISCAL YEAR - ----------------------- ---------- ------------- -------------- ------------- -------------------- James C. Richardson, Jr. -- -- -- -- -- David R. Clark -- -- -- -- -- Norbert E. Woodhams -- -- -- -- -- Pamela M. Witters 25,000 100% $2.00 July 26, 2010 $1.09
14 17 AGGREGATED OPTION EXERCISES IN FISCAL 2001 AND FISCAL YEAR-END OPTION VALUES The following table presents certain information about stock options exercised by the Named Executive Officers during fiscal 2001 and the value of unexercised options held by them at the end of fiscal 2001.
SHARES ACQUIRED NO. SHARES UNDERLYING VALUE OF IN-THE-MONEY ON EXERCISE OPTIONS AT MARCH 3, 2001 OPTIONS AT MARCH 3, 2001 (1) ------------------ ------------------------------- ------------------------------ VALUE NAME NO. REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ---- -------- ----------- ------------- ----------- ------------- James C. Richardson, Jr. -- -- -- -- -- -- David R. Clark -- -- -- -- -- -- Norbert E. Woodhams -- -- -- -- -- -- Pamela M. Witters -- -- 5,000 32,500 $ 0 $ 0
(1) The closing price of the Company's common stock on Wednesday, May 2, 2001, was $1.19 per share. COMPENSATION OF DIRECTORS During fiscal 2001, directors were paid $10,000 per Board meeting attended, $5,000 per Audit, Executive Compensation and Sensitive Transactions Committee meetings attended, and $2,500 per Special Committee meeting attended, except that directors who were employees of the Company, who were compensated by HERTH, or who had material contracts with the Company, received no payment for their service as directors. EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS On June 30, 1996, Mr. Clark and the Company executed an Employment Agreement (the "Clark Employment Agreement") providing that Mr. Clark would serve as President and Chief Operating Officer of the Company for three years at an annual base salary of $200,000 and an annual bonus based on the Company's financial performance. The Clark Employment Agreement was amended on February 23, 1998 (the "Amended Clark Employment Agreement") to increase Mr. Clark's annual base salary to $350,000 and to provide Mr. Clark an annual bonus based upon the Company's performance. The Company can also award bonuses to Mr. Clark based upon other considerations. See "Report of the Executive Compensation Committee." $200,000 of Mr. Clark's base salary is paid by HERTH and $150,000 of his base salary is paid by the Company. See "Certain Relationships and Related Party Transactions." The Amended Clark Employment Agreement has a term of five years, expiring February 28, 2003, and shall be automatically extended for additional, successive, one-year terms, unless the Company notifies Mr. Clark that it does not intend to extend the term. Should Mr. Clark's employment be terminated by the Company without cause, or by reason of death or disability, or should Mr. Clark resign from employment for good reason during the five-year term, then the Company would be obligated to make a severance payment to him equal to the sum of his base salary as would be due in the aggregate for the remainder of the five-year term. In the event of termination without cause, or by reason of death or disability, or a resignation for good reason during any renewal term of the Clark Employment Agreement, the severance payment would equal three months of Mr. Clark's then-existing base salary. Under the Clark Employment Agreement, the Company agreed to appoint Mr. Clark to fill the first available vacancy on the Board. Mr. Clark subsequently filled a vacancy and currently serves as a member of the Board. 15 18 On August 18, 1999, Mr. Woodhams and the Company executed an Incentive Agreement, which was amended on January 1, 2000 (the "Woodhams Incentive Agreement"). The Company agreed to pay Mr. Woodhams an annual salary of $300,000 and a periodic bonus under the Company's executive bonus plan. The Company also agreed to pay to Mr. Woodhams a "pay to stay bonus" in the amount of $800,000 (inclusive of a tax "gross up" amount) in the event that the Company enters into an agreement for the sale of the Company's food processing operation or if Mr. Woodhams' employment is terminated. Mr. Woodhams is also entitled to receive a transaction success bonus in the amount of $750,000 (inclusive of a tax "gross up" amount) and a severance payment of $532,099 (inclusive of a tax "gross up" amount) in the event that such sale is consummated or Mr. Woodhams' employment is terminated. The term of the Woodhams Incentive Agreement expires on June 8, 2003 and shall be automatically extended from year to year unless the Company notifies Mr. Woodhams that it does not intend to extend the term. On July 6, 1999, each of Messrs. Richardson and Clark (each, an "Officer") entered into a Change in Control Agreement with the Company (collectively, the "Change in Control Agreements"). The Change in Control Agreements provide that, if a change in control of the Company occurs, whether or not an Officer's employment is terminated, then the following benefits will be provided by the Company: three times the amount of the annual base salary (paid by the Company and HERTH) of the Officer; three times the amount of the cash bonus paid or payable by the Company and HERTH (for the most recent completed fiscal year of the Company) to the Officer; and a "gross-up" payment for all excise and income tax liabilities resulting from payments under the Change in Control Agreements. A change in control of the Company is considered to have occurred if: (1) the individuals who constituted the Board of Directors as of the date of the applicable Change in Control Agreement cease to constitute a majority of the Board; (2) any "person" (as defined in the applicable Change in Control Agreement) acquires 15% of the Company's common stock; (3) any of certain business combinations is consummated; or (4) the Company is liquidated or dissolved. Payments under the Change in Control Agreements are payable upon a change in control of the Company, whether or not an Officer's employment is terminated. Upon a change in control, Mr. Clark's Employment Agreement would be terminated immediately prior to the change in control. The term of each Change in Control Agreement is ten years and is automatically extended for additional, successive one-year terms unless the Company notifies the Officer that it does not intend to extend the term. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 2001, the Executive Compensation Committee of the Company's Board of Directors consisted of Messrs. Lanier, Howard, Meisner and Puzder, none of whom was an officer or employee of the Company or any of its subsidiaries during fiscal 2001. Messrs. Lanier, Meisner and Puzder have never been officers of the Company or any of its subsidiaries. Mr. Howard served as Chairman of the Board of Directors from 1993 until Mr. Richardson became Chairman in 1999. Mr. Howard served as Executive Vice President of the Company from 1989 to 1993 and as Chief Financial Officer and Treasurer from 1989 to 1994. Mr. Puzder resigned his position in February 2001. REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE It is the responsibility of the Executive Compensation Committee to advise management and the Board of Directors on matters pertaining to compensation arrangements for senior executives. The members of the Committee are all independent, non-employee directors. Following review and approval by the Executive Compensation Committee, all issues pertaining to executive compensation are submitted to the entire Board of Directors for its consideration. Compensation Principles. In determining the compensation of senior executives, the Company believes that compensation should be (1) based in part upon the Company's performance, by the use of bonuses or stock options, (2) based in part upon the individual contributions and attainment of goals of each officer and the performance of management as a group and (3) based in part upon compensation paid by other companies to similarly situated management. The Company's executive compensation program consists of salary, bonus, long-term compensation and other benefits. 16 19 The Company's Chairman, Mr. Richardson, is compensated pursuant to a Management Services Agreement with HERTH (the "HERTH Agreement"), which was amended and restated in December 1999 and expires in March 2002. Mr. Clark's compensation is partially from HERTH and partially from the Company. See "Employment Contracts and Change in Control Agreements" and "Certain Relationships and Related Party Transactions." Executive Compensation. The Committee considers the objectives of the Company, in developing criteria to measure management performance, and whether individual executives have accomplished the goals assigned to them. Several elements of the performance of an executive are based upon non-numerical performance criteria, such as level of responsibility in the Company, comparable compensation of other executives, individual meritorious performance and improvements in administration, customer relations, and strategic planning. Other elements are tied to management's performance individually and as a group in achieving corporate goals, such as financial performance, profit margins, EBITDA and acquisitions and dispositions deemed to be advantageous to the Company. No mathematical weights are assigned to these individual criteria; however, certain specific bonus incentives may be directly related to financial performance goals. The performances of executives compensated under the HERTH Agreement, like those of other executives of the Company, are evaluated by the Committee using these criteria. Performance-based criteria are generally considered as a whole, although specific performance targets may be waived or adjusted in consequence of unforeseen events or circumstances. Concerning this aspect of compensation, the Committee considered that during fiscal year 2001 management met and surpassed many goals set for them by the Board, including retention and development of customer relationships, negotiating new credit facilities, and the restructuring of business units within the Company. The Committee also considered management's timely actions in positioning the Company for future growth and strategic initiatives. In hiring new officers for the Company, consideration is given to compensation arrangements in previous employment, compensation averages for such executives in the food service industry and means of structuring compensation packages to create incentives to achieve individual and corporate goals. Chief Executive Officer Compensation. Mr. Woodham's compensation as Chief Executive Officer, and the evaluation of his performance as Chief Executive Officer, is consistent with the compensation principles described above and reflects the performance of the Company and Mr. Woodhams. Determination of adequate compensation is qualitative in nature and is based upon a variety of factors, including comparison group compensation data, attainment of various corporate goals, financial and operating performance, individual performance and other factors. Chief Financial Officer Compensation. Ms. Witters' compensation as Chief Financial Officer, and the evaluation of her performance as Chief Financial Officer, is consistent with the compensation principles described above and reflects the performance of the Company and Ms. Witters. Determination of adequate compensation is qualitative in nature and is based upon a variety of factors, including comparison group compensation data, attainment of various corporate goals, financial and operating performance, individual performance and other factors. The Executive Compensation Committee Lewis C. Lanier, Chairman Richard F. Howard Bruce E. Meisner 17 20 STOCK PERFORMANCE GRAPH The following graph presents a five-year comparison of cumulative shareholder returns for the Company, the Standard & Poor's Composite Index (the "S&P Composite Index"), and a Company-constructed peer group (the "Peer Group"). The Company-constructed peer group seeks to reflect the performance of various companies that are similar to the Company in industry or line of business over the five-year period beginning February 23, 1996 and ending March 3, 2001. The graph assumes that $100 is invested on February 23, 1996 in each of the Company's common stock, the Peer Group, and on February 23, 1996 in the Standard & Poor's Composite Index, and, in each case, that all dividends are reinvested. The Company's Peer Group consists of food processing peers ConAgra, Inc., Sara Lee Corporation, Tyson Foods, Bridgford Foods Corporation, Hormel Foods Corporation and WLR Foods, Inc. The returns of each group member were weighted according to the member's stock market capitalization at the beginning of each period for which a return is indicated.
Measurement Period Pierre Foods, Peer S&P (Fiscal Year-End) Inc. Group 500 ------------------ ------------- ------ ------ 2/23/96 100.00 100.00 100.00 2/28/97 205.71 120.21 126.16 2/27/98 411.43 160.15 170.32 3/6/99 120.00 162.41 203.94 3/4/00 92.87 91.02 227.86 3/3/01 22.86 127.49 209.18
18 21 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL SHAREHOLDERS The following table sets forth, as of April 27, 2001, information relative to Company common stock ownership by (i) each person known by the Company's management to own beneficially 5.0% or more of the Company's outstanding common stock, (ii) each director of the Company, (iii) each Named Executive Officer and (iv) all directors and executive officers as a group.
NAME AND NUMBER OF SHARES PERCENT OF ADDRESS OF OF COMMON STOCK OUTSTANDING BENEFICIAL OWNER BENEFICIALLY OWNED(1) COMMON STOCK(2) ---------------- --------------------- --------------- PF Management, Inc.(3) 361 Second Street, NW 3,630,212 62.8% Hickory, NC 28601 James C. Richardson, Jr.(4) P.O. Box 3967 3,630,212 62.8 Hickory, NC 28603 David R. Clark(4) P.O. Box 3967 3,630,212 62.8 Hickory, NC 28603 James M. Templeton(4) P.O. Box 1295 3,630,212 62.8 Claremont, NC 28610 Dimensional Fund Advisors Inc.(5) 1299 Ocean Avenue, 11th Floor 493,375 8.5 Santa Monica, CA 90401 Norbert E. Woodhams 9990 Princeton Road 7,627 * Cincinnati, OH 45248 Pamela M. Witters(6) 9990 Princeton Road 6,346 * Cincinnati, OH 45246 Bobby G. Holman 4090 Golf Drive 5,728 * Conover, NC 28613 E. Edwin Bradford(7) P.O. Box 3081 3,141 * Hickory, NC 28603 William R. McDonald III(8) 1257 25th Street Pl., SE 860 * Hickory, NC 28602 Richard F. Howard 5982 Highway 150 East -- * Denver, NC 28037 Lewis C. Lanier P.O. Box 518 -- * 160 Centre Street, N.E. Orangeburg, SC 29115
19 22 Bruce E. Meisner 1316 2nd Street NE, Suite No. 8 -- * Hickory, NC 28601 All directors and executive officers as a group (10 persons) 3,653,914 63.23%
* Less than one percent (1) Ownership is direct with sole voting power and sole investment power unless otherwise indicated by footnote. (2) The actual number of shares outstanding at April 27, 2001 was 5,781,480. Each percentage has been calculated on the basis of such number. In addition, there were 5,000 shares subject to outstanding call options exercisable not later than May 4, 2001. Shares subject to such options have been considered outstanding for the purpose of computing the percentage of outstanding shares owned by the person who holds such options, but have not been considered outstanding for the purpose of computing the percentage of outstanding shares owned by any other person other than the group of all directors and executive officers. (3) All of the shares owned by PF Management are also deemed to be beneficially owned by each of its shareholders. The shareholders of PF Management and their ownership percentages are: Richardson (52.9%), Clark (35.2%) and Templeton (11.9%). (4) Consists of 3,630,212 shares deemed to be owned beneficially through PF Management. (5) The information provided for Dimensional Fund Advisors Inc. ("Dimensional") was obtained from a Schedule 13G dated February 6, 2001 filed with the SEC by Dimensional relative to the Company's common stock. According to the filing, Dimensional is a registered investment advisor with voting and/or investment power over the shares disclosed as beneficially owned by it. The filing states that the shares are actually owned by investment companies, trusts and accounts advised by Dimensional and that Dimensional disclaims beneficial ownership of the shares. (6) Consists of (i) 1,346 shares held directly, and (ii) 5,000 shares underlying currently exercisable call options. (7) Consists of (i) 1,941 shares held directly, and (ii) 1,200 shares owned beneficially through an individual retirement account. (8) Consists of 860 shares held directly by this shareholder's spouse. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS HERTH Management, Inc. provides management services to the Company, including strategic planning and the direction of strategic initiatives, including the identification and pursuit of mergers, acquisitions, other investment opportunities (both within and without the Company's industry) and divestitures; management of the Company's relationships with investment bankers, securities broker-dealers, significant shareholders, noteholders, banks, lawyers and accountants; facilitation of meetings of the Board of Directors; and general oversight of the Company's performance. HERTH provides the full-time services of Messrs. Richardson and Clark. In exchange for these services, the Company pays HERTH $1,500,000 per year pursuant to a management services agreement, which expires in March 2002. The Company paid HERTH $2,550,000 in fiscal 2001, consisting of $1,300,000 pursuant to the HERTH Agreement and an additional $1,250,000 in the aggregate as bonuses paid to Mr. Richardson. The Company paid $3,241,270 in fiscal 2000, consisting of $1,300,000 under the HERTH agreement and an additional $1,941,270 as bonuses paid to Richardson. The 20 23 HERTH Agreement provides for $200,000 of Mr. Clark's salary to be paid for by HERTH. In fiscal 2001, the Company paid such amount directly to Mr. Clark and reduced the $1,500,000 owed to HERTH under the HERTH Agreement by $200,000. Prior to April 17, 2001, the shareholders of HERTH included Messrs. Richardson (22.0%), Templeton (11.0%), and Columbia Hill, LLC ("Columbia") (45.0%), whose equity owners included Messrs. Clark (45.0%) and Richardson (40.0%). As of April 17, 2001, HERTH was owned only by Richardson and Gregory A. Edgell, a former affiliate of the Company. As of April 25, 2001, the HERTH Agreement was assigned to PF Management. Columbia Hill Management, Inc. ("Columbia Hill"), owned 50% by each of Messrs. Richardson and Clark, provides accounting, tax and administrative services, as well as professional services for the management of special projects. During fiscal 2001, Columbia Hill also provided consulting services for development of new foodservice programs, and consulting services for assessment and development of alternative warehousing and distribution programs. Fees paid for these services were approximately $860,000 in fiscal 2001. During fiscal 2001, Columbia Hill, LLC ("Columbia"), owed the Company as much as $705,493 plus accrued interest pursuant to a promissory note payable on demand and bearing interest at the prime rate. Columbia was owned by Messrs. Clark, Richardson and Hefner, who unconditionally guaranteed repayment of the note. In April 2001, the note was assumed by PF Management, and Columbia was liquidated and dissolved. Columbia Hill Land Company, LLC, owned 50% by each of Messrs. Richardson and Clark, leases office space to the Company in Hickory, North Carolina, pursuant to a ten-year lease that commenced in September 1998. Rents paid under the lease were approximately $103,000 in fiscal 2001. Atlantic Cold Storage of Mocksville, LLC ("ACS"), owned one-third each by Richardson, Clark and Hefner, plans to construct and finance a public cold storage warehouse which would lease space to the Company as well as to others. The proposed agreement with the Company is for 10 years and a minimum of 4,000 pallet positions to be leased as of April 1, 2001 or the first date the facility is operational. The Company also agreed to pay $250,000 for specialized construction costs. On November 7, 2000, a Fairness Opinion was obtained which stated that the proposed lease is no less favorable to the Company than those that could be obtained in an arm's-length transaction with a non-affiliated person, and that the transaction is fair to the Company. During fiscal 2001, the Company paid $250,000 to ACS for the specialized construction costs. All material transactions with affiliates of the Company are first reviewed by the Sensitive Transactions Committee of the Board, which is composed of three independent directors. Upon recommendation of this Committee, such transactions are then presented to the entire Board, where they must be approved by a majority of the independent directors. 21 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The Financial Statements listed in the accompanying Index on page F-1 are filed as a part of this Report. Financial Statement Schedules Financial statement schedules have been omitted because they are not applicable or not required or because the required information is provided in the consolidated financial statements or notes thereto. 3. Exhibits See Index to Exhibits. (b) Reports On Form 8-K. A current report on Form 8-K was filed on March 30, 2001 announcing a press release made that same day disclosing the existence and status of certain management buyout negotiations. A current report on Form 8-K was filed on April 27, 2001 announcing the signing of an Agreement and Plan of Share Exchange dated as of April 26, 2001 among the Company, PF Management Inc., David R. Clark and James C. Richardson, Jr. 22 25 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Pierre Foods, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PIERRE FOODS, INC. By: /s/ DAVID R. CLARK -------------------------- David R. Clark Vice Chairman of the Board Dated: May 4, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Pierre Foods, Inc., in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ James C. Richardson, Jr. Chairman of the Board May 4, 2001 - ----------------------------- James C. Richardson, Jr. /s/ David R. Clark Vice Chairman of the Board May 4, 2001 - ----------------------------- (Principal Executive Officer) David R. Clark /s/ Norbert E. Woodhams Chief Executive Officer, President May 4, 2001 - ----------------------------- and Director Norbert E. Woodhams /s/ Pamela M. Witters Chief Financial Officer, Treasurer May 4, 2001 - ----------------------------- and Secretary (Principal Pamela M. Witters Financial Officer and Principal Accounting Officer) /s/ E. Edwin Bradford Director May 4, 2001 - ----------------------------- E. Edwin Bradford /s/ Bobby G. Holman Director May 4, 2001 - ----------------------------- Bobby G. Holman /s/ Richard F. Howard Director May 4, 2001 - ----------------------------- Richard F. Howard /s/ Lewis C. Lanier Director May 4, 2001 - ----------------------------- Lewis C. Lanier /s/ Bruce E. Meisner Director May 4, 2001 - ----------------------------- Bruce E. Meisner /s/ William R. McDonald III Director May 4, 2001 - ----------------------------- William R. McDonald III
23 26 INDEX TO EXHIBITS
Exhibit No. Description - ----------- ----------- 2.1 Purchase Agreement dated as of August 6, 1999, among Mom `n' Pop's Country Ham, LLC, Pierre Foods, LLC, the Company and Hoggs, LLC (schedules and exhibits omitted) (incorporated by reference to Exhibit 2.3 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended December 4, 1999) 2.2 Purchase Agreement dated as of September 10, 1999 among Claremont Restaurant Group, LLC, Fresh Foods Sales, LLC, the Company and CRG Holdings Corp. (incorporated by reference to Exhibit 2.4 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended December 4, 1999) 2.3 Plan of Merger dated as of December 27, 1999 among Pierre Foods, LLC, Pierre Leasing, LLC and the Company (incorporated by reference to Exhibit 2.5 to the Company's Quarterly Report on From 10-Q for its fiscal quarter ended December 4, 1999) 3.1 Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4 (No. 333-58711)) 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for its fiscal year ended February 27, 1998) 4.1 Note Purchase Agreement, dated June 4, 1998, among the Company, the Guarantors and the Initial Purchasers (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the SEC on June 24, 1998) 4.2 Indenture, dated as of June 9, 1998, among the Company, certain Guarantors and State Street Bank and Trust Company, Trustee (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the SEC on June 24, 1998) 4.3 Registration Rights Agreement, dated June 9, 1998, among the Company, certain Guarantors and certain Initial Purchasers (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed with the SEC on June 24, 1998 and incorporated herein by reference) 4.4 Form of Initial Global Note (included as Exhibit A to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the SEC on June 24, 1998 and incorporated herein by reference) 4.5 Form of Initial Certificated Note (included as Exhibit B to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the SEC on June 24, 1998 and incorporated herein by reference) 4.6 Form of Exchange Global Note (included as Exhibit C to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the SEC on June 24, 1998 and incorporated herein by reference) 4.7 Form of Exchange Certificated Note (included as Exhibit D to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the SEC on June 24, 1998 and incorporated herein by reference) 4.8 First Supplemental Indenture, dated as of September 5, 1998, among the Company, State Street Bank and Trust Company, Trustee, and Pierre Leasing, LLC (incorporated by reference to Exhibit 4.8 to Pre-Effective amendment No. 1 to the Company's Registration Statement on Form S-4 (No. 333-58711))
24 27 4.9 Second Supplemental Indenture dated as of February 26, 1999 among the Company, State Street Bank and Trust Company, Trustee, and Fresh Foods Restaurant Group, LLC (incorporated by reference to Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended December 4, 1999) 4.10 Third Supplemental Indenture dated as of October 8, 1999 between the Company and State Street Bank and Trust Company, Trustee (incorporated by reference to Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended December 4, 1999) 10.1 1987 Incentive Stock Option Plan (incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-8 (No. 33-15017)) 10.2 First Amendment to 1987 Incentive Stock Option Plan (incorporated by reference to Exhibit 4(b) to Post-Effective Amendment No. 1 to the Company's Registration Statement on Form S-8 (No. 33-15017)) 10.3 1987 Special Stock Option Plan (restated as of May 15, 1997) (incorporated by reference to Exhibit 99 to the Company's Registration Statement on Form S-8 (No. 333-29111)) 10.4 1997 Incentive Stock Option Plan (as amended and restated February 23, 1998) (incorporated by reference to Post-Effective Amendment No. 1 to Exhibit 99(a) to the Company's Registration Statement on Form S-8 (No. 333-32455)) 10.5 First Amendment to 1997 Incentive Stock Option Plan, dated February 23, 1998 (incorporated by reference to Exhibit 99(b) to Post-Effective Amendment No. 1 to the Company's Registration Statement on Form S-8 (No. 333-32455)) 10.6 1997 Special Stock Option Plan (as amended and restated February 23, 1998) (incorporated by reference to Exhibit 99.1 to Post-Effective Amendment No. 1 to the Company's Registration Statement on Form S-8 (No. 333-33439)) 10.7 First Amendment to 1997 Special Stock Option Plan, dated February 23, 1998 (incorporated by reference to Exhibit 99.2 to Post-Effective Amendment No. 1 to the Company's Registration Statement on Form S-8 (No. 333-33439)) 10.8 1994 Employee Stock Purchase Plan (incorporated by reference to Exhibit 4(c) to the Company's Registration Statement on Form S-8 (No. 33-79014)) 10.9 Amendment to 1994 Employee Stock Purchase Plan, dated as of May 10, 1995 (incorporated by reference to Exhibit 4(b) to Post-Effective Amendment No. 3 to the Company's Registration Statement on Form S-8 (No. 33-79014) 10.10 Second Amendment to 1994 Employee Stock Purchase Plan, dated as of August 30, 1995 (incorporated by reference to Exhibit 4(c) to Post-Effective Amendment No. 3 to the Company's Registration Statement on Form S-8 (No. 33-79014) 10.11 Third Amendment to 1994 Employee Stock Purchase Plan, dated as of February 12, 1997 (incorporated by reference to Exhibit 4(d) to Post-Effective Amendment No. 4 to the Company's Registration Statement on Form S-8 (No. 33-79014)) 10.12 Employment Contract, dated as of June 30, 1996, between the Company and David R. Clark, together with Amendment to Employment Contract, dated as of February 23, 1998 (incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-4 (No. 333-58711))
25 28 10.13 Consulting and Non-Competition Agreement, dated as of January 29, 1998, between the Company and Charles F. Connor, Jr. (incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-4 (No. 333-58711)) 10.14 Rights Agreement, dated as of September 2, 1997, between the Company and American Stock Transfer & Trust Company, Rights Agent (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the SEC on September 5, 1997) 10.15 Credit Agreement, dated as of June 9, 1998, among the Company, certain Guarantors, First Union Commercial Corporation ("First Union"), as Agent and a Lender, and NationsBank N.A., American National Bank and Trust Company of Chicago and National City Commercial Finance, Inc., as Lenders (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the SEC on June 24, 1998) 10.16 Security Agreement, dated as of June 9, 1998, among the Company, certain Guarantors and First Union, as Agent (incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K filed with the SEC on June 24, 1998) 10.17 Pledge Agreement, dated as of June 9, 1998, among the Company, certain Guarantors and First Union, as Agent (incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K filed with the SEC on June 24, 1998) 10.18 Amendment to Credit Agreement and Consent, dated as of September 5, 1998, among the Company, certain subsidiaries of the Company, First Union, as Agent and a Lender, and certain other Lenders (incorporated by reference to Exhibit 10.32 to Pre-Effective Amendment No. 1 to the Company's Registration Statement on Form S-4 (No. 333-58711) 10.19 Borrower Joinder Agreement dated as of February 26, 1999 between Fresh Foods Restaurant Group, LLC and First Union, as Agent (schedules omitted) (incorporated by reference to Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended December 4, 1999) 10.20 Amendment No. 2 to Credit Agreement and Waiver dated as of April 14, 1999 among the Company, certain subsidiaries of the Company, First Union, as Agent and a Lender, and certain other Lenders (incorporated by reference to Exhibit 10.34 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended December 4, 1999) 10.21 Amendment No. 3 to Credit Agreement dated as of May 14, 1999 among the Company, certain subsidiaries of the Company, First Union, as Agent and a Lender, and certain other Lenders (incorporated by reference to Exhibit 10.35 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended December 4, 1999) 10.22 Consent dated as of July 29, 1999 among the Company, certain subsidiaries of the Company, First Union, as Agent and a Lender, and certain other Lenders (incorporated by reference to Exhibit 10.36 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended December 4, 1999) 10.23 Amended and Restated Change in Control Agreement dated as of July 6, 1999 between the Company and David R. Clark (incorporated by reference to Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 4, 1999) 10.24 Amended and Restated Change in Control Agreement dated as of July 6, 1999 between the Company and James C. Richardson, Jr. (incorporated by reference to Exhibit 10.38 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 4, 1999)
26 29 10.25 Severance, Consulting and Noncompete Agreement dated as of July 12, 1999 among Claremont Restaurant Group, LLC, the Company and L. Dent Miller (incorporated by reference to Exhibit 10.39 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 4, 1999) 10.26 Severance, Consulting and Noncompete Agreement dated as of July 12, 1999 among Claremont Restaurant Group, LLC, the Company, HERTH Management, Inc. and Richard F. Howard (incorporated by reference to Exhibit 10.40 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 4, 1999) 10.27 Incentive Agreement dated as of August 18, 1999 among the Company, Pierre Foods, LLC and Norbert E. Woodhams, together with First Amendment to Incentive Agreement dated as of January 1, 2000 (incorporated by reference to Exhibit 10.41 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 4, 1999) 10.28 Severance, Consulting and Noncompete Agreement dated as of September 13, 1999 among Claremont Restaurant Group, LLC, the Company, HERTH Management, Inc. and James M. Templeton (incorporated by reference to Exhibit 10.42 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 4, 1999) 10.29 Amendment No. 4 to Credit Agreement dated as of September 23, 1999 among the Company, certain subsidiaries of the Company, First Union, as Agent and Lender, and certain other Lenders (incorporated by reference to Exhibit 10.43 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 4, 1999) 10.30 Asset Purchase Agreement dated as of September 30, 1999 among Fairgrove Restaurants, LLC, the Company and Fresh Foods Sales, LLC (schedules and exhibits omitted) (incorporated by reference to Exhibit 10.44 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 4, 1999) 10.31 Amended and Restated Management Services Agreement dated as of December 17, 1999 between HERTH Management, Inc. and the Company (incorporated by reference to Exhibit 10.45 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 4, 1999) 10.32 Agreement dated December 21, 1999 between the Company and Gungor Solmaz, together with form of Agreement dated January 2000 between the Company and Gungor Solmaz (incorporated by reference to Exhibit 10.46 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 4, 1999) 10.33 Fifth Amendment to Credit Agreement and Consent dated as of December 30, 1999 by and among the Company, certain subsidiaries of the Company, First Union, as Agent and Lender, and certain other Lenders (schedules and exhibits omitted) (incorporated by reference to Exhibit 10.47 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 4, 1999) 10.34 Consulting and Noncompete Agreement dated as of January 6, 2000 between the Company and L. Dent Miller (incorporated by reference to Exhibit 10.48 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 4, 1999) 10.35 Consulting and Noncompete Agreement dated as of January 14, 2000 between the Company and Charles F. Connor, Jr. (incorporated by reference to Exhibit 10.49 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 4, 1999) 10.36 Bonus Agreement dated as of June 30, 1999 between the Company and James E. Harris (incorporated by reference to Exhibit 10.50 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended December 4, 1999)
27 30 10.37 Loan and Security Agreement, dated as of May 24, 2000, between the Company and Fleet Capital Corporation, as Lender (schedules omitted) (incorporated by reference to Exhibit 10.51 to the Company's Annual Report on Form 10-K for its fiscal year ended March 6, 2000) 10.38 Pierre Foods, Inc. Compensation Exchange Plan dated August 1, 2000 (incorporated by reference to Exhibit 10.38 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended September 2, 2000) 10.39 Assumption and Assignment Agreement dated as of April 17, 2001, between Columbia Hill, LLC and PF Management, Inc. 10.40 Cancellation and Assignment Agreement dated as of April 25, 2001, between David R. Clark, HERTH Management, Inc. and PF Management, Inc. 10.41 Agreement and Plan of Share Exchange between Pierre Foods, Inc. and PF Management, Inc., dated as of April 26, 2001 12 Calculation of Ratios of Earnings to Fixed Charges 21 Subsidiaries of Pierre Foods, Inc. 23 Independent Auditors' Consent 99.1 Risk Factors
The Company hereby agrees to provide to the Commission, upon request, copies of long-term debt instruments omitted from this report pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K under the Securities Act. 28 31 INDEX TO FINANCIAL STATEMENTS
PAGE ---- PIERRE FOODS, INC. INDEPENDENT AUDITORS' REPORT ............................................................. F-2 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of March 3, 2001 and March 4, 2000 ..................... F-3 Consolidated Statements of Operations for the Years Ended March 3, 2001, March 4, 2000 and March 6, 1999 ................................................... F-4 Consolidated Statements of Shareholders' Equity for the Years Ended March 3, 2001, March 4, 2000 and March 6, 1999 ............................................. F-5 Consolidated Statements of Cash Flows for the Years Ended March 3, 2001, March 4, 2000 and March 6, 1999 ................................................... F-6 Notes to Consolidated Financial Statements ............................................ F-7
F-1 32 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Pierre Foods, Inc. Cincinnati, Ohio We have audited the accompanying consolidated balance sheets of Pierre Foods, Inc. and subsidiaries (the "Company," formerly "Fresh Foods, Inc.") as of March 3, 2001 and March 4, 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three fiscal years in the period ended March 3, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 3, 2001 and March 4, 2000, and the results of its operations and its cash flows for each of the three fiscal years in the period ended March 3, 2001 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Cincinnati, Ohio May 4, 2001 F-2 33 PIERRE FOODS, INC. CONSOLIDATED BALANCE SHEETS
March 3, March 4, 2001 2000 ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,813,185 $ 2,701,464 Accounts receivable, net (Notes 3, 7 and 16 - includes related party receivables of $229,551 and $292,990 at March 3, 2001 and March 4, 2000, respectively) 18,427,453 17,422,811 Notes receivable - current, net (Notes 3 and 16 - includes related party notes receivable of $152,456 at March 4, 2000) -- 238,513 Inventories (Notes 4 and 7) 26,804,063 25,025,421 Refundable income taxes (Note 8) 1,292,667 2,828,156 Deferred income taxes (Note 8) 2,174,642 2,290,361 Prepaid expenses and other current assets 1,033,015 799,582 ------------- ------------- Total current assets 51,545,025 51,306,308 PROPERTY, PLANT AND EQUIPMENT, NET (Notes 5, 9 and 16 - includes related party capital expenditures of $250,000 at March 3, 2001) 34,916,493 35,784,819 ------------- ------------- OTHER ASSETS: Trade name (Note 6) 40,286,636 41,764,636 Excess of cost over fair value of net assets of businesses acquired, net (Note 6) 27,871,114 28,893,723 Other intangible assets, net (Note 6) 2,363,956 2,556,936 Notes receivable-related party (Notes 3 and 16) 705,493 705,493 Deferred loan origination fees, net 2,619,157 3,714,748 ------------- ------------- Total other assets 73,846,356 77,635,536 ------------- ------------- Total Assets $ 160,307,874 $ 164,726,663 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current installments of long-term debt (Note 7) $ 67,631 $ 314,433 Trade accounts payable 5,368,066 5,493,168 Accrued insurance 54,582 154,947 Accrued interest 3,153,280 3,213,929 Accrued payroll and payroll taxes 3,915,799 2,427,691 Accrued promotions (includes related party payables of $32,833 and $51,540 at March 3, 2001 and March 4, 2000, respectively) 1,926,650 1,903,241 Accrued taxes (other than income and payroll) 584,206 563,879 Other accrued liabilities 355,253 831,681 ------------- ------------- Total current liabilities 15,425,467 14,902,969 LONG-TERM DEBT, less current installments (Note 7) 115,097,291 115,164,922 OTHER LONG-TERM LIABILITIES (Note 16) 1,347,231 1,638,466 DEFERRED INCOME TAXES (Note 8) 1,571,087 1,487,134 COMMITMENTS AND CONTINGENCIES (Notes 9 and 14) SHAREHOLDERS' EQUITY (Notes 11 and 16) Preferred stock - par value $.10, authorized 2,500,000, no shares issued -- -- Common stock - no par value, authorized 100,000,000 shares; issued and outstanding March, 2001 - 5,781,480 shares and March 4, 2000 - 5,781,000 shares 5,781,480 5,781,000 Additional paid in capital 23,317,053 23,315,881 Retained earnings 2,768,265 7,436,291 Note Receivable-related party (5,000,000) (5,000,000) ------------- ------------- Total shareholders' equity 26,866,798 31,533,172 ------------- ------------- Total Liabilities and Shareholders' Equity $ 160,307,874 $ 164,726,663 ============= =============
See accompanying notes to consolidated financial statements. F-3 34 PIERRE FOODS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED ------------------------------------------------- MARCH 3, MARCH 4, MARCH 6, 2001 2000 1999 ------------- ------------- ------------- REVENUES (Note 13): Food processing $ 211,040,483 $ 183,502,144 $ 149,778,206 Ham curing -- 2,096,052 7,063,625 ------------- ------------- ------------- Total operating revenues 211,040,483 185,598,196 156,841,831 ------------- ------------- ------------- COSTS AND EXPENSES: Costof goods sold (Note 16 - includes related party transactions totaling $12,733 and $658,826 in fiscal 2000 and 1999, respectively) 133,740,149 116,024,983 101,413,313 Selling, general and administrative expenses (Notes 11 and 16 - includes related party transactions totaling $4,199,591, $3,983,434 and $2,600,529 in fiscal 2001, 2000 and 1999, respectively) 62,961,744 65,319,315 40,003,255 Loss on sale of Mom 'n' Pop's Country Ham, LLC (Note 1) -- 2,857,160 -- Net (gain) loss on disposition of property, plant and equipment 27,695 (22,038) 1,003,555 Depreciation and amortization (Note 13) 6,237,969 5,661,893 4,901,356 ------------- ------------- ------------- Total costs and expenses 202,967,557 189,841,313 147,321,479 ------------- ------------- ------------- OPERATING INCOME (LOSS) 8,072,926 (4,243,117) 9,520,352 ------------- ------------- ------------- OTHER INCOME (EXPENSE) Interest expense (Note 16) (13,334,022) (14,985,577) (12,332,248) Other income (expense), net (Note 16 - includes related party income totaling $61,293, $137,364 and $152,743 in fiscal 2001, 2000 and 1999, respectively) 281,600 168,959 409,095 ------------- ------------- ------------- Other expense, net (13,052,422) (14,816,618) (11,923,153) ------------- ------------- ------------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT (4,979,496) (19,059,735) (2,402,801) INCOME TAX BENEFIT (Note 8) 766,708 4,825,168 612,885 ------------- ------------- ------------- LOSS FROM CONTINUING OPERATIONS (4,212,788) (14,234,567) (1,789,916) DISCONTINUED OPERATIONS (Note 1): Income from discontinued restaurant segment (net of income taxes of $1,507,029, and $2,325,555 in fiscal 2000 and 1999, respectively) -- 2,828,367 4,285,108 Gain on disposal of discontinued restaurant segment (net of income taxes of $3,968,525) -- 6,801,726 -- ------------- ------------- ------------- Discontinued operations, net -- 9,630,093 4,285,108 INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (4,212,788) (4,604,474) 2,495,192 EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT (net of income tax benefit of $258,303, $35,633 and $44,158 in fiscal 2001, 2000 and 1999, respectively) (455,238) (52,350) (64,335) ------------- ------------- ------------- NET INCOME (LOSS) $ (4,668,026) $ (4,656,824) $ 2,430,857 ============= ============= ============= NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED Loss from continuing operations $ (0.73) $ (2.45) $ (0.30) Discontinued operations -- 1.66 0.72 Extraordinary loss from early extinguishment of debt (0.08) (0.01) (0.01) ------------- ------------- ------------- Net income (loss) $ (0.81) $ (0.80) $ 0.41 ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 5,781,319 5,808,075 5,898,839
See accompanying notes to consolidated financial statements. F-4 35 PIERRE FOODS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
ACCUMULATED CAPITAL IN RECEIVABLE OTHER TOTAL COMMON EXCESS OF RETAINED FROM COMPREHENSIVE SHAREHOLDERS' STOCK PAR VALUE EARNINGS SHAREHOLDER INCOME EQUITY ----------- ------------ ------------ ----------- ------------- ------------ BALANCE AT FEBRUARY 27, 1998 $ 5,898,449 $ 23,647,020 $ 9,662,258 $ -- $ 19,261 $ 39,226,988 Comprehensive income: Net income -- -- 2,430,857 -- -- -- Realized gain on sale of available for sale securities (net of reclassification adjustments and tax of $13,094) -- -- -- -- (19,261) -- Total comprehensive income 2,411,596 Common stock options exercised (15,625 shares) -- (Note 11) 15,625 65,625 -- -- -- 81,250 Purchase of common stock (110,000 shares) (110,000) (490,022) -- -- -- (600,022) Issuance of common stock (2,975 shares) 2,975 29,222 -- -- -- 32,197 ----------- ------------ ------------ ----------- -------- ------------ BALANCE AT MARCH 6, 1999 5,807,049 23,251,845 12,093,115 -- -- 41,152,009 Net loss and comprehensive loss -- -- (4,656,824) -- -- (4,656,824) Short swing profit reimbursement -- 48,542 -- -- -- 48,542 Loan to shareholder (Note 16) -- -- -- (5,000,000) -- (5,000,000) Common stock options exercised (39,375 shares) -- (Note 11) 39,375 165,238 -- -- -- 204,613 Accelerated vesting of stock options (Note 11) -- 345,970 -- -- -- 345,970 Purchase of common stock (68,024 shares) (68,024) (510,180) -- -- -- (578,204) Issuance of common stock (2,600 shares) 2,600 14,466 -- -- -- 17,066 ----------- ------------ ------------ ----------- -------- ------------ BALANCE AT MARCH 4, 2000 5,781,000 23,315,881 7,436,291 (5,000,000) -- 31,533,172 Net loss and comprehensive loss -- -- (4,668,026) -- -- (4,668,026) Issuance of common stock (480 shares) 480 1,172 -- -- -- 1,652 ----------- ------------ ------------ ----------- -------- ------------ BALANCE AT MARCH 3, 2001 $ 5,781,480 $ 23,317,053 $ 2,768,265 $(5,000,000) $ -- $ 26,866,798 =========== ============ ============ =========== ======== ============
See accompanying notes to consolidated financial statements. F-5 36 PIERRE FOODS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED ---------------------------------------------- MARCH 3, MARCH 4, MARCH 6, 2001 2000 1999 ----------- ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(4,668,026) $ (4,656,824) $ 2,430,857 ----------- ------------ ------------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Extraordinary loss on extinguishment of debt before income tax benefit 713,541 87,983 108,493 Depreciation and amortization 6,237,969 8,199,039 8,463,851 Amortization of deferred loan origination fees 570,625 899,931 620,301 Deferred income taxes 199,672 8,400 298,617 Net (gain) loss on disposition of assets (net of writedowns) 27,695 2,835,122 1,003,555 Net gain on disposal of discontinued operations (Note 1) -- (10,770,251) -- Increase (decrease) in other long-term liabilities (291,235) 1,638,466 -- Other noncash adjustments 1,653 705,039 (126,278) Changes in operating assets and liabilities (net of effects from purchase of restaurant companies and Pierre, and net of sales of ham curing and restaurant segments) providing (using) cash: Receivables (1,004,642) (287,077) (4,815,226) Inventories (1,778,642) 3,301,173 (2,124,657) Refundable income taxes, prepaid expenses and other assets 1,302,056 (2,917,660) 148,285 Trade accounts payable and other accrued liabilities 769,300 (5,763,674) 5,023,953 ----------- ------------ ------------- Total adjustments 6,747,992 (2,063,509) 8,600,894 ----------- ------------ ------------- Net cash provided by (used in) operating activities 2,079,966 (6,720,333) 11,031,751 ----------- ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of net assets of Pierre Foods -- -- (119,289,571) Net proceeds from sale of restaurant segment (Note 1) -- 49,234,814 -- Net proceeds from sale of Mom 'n' Pop's Country Ham, LLC (Note 1) -- 147,239 -- Proceeds from sales of assets to others 60,300 652,523 363,056 Proceeds from sales of assets to other related parties -- 19,750 13,746 Decrease in related party notes receivables 238,513 441,782 777,499 Decrease in other notes receivables -- 103,974 804,843 Capital expenditures to related parties (250,000) (316,233) (2,148,910) Capital expenditures - other (2,514,050) (5,171,445) (13,315,626) Other investing activities, net -- 53,875 111,680 ----------- ------------ ------------- Net cash provided by (used in) investing activities (2,465,237) 45,166,279 (132,683,283) ----------- ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (repayments) under revolving credit agreement -- (29,000,000) 29,000,000 Proceeds from issuance of long-term debt -- -- 115,000,000 Principal payments on long-term debt (314,433) (2,415,224) (12,888,165) Net repayments under short-term borrowing agreements -- -- (5,105,144) Loan origination fees (188,575) (177,909) (4,990,060) Loan to shareholder -- (5,000,000) -- Purchase of common stock -- (1,020,360) (600,022) Proceeds from exercise of stock options -- 204,613 81,250 ----------- ------------ ------------- Net cash provided by (used in) financing activities (503,008) (37,408,880) 120,497,859 ----------- ------------ ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (888,279) 1,037,066 (1,153,673) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,701,464 1,664,398 2,818,071 ----------- ------------ ------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,813,185 $ 2,701,464 $ 1,664,398 =========== ============ =============
See accompanying notes to consolidated financial statements. F-6 37 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION, ACQUISITION AND DISCONTINUED OPERATIONS Description of Business. Pierre Foods, Inc. (the "Company" or "Pierre Foods," formerly known as "Fresh Foods, Inc." or "Fresh Foods") is a vertically integrated producer and marketer of fully-cooked branded and private label protein and bakery products and microwaveable sandwiches for the domestic foodservice market. The Company sells its products through various distribution channels under the Pierre(TM), Fast Choice(R), Fast Bites(TM) and Mom 'n' Pop's(R) brand names. Prior to the sale of the ham curing business effective July 2, 1999, the Company also produced cured hams which were sold primarily through distributors to retail supermarkets under the "Mom `n' Pop's"(R) brand name. In addition, prior to the sale of the restaurant segment effective October 7, 1999, the Company owned and operated 67 restaurants and franchised an additional 36 restaurants operating under the Sagebrush, Western Steer, Prime Sirloin and Bennett's concepts. Acquisition of Pierre Foods Division of Hudson Foods, Inc. On June 9, 1998, the Company purchased certain of the net operating assets of the Pierre Foods Division ("Pierre Cincinnati") of Hudson Foods, Inc. ("Hudson"), a wholly owned subsidiary of Tyson Foods. The acquisition was accounted for using the purchase method of accounting and the results of Pierre Cincinnati's operations were included in the Company's fiscal year ended March 6, 1999 consolidated statements of operations from the date of acquisition. The purchase price, which totaled $119.3 million including capitalized transaction costs was allocated to the net underlying assets based on their respective fair values. Costs associated with the acquisition totaling $1.5 million were capitalized as part of the transaction. The acquisition price was allocated as follows (in millions): Accounts receivable $ 8.5 Inventory 20.9 Fixed assets 22.3 Trade name 44.3 Assembled work force 2.9 Excess of cost over fair value of assets acquired (goodwill) 30.8 Accounts payable 5.3 Accrued liabilities 5.1
Excess purchase price over fair market value of the underlying assets was allocated to goodwill, trade name and assembled work force and is being amortized on a straight-line basis over lives ranging from fifteen to thirty years (Note 2). The purchase was financed by the issuance of $115.0 million 10.75% Senior Notes Due 2006 (the "Senior Notes") and an initial borrowing under a five-year, $75.0 million, revolving bank credit facility. In addition, borrowings under the bank facility were used to extinguish all existing indebtedness of the Company, with the exception of outstanding industrial revenue bonds and certain capital lease obligations (Notes 5, 7 and 9). Following is selected unaudited pro forma combined results of operations for the fiscal year ended March 6, 1999, assuming that the two companies had been combined for accounting purposes as of the beginning of fiscal 1999. All necessary adjustments based on the allocated purchase price of net assets acquired and eliminations for transactions between the Company and Pierre Cincinnati have been reflected in the pro forma calculations. However, the pro forma amounts are not necessarily indicative of the actual results of operations had the two companies been combined at the beginning of the year presented. F-7 38
Fiscal Year Ended ------------------------------------------------ March 6, 1999 (Unaudited, In Thousands, Except Per Share Data) Total operating revenues $ 185,719 Operating income 11,150 Loss from continuing operations $ (3,795) Loss per share from continuing operations - basic and diluted $ (.65)
Disposition of Mom `n' Pop's Country Ham, LLC. Effective July 2, 1999, the Company sold Mom `n' Pop's Country Ham, LLC, its ham curing business, to the management group of that subsidiary that includes the Chairman of the Board for $995,000. Under the terms of the sale agreement, the Company received cash of $9,950 and an 8%, unsecured $985,050 note, due December 31, 1999. In addition, the Company agreed to provide an 8%, $500,000 unsecured working capital line of credit through December 31, 1999. As part of the sale transaction, the Company, on behalf of Mom `n' Pop's Country Ham, LLC, paid $490,178 for a non-compete and consulting agreement with a former executive officer of the subsidiary. In addition, the executive officer received severance benefits totaling $357,583 as a result of the disposal of this business. As a result of this sale, the Company recorded a loss on disposition of $2,857,160. At March 4, 2000, all outstanding principal amounts and accrued interest under the note and working capital line were paid in full. The ham curing business did not qualify for discontinued operations presentation. Disposition of the Restaurant Segment. On September 10, 1999, the Company signed an agreement to sell substantially all of its restaurant operations and thereby committed itself to disposing of its restaurant segment in a transaction completed on October 8, 1999. Under the terms of the agreement, the buyer, Carousel Capital Partners, L.P., acquired Claremont Restaurant Group, LLC ("Claremont Restaurant Group"), as well as non-compete and consulting contracts with certain key restaurant executives in exchange for a cash purchase price of $49,796,904, subject to adjustments. Cash proceeds were used for payments to key restaurant executives for severance, consulting, and noncompete agreements totaling $2,015,361, payments of bonuses to certain restaurant employees totaling $333,868 and payments of investment banking, legal, and accounting fees totaling $1,756,167 to arrive at net cash proceeds of $45,691,508. As of October 8, 1999, the net book value of Claremont Restaurant Group was $34,074,024, resulting in a gain of $11,617,484. In addition, at the time of the sale, the Company accelerated vesting of stock options for all restaurant employees, resulting in the recognition of a charge totaling $207,314, which reduced the net gain to $11,410,170. Coinciding with the transaction discussed above, on October 3, 1999 the Company sold the net assets of its one Bennett's restaurant operation to certain members of management for a cash purchase price of $1,100,000. Net cash proceeds received after payment of legal and other fees totaled $1,080,083, resulting in a net gain of $522,210 from the sale. F-8 39 In addition, on September 14, 1999 the Company sold five former restaurant properties and one tract of vacant land, with a combined book value of $2,433,482, to an entity in which a former officer and principal shareholder is a minority investor, for a net cash purchase price of $938,585. This transaction was completed under an agreement entered into earlier during the fiscal year and was contingent upon the sale of Claremont Restaurant Group. Under the terms of the initial agreement, all non-operating restaurant properties, consisting of seven former restaurant locations and three tracts of undeveloped land with a total book value of $3,620,842, were offered for sale at an aggregate price of $2,635,000. The agreement further specified that the cash proceeds from the sale of any of these properties to third parties prior to the sale of Claremont Restaurant Group would reduce the purchase price of the remaining pool of properties on a dollar-for-dollar basis, subject to the sale of Claremont Restaurant Group. Prior to the sale, four of the properties, with a book value totaling $1,187,359, were sold to unrelated third parties for cash totaling $1,557,065. Due to the nature of this transaction, gross gains totaling $369,706 were netted with the loss recorded from the sale of the remaining real estate occurring on September 14, 1999. Net cash proceeds from these transactions, after legal fees and other settlement costs of $32,428, totaled $2,463,223, resulting in a net loss of $1,157,619. Due to the disposition of all assets and liabilities relating to Claremont Restaurant Group, the results of the restaurant segment have been reported separately as discontinued operations in the consolidated statements of operations. Operating results prior to the measurement date of September 10, 1999 are presented in "Income From Discontinued Restaurant Segment". The operating loss subsequent to the measurement date through the date of disposal was $4,510 and is included in "Gain on Disposal of Discontinued Restaurant Segment", along with the gains and losses discussed above. The results of the discontinued operations do not reflect any interest expense or management fees allocated by the Company. In addition, the results of discontinued operations exclude transaction success bonuses paid to certain corporate officers totaling $3,102,689, as well as amounts totaling $1,389,503 paid to the Company's former Chairman under a severance, consulting, and noncompete agreement as part of the sale (Note 16). Prior year consolidated financial statements have been reclassified to present Claremont Restaurant Group as a discontinued operation. Net revenues and income from discontinued operations are as follows:
March 4, 2000 March 6, 1999 ------------- ------------- Net operating revenues $59,583,905 $101,440,315 ----------- ------------ Operating profit 4,502,401 7,161,985 Other expense, net 167,005 551,322 Income tax provision 1,507,029 2,325,555 ----------- ------------ Income from discontinued restaurant segment $ 2,828,367 $ 4,285,108 ----------- ------------ Pretax gain on disposal of discontinued restaurant segment $10,770,251 $ -- Income tax provision 3,968,525 -- ----------- ------------ Gain on disposal of discontinued restaurant segment $ 6,801,726 $ -- =========== ============
F-9 40 Corporate Reorganization. On December 31, 1999, the Company completed a reorganization which merged Pierre Foods, LLC (Pierre Cincinnati) and Pierre Leasing, LLC into Fresh Foods, Inc. In July 2000, the Company changed its name to "Pierre Foods, Inc." Subsequent to the reorganization in 1999, Fresh Foods Properties, LLC is the only subsidiary of the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. The accompanying consolidated financial statements include Pierre Foods, Inc. and subsidiaries. All intercompany transactions have been eliminated. Fiscal Year. The Company reports the results of operations using a 52-53 week basis. As a result of the Pierre acquisition, described in Note 1, the Company changed its interim fiscal periods to conform with standard food processing industry interim periods. Each quarter of the fiscal year will contain 13 weeks except for the infrequent fiscal years with 53 weeks. Prior to the change in interim periods the Company reported the results of operations based on quarters of 12, 12, 12 and 16 weeks. In order to adopt this new interim calendar, the fiscal year ended March 6, 1999 contains 53 weeks. Fiscal 2001 and fiscal 2000 represent 52 week periods. The Company's fiscal year ended March 3, 2001 is referred to herein as "fiscal 2001," its fiscal year ended March 4, 2000 is referred to herein as "fiscal 2000," and its fiscal year ended March 6, 1999 is referred to herein as "fiscal 1999." Cash and cash equivalents. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market. Property, Plant and Equipment. Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs which do not significantly extend the useful lives of assets are charged to operations whereas additions and betterments, including interest costs incurred during construction, which was not material for any year presented, are capitalized. Depreciation of property, plant and equipment is provided over the estimated useful lives of the respective assets on the straight-line basis. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the terms of the respective leases. Property under capital leases is amortized in accordance with the Company's normal depreciation policy. Depreciation expense along with amortization of intangible assets is recorded as a separate line item in the consolidated statements of operations. Cost of goods sold and selling, general and administrative expenses exclude depreciation expense. The Company evaluates the carrying values of long-lived assets for impairment by assessing recoverability based on forecasted operating cash flows on an undiscounted basis, and determined no impairment charge was necessary at March 3, 2001. Intangible Assets. Intangible assets consist of the excess of cost over the fair value of net assets of businesses acquired, assembled workforce and trade name. The Company assesses recoverability of the excess cost over the assigned value of net assets acquired by determining whether the amortization of the balance over its remaining life can be recovered through the undiscounted future operating cash flows of the acquired operations. The estimated lives of the intangible assets are as follows: Excess of cost over fair value of net assets acquired 15 - 30 years Trade name 30 years Assembled workforce 15 years
F-10 41 Revenue Recognition. Revenue from sales of food processing products are recorded at the time the goods are shipped and title passes. Revenue is recognized as the net amount to be received after deductions for estimated discounts and product returns. Advertising Costs. The Company expenses advertising costs as incurred. Advertising expense included in continuing operations for fiscal 2001, fiscal 2000 and fiscal 1999 was $891,173, $994,334 and $435,976 respectively. Research and Developments. The Company expenses research and development costs as incurred. Research and development expense included in continuing operations for fiscal 2001, fiscal 2000 and fiscal 1999 was $464,594, $354,322 and $301,674 respectively. Income Taxes. Income taxes are provided for temporary differences between the tax and financial accounting bases of assets and liabilities using the asset and liability method. The tax effects of such differences are reflected in the balance sheet at the enacted tax rate applicable to the years when such differences are scheduled to reverse. The effect on deferred taxes of a change in tax rates is recognized in the period that includes the enactment date. Reclassifications. Financial statements for fiscal 2000 and fiscal 1999 have been reclassified, where applicable, to conform to the financial statement presentation used in fiscal 2001. 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates at March 3, 2001 and March 4, 2000 include sales discounts and promotional allowances, inventory reserves, insurance reserves, and useful lives assigned to intangible assets. Actual results could differ from those estimates. New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative financial instruments, including certain derivative instruments embedded in other contracts (collectively referred to as embedded derivatives) and for hedging activities. The new standard requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company adopted the provisions of these statements in the first quarter of the fiscal year ending March 2, 2002. The adoption of this new standard did not have a material impact on the financial condition, results of operations or cash flows of the Company. In June 2000, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 provides the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company adopted the applicable provisions of SAB 101 during fiscal 2001. The impact of adopting the provisions of SAB 101 was not material. F-11 42 3. ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable consist of the following:
March 3, March 4, 2001 2000 ----------- ----------- Accounts receivable: Trade accounts receivable (less allowance for doubtful receivables of $244,881 and $114,661 at March 3, 2001 and March 4, 2000) $17,802,086 $16,398,631 Franchisees -- 50,000 Other 395,816 681,190 ----------- ----------- 18,197,902 17,129,821 Related parties (Note 16) 229,551 292,990 ----------- ----------- Total accounts receivable $18,427,453 $17,422,811 =========== =========== Notes receivable: Related parties; interest rates 8.25% to 9.0% (Note 16) $ 705,493 $ 857,949 Less current portion -- 152,456 ----------- ----------- Noncurrent notes receivable - related parties 705,493 705,493 ----------- ----------- Notes receivable - other; interest rates 8.5% to 9.5% -- 86,057 Less current portion -- 86,057 ----------- ----------- Noncurrent notes receivable - other -- -- ----------- ----------- Total noncurrent notes receivable $ 705,493 $ 705,493 =========== ===========
See Note 16 regarding a $5,000,000 note receivable from a significant shareholder presented as a reduction of shareholders' equity. 4. INVENTORIES A summary of inventories, by major classification, follows:
March 3, March 4, 2001 2000 ----------- ----------- Manufacturing supplies $ 1,189,481 $ 1,149,107 Raw materials 4,404,820 3,857,801 Work in process 4,281 -- Finished goods 21,205,481 20,018,513 ----------- ----------- Total $26,804,063 $25,025,421 =========== ===========
F-12 43 5. PROPERTY, PLANT AND EQUIPMENT The major components of property, plant and equipment are as follows:
Estimated March 3, March 4, Useful Life 2001 2000 ------------ ------------ ------------ Land $ 1,270,025 $ 1,270,025 Land improvements 10-20 years 382,304 382,304 Buildings 20-40 years 16,073,803 15,661,100 Leasehold improvements 5-20 years 670,143 660,598 Machinery and equipment 5-20 years 28,459,116 27,770,877 Machinery and equipment under capital leases 5-15 years 630,650 763,517 Furniture and fixtures 5-15 years 4,031,735 3,451,153 Automotive equipment 2-5 years 487,504 472,307 Construction in progress 636,828 279,891 ------------ ------------ Total 52,642,108 50,711,772 Less accumulated depreciation and amortization 17,725,615 14,926,953 ------------ ------------ Property, plant and equipment, net $ 34,916,493 $ 35,784,819 ============ ============
6. INTANGIBLE ASSETS Intangible assets consist of the following:
March 3, March 4, 2001 2000 ------------ ------------ Trade name $ 44,340,000 $ 44,340,000 Less accumulated amortization (4,053,364) (2,575,364) ------------ ------------ Total $ 40,286,636 $ 41,764,636 ============ ============ Excess of cost over fair value of net assets of businesses acquired $ 30,678,287 $ 30,678,287 Less accumulated amortization (2,807,173) (1,784,564) ------------ ------------ Total $ 27,871,114 $ 28,893,723 ============ ============ Assembled workforce $ 2,893,000 $ 2,893,000 Less accumulated amortization (529,044) (336,064) ------------ ------------ Total $ 2,363,956 $ 2,556,936 ============ ============
F-13 44 7. FINANCING ARRANGEMENTS Long-term debt is comprised of the following:
March 3, March 4, 2001 2000 ------------- ------------- 10.75% Senior Notes, interest payable on June 1 and December 1 of each year, maturing on June 1, 2006 $ 115,000,000 $ 115,000,000 9.25% to 11.5% capitalized lease obligations maturing 2004 (Note 9) 164,922 479,355 ------------- ------------- Total long-term debt 115,164,922 115,479,355 Less current installments 67,631 314,433 ------------- ------------- Long-term debt, excluding current installments $ 115,097,291 $ 115,164,922 ============= =============
The Senior Notes are unsecured obligations of the Company, unconditionally guaranteed on a senior unsecured basis by all existing subsidiaries of the Company, subject to certain financial and non-financial covenants. At March 3, 2001, the Company was in compliance with all covenants under the Senior Notes. Effective May 24, 2000, the Company obtained a three-year variable rate $25 million revolving credit facility which provides that the Company will be able to borrow up to an amount (including standby letters of credit up to $5.0 million) equal to the lesser of $25.0 million less required minimum availability or a borrowing base (comprised of eligible accounts receivable and inventory). Funds available under the revolving credit facility may be used for general working capital needs. In addition, the Company is required to meet certain financial covenants regarding net worth, cash flow and restricted payments, including a restriction against dividend payouts. Effective May 30, 2000 the Company terminated a $75 million credit facility which resulted in the recognition of an extraordinary loss of $455,238, net of income taxes of $258,303. The average rate on the $25 million revolving line of credit was 9.41% for the fiscal year ended March 3, 2001. The average rate on the $75 million revolving line of credit was 8.27% for the fiscal year ended March 4, 2000, and 8.26% for the fiscal year ended March 6, 1999. Long-term debt maturities, including capital leases (Note 9), subsequent to March 3, 2001, are as follows:
Fiscal Year Amount ----------- ------------- 2002 $ 67,631 2003 49,686 2004 46,066 2005 1,539 2006 115,000,000 ------------- Total $ 115,164,922 =============
F-14 45 8. INCOME TAXES The income tax benefit attributable to continuing operations is summarized as follows:
FISCAL YEARS ENDED -------------------------------------------------------------- MARCH 3, MARCH 4, MARCH 6, 2001 2000 1999 ------------ ------------ ------------ Current: Federal $ (1,201,123) $ (5,477,218) $ 788,314 State (23,557) 191,094 (87,467) ------------ ------------ ------------ Total current (1,224,680) (5,286,124) 700,847 ------------ ------------ ------------ Deferred: Federal 675,159 (404,262) (1,427,927) State (217,187) 865,218 114,195 ------------ ------------ ------------ Total deferred 457,972 460,956 (1,313,732) ------------ ------------ ------------ Total benefit $ (766,708) $ (4,825,168) $ (612,885) ============ ============ ============
Actual income tax benefits are different from amounts computed by applying a statutory federal income tax rate to loss before income tax from continuing operations. The computed amount is reconciled to total income tax benefit from continuing operations as follows:
FISCAL YEARS ENDED ------------------------------------------------------------------------------------- MARCH 3, 2001 MARCH 4, 2000 MARCH 6, 1999 ---------------------- ---------------------- ------------------------- PERCENT OF PERCENT OF PERCENT OF AMOUNT PRETAX LOSS AMOUNT PRETAX LOSS AMOUNT PRETAX LOSS ---------- ----------- ---------- ----------- ---------- ----------- Computed benefit at statutory rate $(1,693,028) (34.0)% $(6,480,310) (34.0)% $ (816,952) (34.0)% Tax effect resulting from: State income taxes, net of federal tax benefit (158,889) (3.2) 790,493 4.1 17,641 0.7 Compensation limitation 442,000 8.9 833,752 4.4 -- -- Meals and entertainment 117,368 2.4 90,648 0.5 138,962 5.8 Other permanent differences 525,841 10.5 (59,751) (0.3) 47,464 2.0 ---------- ----- ----------- ----- ---------- ----- Income tax benefit $ (766,708) (15.4)% $(4,825,168) (25.3)% $ (612,885) (25.5)% ========== ===== =========== ===== ========== =====
F-15 46 8. INCOME TAXES, CONTINUED The approximate tax effect of each type of temporary difference and carryforward that gave rise to the Company's deferred income tax assets and liabilities for fiscal 2001 and fiscal 2000 is as follows:
MARCH 3, 2001 MARCH 4, 2000 ---------------------------------------- ---------------------------------------- ASSETS LIABILITIES TOTAL ASSETS LIABILITIES TOTAL ---------- ----------- ---------- ---------- ----------- ---------- Current: Allowance for doubtful receivables $ 45,822 $ -- $ 45,822 $ 56,037 $ -- $ 56,037 Inventory 811,625 -- 811,625 852,219 -- 852,219 Accrued promotional expense 751,394 -- 751,394 684,792 -- 684,792 Accrued vacation pay 410,265 -- 410,265 378,650 -- 378,650 Reserve for returns 35,721 -- 35,721 73,743 -- 73,743 Reserves - other 34,281 -- 34,281 58,195 -- 58,195 Prepaid expenses -- (168,178) (168,178) -- (91,239) (91,239) Accrued bonus 107,809 -- 107,809 48,534 -- 48,534 Accrued worker's compensation 128,937 -- 128,937 144,992 -- 144,992 Other 16,966 -- 16,966 84,438 -- 84,438 ---------- ----------- ---------- ---------- ----------- ---------- Total current 2,342,820 (168,178) 2,174,642 2,381,600 (91,239) 2,290,361 ---------- ----------- ---------- ---------- ----------- ---------- Noncurrent: Property, plant and equipment -- (3,332,260) (3,332,260) -- (2,476,686) (2,476,686) Consulting agreements 517,359 -- 517,359 608,976 -- 608,976 Goodwill amortization (2,675,410) (2,675,410) -- (1,620,144) (1,620,144) General business credit carryforward 1,070,799 -- 1,070,799 932,546 -- 932,546 Alternative minimum tax credit carryforward 654,317 -- 654,317 295,847 -- 295,847 Federal loss carryforward 1,427,658 -- 1,427,658 728,369 -- 728,369 State loss carryforward 528,718 -- 528,718 28,934 -- 28,934 Other 237,732 -- 237,732 15,024 -- 15,024 ---------- ----------- ---------- ---------- ----------- ---------- Total noncurrent 4,436,583 (6,007,670) (1,571,087) 2,609,696 (4,096,830) (1,487,134) ---------- ----------- ---------- ---------- ----------- ---------- Total current and noncurrent $6,779,403 $(6,175,848) $ 603,555 $4,991,296 $(4,188,069) $ 803,227 ========== =========== ========== ========== =========== ==========
At March 3, 2001, federal and state operating loss carryovers of approximately $4,200,000 and $10,600,000, respectively, are available to offset future federal and state taxable income. The carryover periods range from five to twenty years, which will result in expirations of varying amounts beginning in fiscal 2006 and continuing through fiscal 2021. No valuation allowance has been provided as of March 3, 2001 because management believes that it is more likely than not that the deferred tax assets will be realized. F-16 47 9. LEASED PROPERTIES The Company operates certain machinery and equipment under leases classified as capital leases. The machinery and equipment leases have original terms ranging from one to eight years. The assets covered under these leases have carrying values of $279,034, $394,810 and $1,022,457 at March 3, 2001, March 4, 2000 and March 6, 1999, respectively. Certain machinery and equipment are under operating leases with terms that are effective for varying periods until 2006. Certain of these leases have remaining renewal clauses, exercisable at the option of the lessee. Leases with related parties are discussed in Note 16. At March 3, 2001, minimum rental payments required under operating and capital leases are summarized as follows:
Operating Leases --------------------------------------------------------------------------------- Minimum Minimum Sublease Capital Fiscal Year Payments Receipts Total Leases Total ----------- ----------- ---------- ----------- --------- ----------- 2002 $ 729,655 $ (34,260) $ 695,395 $ 79,739 $ 775,134 2003 536,769 (34,260) 502,509 56,980 559,489 2004 499,464 (34,260) 465,204 48,582 513,786 2005 471,078 (34,260) 436,818 1,563 438,381 2006 119,723 (34,260) 85,463 - 85,463 Later years 258,000 (68,520) 189,480 - 189,480 ----------- ---------- ----------- --------- ----------- Total minimum lease payments $ 2,614,689 $ (239,820) $ 2,374,869 186,864 $ 2,561,733 =========== ========== =========== =========== Less amount representing interest (21,942) --------- Present value of minimum lease payments under capital leases (Note 7) $ 164,922 =========
Rental expense charged to continuing operations is as follows:
Fiscal Year Ended ------------------------------------------------------------- March 3, March 4, March 6, 2001 2000 1999 ----------- ----------- --------- Real estate $ 185,103 $ 251,340 $ 147,756 Equipment 998,012 808,164 738,622 ----------- ----------- --------- Total $ 1,183,115 $ 1,059,504 $ 886,378 =========== =========== =========
F-17 48 10. EMPLOYEE BENEFITS On March 1, 1994, the Company established an employee stock purchase plan through which employees, after meeting minimum eligibility requirements, may contribute up to 10% of their base earnings toward the purchase of the Company's common stock. The plan provides that the Company will make matching contributions of 25% of the employee's contribution. Participation in the plan is voluntary. All contributions are funded monthly and vest immediately. The Company's contributions to the plan included in continuing operations totaled $11,699, $82,707 and $5,937 in fiscal 2001, 2000 and 1999, respectively. Effective June 16, 2000, the Company terminated the plan. During fiscal 2001, the plan assets, comprised of the Company's common stock and cash, totaling approximately $230,000 were distributed to plan participants based on their respective account balances. The Company maintains a 401(k) Retirement Plan for its employees which provides that the Company will make a matching contribution of up to 50% of an employee's voluntary contribution, limited to the lesser of 4% of that employee's annual compensation or $10,500 for fiscal 2001. Effective July 3, 2000, the Company increased its matching contribution from the lesser of 4% to the lesser of 5% of that employee's annual compensation or $10,500 for fiscal 2001. The Company's contributions included in continuing operations were $396,883, $352,773 and $243,578 in fiscal 2001, 2000 and 1999, respectively. The Company provides employee health insurance benefits to employees. During fiscal 2001, 2000 and 1999, benefits were provided through both fully insured and self insurance group medical plans which are partially funded by the Company. During fiscal 2000 and 1999, benefits were also provided through a Voluntary Employee Benefit Association ("VEBA") which is partially funded by the Company. During fiscal 2001, 2000 and 1999, contributions included in continuing operations were $1,789,926, $1,844,874 and $2,126,292, respectively. Effective August 1, 2000, the Company adopted the Pierre Foods, Inc. Compensation Exchange Plan. The Plan is a non-qualified deferred compensation plan in which eligible participants consist of highly compensated employees and the Company's Board of Directors. As of March 3, 2001, cash contributions to the Plan total $56,167. F-18 49 11. CAPITAL STOCK STOCK OPTIONS The Company's 1987 Incentive Stock Option Plan, as amended, provides for the issuance of up to 625,000 shares of the Company's common stock to key employees, including officers of the Company. The Company may grant Incentive Stock Options ("ISOs") or nonqualified stock options to eligible employees. Stock options granted under this plan have terms of ten years, vest evenly over five years, and are assigned an exercise price of not less than the fair value on the date of grant. At March 3, 2001, no options were outstanding under this Plan. The Company's 1987 Special Stock Option Plan, as amended, provides for the issuance of up to 625,000 shares of the Company's common stock to key management employees, including officers and directors of the Company and certain other individuals. All options granted under this Plan are nonqualified stock options. Stock options granted under this plan have terms of ten years, vest immediately, and are assigned an exercise price of not less than the fair value on the date of grant. The Company's 1997 Incentive Stock Option Plan, as amended, provides for the issuance of up to 1,000,000 shares of the Company's common stock to key employees, including officers of the Company. The Company may grant Incentive Stock Options ("ISOs") or nonqualified stock options to eligible employees. Stock options granted under this plan have terms of ten years, vest evenly over five years, and are assigned an exercise price of not less than the fair value on the date of grant. The Company's 1997 Special Stock Option Plan, as amended, provides for the issuance of up to 1,500,000 shares of the Company's common stock to key management employees, including officers and directors of the Company and certain other individuals. All options granted under this Plan are nonqualified stock options. Stock options granted under this plan have terms of ten years, vest immediately, and are assigned an exercise price of not less than the fair value on the date of grant. During fiscal 1999, the Company repriced certain of its outstanding options to $10.50, the fair market value on the date of repricing. All options with an exercise price in excess of $10.50 were repriced. During fiscal 2000, certain current and former officers and directors of the Company voluntarily tendered 150,000 stock options of the Incentive Stock Option Plan and 1,000,000 stock options of the Special Stock Option Plan for cancellation. A summary of the changes in shares under option and the weighted-average exercise prices for these Plans follows:
1987 AND 1997 INCENTIVE 1987 AND 1997 SPECIAL STOCK OPTION PLANS STOCK OPTION PLANS ----------------------------- ---------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ---------- -------------- ---------- -------------- Balance at February 27, 1998 .......................... 367,739 $ 11.92 1,050,000 $ 13.99 Forfeited or cancelled * ......................... (617,285) 15.47 (1,075,000) 16.00 Issued * ......................................... 1,077,969 11.93 1,275,000 11.36 Exercised ........................................ (15,625) 5.20 -- -- ---------- ---------- Balance at March 6, 1999 .............................. 812,798 9.37 1,250,000 9.50 Forfeited or cancelled ........................... (457,919) 9.07 (1,000,000) 10.27 Issued ........................................... 166,671 5.76 -- -- Exercised ........................................ (39,375) 5.20 -- -- ---------- ---------- Balance at March 4, 2000 .............................. 482,175 8.75 250,000 6.84 Forfeited or cancelled ........................... (246,375) 8.12 (12,500) 2.90 Issued ........................................... 25,000 2.00 -- -- ---------- ---------- Balance at March 3, 2001 .............................. 260,800 $ 8.52 237,500 $ 7.04 ========== ==========
* Includes 584,402 Incentive Stock Options and 1,075,000 Special Stock Options repriced on August 27, 1998. F-19 50 11. CAPITAL STOCK, CONTINUED A summary of the range of weighted average exercise prices and weighted average remaining contractual lives for options outstanding under the Plans at March 3, 2001 is as follows:
WEIGHTED AVERAGE AVERAGE SHARES CONTRACTUAL EXERCISE PRICE OUTSTANDING LIFE -------------- ----------- ----------- 1987 and 1997 Special Stock Option Plans ...................... $ 3.20 112,500 10 months $ 10.50 125,000 86 months --------- 237,500 ========= 1987 and 1997 Incentive Stock Option Plans .................... $ 10.50 185,000 87 months $ 5.13 22,500 94 months $ 5.75 25,000 97 months $ 5.38 1,500 99 months $ 6.75 1,800 105 months $ 2.00 25,000 113 months --------- 260,800 =========
A summary of the number of shares exercisable and the weighted average exercise price at March 3, 2001 is as follows:
WEIGHTED SHARES AVERAGE OUTSTANDING EXERCISE PRICE ----------- -------------- 1997 Special Stock Option Plan ............................. 112,500 $ 3.20 125,000 $ 10.50 -------- ------- 237,500 $ 7.04 ======== ======= 1997 Incentive Stock Option Plan ........................... 123,209 $ 9.41 ======== =======
The Company accounts for its stock option plans using the intrinsic value based method. Accordingly, no compensation expense was recognized for stock-based compensation relating to options granted in fiscal 2001, 2000, and 1999 since the exercise price of the options approximated the fair market value on the date of grant. Had compensation for stock options granted been determined using the fair value based method, the Company's net income (loss) and net income (loss) per common share amounts for fiscal 2001, 2000, and 1999 would approximate the following pro forma amounts:
FISCAL YEARS ENDED ---------------------------------------------------------------------------------------- MARCH 3, 2001 MARCH 4, 2000 MARCH 6, 1999 -------------------------- ---------------------------- -------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- ----------- ------------ ------------ ----------- ----------- Loss from continuing operations $(4,212,788) $(4,489,924) $(14,234,567) $(15,363,122) $(1,789,916) $(3,743,044) Income from discontinued operations -- -- 9,630,093 9,051,558 4,285,108 4,016,347 Extraordinary loss (455,238) (455,238) (52,350) (52,350) (64,335) (64,335) ----------- ----------- ------------ ------------ ----------- ----------- Net income (loss) $(4,668,026) $(4,945,162) $ (4,656,824) $ (6,363,914) $ 2,430,857 $ 208,968 Net income (loss) per common share -- basic and diluted: Loss from continuing operations $ (0.73) $ (0.78) $ (2.45) $ (2.65) $ (0.30) $ (0.63) Income from discontinued operations -- -- 1.66 1.56 0.72 0.68 Extraordinary loss (0.08) (0.08) (0.01) (0.01) (0.01) (0.01) ----------- ----------- ------------ ------------ ----------- ----------- Net income (loss) $ (0.81) $ (0.86) $ (0.80) $ (1.10) $ 0.41 $ 0.04 Weighted average fair value of the options 5.02 6.04 5.18
F-20 51 11. CAPITAL STOCK, CONTINUED The fair value of options granted under the Company's stock option plans during fiscal 2001, 2000, and 1999 were estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average assumptions used were as follows:
MARCH 3, 2001 MARCH 4, 2000 MARCH 6, 1999 -------------- ------------- ------------- Dividend yield .............................................................. -- -- -- Expected volatility ......................................................... 73.9% 62.6% 66.6% Risk free interest rate ..................................................... 4.1% 6.0% 5.0% Expected lives .............................................................. 3.5 3.5 3.5
In fiscal 2000, contributed capital increased $345,970, due to accelerated vesting of stock options resulting from the dispositions of the restaurant segment and the ham curing business. SHAREHOLDER RIGHTS PLAN In fiscal 1998, the Company adopted a shareholder rights plan pursuant to which the holder of each share of Company common stock also holds a stock purchase right ("Right") that may be exercised for Company preferred stock or Company common stock upon the occurrence of certain "triggering events" specified in a Rights Agreement dated as of September 2, 1997 between the Company and American Stock Transfer and Trust Company. On August 28, 1997, the Company's Board of Directors declared a dividend distribution of one Right for each share of the Company's common stock to the Company's shareholders of record at the close of business on September 10, 1997. Each Right entitles the record holder to purchase from the Company one one-hundredth of a share of Junior Participating Preferred Stock, Series A, of the Company at a purchase price of $30. The Rights are attached to the Company's common stock and are not exercisable except under the limited circumstances set forth in the Rights Agreement relating to the acquisition of, or the commencement of a tender offer for, 15% or more of the Company's common stock. The Rights may be redeemed at a price of $.001 per Right by the Company any time prior to any person or group acquiring 15% or more of the Company's common stock and will expire on September 10, 2007. Until the Rights separate from the Company's common stock, each newly-issued share of such common stock will have a Right attached. The Rights do not have voting or dividend rights. PREFERRED STOCK The Company is authorized to issue 2,500,000 shares of preferred stock with a par value of $.10 per share in one or more series. All rights and preferences of each series are to be established by the Company prior to issuance. There are no issues of this class of stock outstanding as of March 3, 2001. COMMON STOCK REPURCHASE On December 21, 1999, the Company signed an agreement with a shareholder which finalized an agreement in principal reached on November 16, 1999. Under the terms of the agreement, the Company agreed to purchase from the shareholder 68,024 shares of the Company's common stock and receive a release of any possible claims against the Company for a total price of $1,020,360. The excess of the purchase price over the market price of the stock at November 16, 1999 totaled $442,156 and was recognized as selling, general and administrative expense. F-21 52 12. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of the financial instruments listed below have been determined by the Company using available market information and appropriate valuation techniques. Considerable judgment is required, however, to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
March 3, 2001 ------------------------------------ Carrying Amount Fair Value --------------- ------------- Assets: Cash and cash equivalents $ 1,813,185 $ 1,813,185 Accounts receivable 18,427,453 18,427,453 Notes receivable 705,493 705,493 Liabilities: Accounts payable 5,368,066 5,368,066 Long-term debt (excluding capital leases) 115,000,000 41,975,000 Equity: Receivable from shareholder 5,000,000 5,000,000
March 4, 2000 ------------------------------------ Carrying Amount Fair Value --------------- ------------- Assets: Cash and cash equivalents $ 2,701,464 $ 2,701,464 Accounts receivable 17,422,811 17,422,811 Notes receivable 944,006 944,006 Liabilities: Accounts payable 5,493,168 5,493,168 Long-term debt (excluding capital leases) 115,000,000 63,250,000 Equity: Receivable from shareholder 5,000,000 5,000,000
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable are a reasonable estimate of their fair value due to short-terms to maturity. The fair value of notes receivable is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of long-term debt is estimated based on quoted market prices and interest rates currently available for issuance of debt with similar terms and remaining maturities. F-22 53 13. MAJOR BUSINESS SEGMENTS Food Processing: Pursuant to the acquisition of Pierre Cincinnati, the Company produces beef, poultry and pork products that typically are custom-developed to meet specific customer requirements. These products are (i) sold to foodservice customers such as restaurant chains, schools and healthcare providers, (ii) sold through various distribution channels, including warehouse clubs and grocery stores, or (iii) combined with specialty breads to produce microwaveable sandwiches that are sold through other foodservice channels such as convenience stores, vending machines, warehouse clubs and grocery stores. Prior to the acquisition of Pierre, the Company produced a variety of biscuits, yeast rolls and other flour-based products, sold primarily under the "Mom 'n' Pop's" brand name to institutional buyers, vending companies, delicatessens and supermarkets. The inclusion of Pierre Cincinnati's operations in fiscal 1999 (see Note 1) results in increases in every revenue and expense category compared with p Ham Curing: Prior to the sale of Mom 'n' Pop's Country Ham, LLC, effective July 2, 1999, the Company produced whole cured hams, packaged cured ham slices, pre-portioned ham for portion control customers, and various "side meat" products. A portion of ham production was sold directly or through distributors to retail supermarkets under the "Mom 'n' Pop's" brand name, primarily in North Carolina, South Carolina, Virginia, Tennessee, Alabama and Georgia. The remainder of production was sold to institutional food distributors. During fiscal 2000 and 1999, corporate expenses related to the management of the food processing, restaurant and ham curing segments are excluded from profit for reportable segments. During fiscal 2001, subsequent to the sales of the restaurant segment and ham curing business, corporate expenses are included in food processing profit for reportable segments. The following tables set forth revenue and operating profit by segment included in continuing operations: Food Ham Processing Curing Total
FOOD HAM PROCESSING CURING TOTAL ------------ ----------- ------------ Fiscal 2001: Revenues from external customers $211,040,483 $ -- $211,040,483 Depreciation and amortization 6,237,969 -- 6,237,969 Segment profit 8,072,926 -- 8,072,926 Segment assets 160,307,874 -- 160,307,874 Expenditures for capital assets 2,764,050 -- 2,764,050 Fiscal 2000: Revenues from external customers $183,502,144 $ 2,096,052 $185,598,196 Depreciation and amortization 5,419,582 95,488 5,515,070 Segment profit (loss) 15,330,661 (268,767) 15,061,894 Segment assets 143,236,471 -- 143,236,471 Expenditures for capital assets 4,318,863 -- 4,318,863 Fiscal 1999: Revenues from external customers $149,778,206 $ 7,063,625 $156,841,831 Intersegment revenues (1) -- 25,532 25,532 Depreciation and amortization 4,450,616 340,966 4,791,582 Segment profit (loss) 18,183,964 (87,556) 18,096,408 Segment assets 150,857,914 4,012,412 154,870,326 Expenditures for capital assets 4,085,653 498,290 4,583,943
(1) Intersegment sales are recorded on prevailing prices and relate solely to the food processing and ham curing segments.
FISAL YEARS ENDED --------------------------------------------------- MARCH 3, 2001 MARCH 4, 2000 MARCH 6, 1999 ------------- ------------- ------------- Revenues: Total revenues from reportable segments $211,040,483 $185,598,196 $156,867,363 Elimination of intersegment revenues -- -- (25,532) ------------ ------------ ------------ Total consolidated revenues $211,040,483 $185,598,196 $156,841,831 ============ ============ ============
F-23 54
FISAL YEARS ENDED --------------------------------------------------- MARCH 3, 2001 MARCH 4, 2000 MARCH 6, 1999 ------------- ------------- ------------- Profit or Loss: Total profit for reportable segments $ 8,072,926 $ 15,061,894 $ 18,096,408 Corporate expenses -- (16,447,851) (8,576,056) Loss on sale of Mom 'n Pop's Country Ham, LLC -- (2,857,160) -- Interest and other expense, net (13,052,422) (14,816,618) (11,923,153) ------------ ------------ ------------ Loss from continuing operations before income tax benefit $ (4,979,496) $(19,059,735) $ (2,402,801) ============ ============ ============ Assets: Total assets for reportable segments $160,307,874 $143,236,471 $154,870,326 Corporate and discontinued restaurant segment assets -- 21,490,192 62,118,697 ------------ ------------ ------------ Consolidated total $160,307,874 $164,726,663 $216,989,023 ============ ============ ============
SEGMENT CONSOLIDATED TOTALS CORPORATE TOTAL(1) ---------- --------- ------------ Other Significant Items: Fiscal 2001: Expenditures for capital assets $2,764,050 $ -- $2,764,050 Depreciation and amortization 6,237,969 -- 6,237,969 Fiscal 2000: Expenditures for capital assets $4,318,863 $690,544 $5,009,407 Depreciation and amortization 5,515,070 146,823 5,661,893 Fiscal 1999: Expenditures for capital assets $4,583,943 $777,027 $5,360,970 Depreciation and amortization 4,791,582 109,774 4,901,356
(1) Excludes discontinued restaurant segment expenditures for assets and depreciation and amortization. Sales by major product line are as follows:
FISAL YEARS ENDED --------------------------------------------------- MARCH 3, 2001 MARCH 4, 2000 MARCH 6, 1999 ------------- ------------- ------------- Food Processing Fully-cooked protein products $115,330,520 $107,001,251 $ 89,886,921 Microwaveable sandwiches 88,425,039 68,500,800 52,392,376 Bakery and other products 7,284,924 8,000,093 7,498,909 ------------ ------------ ------------ Total food processing revenues $211,040,483 $183,502,144 $149,778,206 ============ ============ ============ Ham Curing Sliced hams $ -- $ 1,530,118 $ 4,944,538 Whole hams -- 565,934 2,119,087 ------------ ------------ ------------ Total ham curing revenues $ -- $ 2,096,052 $ 7,063,625 ============ ============ ============
Significantly all revenues and long-lived assets are derived and reside in the United States. F-24 55 14. COMMITMENTS AND CONTINGENCIES Under the provisions of the Purchase Agreement with Carousel Capital, the Company is responsible for all income tax and payroll taxes for the period prior to the sale, relating to Claremont Restaurant Group and related subsidiaries. The Company believes it has properly recorded any such liabilities to taxing authorities. The Company provides a secured letter of credit in the amount of $1,500,000 to its insurance carrier for the underwriting of certain performance bonds. The Company also provides secured letters of credit to its insurance carriers for outstanding and potential worker's compensation and general liability claims. Letters of credit for these claims totaled $500,000 in fiscal 2000 and 1999, and $360,000 during fiscal 2001. Beginning fiscal 2001, the Company also provides a secured letter of credit in the amount of $250,000 to one of its suppliers. The Company is involved in various legal proceedings. Management believes, based on the advice of legal counsel, that the outcome of such proceedings will not have a materially adverse effect on the Company's financial position or future results of operations and cash flows. 15. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and net income taxes refunded is as follows:
FISAL YEARS ENDED --------------------------------------------------- MARCH 3, 2001 MARCH 4, 2000 MARCH 6, 1999 ------------- ------------- ------------- Interest $ 12,790,175 $ 14,495,414 $ 8,954,506 Income taxes $ 2,760,172 $ 3,585,875 $ 346,372
16. TRANSACTIONS WITH RELATED PARTIES Related party transactions recorded in continuing operations during fiscal 2001, 2000 and 1999 arose in connection with the following relationships: Under a contract with a management services company owned by certain officers and directors, as amended on December 17, 1999, the Company receives corporate management services, which include, among other things, strategic planning, investor relations, management of the Company's banking, accounting and legal relationships and general oversight. Management fees paid under this contract are in lieu of salary compensation for certain of the Company's senior executives. During fiscal 2001, 2000 and 1999, the amount paid annually under this contract was $1,300,000. In addition, during fiscal 2001, 2000 and 1999 the Company paid bonuses of $1,775,000, $1,695,522 and $375,000, respectively, to the management services company and its senior executives. The Company uses the services of a company in which the Company's principal shareholders have substantial ownership interests. Services provided by this company include accounting, tax and administrative services, as well as consulting services related to the development of new sales, warehousing and distribution programs. Total payments for such services were $860,000 in fiscal 2001. The Company has agreed to lease warehouse space from a company in which the Company's principal shareholders have substantial ownership interests. The warehouse facility currently is under construction. The lease is a ten-year term to begin the first day the facility is operational. During fiscal 2001, the Company paid $250,000 for specialized construction costs. F-25 56 During fiscal 2000 and 1999, the Company maintained comprehensive insurance coverage through an insurance agency whose owner was a principal shareholder of the Company. Payments made to this agency totaled $447,000 and $2,267,000 in fiscal 2000 and 1999, respectively. During fiscal 2000 and 1999, the Company maintained two notes receivable from two of its principal shareholders. During fiscal 2001, one note plus accrued interest was paid in full. The Company recorded interest income of $61,293, $137,364 and $152,743 in fiscal 2001, 2000 and 1999, respectively, on related party notes receivable. The Company obtains public relations, investor relations and graphic design services from a marketing services company that was owned by a current director. Payments for these services totaled $7,000, $221,000 and $529,000, during fiscal 2001, 2000 and 1999, respectively. During fiscal 2001, the marketing services company was sold by the director. The Company has mutual leasing agreements with certain related individuals and with certain companies in which the Company's principal shareholders have substantial ownership interests. Total payments under such leasing agreements were $103,200, $103,200 and $51,600 during fiscal 2001, 2000 and 1999, respectively. Two directors have direct and indirect interests in a company with which a product licensing agreement has been signed. Under the terms of the agreement, the Company can produce and market certain products under brand names owned by the other company in exchange for royalty payments. Production of such a product began in mid-fiscal 1999. Royalties paid totaled $156,000, $120,000 and $78,000 during fiscal 2001, 2000 and 1999, respectively. During February 2001, these directors resigned their positions. On January 14, 2000, the Company entered into a Consulting and Noncompete Agreement with Mr. Charles F. Connor, Jr., a significant shareholder and co-founder of the Company. The agreement, which has a five-year term, provides payments of $200,000 per year and family medical insurance coverage. The net present value of payments under the agreement, including the net present value of the medical insurance coverage over the term, is estimated to be $831,000. This amount was expensed in selling, general and administrative expense during the fourth quarter of fiscal 2000, and the balance is reflected in other long-term liabilities. On January 6, 2000, the Company entered into a Consulting and Noncompete Agreement with Mr. L. Dent Miller, a significant shareholder, former President of Claremont Restaurant Group and former member of the Company's Board of Directors. The agreement, which has a five-year term, provides payments of $200,000 per year. The net present value of payments under the agreement is estimated to be $807,000. This amount was expensed in selling, general and administrative expense during the fourth quarter of fiscal 2000, and the balance is reflected in other long-term liabilities. Mr. Miller resigned from his position as a member of the Board of Directors of the Company, pursuant to his Consulting and Noncompete Agreement. Subsequent to fiscal 2000, Mr. Miller is no longer a shareholder or related party. On December 16, 1999, the Board of Directors approved a loan to Mr. James C. Richardson, the Company's current Chairman, of an amount up to $8.5 million for the purpose of enabling Mr. Richardson to purchase shares of the Company's common stock owned by certain shareholders. The terms of the loan provide that outstanding amounts will bear a simple interest rate of 8.5%, with principal and interest due at maturity, three years from the date of the loan. At March 4, 2000, disbursements under the loan approval totaled $5 million. Due to the nature of the loan, the outstanding balance is presented as a reduction of shareholders' equity. On June 30, 1999, the Company replaced the existing Change in Control Agreement with the company's former Chief Financial Officer (Mr. Harris) with a Bonus Agreement which specified the amounts of bonus payments to be received upon disposition of Claremont Restaurant Group. The Company paid $1,059,701 under the terms of this agreement in fiscal 2000 as a result of the sale. The related expense is included in continuing operations in selling, general and administrative expense. F-26 57 On July 6, 1999, the Company replaced certain existing Change in Control Agreements with the Company's current Chairman (Mr. Richardson) and current Vice Chairman (Mr. Clark) with revised Change in Control Agreements. The revised agreements provide that, if a change in control of the Company occurs, the following benefits will be provided by the Company: three times the amount of the annual base salary of the officer; three times the amount of the cash bonus paid or payable to such person for the most recent fiscal year; and a "gross-up" payment for all excise and income tax liabilities resulting from payments under the Change in Control Agreements. A change in control of the Company is considered to have occurred if: 1) the individuals who constituted the Board of Directors as of the date of the applicable Change in Control Agreement cease to constitute a majority of the Board; 2) any "person" (as defined in the applicable Change in Control Agreement) acquires 15% of the Company's common stock; 3) any of certain business combinations is consummated, unless the beneficial owners of the Company's common stock before the combination own more than 50% of the stock after the combination; or 4) the Company is liquidated or dissolved. Payments under the Change in Control Agreements are payable upon a change in control of the Company, whether or not an officer's employment is terminated. The term of each Change in Control Agreement is ten years unless it expires earlier upon the termination of an officer's employment. During fiscal 2000, the Company replaced an existing Change in Control Agreement with the Company's former Chairman (Mr. Howard) with a Severance, Consulting, and Noncompete Agreement. Payments made to Mr. Howard under this new agreement totaled $1,389,503 and are included in continuing operations in selling, general and administrative expense. During fiscal 2000, the Company sold its ham curing business to the management group of that subsidiary for $995,000, resulting in a net loss of $2,857,000. On August 18, 1999, the Company entered into an Incentive Agreement with the Company's current President (Mr. Woodhams), which replaced a Change in Control Agreement and Employment Contract. The agreement, as amended on January 1, 2000, specifies terms relating to salary and bonus amounts to be paid to the executive during the four year-term of the agreement, as well as severance and disposition bonus amounts to be received upon any sale of the Company. On December 17, 1999, the Company signed an Amended and Restated Management Services Agreement with HERTH Management, Inc ("HERTH"). The amended agreement, which terminates March 31, 2002, outlines the nature of the services to be provided by HERTH and continues to provide for annual payments totaling $1,500,000, payable in four equal quarterly installments. Related party transactions recorded in discontinued operations during fiscal 2000 and 1999 arose in connection with the following relationships: During fiscal 2000, the Company replaced certain existing Change in Control Agreements with two key restaurant executives (Mr. Miller and Mr. Templeton) with Severance, Consulting and Noncompete Agreements. These agreements, which became effective with the disposition of the restaurant operations, provide the terms under which the two executives are to provide consulting services to Claremont Restaurant Group, and stipulate that they are to refrain from engaging in competitive activities related to restaurant operations and franchising for a period of five years. On October 7, 1999, payments totaling $2,015,361 were made to the two restaurant executives as a result of these agreements, and the consulting and noncompete agreements were transferred to Carousel Capital Partners, L.P. , the purchaser of Claremont Restaurant Group. The costs of the agreements are reflected in the gain on disposal of discontinued restaurant segment (Note 1). Certain current and past officers, directors and principal shareholders of the Company had ownership interests in franchisee companies during fiscal 1999. Total franchise, royalty and other fees from related party franchise companies were $34,000 during fiscal 1999. F-27 58 Immediate family members of a current director have ownership interests in companies from which the Company purchased restaurant equipment, furnishings and supplies. Purchases from these companies totaled $13,000 and $2,555,000 during fiscal 2000 and 1999, respectively. The Company had mutual leasing agreements with certain related individuals and with certain companies in which the Company's principal shareholders have substantial ownership interests. Total payments under such leasing agreements were $867,800 and $1,796,400 during fiscal 2000 and 1999, respectively. During fiscal 2000, the Company sold five former restaurant properties and one tract of vacant land to an entity in which a former officer and principal shareholder is a minority investor, for a net cash purchase price of $939,000, resulting in a net loss of $1,495,000. During fiscal 2000, the Company sold the net assets of its one Bennett's restaurant operation to certain members of management for a cash purchase price of $1,100,000, resulting in a net gain of $522,000. 17. SUBSEQUENT EVENTS A definitive agreement and plan of share exchange with PF Management, Inc., a management group that owns approximately 63% of the Company's outstanding common stock, was approved by the Company's Board of Directors on April 26, 2001. The agreement, also executed on April 26, 2001, calls for PF Management, Inc. to purchase for $1.21 per share, all shares of the Company's common stock owned by unaffiliated investors. The transaction requires a favorable vote by the holders of 75% of the Company's outstanding shares but does not require approval by the holders of the Company's outstanding 10 3/4% senior notes. The closing of the transaction is subject to shareholder approval, financing and other conditions typical of a management buyout. F-28 59 REPORT OF MANAGEMENT The management of Pierre Foods, Inc. is responsible for the preparation and integrity of the consolidated financial statements of the Company. The financial statements and notes have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and, in the judgment of management, present fairly and consistently the Company's financial position and results of operations and cash flows. The financial information contained elsewhere in this annual report is consistent with that in the financial statements. The financial statements and other financial information in this annual report include amounts that are based on management's best estimates and judgments. The Company maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. The Company's financial statements have been audited by Deloitte & Touche LLP. Management has made available to them all of the Company's financial records and related data, and believes that all representations made to Deloitte & Touche LLP during this audit were valid and appropriate. Their report provides an independent opinion upon the fairness of the financial statements. The Board of Directors discharges its responsibility for the Company's financial statements through its three-member Audit Committee, all of which are non-management directors. The Audit Committee meets periodically with Deloitte & Touche LLP, and the reporting staff have direct access to the Audit Committee to discuss the scope and results of their work, the adequacy of internal accounting controls and the quality of financial reporting. /s/ Norbert E. Woodhams /s/ Pamela M. Witters - ------------------------------------- ------------------------------------- Norbert E. Woodhams Pamela M. Witters President and Chief Executive Officer Chief Financial Officer and Treasurer EX-10.39 2 g68934ex10-39.txt ASSUMPTION AND ASSIGNMENT AGREEMENT DATED 4/17/01 1 EXHIBIT 10.39 ASSUMPTION AND ASSIGNMENT AGREEMENT THIS ASSUMPTION AGREEMENT (this "Agreement") is made as of this 17th day of April, 2001, by and among, Columbia Hill, LLC, a North Carolina limited liability company (the "Debtor"), PF Management, Inc., a North Carolina corporation with principal offices in Hickory, North Carolina (the "Corporation"), and James C. Richardson, Jr., David R. Clark, and James M. Templeton (collectively, the "Guarantors"). Recital: WHEREAS, the Debtor is obligated to Pierre Foods, Inc. (herein the "Obligee") under the terms of a certain promissory note dated February 28, 1997, as modified by that certain Note Modification Agreement dated January 7, 1999 (the "Modification"), in the original amount of $705,493.00 (as modified, the "Note"), a copy of which Note and Modification is attached hereto as Exhibit A, issued pursuant to that certain Agreement to Purchase and Sell Stock dated February 28, 1997 by and between WSMP, Inc. and the Debtor (the "Contract"), and WHEREAS, the Debtor is desirous of contributing and assigning its rights in the Contract and its assets, subject to its liabilities, to the Corporation as a contribution to its capital, and the Corporation is willing to assume all indebtedness, liabilities, and obligations of the Debtor under the Note and Contract. NOW, THEREFORE, in consideration of the mutual premises herein and the contribution by the Debtor of its assets to the Corporation, the parties hereto agree as follows: 1. The Debtor hereby contributes all of its assets, subject to its liabilities, to the Corporation and hereby assigns the Contract to the Corporation. 2. The Corporation hereby assumes the Note and accepts assignment of the Contract, and the Corporation hereby covenants, promises, and agrees (a) to pay the principal and interest due on the Note, and all other sums payable thereunder, at the times, in the manner, and in all respects as therein provided; (b) to perform and comply with all of the terms, covenants, agreements, and obligations to be performed by the Debtor under the Note or Contract at the times, in the manner, and in all respects as therein provided; and (c) to be bound by each and all of the terms, covenants, agreements, and obligations of the Contract and the Note. All Guarantors shall comply with all requirements of the Contract regarding execution and delivery of guaranties in the appropriate form to the Obligee. 3. The Debtor shall remain fully liable under the terms, provisions, covenants, and obligations of the Note. The liability of the Debtor, Guarantors and the Corporation under the Note shall be joint and several. The assumption by the Corporation of the Note, the execution and delivery of this Agreement and the terms, provisions, covenants, agreements, or obligations contained in this Agreement shall in no manner release or lessen the indebtedness, liabilities, and obligations of the Debtor and Guarantors under the Note. 2 4. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. This Agreement shall be binding upon the parties, their heirs, successors and assigns. 5. This Agreement may be executed in counterparts, all of which when taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, this Agreement has been executed under seal as of the day and year first above written. COLUMBIA HILL, LLC ------------------------------------(SEAL) James C. Richardson Jr., Manager ------------------------------------(SEAL) David R. Clark, Manager ------------------------------------(SEAL) Larry D. Hefner, Manager ATTEST: PF Management, Inc. - ------------------------ By: Brian D. Davis --------------------------------- Secretary David R. Clark President (Corporate Seal) 3 Guarantors: ------------------------------------(SEAL) David R. Clark ------------------------------------(SEAL) James C. Richardson Jr. ------------------------------------(SEAL) James M. Templeton 4 EXHIBIT A NOTE EX-10.40 3 g68934ex10-40.txt CANCELLATION AND ASSIGNMENT AGREEMENT 4/25/01 1 EXHIBIT 10.40 NORTH CAROLINA CATAWBA COUNTY CANCELLATION AND ASSIGNMENT AGREEMENT This Agreement effective as of the 25th day of April, 2001, by and between David R. Clark, a citizen residence of Catawba County, North Carolina ("Clark") and HERTH Management, Inc., a North Carolina corporation ("HERTH"), and PF Management, Inc., a North Carolina corporation ("PFM"). WITNESSETH: WHEREAS, Clark and HERTH entered into a certain Incentive Agreement effective June 30, 1996 (the "Incentive") and a certain Option Agreement dated July 1, 1996 (the "Option"); and WHEREAS, in consideration of such transactions occurring effective April 17, 2001, between HERTH and other parties, including PFM, in which Clark has a beneficial interest, and as an inducement to HERTH for consenting and permitting such transactions, Clark has agreed to cancel and relinquish all interests and rights he may have with respect to the Option and the Incentive; and WHEREAS, HERTH is a party to a certain Amended and Restated Management Services Agreement ("Services Agreement") dated December 17, 1999 with Fresh Foods, Inc. (now Pierre Foods, Inc.), and it is the intention of the parties that such services will henceforth be provided by PFM, and as an inducement to and in consideration of the transactions occurring April 17, 2001, and the aforesaid cancellation and relinquishment by Clark of his interest in the Option and the Incentive, HERTH is in agreement to assign its rights and interests under the Services Agreement and PFM is willing to accept and assume the obligations thereunder. Now, therefore, in consideration of the mutual premises herein, and other consideration, the receipt and legal sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Clark and HERTH do hereby cancel and terminate the Option and the Incentive and neither party shall have any rights, obligation or liability henceforth under Option and Incentive. 2. Subject to the approval of Pierre Foods, Inc., HERTH does hereby assign and transfer to PFM all of HERTH's right, title and interest in and to the Services Agreement, and PFM hereby assumes all obligations under the Services Agreement, and agrees to perform all obligations thereunder from and after the date hereof, and does further indemnify and hold harmless HERTH from and against any and all liability from or pursuant to the Services Agreement subsequent to the day hereof. 2 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. HERTH MANAGEMENT, INC. By: - ---------------------- ------------------------------------- Witness James C. Richardson, Jr. President - ---------------------- ----------------------------------------(SEAL) Witness David R. Clark PF MANAGEMENT, INC. By: - ---------------------- ------------------------------------- Witness David R. Clark President EX-10.41 4 g68934ex10-41.txt AGREEMENT AND PLAN OF SHARE EXCHANGE 1 EXHIBIT 10.41 AGREEMENT AND PLAN OF SHARE EXCHANGE AMONG PIERRE FOODS, INC., PF MANAGEMENT, INC. JAMES C. RICHARDSON, JR. AND DAVID R. CLARK 2 ARTICLE 1 TERMS AND CONDITIONS OF THE EXCHANGE................................................................ 1 1.1 The Exchange................................................................................ 1 1.2 Payment of Cash and Surrender of Share Certificates......................................... 2 1.3 Effects of the Exchange..................................................................... 3 1.4 Closing..................................................................................... 3 1.5 Stock Options and Employee Benefit Plans.................................................... 3 ARTICLE 2 GENERAL CONDITIONS AND AGREEMENTS................................................................... 4 2.1 Effective Time.............................................................................. 4 2.2 Termination................................................................................. 4 2.3 Effect of Termination....................................................................... 6 2.4 Conduct of the Participating Corporations prior to the Effective Time....................... 6 2.5 Conditions to the Exchange.................................................................. 9 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY....................................................... 11 3.1 Due Authorization........................................................................... 11 3.2 Consents and Approvals; No Violation........................................................ 11 3.3 SEC Reports................................................................................. 11 3.4 Litigation.................................................................................. 12 3.5 Rights Agreement; Anti-Takeover Laws........................................................ 12 3.6 Fairness Opinion............................................................................ 12 3.7 Board Action................................................................................ 12 3.8 Absence of Certain Changes.................................................................. 12 3.9 Proxy Statement and Transaction Statement Information....................................... 13 3.10 Stock Options............................................................................... 13 3.11 Brokers..................................................................................... 13 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE ACQUIROR...................................................... 14 4.1 Organization, Standing and Qualification.................................................... 14 4.2 Authority for this Agreement................................................................ 14 4.3 Consents and Approvals; No Violation........................................................ 14 4.4 Financing................................................................................... 14 4.5 Litigation.................................................................................. 14 4.6 Brokers..................................................................................... 15 4.7 Proxy Statement and Transaction Statement Information....................................... 15 ARTICLE 5 ADDITIONAL AGREEMENTS............................................................................... 15 5.1 Indemnification; Directors and Officers Liability Insurance................................. 15 5.2 Shareholder Approval; Proxy Statement....................................................... 16 5.3 Fees and Expenses........................................................................... 17 5.4 Reasonable Efforts.......................................................................... 17 5.5 Public Announcements; Certain Notices....................................................... 17 5.6 Exemption from Liability Under Section 16(b)................................................ 18 ARTICLE 6 NOTICES............................................................................................. 18 ARTICLE 7 MISCELLANEOUS....................................................................................... 19 7.1 Governing Law............................................................................... 19 7.2 Binding Agreement........................................................................... 19
i 3 7.3 Counterpart Originals....................................................................... 19 7.4 Entire Agreement............................................................................ 19 7.5 Amendments.................................................................................. 19 7.6 Definitions................................................................................. 19 ANNEX A Articles of Share Exchange between PF Management, Inc. and Pierre Foods, Inc.................................................................... A-1
ii 4 AGREEMENT AND PLAN OF SHARE EXCHANGE THIS AGREEMENT AND PLAN OF SHARE EXCHANGE (this "Agreement" or the "Exchange Agreement") is made and entered into as of April 26, 2001, among Pierre Foods, Inc., a North Carolina corporation (the "Company"), and PF Management, Inc., a North Carolina corporation (the "Acquiror" and, together with the Company, the "Participating Corporations"), and James C. Richardson, Jr. and David R. Clark, who are the principal shareholders of the Acquiror (the "Principal Shareholders"), pursuant to Section 55-11-02 of the North Carolina Business Corporation Act (the "Act"). STATEMENT OF PURPOSE The respective Boards of Directors of the Participating Corporations have approved the acquisition of the Company by the Acquiror pursuant to a statutory share exchange in accordance with the provisions of Section 55-11-02 of the Act (the "Exchange"). In the Exchange, all of the outstanding shares of common stock, no par value per share, of the Company (the "Common Stock"), together with the associated preferred stock purchase rights (the "Rights") issued pursuant to the Rights Agreement, as defined below (the shares of Common Stock and associated Rights being referred to herein as "Shares"), other than the Shares already owned by the Acquiror, would, on the terms and subject to the conditions set forth in this Agreement, be converted into the right to receive $1.21 per Share. The Board of Directors of the Company, other than James C. Richardson, Jr. and David R. Clark (the "Board"), has unanimously adopted resolutions approving this Agreement and the Exchange. The Board determined that the Exchange is fair to and in the best interests of the holders of Shares, other than the Acquiror, and unanimously recommended that the Company's shareholders approve and adopt this Agreement, including the Plan of Share Exchange set forth in the Articles of Share Exchange, the form of which is Annex A to this Agreement (the "Plan"). NOW, THEREFORE, in consideration of the premises and the representations, warranties and agreement herein contained, the parties agree as follows: ARTICLE 1 TERMS AND CONDITIONS OF THE EXCHANGE 1.1 The Exchange. The Acquiror will become the holder of all of the outstanding Shares pursuant to the terms and conditions of this Agreement and the Plan. At the Effective Time (as defined in Section 2.1 below), and subject to the conditions set forth in this Agreement, the shares of the Participating Corporations shall be exchanged as follows: (a) Acquiror. The outstanding shares of capital stock of the Acquiror will not be exchanged, altered or affected in any manner as a result of the share exchange to be effected pursuant to the Plan and will remain outstanding as shares of the Acquiror. 5 (b) The Company. At the Effective Time, each of the outstanding Shares of the Company except those already owned by the Acquiror (the "Exchange Shares") will, by virtue of the share exchange provided for by the Plan and without any further action on the part of the holder thereof, be exchanged for, and become the right to receive from the Acquiror, $1.21 in cash (the "Exchange Price") upon surrender to the Acquiror (or an agent of the Acquiror designated as provided in Section 1.2 hereof) of the certificate or certificates representing such Exchange Shares, as provided in Section 1.2 hereof, and each of the Exchange Shares shall be cancelled. No interest shall be payable with respect to payment of such cash amount on surrender of outstanding certificates. No holder of any Exchange Shares (or any certificate representing such Exchange Share or Shares) immediately prior to the Effective Time shall be entitled to receive any dividend declared and payable in respect of such Exchange Shares after the Effective Time, any such dividend being the property of the Acquiror. The stock transfer ledger of the Company shall be closed in respect of the Exchange Shares from and after the Effective Time. 1.2 Payment of Cash and Surrender of Share Certificates. (a) At the Effective Time, the Acquiror shall irrevocably deposit or cause to be deposited with a bank or trust company to be designated by the Acquiror and reasonably satisfactory to the Company, which is organized and doing business under the laws of the United States or any state thereof and has a combined capital and surplus of at least $100 million, as paying agent for the holders of the Exchange Shares, cash in the aggregate amount required to effect the conversion of the Exchange Shares into the consideration to be paid to the shareholders of the Company as provided in Section 1.1(b) (the "Aggregate Exchange Consideration"). Pending distribution pursuant to this Agreement, the Aggregate Exchange Consideration shall be held in trust for the benefit of the holders of the Exchange Shares and the funds shall not be used for any other purposes, and the Acquiror and the Company may direct the paying agent to invest such cash, provided that such investments (i) shall be obligations of or guaranteed by the United States of America, commercial paper obligations receiving the highest rating from either Moody's Investor Services, Inc. or Standard & Poor's Corporation, or certificates of deposit, bank repurchase agreements or bankers acceptances of domestic and commercial banks with capital exceeding $250 million or money market funds which are invested solely in such permitted investments and (ii) shall have maturities that will not prevent or delay payments to be made pursuant to this Agreement. Any interest and other income resulting from such investments shall be paid to the Acquiror. (b) After the Effective Time, each holder, other than the Acquiror, of an outstanding certificate or certificates representing Exchange Shares shall surrender the same to the Acquiror in accordance with the instructions contained in a form of letter of transmittal. The letter of transmittal and certificate(s) shall be delivered to the bank, trust company or other party designated by the Acquiror as paying agent for the exchange of Exchange Shares for cash as provided herein. Upon such surrender, each such holder shall receive cash in an amount equal to the Exchange Price for each Exchange Share represented by a certificate so surrendered. Until so surrendered, each outstanding certificate that prior to the Effective Time represented one or more Exchange Shares shall be deemed for all purposes to evidence only the ownership of the non-transferable right -2- 6 to receive the cash to be exchanged for each Exchange Share represented by such certificate. With respect to any certificate for Exchange Shares that has been lost or destroyed, the Acquiror shall pay the holder thereof the consideration attributable to such certificate upon receipt of (i) evidence of ownership of such Exchange Shares reasonably satisfactory to the Acquiror, and (ii) an indemnity bond posted by such holder in such amount as the Acquiror may reasonably require. (c) If any cash deposited with the paying agent for purposes of payment in exchange for the Exchange Shares remains unclaimed following the expiration of six months after the Effective Time, such cash shall be delivered to the Acquiror by the paying agent, and thereafter the paying agent shall not be liable to any persons claiming any amount of such cash, and any future surrender and exchange shall be effected directly with the Acquiror (subject to applicable abandoned property, escheat and similar laws). No interest shall accrue or be payable with respect to any amount which any such holder shall be so entitled to receive. (d) None of the Acquiror, the Company or the paying agent shall be liable to any person in respect of any unsurrendered Exchange Shares (or dividends or distributions in respect thereto) or cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. 1.3 Effects of the Exchange. The Exchange shall transpire pursuant to the provisions of and with the effect provided in the Act. The Exchange is a statutory share exchange and not a merger. 1.4 Closing. The closing of the Exchange (the "Closing") shall take place at the offices of Womble Carlyle Sandridge & Rice, PLLC, 3300 One First Union Center, 301 South College Street, Charlotte, North Carolina 28202-6025, at 10:00 a.m., local time, on the second business day after the day on which the last of the conditions set forth in Section 2.5 of this Agreement shall have been fulfilled or waived or at such other time and place as the Participating Corporations shall agree. 1.5 Stock Options and Employee Benefit Plans. The Company shall (a) terminate the 1997 Special Stock Option Plan, the 1997 Incentive Stock Option Plan and the 1987 Special Stock Option Plan (the "Stock Option Plans"), and shall terminate or amend any other plan or arrangement providing for the issuance or grant of any other interest in respect of the capital stock of the Company, prior to the Effective Time, so that no such interest shall remain outstanding after the Effective Time, (b) grant no further options under the Stock Option Plans and (c) take all necessary actions prior to the Effective Time, including obtaining required consents, such that all outstanding options under the Stock Option Plans shall be cancelled prior to the Effective Time, provided that the exercise prices of all such options are above the Exchange Price. -3- 7 ARTICLE 2 GENERAL CONDITIONS AND AGREEMENTS 2.1 Effective Time. As used in the Plan, the term "Effective Time" means the time at which Articles of Share Exchange, substantially in the form attached to this Agreement as Annex A, shall have been filed with the Secretary of State of North Carolina in accordance with Section 55-11-05 of the Act or such later date set forth in the Articles of Share Exchange. 2.2 Termination. This Agreement may be terminated and the transactions contemplated by this Agreement may be abandoned at any time prior to the Closing (whether before or after the approval of this Agreement by the shareholders of the Company) as follows: (a) By mutual written agreement of the Participating Corporations; or (b) (i) By either the Company or the Acquiror if the Exchange shall not have been consummated by September 30, 2001; provided, that neither of the parties shall be entitled to terminate this Agreement pursuant to this Section 2.2(b)(i) if, at the time of such proposed termination, it is in material breach of its representations and warranties, covenants or other agreements under this Agreement; or (ii) By the Company if, prior to the Effective Time, there has occurred, and the Company has notified the Acquiror of the occurrence of, a material breach by the Acquiror of any representation, warranty, covenant or agreement set forth herein and such breach is not cured within 30 days after notice; provided, that if such breach is not reasonably capable of being cured within such 30 day period, the Company may terminate this Agreement at any time after it has given the Acquiror notice of such breach; and provided further, that the Company shall not be entitled to terminate this Agreement pursuant to this Section 2.2(b)(ii) if it is in material breach of its representations and warranties, covenants or other agreements under this Agreement; or (c) (i) By either the Acquiror or the Company if a federal, state or local court, commission, governmental body, regulatory or administrative agency, authority or tribunal (a "Governmental Entity") shall have issued an order, decree or filing or taken any other action, in each case permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement; or (ii) By the Acquiror if, prior to the Effective Time, there has occurred, and the Acquiror has notified the Company of the occurrence of, a material breach by the Company of any representation, warranty, covenant or agreement set forth herein and such breach is not cured within 30 days after notice; provided, that if such breach is not reasonably capable of being cured within such 30 day period, the Acquiror may terminate this Agreement at any time after it has given the Company notice of such breach; and provided further, that the Acquiror shall not be entitled to terminate this Agreement pursuant to this Section 2.2(c)(ii) if it is in -4- 8 material breach of its representations and warranties, covenant or other agreement under this Agreement. (d) By the Company for the purpose of allowing the Company to enter into one or more related agreements in accordance with Section 2.4 with respect to a Superior Proposal (as defined below) if the Board, based on the recommendations of the special committee of the Board established to review and consider the proposal to effect the Exchange contemplated by this Agreement (the "Special Committee"), after receiving advice from counsel to the Special Committee, has determined in good faith that a failure to terminate this Agreement and enter into an agreement to effect the Superior Proposal would constitute a breach of its fiduciary duties; provided, that: (i) the Company has complied with all provisions of Section 2.4(d); (ii) the Acquiror does not make, within three business days after receipt of the Company's written notification of its intention to enter into a binding agreement for a Superior Proposal, an offer to enter into an amendment to this Agreement containing terms such that the Board, based on the recommendation of the Special Committee after receiving advice from its financial advisors, determines in good faith that this Agreement as so amended is at least as favorable, from a financial point of view, to the shareholders of the Company (other than the Acquiror) as the Superior Proposal; (iii) the Company pays the Acquiror's Expenses (as defined below) in accordance with Section 2.3(b) hereof; and (iv) substantially contemporaneously with such termination, the Company enters into a definitive agreement to effect the Superior Proposal. (e) By the Acquiror, at any time prior to the approval of the Exchange by the shareholders of the Company, if: (i) the Board, or the Special Committee, shall have withdrawn, modified, or changed its recommendation in respect of this Agreement in a manner adverse to the Acquiror or resolved to do so; (ii) the Board, or the Special Committee, shall have recommended any proposal other than by the Acquiror in respect of an Acquisition Transaction (as defined below) or resolved to do so; or (iii) the Company has received a proposal regarding an Acquisition Transaction and the Company shall not have rejected such proposal within 10 business days after its receipt or, if sooner, the date its existence first becomes publicly disclosed. (f) By the Company if there shall have been threatened, instituted or pending any action or proceeding by any Governmental Entity, or by any other Person, domestic or foreign, before any court of competent jurisdiction or Governmental Entity, which -5- 9 could reasonably be expected to make illegal, materially impede or otherwise directly or indirectly prohibit or materially restrain the Exchange or seek to obtain material damages in connection therewith. 2.3 Effect of Termination. (a) In the event of a party's termination of this Agreement as provided in Section 2.2 hereof, written notice thereof shall promptly be given to the other party specifying the provision hereof pursuant to which such termination is made, and, subject to Section 2.3(b) hereof, this Agreement shall become null and void and there shall be no liability on the part of the Acquiror or the Company; provided, that nothing herein shall relieve any party from liability for any breach of this Agreement. (b) If: (i) the Acquiror shall have terminated this Agreement pursuant to Section 2.2(e); (ii) the Acquiror shall have terminated this Agreement pursuant to Section 2.2(c)(ii) and following the date hereof and either prior to such termination or within two months after such termination, (A) the Company shall have received a proposal with respect to an Acquisition Transaction that the Company has not rejected prior to such termination, and (B) within 12 months after the date of such termination, the Company shall enter into a definitive agreement with respect to such Acquisition Transaction ; or (iii) the Company shall have terminated this Agreement pursuant to Section 2.2(d); then the Company shall pay to the Acquiror an amount equal to the Acquiror's actual and documented out-of-pocket expenses incurred or paid by the Acquiror in connection with the Exchange, this Agreement and the consummation of the transactions contemplated hereby ("Expenses"), which amounts shall be payable by wire transfer to such account as the Acquiror may designate in writing to the Company. The Company shall pay such Expenses within two business days after the Acquiror has provided the Company with documentation of the Expenses and a written request for payment, provided there has occurred (A) a termination pursuant to Section 2.2(d) or Section 2.2(e) or (B) an Acquisition Transaction under the circumstances described in Section 2.3(b)(ii). 2.4 Conduct of the Participating Corporations prior to the Effective Time. (a) Until the completion of the Exchange, the Company shall continue to conduct its business without material change and it shall not, without the consent of the Acquiror, (i) issue any equity security or instrument convertible into any equity security, (ii) make any distribution or other disposition of its assets, capital or surplus except in the ordinary course of business, (iii) take any action which would impair its assets, or (iv) take any action that would cause its representations and warranties to be untrue in any material respect at the Effective Time. Subject to the conditions set forth in this -6- 10 Agreement, prior to the Effective Time, each of the Participating Corporations shall promptly take all such actions as shall be necessary or appropriate in order to effect the Exchange in accordance with the terms and conditions of the Plan, including, but not limited to, complying with the conditions set forth in Section 2.5(b). (b) During the period beginning on the date of this Agreement and ending at the Effective Time, the Company shall, and shall cause each of its subsidiaries to, upon reasonable notice, afford the Acquiror and its counsel, accountants, financing sources, consultants and other authorized representatives reasonable access during normal business hours to the employees, properties, books and records and accountants of the Company and its subsidiaries. The Company shall furnish promptly to the Acquiror (i) a copy of each report, schedule or other document filed by it or any of its subsidiaries during such period pursuant to federal or state securities laws and (ii) all other information concerning its or its subsidiaries' business, properties and personnel as the Acquiror shall from time to time reasonably request. (c) Subject to Section 5.5(a), each party hereto shall, and shall cause each of its directors, officers, attorneys and advisors to, maintain the confidentiality of all information obtained hereunder which is not otherwise publicly disclosed by the other party, such undertakings with respect to confidentiality to survive any termination of this Agreement. In the event of the termination of this Agreement, each party shall return to the other party upon request all confidential information previously furnished in connection with the transactions contemplated by this Agreement. (d) The Company shall, and shall cause its subsidiaries and each of their directors, officers, employees, agents, advisors and representatives to, immediately cease any discussions or negotiations with third parties with respect to any Acquisition Transaction. Prior to the Effective Time, the Company agrees that it shall not, and shall not authorize or permit any of its subsidiaries or any of their directors, officers, agents, advisors or representatives to, directly or indirectly: (i) Solicit, initiate, facilitate or encourage (including without limitation by furnishing information to a third party or by taking any action which would make the Rights Agreement dated as of September 2, 1997 between the Company and American Stock Transfer & Trust Company, as Rights Agent (the "Rights Agreement"), inapplicable to any Acquisition Transaction (other than the Exchange)) any inquiries or the making of any proposal with respect to any tender offer or exchange offer involving the Company or any proposal with respect to any merger, consolidation, statutory share exchange or other business combination involving the Company or any subsidiary of the Company, the acquisition of all or any significant part of the assets of the Company or any subsidiary of the Company or more than 10% of any class of the capital stock of the Company or any subsidiary of the Company (each, an "Acquisition Transaction"); (ii) Except for agreements with respect to a Superior Proposal entered into in accordance with Section 2.2(d) and except for confidentiality agreements -7- 11 entered into in connection with actions permitted in accordance with Section 2.4(d)(iii), enter into any agreement, arrangement or understanding with respect to any Acquisition Transaction or enter into any agreement, arrangement or understanding requiring it to abandon, terminate or fail to consummate the Exchange or any other transaction contemplated by this Agreement; or (iii) Negotiate, explore or otherwise engage in discussions with any individual or any partnership, joint venture, corporation, trust, limited liability company or any other entity or any unincorporated organization or group (a "Person"), other than the Acquiror and its representatives, with respect to any Acquisition Transaction, or any inquiry that may reasonably be expected to lead to a proposal for an Acquisition Transaction; provided, that the Company may (A) participate in discussions with or request clarifications from or furnish information (pursuant to a confidentiality agreement with terms not more favorable to such third party than as set forth in Section 2.4(c)) to any third party which makes an unsolicited written proposal to effect an Acquisition Transaction that did not result from the breach of this Section 2.4 and subject to compliance with its obligations under Section 2.4(d), in each case solely for the purpose of obtaining information reasonably necessary to ascertain whether such Acquisition Transaction is, or could reasonably likely lead to, a Superior Proposal, and (B) in response to an unsolicited written proposal from a third party making a Superior Proposal that did not result from the breach of this Section 2.4 and subject to compliance with its obligations under Section 2.4(d), furnish information (pursuant to a confidentiality agreement with terms not more favorable to such third party than as set forth in Section 2.4(c)) to and engage in discussions and negotiations with such third party, but only, in the case of clause (A) and clause (B), if the Board, based on the recommendation of the Special Committee after receiving written advice from its financial advisors and after receiving advice from outside counsel to the Special Committee, determines in good faith that taking such action is in the best interests of the Company and its shareholders other than the Acquiror and such action is required by its fiduciary duties under applicable law. (iv) Without limiting the foregoing, it is agreed that any violation of the restrictions set forth in this Section 2.4(d) by any director, officer, employee, agent, advisor or representative of the Company, whether or not such Person is purporting to act on behalf of the Company, shall constitute a breach of this Section 2.4(d) by the Company. (e) The Company agrees to advise the Acquiror in writing within 24 hours after the receipt thereof of the existence of: (i) Any inquiries, proposals or requests for information received by the Company or any of its directors, officers, agents, advisors or representatives (other than James C. Richardson, Jr. or David R. Clark), or by the financial and legal advisors to the Special Committee, from a Person (other than the Acquiror and its representatives) with respect to an Acquisition Transaction; and -8- 12 (ii) The content of any such inquiries, proposals or requests, including the identity of such third party and the terms of any financing arrangement or commitment in connection with such Acquisition Transaction; and shall update the Acquiror on an ongoing basis or upon the Acquiror's reasonable request on the status thereof. The Company shall simultaneously provide to the Acquiror any non-public information concerning the Company provided to any other Person or group in connection with any Acquisition Transaction which was not previously provided to the Acquiror. (f) As used herein, "Superior Proposal" means a written and unsolicited proposal or offer made by any Person (other than the Acquiror) to acquire all or substantially all of the capital stock of the Company pursuant to a tender offer, exchange offer, merger, statutory share exchange or other business combination or to purchase all or substantially all of the assets of the Company on terms that, as determined in good faith by the Board, based on the recommendation of the Special Committee after receiving written advice of its financial advisors, are more favorable from a financial point of view to the Company and its shareholders, other than the Acquiror, than the transactions contemplated hereby and any alternative proposed by the Acquiror. 2.5 Conditions to the Exchange. (a) The obligations of the Participating Corporations and the Principal Shareholders to consummate the Exchange pursuant to the Plan shall be conditioned upon the satisfaction of the following conditions: (i) The Plan shall have been approved at the meeting of shareholders of the Company held for such purpose (the "Shareholder Meeting"), or any adjournment thereof, by the vote of the holders of 75% of the Common Stock outstanding and entitled to vote thereon. (ii) All filings, registrations, notices, consents, approvals, authorizations, certificates, orders and permits with respect to the exchange of the Exchange Shares pursuant to and in accordance with the provisions of the Plan required from any Governmental Entity having or asserting jurisdiction over the Participating Corporations shall have been made or obtained and be in full force and effect on a basis reasonably satisfactory to the Participating Corporations. (iii) No Governmental Entity shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, executive order, decree or injunction which prohibits or has the effect of prohibiting the consummation of the Exchange; provided, that the party asserting this condition shall have used its reasonable best efforts to have any such order, decree or injunction vacated. (iv) There shall not have been threatened, instituted or pending any action or proceeding by any Governmental Entity, or by any other Person, domestic or foreign, before any court of competent jurisdiction or Governmental Entity, which could reasonably be expected to: (i) make illegal, materially impede -9- 13 or otherwise directly or indirectly prohibit or materially restrain the Exchange or seek to obtain material damages in connection therewith, (ii) prohibit or materially limit the ownership or operation by the Acquiror of all or any material portion of the business or assets of the Company and its subsidiaries taken as a whole or compel the Acquiror to dispose of or hold separately all or any material portion of the business or assets of the Acquiror or the Company and its subsidiaries taken as a whole, or seek to impose any material limitation on the ability of the Acquiror to conduct its business or own such assets, or (iii) have a material adverse effect on the business of the Acquiror or the Company and its subsidiaries taken as a whole (hereinafter as applied to the Company, a "Material Adverse Effect"). (v) Each of the Participating Corporations shall have received from the other Participating Corporation such certificate or certificates as shall reasonably be requested to evidence satisfaction of the conditions set forth in this Section 2.5. (b) The obligations of the Acquiror and the Principal Shareholders to consummate the Exchange shall be conditioned on the satisfaction of the following conditions: (i) The representations and warranties of the Company made in this Agreement shall be true and correct in all material respects at, and at all times prior to, the Effective Time, and the Company shall have fully performed in all material respects its covenants and obligations under this Agreement at or prior to the Effective Time. (ii) The holders of no more than 5% of the Common Stock shall have given written notice of their intent to demand payment for their Shares and shall not have voted for the Exchange, pursuant to Article 13 of the Act. (iii) There shall not have occurred any event, change, circumstance or occurrence that has had or that would reasonably be expected to have a Material Adverse Effect on the Company or any of its subsidiaries taken as a whole. (iv) There shall not have occurred and be continuing (A) any general suspension of, or limitation on prices for, trading in securities through the Nasdaq Stock Market or (B) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States. (v) There shall not have been threatened, instituted or pending any action or proceeding by any Governmental Entity, or by any other Person, domestic or foreign, before any court of competent jurisdiction or Governmental Entity, which could reasonably be expected to (i) impose limitations on the ability of the Acquiror effectively to exercise full rights of ownership of the Shares owned by it, including, without limitation, the right to vote such Shares on all matters properly presented to the Company's shareholders or (ii) require divestiture by the Acquiror of any Shares. -10- 14 (vi) The Acquiror shall have obtained financing necessary to satisfy its obligations to pay the Exchange Price and the Expenses on terms and conditions satisfactory to the Acquiror in its sole discretion (it being understood that this condition shall not apply to the Principal Shareholders). (c) The obligations of the Company to consummate the Exchange shall be conditioned on the representations and warranties of the Acquiror made in this Agreement being true and correct in all material respects at, and at all times prior to, the Effective Time, and the Acquiror having fully performed in all material respects its covenants and obligations under this Agreement at or prior to the Effective Time. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY 3.1 Due Authorization. The Company has the requisite corporate power and authority to execute and deliver this Agreement and, following compliance with Section 2.5(a)(i), to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement by the Company (through the Chairman of the Special Committee) and the consummation by the Company of the transactions contemplated by this Agreement have been duly and validly authorized by the Board and no other corporate proceeding on the part of the Company is necessary to authorize this Agreement or to consummate the transactions so contemplated, other than the approval and adoption of this Agreement by the holders of 75% of the Shares outstanding. This Agreement has been duly and validly executed and delivered by the Company and constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and subject to general principles of equity (whether considered in a proceeding in equity or at law). 3.2 Consents and Approvals; No Violation. Neither the execution and delivery of this Agreement by the Company nor the consummation of the transactions contemplated by this Agreement will (a) conflict with or result in a breach of any provision of the articles of incorporation or bylaws of the Company; (b) require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, except pursuant to the Exchange Act; (c) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms of any obligation to which the Company is a party or by which any of its assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or that would not materially and adversely affect the ability of the Company to consummate the transactions contemplated by this Agreement; or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any of its assets, except for violations that would not materially and adversely affect the ability of the Company to consummate the transactions contemplated by this Agreement. 3.3 SEC Reports. The Company has filed with the Securities and Exchange Commission (the "SEC") all forms, reports and documents required to be filed by it pursuant to applicable law since January 1, 1998 (the "SEC Reports"), all of which have complied as of their -11- 15 respective filing dates in all material respects with all applicable requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and regulations of the SEC promulgated under the Exchange Act. None of the SEC Reports, including, without limitation, any financial statements or schedules included or incorporated by reference in the SEC Reports, at the time filed, contained an untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.4 Litigation. There is no claim, action, proceeding or governmental investigation pending or, to the knowledge of the Company, threatened against the Company or any of its subsidiaries before any court or other Governmental Entity that, individually or in the aggregate, could be reasonably expected to (i) have a Material Adverse Effect or (ii) result in a material amendment or termination of the Plan or prevent, enjoin, materially alter the terms of or materially delay the Exchange. 3.5 Rights Agreement; Anti-Takeover Laws. The Rights Agreement is not applicable to this Agreement or to the transactions contemplated by this Agreement. Neither the North Carolina Shareholder Protection Act nor the North Carolina Control Share Acquisition Act is applicable to the Company. The only vote of shareholders of the Company required to approve and adopt this Agreement is the affirmative vote of the holders of at least 75% of the outstanding Shares. 3.6 Fairness Opinion. Grant Thornton LLP, the independent financial advisor to the Special Committee, has delivered to the Special Committee and the Board its written opinion that the Exchange Price is fair, from a financial point of view, to the Company and its subsidiaries and the holders of the Shares other than the Acquiror. At the date of this Agreement, such opinion has not been withdrawn or modified. A true and complete copy of such opinion has been delivered to the Acquiror. 3.7 Board Action. The Special Committee, at a meeting duly called and held, has unanimously (i) determined that the Exchange is fair to and in the best interests of the Company and its subsidiaries and the holders of the Shares other than the Acquiror and (ii) submitted to the Board its recommendation that the Board approve and adopt this Agreement and the Plan and that the Board recommend that the shareholders of the Company approve and adopt this Agreement and the Plan. The Board, at a meeting duly called and held, has unanimously (exclusive of directors who abstained from voting because of their relationship with the Acquiror) (i) determined that the Exchange is fair to and in the best interests of the holders of the Shares other than the Acquiror, (ii) approved and adopted this Agreement and the Plan and (iii) recommended that the shareholders of the Company approve and adopt this Agreement and the Plan. The Company has been advised by its directors and executive officers that each of them intends to vote all of his or her Shares in favor of approval and adoption of this Agreement and the Plan. 3.8 Absence of Certain Changes. Since March 4, 2000, except as contemplated by this Agreement or disclosed in any SEC Report filed since the Company's Annual Report on Form 10-K for the year ended March 4, 2000 and prior to the date of this Agreement, there has not been (i) any change in the business, operations, properties, condition (financial or otherwise), -12- 16 assets or liabilities (including, without limitation, contingent liabilities) of the Company and its subsidiaries having individually or in the aggregate a Material Adverse Effect, (ii) any damage, destruction or loss (whether or not covered by insurance) with respect to any property or asset of the Company or any of its subsidiaries having, individually or in the aggregate, a Material Adverse Effect, (iii) any change by the Company in its accounting methods, principles or practices not mandated by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants or the SEC, or (iv) any declaration, setting aside or payment of any dividend or distribution in respect of any capital stock of the Company or any redemption, purchase or other acquisition of any of its securities. 3.9 Proxy Statement and Transaction Statement Information. The proxy statement to be sent to the shareholders of the Company in connection with the Shareholder Meeting (as amended or supplemented, the "Proxy Statement") will comply in all material respects with the requirements of the Exchange Act and, on the date filed with the SEC, on the date first published, sent or given to the Company's shareholders, and on the date of the Shareholder Meeting, will not contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading, except that no representation is made by the Company with respect to the information supplied by the Acquiror in writing expressly for inclusion in the Proxy Statement. The written information supplied or to be supplied by the Company, expressly for inclusion or incorporation by reference in the Transaction Statement will not, on the date filed with the SEC, the date first published, sent or given to the Company's shareholders, and at the time of the Shareholder Meeting, contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. 3.10 Stock Options. The exercise price of each outstanding option under the Stock Option Plans is above the Exchange Price. 3.11 Brokers. No broker, finder or other investment banker is entitled to receive any brokerage, finder's or other fee or commission in connection with this Agreement or the transactions contemplated by this Agreement based upon agreements made by or on behalf of the Company, except that Grant Thornton LLP was retained by, and acted as financial advisor to, the Special Committee. Grant Thornton LLP's fee for its financial advisory services is set forth in letter agreements between Grant Thornton LLP and the Special Committee, dated February 27 and April 11, 2001, copies of which have been supplied to the Acquiror. -13- 17 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE ACQUIROR 4.1 Organization, Standing and Qualification. The Acquiror is duly organized, validly existing and in good standing under the laws of the State of North Carolina and has the corporate power to own all of its properties and assets and to carry on its business as it is now being conducted. 4.2 Authority for this Agreement. The Acquiror has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement by the Acquiror and the consummation by the Acquiror of the transactions contemplated by this Agreement have been duly and validly authorized by the board of directors of the Acquiror and no other corporate proceeding on the part of the Acquiror is necessary to authorize this Agreement or to consummate the transactions contemplated by this Agreement. This Agreement has been duly and validly executed and delivered by the Acquiror and constitutes a valid and binding agreement of the Acquiror, enforceable against the Acquiror in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency and similar laws affecting creditors rights generally and subject to general principles of equity (whether considered in a proceeding in equity or at law). 4.3 Consents and Approvals; No Violation. Neither the execution and delivery of this Agreement by the Acquiror nor the consummation of the transactions contemplated by this Agreement will (a) conflict with or result in a breach of any provision of the articles of incorporation or bylaws of the Acquiror; (b) require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, except pursuant to the Exchange Act; (c) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms of any obligation to which the Acquiror is a party or by which any of its assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or that would not materially and adversely affect the ability of the Acquiror to consummate the transactions contemplated by this Agreement; or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Acquiror or any of its assets, except for violations that would not materially and adversely affect the ability of the Acquiror to consummate the transactions contemplated by this Agreement. 4.4 Financing. The Principal Shareholders have the ability to fund the Acquiror's obligations under this Agreement to pay the Exchange Price and the Expenses by contributing to the Acquiror their own assets and arranging for the Acquiror to obtain financing, which financing may be personally guaranteed by the Principal Shareholders, and they hereby covenant to make available to the Acquiror their assets and access to financing for such purposes. The Principal Shareholders are parties to this Agreement solely for the purpose of jointly and severally making the representation, warranty and covenant contained in the foregoing sentence. 4.5 Litigation. There is no claim, action, proceeding or governmental investigation pending, or to the knowledge of the Acquiror, threatened against the Acquiror that, individually or in the aggregate, has materially and adversely affected or could reasonably be expected to -14- 18 materially and adversely affect the ability of the Acquiror to consummate the transactions contemplated by this Agreement or that in any manner seeks to enjoin the Exchange. 4.6 Brokers. No broker, finder or other investment banker is entitled to any brokerage, finder's or other similar fee or commission in connection with this Agreement or the transactions contemplated by this Agreement based upon agreements made by or on behalf of the Acquiror or its shareholders, except that HHCO Limited was retained by, and acted as financial advisor to, the Acquiror. HHCO Limited 's fee for its financial advising services is set forth in a letter agreement between HHCO Limited and the Acquiror, dated February 12, 2001, a copy of which has been supplied to the Company. 4.7 Proxy Statement and Transaction Statement Information. The written information supplied or to be supplied by the Acquiror expressly for inclusion or incorporation by reference in the Proxy Statement and the Transaction Statement will not, on the date filed with the SEC, the date first published, sent or given to the Company's shareholders, and at the time of the Shareholder Meeting, contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. ARTICLE 5 ADDITIONAL AGREEMENTS 5.1 Indemnification; Directors and Officers Liability Insurance. (a) Until the sixth anniversary of the Effective Time, the Company shall indemnify each of its officers, directors or employees (the "Indemnified Parties") against all losses, claims, damages, liabilities, costs or expenses arising from his service as an officer, director or employee or prior to and including the Effective Time, and shall provide for the advancement of expenses incurred in defense of any action or suit, to the fullest extent required pursuant to the Company's articles of incorporation and bylaws as each is in effect on the date of this Agreement. If any claim is made against any of the Indemnified Parties on or prior to the sixth anniversary of the Effective Time arising from his service as an officer, director or employee at or prior to the Effective Time, the provisions of this Section 5.1 shall continue in effect until the final disposition of all such claims. (b) Unless otherwise agreed to by the Acquiror, until the sixth anniversary of the Effective Time, the Company shall maintain or cause to be maintained in effect, at no expense to the beneficiaries thereof, directors' and officers' liability protection with respect to matters occurring at or prior to the Effective Time, providing the same coverage with respect to the Company's current officers and directors as in effect on the date of this Agreement. (c) In the event the Company (i) consolidates with or merges into or effects any other business combination with any other Person and shall not be the continuing, surviving or controlling entity of such consolidation, merger or combination or (ii) -15- 19 transfers all or substantially all of its properties and assets to any Person, then and in each such case proper provisions shall be made so that the successors and assigns of the Company shall assume the obligations of the Company in this Section 5.1. (d) Each of the Indemnified Parties is an intended beneficiary of the provisions of this Section 5.1 and shall have the right to enforce such provisions individually on his or her own behalf. 5.2 Shareholder Approval; Proxy Statement. (a) The Company shall call the Shareholder Meeting for the purpose of voting on the Exchange and shall take all action necessary or advisable in its reasonable judgment to obtain shareholder approval of the Exchange. The Shareholder Meeting shall be held as soon as practicable following clearance of the Proxy Statement by the SEC as provided in Section 5.2(b), and the Company will, through its Board, subject to this Agreement, recommend to its shareholders the approval of the Exchange. Subject to Sections 2.2(d) and 2.4(d), the Company agrees that it shall include in the Proxy Statement the recommendation of its Board to the shareholders of the Company to approve and adopt this Agreement and approve the Exchange. (b) The Company will, as soon as practicable following the date of this Agreement, prepare and file with the SEC a preliminary Proxy Statement and will use its reasonable best efforts to respond to any comments of the SEC and to cause the Proxy Statement to be cleared by the SEC. The Company and the Acquiror will, as soon as practicable following the date of this Agreement, jointly prepare and file a Transaction Statement on Schedule 13E-3 (the "Transaction Statement") and will use their reasonable best efforts to respond to any comments of the SEC and to cause the Transaction Statement to be cleared by the SEC. The Company shall give the Acquiror and its counsel the opportunity to review the preliminary Proxy Statement prior to its being filed with the SEC and all amendment and supplements to the Proxy Statement, responses to requests for additional information and replies to comments prior to their being filed with, or sent to, the SEC. As promptly as practicable after the Proxy Statement and the Transaction Statement have been cleared by the SEC, the Company shall mail the Proxy Statement to the shareholders of the Company. If at any time prior to the approval of this Agreement by the Company's shareholders there shall occur any event that should be set forth in an amendment or supplement to the Proxy Statement or Transaction Statement, the Company will prepare and mail to its shareholders such an amendment or supplement. The Company shall not use any material in connection with the Shareholder Meeting without the Acquiror's prior approval. (c) The Company shall use its commercially reasonable efforts to obtain the necessary approvals by its shareholders of the Exchange, this Agreement and the transactions contemplated hereby. (d) The Acquiror agrees to cause all Shares owned by the Acquiror to be voted in favor of the approval of the Exchange. -16- 20 5.3 Fees and Expenses. Whether or not the Exchange is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses, except as expressly set forth in this Agreement. 5.4 Reasonable Efforts. On the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use its commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Exchange, and the other transactions contemplated by this Agreement, including (a) obtaining all necessary actions or non-actions, waivers, consents and approvals from Governmental Entities and the making of all necessary registrations and filings and the taking of all reasonable steps as may be necessary to obtain an approval or waiver from or to avoid an action or proceeding by any Governmental Entity, (b) obtaining all necessary consents, approvals or waivers from third parties, (c) defending any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Entity vacated or reversed, and (d) executing and delivering any additional instruments necessary to consummate the transactions contemplated by this Agreement. Notwithstanding the foregoing, no loan agreement or contract for borrowed money shall be repaid except as currently required by its terms, in whole or in part, and no contract shall be amended to increase the amount payable thereunder or otherwise to be more burdensome to the Company or any of its subsidiaries in order to attain any such consent, approval or authorization without the prior written consent of the Acquiror. 5.5 Public Announcements; Certain Notices. (a) The Acquiror and the Company will consult with each other before issuing any press release or otherwise making any public statements with respect to the transactions contemplated by this Agreement, and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable law or regulation or by obligations pursuant to any listing agreement with any national securities exchange or The Nasdaq Stock Market so long as it has used reasonable best efforts to consult with the other party prior to issuing such press release or making such public disclosure. (b) The Company shall give prompt notice to the Acquiror, and the Acquiror shall give prompt notice to the Company, of the occurrence, or failure to occur, of any event, which occurrence or failure to occur would likely cause any representation or warranty made by it contained in the Agreement to be untrue in any material respect at any time from the date of this Agreement to the Closing. Each of the Company and the Acquiror shall give prompt notice to the other party of any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement. -17- 21 5.6 Exemption from Liability Under Section 16(b). The Board, or a committee of non-employee directors thereof (as such term is defined for purposes of Rule 16b-3(d) under the Exchange Act), shall prior to the Effective Time adopt a resolution providing that, to the extent the Exchange is deemed for purposes of Section 16 of the Exchange Act to constitute a purchase of Shares by the Acquiror and by its controlling shareholders who also are officers and directors of the Company, such purchases (including the specific changes in such officers' and directors' beneficial ownership of the Company's Common Stock resulting from the Exchange) are approved by such Board or by such committee thereof and are intended to be exempt from liability pursuant to Section 16(b) of the Exchange Act. ARTICLE 6 NOTICES All notices and other communications hereunder shall be in writing and shall be deemed given when delivered personally or via courier service or when received if mailed by registered mail, return receipt requested to the parties at the addresses indicated below: To the Acquiror: PF Management, Inc. 361 Second Street NW Hickory, NC 28601 Attn: David R. Clark, President Copy to: Womble Carlyle Sandridge & Rice, PLLC 3300 One First Union Center 301 South College Street Charlotte, NC 28202-6025 Attn: Garza Baldwin, III To the Company: Special Committee of the Board of Directors Pierre Foods, Inc. 361 Second Street, NW Hickory, NC 28601 Attn: Bobby G. Holman, Chairman Copy to: Foley & Lardner 150 West Jefferson Suite 1000 Detroit, MI 48226-4416 Attn: Patrick Daugherty -18- 22 ARTICLE 7 MISCELLANEOUS 7.1 Governing Law. This Agreement shall be interpreted, construed and enforced under and in accordance with the laws of the State of North Carolina. 7.2 Binding Agreement. This Agreement shall be binding on and shall inure to the benefit of the parties to this Agreement. Obligations undertaken by the parties may not be assigned or delegated without the written consent of the other party hereto and, except as provided in Section 5.1(d), nothing herein shall be construed to create any rights enforceable by any other Person. 7.3 Counterpart Originals. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, as long as one or more counterparts shall have been signed by each of the parties and delivered to the other. 7.4 Entire Agreement. This Agreement embodies the entire agreement and understanding between the parties, superseding all prior agreements and understandings between them relating to the subject matter of this Agreement. 7.5 Amendments. This Agreement may be amended only by the written agreement of both parties hereto; provided, at the request of the Acquiror prior to the approval of this Agreement by the shareholders of the Company, the Company shall enter into an amendment to this Agreement that provides for the acquisition of the Company by the Acquiror in a multi-step transaction that involves a tender offer for all the outstanding Shares at a price equal to the Exchange Price, followed by a statutory share exchange in which the Shares of non-tendering shareholders would be converted into the right to receive the Exchange Price. After the approval of this Agreement by the shareholders of the Company, no amendment may be made which reduces the amount or changes the form of consideration to be received in the Exchange or otherwise changes or effects any change that would adversely affect the holders of the Shares without the further approval of the shareholders of the Company. 7.6 Definitions.
Term Defined in Section ---- ------------------ Act Introduction Aggregate Exchange Consideration Section 1.2(a) Agreement Introduction Acquiror Introduction Acquisition Transaction Section 2.4(d)(i) Board Statement of Purpose Closing Section 1.4 Common Stock Statement of Purpose Company Introduction Exchange Statement of Purpose Exchange Act Section 3.3
-19- 23 Exchange Agreement Introduction Exchange Price Section 1.1(b) Exchange Shares Section 1.1(b) Effective Time Section 2.1 Expenses Section 2.3(b) Governmental Entity Section 2.2(c)(i) Indemnified Parties Section 5.1(a) Material Adverse Effect Section 2.5(a)(iv) Participating Corporations Introduction Person Section 2.4(d)(iii) Plan Statement of Purpose Principal Shareholders Introduction Proxy Statement Section 3.9 Rights Statement of Purpose Rights Agreement Section 2.4(d)(i) SEC Section 3.3 SEC Reports Section 3.3 Shareholder Meeting Section 2.5(a)(i) Shares Statement of Purpose Special Committee Section 2.2(d) Stock Option Plans Section 1.5 Stock Purchase Plan Section 1.5 Superior Proposal Section 2.4(f) Transaction Statement Section 5.2(b)
[The remainder of this page is intentionally blank.] -20- 24 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the dates indicated below. PIERRE FOODS, INC. By: /s/ Bobby G. Holman -------------------------------------------- Bobby G. Holman Chairman of the Special Committee of the Board of Directors PF MANAGEMENT, INC. By: /s/ David R. Clark -------------------------------------------- David R. Clark President /s/ James C. Richardson, Jr. ----------------------------------------------------- James C. Richardson, Jr. (Solely for the purpose of Sections 4.4 and 2.5) /s/ David R. Clark ----------------------------------------------------- David R. Clark (Solely for the purpose of Sections 4.4 and 2.5) -21- 25 ANNEX A ARTICLES OF SHARE EXCHANGE BETWEEN PF MANAGEMENT, INC. AND PIERRE FOODS, INC. Pursuant to Section 55-11-05 of the General Statutes of North Carolina, PF Management, Inc., a corporation organized under the laws of the State of North Carolina, hereby submits these Articles of Share Exchange for the purpose of acquiring all of the outstanding shares of common stock, no par value, of Pierre Foods, Inc., a corporation organized under the law of the State of North Carolina. I. The Plan of Share Exchange that was duly adopted by the board of directors of each of the corporations participating in the exchange and that was approved by the shareholders of Pierre Foods, Inc. in the manner prescribed by Chapter 55 of the General Statutes of North Carolina is as follows: PLAN OF SHARE EXCHANGE A. CORPORATIONS PARTICIPATING IN SHARE EXCHANGE. PF Management, Inc. (the "Acquiror") will acquire all of the outstanding shares of Pierre Foods, Inc. (the "Company") pursuant to the terms and conditions of this Plan. B. EXCHANGE OF SHARES. At the effective time of the share exchange (the "Effective Time"), the shares of the corporations participating in the share exchange shall be exchanged as follows: 1. Acquiror. The outstanding shares of the Acquiror will not be exchanged or altered in any manner as a result of the share exchange and will remain outstanding as shares of the Acquiror. 2. The Company. Each outstanding share of the Company, except those already owned by the Acquiror, will be exchanged for and become the right to receive from the Acquiror $1.21 in cash per share and each such share shall be cancelled. A-1 26 3. Surrender of Share Certificates. Each holder of a certificate representing shares of the Company to be exchanged under this Plan will be entitled, upon presentation and surrender to the Acquiror of such certificate, to receive in exchange therefor the consideration described in paragraph 2 of this Plan. Until so surrendered, each outstanding certificate that prior to the Effective Time represented shares of the Company will be deemed for all purposes to evidence ownership of the consideration to be issued for such shares. C. ABANDONMENT. After the approval of this Plan by the shareholders of the Company, and at any time prior to the exchange becoming effective, the board of directors of the Acquiror may, in its discretion, abandon the share exchange. II. Approval by the shareholders of the undersigned Acquiror was not required. III. The share exchange will become effective upon filing by the Secretary of State of North Carolina. This the ______ day of ______________, 2001. PF MANAGEMENT, INC. By: ------------------------------------ David R. Clark President A-2 EX-12 5 g68934ex12.txt CALCULATION OF RATIOS OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS OF DOLLARS, EXCEPT FOR RATIOS)
2001 2000 1999 1998 1997 -------- -------- -------- ------- ------- Loss from continuing operations before income tax benefit $ (4,979) $(19,060) $ (2,403) $(5,798) $(5,698) Add Fixed Charges: Interest expense 12,763 14,086 11,712 1,649 1,693 Amortization of financing costs 571 900 620 113 175 -------- -------- -------- ------- ------- Total income (loss) as defined $ 8,355 $ (4,074) $ 9,929 $(4,036) $(3,830) ======== ======== ======== ======= ======= Fixed Charges: Interest expense $ 12,763 $ 14,086 $ 11,712 $ 1,649 $ 1,693 Capitalized interest -- -- 203 59 9 Amortization of financing costs 571 900 620 113 175 -------- -------- -------- ------- ------- Total fixed charges $ 13,334 $ 14,986 $ 12,535 $ 1,821 $ 1,877 ======== ======== ======== ======= ======= Ratio of earnings to fixed charges 0.63 (0.27) 0.79 (2.22) (2.04) Additional income required to meet a 1.0 ratio: $ 4,979 $ 19,060 $ 2,606 $ 5,857 $ 5,707
2 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERS ENDED ------------------------------------------------------------------ 6/3/00 9/2/00 12/2/00 3/3/01 ------------ ------------ ------------ ------------ Operating revenues $ 45,946,753 $ 48,734,129 $ 60,883,230 $ 55,476,371 Gross profit $ 16,689,074 $ 17,661,453 $ 22,094,858 $ 20,854,949 Loss from continuing operations $ (1,445,351) $ (1,022,886) $ (397,851) $ (1,346,700) Extraordinary loss $ (455,238) $ -- $ -- $ -- Net income (loss) $ (1,900,589) $ (1,022,886) $ (397,851) $ (1,346,700) Loss from continuing operations per common share - basic and diluted $ (0.25) $ (0.18) $ (0.07) $ (0.23)
QUARTERS ENDED ------------------------------------------------------------------ 6/5/99 9/5/99 12/4/99 3/4/00 ------------ ------------ ------------ ------------ Operating revenues $ 44,454,722 $ 41,620,043 $ 50,012,578 $ 49,510,853 Gross profit $ 17,748,079 $ 17,443,832 $ 17,754,810 $ 16,626,492 Loss from continuing operations $ (408,468) $ (3,033,793) $ (7,914,628) $ (2,877,678) Income from discontinued restaurant segment $ 1,241,783 $ 1,287,338 $ 299,246 $ -- Gain on disposal of discontinued restaurant segment $ -- $ -- $ 6,801,726 $ -- Extraordinary loss $ -- $ (52,350) $ -- $ -- Net income (loss) $ 833,315 $ (1,798,805) $ (813,656) $ (2,877,678) Loss from continuing operations per common share - basic and diluted $ (0.07) $ (0.52) $ (1.36) $ (0.50)
EX-21 6 g68934ex21.txt SUBSIDIARIES OF PIERRE FOODS, INC. 1 EXHIBIT 21 SUBSIDIARIES OF PIERRE FOODS, INC. Fresh Foods Properties, LLC EX-23 7 g68934ex23.txt CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in 1994 Employee Stock Purchase Plan Registration Statement No. 33-79014 as amended by Post-Effective Amendment No.3, 1997 Special Stock Option Plan Registration Statement No. 333-33439 as amended by Post-Effective Amendment No.1, 1997 Incentive Stock Option Plan Registration Statement No. 333-32455 as amended by Post-Effective Amendment No.1, 1987 Special Stock Option Plan Registration Statement No. 333-29111, and 1987 Incentive Stock Option Plan Registration Statement No. 33-15017 as amended by Post-Effective Amendment No.1, each on Form S-8, of our report dated May 4, 2001 appearing in this Annual Report on Form 10-K of Pierre Foods, Inc. for the fiscal year ended March 3, 2001. DELOITTE & TOUCHE LLP Cincinnati, Ohio May 4, 2001 EX-99.1 8 g68934ex99-1.txt RISK FACTORS 1 EXHIBIT 99.1 RISK FACTORS SUBSTANTIAL LEVERAGE; INSUFFICIENT CASH FLOW FROM OPERATIONS At March 3, 2001 the Company had approximately $115.5 million of indebtedness, representing 71.5% of its total capitalization. The ability of the Company to satisfy its debt obligations depends largely on the Company's operating performance, which is affected by prevailing economic conditions and financial, business and other factors, many of which are beyond the Company's control. The degree to which the Company is leveraged has important consequences to the Company, including the following: (i) the Company's ability to obtain additional financing is limited; (ii) substantial portions of the Company's cash flows from operations must be dedicated to the debt service, thereby reducing the funds available to the Company for its operations; (iii) the Company's debt instruments contain financial and other restrictive covenants, including covenants restricting the incurrence and restructuring of debt, the creation of liens, the payment of dividends and sales of assets; (iv) the Company's borrowings under its $25 million revolving credit facility are at variable rates of interest, resulting in adverse effects on the Company's financial condition and results of operations when the relevant market interest rates increase; (v) the debt outstanding under the $25 million revolving credit facility is secured by substantially all of the Company's accounts receivable and inventory; (vi) the Company is more leveraged than many of its competitors, placing the Company at a relative competitive disadvantage; and (vii) the Company's high degree of indebtedness makes it more vulnerable in the event of a downturn in its business. As a result of the Company's level of indebtedness, its financial capacity to respond to market conditions, extraordinary capital needs and other factors is limited. Fiscal 2001 operating cash flows were not sufficient to provide necessary working capital and to service existing debt. The Company anticipates that its fiscal 2002 cash requirements for working capital and debt service will be met through a combination of funds provided by operations and borrowings under the $25 million revolving credit facility. Significant assumptions underlie this belief, including, among other things, that the Company will succeed in implementing its business strategy and that there will be no material adverse developments in the business, liquidity or significant capital requirements of the Company. The Company has budgeted approximately $4.8 million for capital expenditures in fiscal 2002. These expenditures are devoted to routine food processing capital improvement projects and other miscellaneous expenditures and should be sufficient to maintain current operating capacity. The Company believes that funds from operations and funds from the $25 million revolving credit facility, as well as the Company's ability to enter into capital or operating leases, will be adequate to finance these routine capital expenditures. If the Company continues its historical revenue growth trend as expected, then it will be required to raise and invest additional capital for various plant expansion projects to provide operating capacity to satisfy increased demand. The Company believes that future cash requirements for these plant expansion projects would need to be met through other long-term financing sources, such as an increase in borrowing availability under the $25 million credit facility, the issuance of industrial revenue bonds or equity investment. The incurrence of additional debt is governed and restricted by the Company's existing debt instruments. Furthermore, there can be no assurance that additional long-term financing will be available on advantageous terms (or any terms) when needed by the Company. The Company anticipates continued sales growth in key market areas. As noted above, however, this growth will require capital expansion projects to increase existing plant capacity to satisfy increased demand. Sales growth, improved operating performance and expanded plant capacity -- none of which is assured -- will be necessary for the Company to continue to service existing debt. If the Company is unable to continue servicing its debt, then it will need to adopt alternative strategies, which may include actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing its indebtedness or seeking additional equity capital. There can be no assurance that any of these strategies could be effected on satisfactory terms or that the chosen strategy would enable the Company to avoid defaults under its existing debt instruments. 2 RESTRICTIONS IMPOSED BY THE COMPANY'S DEBT INSTRUMENTS The Company's debt instruments include covenants that, among other things, limit or restrict the ability of the Company to dispose of assets, incur additional indebtedness, repay other indebtedness, pay dividends, enter into certain investments or acquisitions, repurchase or redeem capital stock, engage in mergers or consolidations or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities. There can be no assurance that such limitations and restrictions will not adversely affect the Company's ability to finance its future operations or capital needs or engage in other business activities that may be in the interest of the Company. The Company's $25 million revolving credit facility also requires the Company to maintain compliance with certain financial covenants. The ability of the Company to comply with such financial covenants may be affected by events beyond the Company's control. A breach of any of these covenants or the inability of the Company to comply with the required financial covenants could result in a default under the $25 million revolving credit facility. In the event of any such default, the lender under the revolving credit facility could elect to declare all borrowings outstanding under such facility, together with accrued interest and other fees, to be due and payable. If the Company were unable to repay any such borrowings when due, then the lender could proceed against its collateral, with material adverse effects on the Company's business, financial condition and results of operations. MANAGEMENT CONTROL At May 2, 2001, the Company's directors and executive officers (10 persons) beneficially owned, in the aggregate, 3,653,914 shares (or approximately 63.2%) of the Company's outstanding common stock (including as "outstanding" all shares underlying options exercisable by May 4, 2001). This degree of share ownership might be sufficient to enable the Company's directors and executive officers, acting as a group, to influence decisively the outcome of matters requiring shareholder approval, including the election of directors and significant corporate transactions. The voting power of the Company's directors and executive officers under certain circumstances could have the effect of preventing or delaying a change in control of the Company. FACTORS INHIBITING TAKEOVER The Company's Restated Articles of Incorporation, as amended (the "Articles"), the Company's Bylaws, as amended (the "Bylaws"), and the Company's Preferred Stock Purchase Rights (the "Rights") contain various provisions that may hinder, delay or prevent the acquisition of control of the Company without the approval of the Board of Directors of the Company (the "Board"). Certain provisions of the Articles and the Bylaws, among other things, (i) authorize the issuance of "blank check" preferred stock, (ii) divide the members of the Board into three classes, the members of which serve for three-year terms and can be removed only by supermajority shareholder vote, and (iii) require a supermajority shareholder vote to approve any of certain business combinations requiring shareholder approval. In addition, the Company has entered into a Rights Agreement with American Stock Transfer & Trust Company, as Rights Agent, pursuant to which one Right is attached to each share of common stock and initially trades with such share. The Rights would cause substantial dilution to a person or group that attempted to acquire the Company on terms not approved in advance by the Board. SHARES AVAILABLE FOR SALE; LIMITED SECONDARY MARKET FOR THE COMMON STOCK At May 2, 2001, there were 5,781,480 shares of the Company's common stock outstanding. Of such amount, at least 2,127,566 shares were then freely tradable without restriction in the public market, the remaining shares being eligible for sale in the time, manner and volumes permitted by Rule 144 under the Securities Act of 1933. The holders of such remaining shares have not agreed to further limitations on the sale of their shares. In addition, at May 2, 2001 there were options to purchase 498,300 shares of common stock outstanding at an average exercise price of $7.82 per share. Of such amount, options to purchase 360,709 shares are exercisable presently, and all of the underlying shares have been registered with the SEC for public sale. The Company also has registered for public sale an additional 2,248,602 shares of unissued common stock; such shares are reserved for future grants under the Company's stock option plans. Sales of substantial amounts of common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the market price of the stock, particularly in view of the limited secondary market for the stock that exists. 3 PRICE VOLATILITY The market price of the Company's common stock is volatile and may be affected by a number of factors, including the announcement of new products or services by the Company or its competitors, quarterly variations in the Company's or its competitors' results of operations, changes in earnings estimates or recommendations by securities analysts, the initiation or termination of coverage by analysts, developments in the food processing industry, general market conditions and other factors, including factors unrelated to the operating performance of the Company or its competitors. Such factors, as well as general economic, political and market conditions, such as recessions, may materially and adversely affect the market price of the stock. NO DIVIDENDS The Company's debt instruments restrict its ability to pay dividends. Notwithstanding the restrictions, the Company does not anticipate paying dividends on the common stock in the foreseeable future. COMPETITION The food production business is highly competitive and is often affected by changes in tastes and eating habits of the public, economic conditions affecting spending habits and other demographic factors. In sales of meat products, the Company faces strong price competition from a variety of large meat processing concerns and from smaller local and regional operations. In sales of biscuit and yeast roll products, the Company competes with a number of large bakeries in various parts of the country. The sandwich industry is extremely fragmented, with few large direct competitors but low barriers to entry and indirect competition in the form of numerous other products. GOVERNMENT REGULATION The food production industry is subject to extensive federal, state and local government regulation. The Company's food processing facilities and food products are subject to frequent inspection by the United States Department of Agriculture (the "USDA"), the Food and Drug Administration (the "FDA") and other government authorities. In July 1996, the USDA issued strict new policies against contamination by food-borne pathogens such as E. coli and Salmonella and established the Hazard Analysis and Critical Control Points ("HACCP") system. The HACCP standards require the implementation of a seven step system for preventing hazards that could cause food-borne illnesses and became effective on January 25, 2000 for all food manufacturers with over ten employees and $25 million in sales. The Company is in full compliance with all FDA and USDA regulations, including HACCP standards, but there can be no assurance that the Company will be able to remain in compliance. The Company's failure to comply with applicable laws and regulations could subject it to civil remedies, including fines, injunctions, recalls and seizures, or even criminal sanctions, any of which could have material adverse effects on the Company. The Company's operations are also governed by laws and regulations relating to workplace safety and worker health that, among other things, establish noise standards and regulate the use of hazardous chemicals in the workplace. The Company also is subject to numerous federal, state and local environmental laws. Under applicable environmental laws, the Company may be responsible for remediation of environmental conditions and may be subject to associated liabilities relating to its facilities and the land on which its facilities are or had been situated, regardless of whether the Company leases or owns the facilities or land in question and regardless of whether such environmental conditions were created by the Company or by a prior owner or tenant. There can be no assurance that any failure to comply, or compliance in the future, with environmental laws, or that liabilities arising thereunder, will have no material adverse effect on the Company's business, financial condition or results of operations. 4 The Company's operations are subject to licensing and regulation by a number of state and local governmental authorities, which include health, safety, sanitation, building and fire agencies. Operating costs are affected by increases in costs of providing health care benefits, the minimum hourly wage, unemployment tax rates, sales taxes and other similar matters over which the Company has no control. The Company is subject to laws governing relationships with employees, including minimum wage, overtime, working condition and citizenship requirements. GENERAL RISKS OF THE FOOD INDUSTRY The food processing industry is generally subject to various risks, including adverse changes in general economic conditions, evolving consumer preferences, nutritional and health-related concerns, federal, state and local food inspection and processing controls and litigation-oriented risks in the nature of consumer product liability claims, product tampering problems and the availability and expense of liability insurance. There has recently been increasing scrutiny due to the association of meat products with recent outbreaks of illness, and even death, caused by pathogens which can be found in raw and improperly cooked meat. Incidents of contamination experienced by other food processors have materially and adversely affected their businesses and could adversely affect the Company's business. Product recalls are sometimes required in the meat industry to withdraw contaminated or mislabeled products from the market. ADVERSE CHANGES IN FOOD COSTS; AVAILABILITY OF SUPPLIES The profitability of the Company is dependent on its ability to anticipate and react to changes in food prices in general and to changes in meat prices in particular. While the Company has historically been able to anticipate and react to changing prices through purchasing practices and price adjustments so as to avoid any material adverse effect on profitability, there can be no assurance that the Company will be able to do so in the future. In particular, no assurance can be given that the Company will be able to pass any cost increases on to its customers. The Company does not engage in hedging transactions with respect to raw material purchases. Failure to engage in such transactions may result in increased price volatility, with resulting adverse effects on results of operations. In addition, the Company's dependency upon regular deliveries of supplies from particular suppliers means that interruptions or stoppages in such deliveries could adversely affect the Company until arrangements with alternate suppliers could be made. DEPENDENCE ON KEY PERSONNEL The Company believes that its continued success will largely depend upon the abilities and experience of its senior management team such that loss of the services of one or more senior managers could adversely affect the Company's results of operations. The Company has entered into an Incentive Agreement with its President and Chief Executive Officer. This agreement sets forth the compensation to be paid to the President, but does not provide for a specified employment term for the President. POTENTIAL LABOR DISRUPTION None of the Company's employees is covered by a collective bargaining agreement. To the extent the Company experiences a labor disruption in the future, there could be material adverse effects on the Company's business, financial condition and results of operations. EFFECTS OF PENDING MANAGEMENT BUYOUT The Company entered into an exchange agreement on April 26, 2001, with PF Management, Inc., which calls for PF Management to purchase all of the Company's outstanding stock. The agreement is subject to the approval of 75% of the Company's shareholders. In the event the Company's shareholders approve the transaction, the Company's stock will be delisted from the NASDAQ Small Cap Market and there will be no further public trading of the stock. Each shareholder will receive $1.21 for each share of the Company's common stock owned by such shareholder. 5 If the transaction is not approved by the Company's shareholders, the Company will nevertheless have incurred significant expenses (including legal, accounting, investment banking and other fees) which may have an adverse effect on the financial condition and results of operations of the Company. In addition, the characteristics of the stock will have the same risk factors as described elsewhere: illiquidity and a small number of shares outstanding which are held by non-affiliates of the Company. -----END PRIVACY-ENHANCED MESSAGE-----