-----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, LPCHGguv06DMqfrMMCoeYstbMYAzjOaXMismQtC/cvTiUOFi6Mn1zEEHnaiX8A3C JLGfsnnwIGwPhU/cjfxVpQ== 0000950144-02-006146.txt : 20020530 0000950144-02-006146.hdr.sgml : 20020530 20020530165205 ACCESSION NUMBER: 0000950144-02-006146 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020302 FILED AS OF DATE: 20020530 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: 1934 Act SEC FILE NUMBER: 000-07277 FILM NUMBER: 02666548 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: WSMP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FRESH FOODS INC DATE OF NAME CHANGE: 19980513 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN STEER MOM N POPS INC DATE OF NAME CHANGE: 19880719 10-K 1 g76612e10vk.txt PIERRE FOODS, INC. 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 2, 2002 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 20, 2002 was 5,781,480. The aggregate market value of Pierre Foods, Inc. Common Stock held by nonaffiliates of Pierre Foods, Inc. as of May 20, 2002 was $4,947,916. 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 Critical Accounting Policies and Estimates............................. 9 Liquidity and Capital Resources........................................ 9 Commercial Commitments, Contingencies and Contractual Obligations...... 11 Inflation.............................................................. 11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................... 11 Item 8. Financial Statements and Supplementary Data...................................... 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................................... 13 PART III Item 10. Directors and Executive Officers of the Registrant............................... 14 Item 11. Executive Compensation........................................................... 15 Item 12. Security Ownership of Certain Beneficial Owners and Management................... 21 Item 13. Certain Relationships and Related Transactions................................... 22 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................. 25
i 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. 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 4, 2000 is referred to as "fiscal 2000," its fiscal year ended March 3, 2001 is referred to as "fiscal 2001," and its fiscal year ended March 2, 2002 is referred to as "fiscal 2002." FINANCIAL INFORMATION ABOUT SEGMENTS During fiscal 2002 and fiscal 2001, the Company operated in the segment of food processing operations, servicing the foodservice industry. In fiscal 2000, 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 beef, chicken and pork 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, Ohio 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 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 2002 Fiscal 2001 Fiscal 2000 Revenues Revenues Revenues (In Millions) % (In Millions) % (In Millions) % ------------- ----- ------------- ----- ------------- ----- Food Processing: Fully-Cooked Protein Products........ $ 139.0 57.3 $ 111.2 54.6 $ 103.1 57.5 Microwaveable Sandwiches............. 95.8 39.5 85.2 41.9 66.4 37.1 Bakery and Other Products............ 7.8 3.2 7.1 3.5 7.5 4.2 --------- ----- -------- ----- -------- ----- Total Food Processing............. 242.6 100.0 203.5 100.0 177.0 98.8 Ham Curing.............................. -- -- -- -- 2.1 1.2 --------- ----- -------- ----- -------- ----- Total............................... $ 242.6 100.0 $ 203.5 100.0 $ 179.1 100.0 ========= ===== ======== ===== ======== =====
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 100 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), Mom `n' Pop's(R) and Chop House(TM). 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 SEASONALITY Except for sales to school districts, which represent approximately 24% of total sales and 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, ConAgra, 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 eight food technologists in the product and process 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 nearly 200 new SKUs in fiscal 2002. Over 28% of fiscal 2002 food processing sales were related to products developed in the last two years, the Company's definition of a new product. In fiscal 2002, 2001 and 2000, the Company spent approximately $373,000, $465,000 and $354,000 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 subsidiary. 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 2, 2002, the Company employed approximately 1,300 persons. The Company has experienced no work stoppage attributed to labor disputes and considers its employee relations to be good. 3 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 executive office space in Hickory, North Carolina from an affiliated party for $115,700 per year at terms no less favorable than those which could be obtained from an unaffiliated third party. 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 subsidiary 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 2002. 4 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is quoted on the OTC Bulletin Board (OTCBB) under the symbol "FOOD.OB." As of May 20, 2002, the Company had approximately 1,452 shareholders of record. The following table sets forth the quarterly high and low sales price per share as reported on NASDAQ for the Company's common stock. Range of Prices ------------------ High Low ------- ------- Fiscal year ended March 3, 2001: First Quarter......................................... $ 4.813 $ 2.375 Second Quarter........................................ 3.094 1.750 Third Quarter......................................... 2.500 1.125 Fourth Quarter........................................ 1.250 0.750 Fiscal year ended March 2, 2002: First Quarter......................................... $ 1.937 $ 0.906 Second Quarter........................................ 2.280 1.190 Third Quarter......................................... 2.200 1.240 Fourth Quarter........................................ 2.390 1.050 The closing bid price on May 20, 2002 was $2.30 per share. The Company did not declare a cash dividend during fiscal 2002 or fiscal 2001. The Company's debt instruments restrict its ability to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and the Company's consolidated financial statements and supplementary data. 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 2002 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 and supplementary data. 5
Fiscal Years Ended ------------------------------------------------------------------------- March 2, March 3, March 4, March 6, Feb.27, 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- (dollars in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues .................................... $ 242,605 $ 203,475 $ 179,415 $ 150,455 $ 66,245 Cost of goods sold .......................... 160,781 133,385 115,968 101,356 59,153 Selling, general and administrative ......... 61,726 55,752 59,193 33,673 10,356 Loss on sale of Mom `n' Pop's Country Ham, LLC ................................ -- -- 2,857 -- -- Net (gain) loss on disposition of property, plant and equipment ..................... 84 27 (22) 1,004 (640) Depreciation and amortization ............... 6,438 6,238 5,662 4,902 1,615 --------- --------- --------- --------- --------- Operating income (loss) ..................... 13,576 8,073 (4,243) 9,520 (4,239) Interest expense ............................ 13,206 13,334 14,986 12,332 1,762 Other income, net ........................... 364 281 169 409 204 Income tax benefit (provision) .............. (733) 767 4,825 613 1,926 --------- --------- --------- --------- --------- Income (loss) from continuing operations .... 1 (4,213) (14,235) (1,790) (3,871) Income from discontinued operations (2) ..... -- -- 2,828 4,285 6,121 Gain on disposal of discontinued operations (2) .......................... -- -- 6,802 -- -- Extraordinary item (1) ...................... -- (455) (52) (64) -- --------- --------- --------- --------- --------- Net income (loss) ........................... $ 1 $ (4,668) $ (4,657) $ 2,431 $ 2,250 ========= ========= ========= ========= ========= NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED: Income (loss) from continuing operations .... $ -- $ (0.73) $ (2.45) $ (0.30) $ (0.68) Income from discontinued operations ......... -- -- 0.49 0.72 1.08 Gain on disposal of discontinued operations . -- -- 1.17 -- -- Extraordinary item .......................... -- (0.08) (0.01) (0.01) -- --------- --------- --------- --------- --------- Net income (loss) ........................... $ -- $ (0.81) $ (0.80) $ 0.41 $ 0.40 ========= ========= ========= ========= ========= BALANCE SHEET DATA: Working capital (deficit) ................... $ 37,061 $ 35,890 $ 36,403 $ 27,126 $ (497) Total assets ................................ 169,821 160,308 164,727 216,989 71,656 Total debt .................................. 121,231 115,165 115,479 146,940 20,918 Shareholders' equity ........................ 27,207 26,867 31,533 41,152 39,227 OTHER DATA: Capital expenditures ........................ $ 5,994 $ 2,764 $ 5,488 $ 15,479 $ 13,252
- ----------------- (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. (2) Reflects income from discontinued operations in the amount of $2,828 in fiscal 2000, $4,285 in fiscal 1999 and $6,121 in fiscal 1998. In addition, reflects income from discontinued operations of $6,802 in fiscal 2000. See Note 1 - Basis of Presentation, Acquisition and Discontinued Operations to the consolidated financial statements. 6 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. 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 of 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 contains 13 weeks except for the infrequent fiscal years with 53 weeks. The results for fiscal 2002, 2001 and 2000 contain 52 weeks. Results for fiscal 2002, 2001 and 2000 for each segment are shown below:
Fiscal Years Ended ------------------------------------------ March 2, March 3, March 4, 2002 2001 2000 -------- -------- -------- (in millions) Revenues, net: Food processing ....................................... $ 242.6 $ 203.5 $ 177.0 Ham curing ............................................ -- -- 2.1 -------- -------- -------- Total ........................................... 242.6 203.5 179.1 -------- -------- -------- Cost of goods sold: Food processing ....................................... 160.8 133.4 113.5 Ham curing ............................................ -- -- 2.1 -------- -------- -------- Total ........................................... 160.8 133.4 115.6 -------- -------- -------- Selling, general and administrative ...................... 61.7 55.8 59.2 Loss on sale of Mom `n' Pop's Country Ham, LLC ........... -- -- 2.8 Net loss on disposition of property, plant and equipment . 0.1 -- -- Depreciation and amortization ............................ 6.4 6.2 5.7 -------- -------- -------- Operating income (loss) .................................. 13.6 8.1 (4.2) Interest and other expense, net .......................... (12.9) (13.1) (14.8) -------- -------- -------- Income (loss) from continuing operations before income tax 0.7 (5.0) (19.0) Income tax (provision) benefit ........................... (0.7) 0.8 4.8 -------- -------- -------- Income (loss) from continuing operations ................. -- (4.2) (14.2) Income from discontinued restaurant segment .............. -- -- 2.8 Gain on disposal of discontinued restaurant segment ...... -- -- 6.8 Extraordinary item ....................................... -- (0.5) (0.1) -------- -------- -------- Net income (loss) ........................................ $ -- $ (4.7) $ (4.7) ======== ======== ========
7 FISCAL 2002 COMPARED TO FISCAL 2001 REVENUES, NET. Net revenues increased by $39.1 million, or 19.2%. The increase in net revenues was due the introduction of new products and to an increase in demand in all core customer channels. COST OF GOODS SOLD. Cost of goods sold increased by $27.4 million, or 20.5%. As a percentage of revenues, cost of goods sold increased from 65.6% to 66.3%. This increase primarily was due to an increase in raw material prices and a change in product mix to lower margin product, offset by improved production efficiencies. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased by $6.0 million, or 10.7%, primarily due to an increase in overhead costs. As a percentage of revenues, selling, general and administrative expenses decreased from 27.4% to 25.4%, primarily due to cost reduction initiatives in fiscal 2002. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by $.2 million, or 3.2%, due to the increase in capital expenditures. As a percentage of revenues, depreciation and amortization decreased from 3.1% to 2.7%. OTHER EXPENSE, NET. The primary component of net other expense for fiscal 2002 and fiscal 2001 is interest expense. Interest expense consists primarily of interest on fixed rate long-term debt, and decreased from $13.3 million to $13.2 million. INCOME TAX PROVISION. The effective tax rate for fiscal 2002 continuing operations was 99.9% compared to 15.4% for fiscal 2001. The increase in the effective tax rate is due primarily to the effects of permanent timing differences. FISCAL 2001 COMPARED TO FISCAL 2000 REVENUES, NET. Net revenues increased by $24.4 million, or 13.6%, due to a $26.5 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 net 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 $17.8 million, or 15.4%, comprised of a $19.9 million (17.5%) 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 net 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 $3.4 million, or 5.8%, 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 net operating revenues, selling, general and administrative expenses decreased from 33.0% to 27.4% 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 net operating revenues, depreciation and amortization decreased from 3.2% to 3.1%. 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. 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. 8 CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require the Company to make estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and the impact of those events cannot be determined with certainty, the actual results will inevitably differ from the Company's estimates. Such differences could be material to the financial statements. The Company believes its application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, the Company's application of accounting policies has been appropriate, and actual results have not differed materially from those determined using necessary estimates. The following critical accounting policies affect the Company's more significant judgments and estimates used in the preparation of its financial statements. REVENUE RECOGNITION. Revenue from sales of food processing products is recorded at the time title transfers. Standard shipping terms are FOB destination, therefore title passes at the time the product is delivered to the customer. Revenue is recognized as the net amount to be received after deductions for estimated discounts, product returns and other allowances. These estimates are based on historical trends and expected future payments (see also PROMOTIONS below). PROMOTIONS. Promotional expenses associated with rebates, marketing promotions and special pricing arrangements are recorded as a reduction of revenues at the time the sale is recorded. Certain of these expenses are estimated based on expected future payments to be made under these programs. The Company believes the estimates recorded in the financial statements are reasonable estimates of the Company's future liability. GOING CONCERN ASSUMPTION. Significant assumptions underlie the belief that the Company anticipates that its fiscal 2003 cash requirements for working capital and debt service will be met through a combination of funds provided by operations and borrowings under the anticipated $50 million Foothill Capital credit facility, including, among other things, that the Company will succeed in implementing its business strategy and in closing the Foothill Capital credit facility and that there will be no material adverse developments in the business, liquidity or significant capital requirements of the Company. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $9.9 million and $2.1 million for fiscal 2002 and fiscal 2001, respectively, compared to cash used in operating activities of $6.7 million in fiscal 2000. The increase in net cash provided by operating activities from fiscal 2001 to fiscal 2002 was primarily due to the increase in operating income of $5.5 million. 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 2002 were: (1) a decrease in inventories of $3.0 million and (2) an increase in trade accounts payable and other accrued liabilities of $2.4 million, offset by (3) an increase in accounts receivable of $3.3 million. The primary components of net cash provided by operating activities for fiscal 2001 were: (1) a decrease in net loss from continuing operations from $14.2 million in fiscal 2000 to $4.2 million in fiscal 2001, (2) net income tax refunds received of $1.5 million and (3) an increase in accrued payroll of $1.5 million, offset by (4) a decrease in accounts payable and other accrued liabilities, excluding accrued payroll, of $1.0 million and (5) an increase in accounts receivable and inventories of $2.8 million. The Company had positive working capital at March 2, 2002 and March 3, 2001 of $37.1 million and $35.9 million, respectively. Cash flows used in investing activities were $7.3 million for fiscal 2002. The primary component was for routine capital expenditures totaling $6.0 million. Cash flows used in investing activities were $2.5 million for fiscal 2001. The primary component was for routine capital expenditures totaling $2.8 million, offset by the collection of a related party note receivable of $.2 million. 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 in the amount of $50.1 million, offset by capital expenditures for the food processing and restaurant segments totaling $5.5 million. 9 Cash flows provided by financing activities were $0.2 million for fiscal 2002, due the capital contribution of the special purpose leasing entity (see AIRCRAFT OPERATING LEASE AGREEMENT below), offset by principal payments on the Company's capital leases and principal payments related to the obligation of the special purpose leasing entity. 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 of $0.3 million and fees of $0.2 million associated with the Company's $25 million revolving credit facility secured May 24, 2000. Cash flows used in financing activities were $37.4 million in fiscal 2000. The major components of the cash flows used in fiscal 2000 were (1) the early payoff of the Company's industrial revenue bonds of $2.1 million, (2) repayment of borrowings under the revolving credit facility with proceeds from the disposition of the restaurant segment of $38.3 million, (3) a loan to a principal shareholder of $5.0 million and (4) the repurchase of the Company's common stock of $1.0 million. 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. On May 10, 2002, the Company signed a binding letter agreement with Foothill Capital Corporation ("Foothill Capital"), the terms of which will replace the Company's $25 million credit facility. Under the letter agreement, Foothill Capital will extend a five-year secured credit facility to the Company in an aggregate amount up to $50 million, which includes a $16 million term loan subline, a $10 million capital expenditure subline and a $7 million letter of credit subfacility. The collateral for the facility will include substantially all of the Company's assets. The Company expects to close on the facility on or before May 31, 2002, the expiration date of the commitment letter. At March 2, 2002, the Company had $4.6 million in cash or cash equivalents on hand, had no outstanding borrowings under the revolving credit facility, and had approximately $20.0 million of additional borrowing availability. At March 2, 2002, 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 2002 operating cash flows were sufficient to provide necessary working capital and to service existing debt. These cash requirements were satisfied through a combination of funds provided by cash on hand at the end of fiscal 2001 and borrowings under the $25 million revolving credit facility. The Company anticipates that its fiscal 2003 cash requirements for working capital and debt service will be met through a combination of funds provided by operations and borrowings under the anticipated $50 million Foothill Capital credit facility. The Company has budgeted approximately $13.2 million for capital expenditures in fiscal 2003. These expenditures are primarily devoted to a plant expansion in order to maintain the current revenue of growth trend. Additional expenditures are designated for routine food processing capital improvement projects and other miscellaneous expenditures. The Company believes that funds from operations and funds from the anticipated $50 million Foothill Capital credit facility, as well as the Company's ability to enter into capital or operating leases, will be adequate to finance these 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 additional 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 or its anticipated $50 million credit facility with Foothill Capital, 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. 10 The Company anticipates continued sales growth in key market areas. As noted above, however, this growth will require future 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. AIRCRAFT OPERATING LEASE AGREEMENT. During the fourth quarter of fiscal 2002, the Company leased an aircraft from Columbia Hill Aviation, LLC ("Columbia Hill Aviation"), owned 100% by PF Management. Columbia Hill Aviation is not a subsidiary of the Company, however the Company considers Columbia Hill Aviation a non-independent special purpose leasing entity. Accordingly, Columbia Hill Aviation's financial condition, results of operations and cash flows have been included in the Company's consolidated financial statements. Effective March 1, 2002, the Company's original operating lease was replaced with a four-year non-exclusive operating lease agreement. Pursuant to the new lease, the Company is obligated to make minimum quarterly lease payments for the right to use the aircraft for a specified number of hours. Under this lease arrangement, Columbia Hill Aviation is responsible for all expenses incurred in the operation and use of the aircraft, except that the Company must provide its own crew. The Company obtained a fairness opinion that states that the agreement is fair to the Company from a financial point of view. In addition, this relationship was reviewed and approved by the Company's Sensitive Transactions Committee and the Board of Directors. See further discussion at Note 16 to the Consolidated Financial Statements. Under the terms of the operating lease agreement with Columbia Hill Aviation, and the financing arrangements between Columbia Hill Aviation and its creditor, the Company does not maintain the legal right of ownership to the aircraft, nor does Columbia Hill Aviation's creditor maintain any legal recourse to the Company. COMMERCIAL COMMITMENTS, CONTINGENCIES AND CONTRACTUAL OBLIGATIONS See Note 14 to the Consolidated Financial Statements for a discussion of commitments, contingencies and contractual obligations. INFLATION The Company believes that inflation has not had a material impact on its results of operations for fiscal 2002, fiscal 2001 or fiscal 2000. The Company does not expect inflation to have a material impact on its results of operations for fiscal 2003. 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 2, 2002, March 3, 2001 or March 4, 2000. Certain of the Company's outstanding nonderivative financial instruments at March 2, 2002 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 2, 2002, all principal amounts were accruing interest at fixed rates. In the future, should the Company borrow funds under its variable-rate revolving credit facility, which may include up to $50 million of variable rate debt under the anticipated Foothill Capital 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 2, 2002. The table presents principal cash outflows and related interest rates by maturity date. 11 March 2, 2002 Expected Maturities in Fiscal Years Long-Term Debt ----------------------------------- Weighted Average ----------------------------------- Fixed Rate Interest Rate ---------- ------------- 2003 $ 49,686 9.28% 2004 47,605 9.28% 2005 -- -- 2006 115,000,000 10.75% Thereafter -- -- ------------ Total $115,097,291 10.75% ============ Fair Value $ 57,597,291 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 2, 2002, 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 2, 2002, 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. The estimated fair values of the financial instruments 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 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. See further discussion at Note 12 to the Consolidated Financial Statements. 12 MANAGEMENT BUYOUT On April 26, 2001, the Company signed a definitive exchange agreement documenting a management buyout proposal by PF Management. In July, the Special Committee of the Board of Directors of the Company received a competing proposal from William E. Simon & Sons ("Simon") and Triton Partners ("Triton") in which Simon and Triton proposed to commence a tender offer to purchase the Company's common stock for $2.50 per share, subject to certain conditions. The Special Committee was considering the Simon and Triton proposal in light of the exchange agreement and other factors when the Company was contacted in August by counsel to an Ad Hoc Committee of holders of the Company's 10-3/4% Senior Notes Due 2006 who stated that the members of the Ad Hoc Committee, collectively owning at least $90 million in aggregate principal amount of the Senior Notes, were interested in negotiating with the Company to restructure the Company's debt and equity capital. The Special Committee and the Board of Directors decided that the Company should pursue these negotiations; however, when the Company and the Ad Hoc Committee were unable to agree on a mutually acceptable proposal, the Company terminated formal negotiations with the Ad Hoc Committee. On December 13, 2001, Simon entered into an agreement with PF Management, guaranteed by the Company, whereby Simon agreed to assist PF Management in completing the management buyout and possible subsequent restructurings of PF Management and the Company. Commensurate with the signing of this agreement, Simon withdrew its offer made in July with Triton. Following the signing of this agreement, PF Management and the Company entered into an amendment of the definitive exchange agreement. The amendment, dated December 20, 2001, provides for an increase in the exchange price to be paid in the management buyout from $1.21 to $2.50 per share. The Company has filed a preliminary proxy statement in preparation for a special meeting of the shareholders to consider the management buyout proposal, which is subject to SEC review. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is set forth on pages F-1 through F-31. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 13 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS AND EXECUTIVE OFFICERS JAMES C. RICHARDSON, JR., CHAIRMAN, age 53, 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 45, 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 59, 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 66, 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 52, 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 53, 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 68, 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 served as Mayor of the City of Hickory, North Carolina, an elective office he has held from 1981 through 2001. 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 52, 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, and has been the proprietor since 1985. During fiscal 2001, Mr. Meisner served on the Audit, Executive Compensation and Special Committees. He continues to serve on those Committees. 14 NORBERT E. WOODHAMS, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR, age 56, 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 45, became the Company's Chief Financial Officer on December 16, 1999, and Senior Vice President on October 26, 2000. 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. ROBERT C. NAYLOR, SENIOR VICE PRESIDENT OF SALES, age 49, became the Company's Senior Vice President of Sales on December 16, 1999. Immediately prior, he was Senior Vice President of Sales 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 1978 to 1998, he served in various sales positions, including Vice President of Sales. 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 2, 2002, except for the untimely filing of a Form 3 filed for Robert C. Naylor. 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"). The Company granted no options during fiscal 2002.
Annual Compensation ------------------- Long Term Name and Fiscal Compensation All Other Principal Position Year Salary Bonus Other Option Awards Compensation ------------------ ---- ------ ----- ------- ------------- ------------ ($) ($) ($) (1) (# of Shares $ (2) Underlying Options) -------------------------------------------------------------------------------------------------------------------------- James C. Richardson, Jr. 2002 $ 481,148(3) $ 750,000(4) $207,314 0 $ 0 Chairman 2001 0(3) 1,775,000(4) 0 0 0 2000 0(3) 1,145,748(4) 799,522 (5) 0 -------------------------------------------------------------------------------------------------------------------------- David R. Clark 2002 $ 665,604(6) $1,368,800 $ 18,876 0 $ 3,200 Vice Chairman 2001 150,000(6) 0 0 0 3,200 2000 150,000(6) 1,261,969(4) 795,522 (5) 3,200 --------------------------------------------------------------------------------------------------------------------------
15
Annual Compensation ------------------- Long Term Name and Fiscal Compensation All Other Principal Position Year Salary Bonus Other Option Awards Compensation ------------------ ---- ------ ----- ------- ------------- ------------ ($) ($) ($) (1) (# of Shares $ (2) Underlying Options) -------------------------------------------------------------------------------------------------------------------------- Norbert E. Woodhams 2002 $ 307,693 $ 324,771 $ 0 0 $3,200 President and 2001 300,000 0 0 0 3,200 Chief Executive Officer 2000 275,622 355,007 179,100 (5) 3,200 -------------------------------------------------------------------------------------------------------------------------- Pamela M. Witters 2002 $ 184,669 $ 201,426 $ 0 0 $3,200 Chief Financial 2001 152,500 20,000 0 25,000 3,200 Officer, Treasurer and 2000 104,438 73,546 0 0 652 Secretary -------------------------------------------------------------------------------------------------------------------------- Robert C. Naylor 2002 $ 193,860 $ 202,416 $ 0 0 $1,040 Senior Vice President 2001 183,600 0 0 0 1,040 of Sales 2000 180,000 116,607 0 0 1,040 --------------------------------------------------------------------------------------------------------------------------
(1) For fiscal 2002, consists of the value of life insurance premiums. For fiscal 2000, consists of tax "gross up" payments made in connection with the payment of transaction success bonuses. For all periods shown, company cars and certain other benefits are excluded, as such items did not exceed 10% of the individual's annual salary and bonus. (2) Includes matching contributions made by the Company to the Company's 401(k) plan. (3) For fiscal 2002, includes compensation by HERTH Management, Inc. ("HERTH") and subsequently PF Management through September 3, 2001, plus salary beginning September 3, 2001. For fiscal 2001 and 2000, no salary was paid to this individual, who was instead compensated solely by HERTH. The Company paid PF Management $967,500 in fiscal 2002, consisting of $325,000 under the management services agreement, $350,000 as a cancellation fee, and $150,000 as bonuses paid to Mr. Richardson. The Company paid HERTH $925,000 in fiscal 2002, consisting of $325,000 pursuant to the HERTH agreement and an additional $600,000 in the aggregate as bonuses paid to Mr. Richardson. 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 2002, includes management performance bonuses of $600,000 paid directly to HERTH and management performance bonuses of $150,000 paid directly to PF Management. 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, these Named Executive Officers 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) For fiscal 2002, excludes $100,000, and for both fiscal 2001 and fiscal 2000, excludes $200,000 paid by the Company and offset from amounts owing to HERTH and subsequently PF Management. See "Employment Contracts and Change in Control Agreements" and "Certain Relationships and Related Party Transactions." 16 AGGREGATED OPTION EXERCISES IN FISCAL 2002 AND FISCAL YEAR-END OPTION VALUES The following table presents the value of unexercised options held by the Named Executive Officers during fiscal 2002. No stock options were exercised during fiscal 2002.
No. Shares Underlying Value of In-the-Money Options At March 2, 2002 Options At March 2, 2002 (1) ---------------------------------- ---------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ----------- ------------- James C. Richardson, Jr. -- -- -- -- David R. Clark -- -- -- -- Norbert E. Woodhams -- -- -- -- Pamela M. Witters 12,500 25,000 5,000 20,000 Robert C. Naylor 30,000 20,000 -- --
- -------------------- (1) The closing bid price of the Company's common stock on Wednesday, May 20, 2002, was $2.30 per share. COMPENSATION OF DIRECTORS During fiscal 2002, 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 September 3, 2001, each of James C. Richardson, Jr., the Company's Chairman, and David R. Clark, the Company's Vice Chairman, executed an Employment Agreement with the Company for three years at an annual base salary of $1,000,800, which may be increased from time to time by the Board of Directors. The Company can also award bonuses to Mr. Richardson and Mr. Clark based upon other considerations. See "Report of the Executive Compensation Committee." Each of these employment agreements will be automatically extended for additional, successive one-year terms, unless the Company or the respective employee gives prior notice of termination. Should Mr. Richardson's or Mr. Clark's employment be terminated by the Company without cause, or by reason of death or disability, or should Mr. Richardson or Mr. Clark resign from employment for good reason, 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 initial three-year term or the one-year renewal term then in effect, as the case may be, but which shall not be less than three months of his base salary then in effect. In the case of Mr. Clark, the Employment Agreement dated as of September 3, 2001 replaces the Employment Agreement between the Company and Mr. Clark dated June 30, 1996, as amended February 23, 1998 (the "superseded agreement"). As amended, the superseded agreement provided for an annual base salary of $350,000 and an annual bonus based on the Company's financial performance. Under this agreement, $200,000 of Mr. Clark's base salary was paid by HERTH and $150,000 of his base salary was paid by the Company. See "Certain Relationships and Related Party Transactions." The superseded agreement expired February 28, 2003, with automatic successive renewals for one-year terms, unless the Company notified Mr. Clark that it did not intend to extend the term. If Mr. Clark's employment were terminated by the Company without cause, or by reason of death or disability, or if Mr. Clark resigned from employment for good reason during the initial five-year term under the superseded agreement, then the Company would have been 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 17 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 under the superseded agreement, the severance payment would equal three months of Mr. Clark's then-existing base salary. On August 18, 1999, Norbert E. Woodhams, the Company's President, Chief Executive Officer and Director, and the Company executed an Incentive Agreement, which provided for an annual salary of $250,000 and a periodic bonus under the Company's executive bonus plan (the "Woodhams Incentive Agreement"). 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 Woodhams Incentive Agreement was amended on January 1, 2000 and December 31, 2001 to increase Mr. Woodhams annual salary to $300,000 and $350,000, respectively. The term of the Woodhams Incentive Agreement expires on June 8, 2003 and will 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. On December 31, 2001, each of Pamela M. Witters, the Company's Chief Financial Officer, and Robert C. Naylor, the Company's Senior Vice President of Sales, executed an Employment Agreement with the Company for three years. Ms. Witters' agreement provides for an annual base salary of $210,000, and Mr. Naylor's agreement provides for an annual base salary of $220,000, each of which may be increased from time to time by the Board of Directors. The Company can also award bonuses to Ms. Witters and Mr. Naylor based upon other considerations. See "Report of the Executive Compensation Committee." Each of these employment agreements will be automatically extended for additional, successive one-year terms, unless the Company or the respective employee gives prior notice of termination. Should Ms. Witters' or Mr. Naylor's employment be terminated by the Company without cause, or by reason of death or disability, or should Ms. Witters or Mr. Naylor resign from employment for good reason, then the Company would be obligated to make a severance payment to that employee equal to the sum of his or her base salary as would be due in the aggregate for the remainder of the initial three-year term or the one-year renewal term then in effect, as the case may be, but which shall not be less than three months of his or her base salary then in effect. In the event of a change in control of the Company (excluding the proposed management buyout), Ms. Witters and Mr. Naylor shall be entitled to receive (a) three times the amount of base salary paid or payable by the Company to that employee for services rendered during the most recently completed fiscal year, plus (b) three times the amount of aggregate cash bonus paid or payable by the Company to that employee for services rendered during the most recently completed fiscal year. 18 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 2002, the Executive Compensation Committee of the Company's Board of Directors consisted of Messrs. Lanier, Howard and Meisner, none of whom was an officer or employee of the Company or any of its subsidiaries during fiscal 2002. Messrs. Lanier and Meisner 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. 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, (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. 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. 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 2002 management met and surpassed many goals set for them by the Board, including retention and development of customer relationships, negotiating a debt refinancing and the completion of 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. Compensation of Chief Executive Officer and other Senior Executives. The evaluation of the performance of the Chief Executive Officer and the other senior executives is consistent with the compensation principles described above. The compensation paid to the Chief Executive Officer and the other senior executives reflects the performance of the Company and each senior executive. 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 19 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 28, 1997 and ending March 2, 2002. The graph assumes that $100 is invested on February 28, 1997 in each of the Company's common stock, the Peer Group, and on February 28, 1997 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 and Hormel Foods. 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. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* AMONG PIERRE FOODS, INC., THE S & P 500 INDEX AND A PEER GROUP [PERFORMANCE GRAPH] Measurement Period Pierre Foods, Peer S&P (Fiscal Year-End) Inc. Group 500 ----------------- ------------- ----- --- 2/28/97 100.00 100.00 100.00 2/27/98 200.00 133.22 135.00 3/6/99 58.33 135.11 161.65 3/4/00 45.14 75.71 180.61 3/3/01 11.11 106.04 165.80 3/2/02 25.56 119.42 150.03 *$100 invested on 2/28/97 in stock or index-including reinvestment of dividends. 20 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL SHAREHOLDERS The following table shows, as of April 11, 2002, except as otherwise indicated, the holdings of Pierre Foods common stock by (1) any entity or person known to us to be the beneficial owner of more than five percent of the outstanding shares, (2) each director and each executive officer and (3) by 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 ---------------- ---------------------- ------------ PF Management, Inc. (2) 361 Second Street, NW 3,630,212 62.8% Hickory, NC 28601 James C. Richardson, Jr. (3) P.O. Box 3967 3,630,212 62.8 Hickory, NC 28603 David R. Clark (3) P.O. Box 3967 3,630,212 62.8 Hickory, NC 28603 James M. Templeton (3) P.O. Box 1295 3,630,212 62.8 Claremont, NC 28610 Dimensional Fund Advisors Inc. (4) 1299 Ocean Avenue, 11th Floor 493,375 8.5 Santa Monica, CA 90401 Robert C. Naylor (5) 9990 Princeton Road 55,197 * Cincinnati, OH 45246 Pamela M. Witters (6) 9990 Princeton Road 13,846 * Cincinnati, OH 45246 Norbert E. Woodhams 9990 Princeton Road 7,627 * Cincinnati, OH 45246 Bobby G. Holman 4090 Golf Drive 5,728 * Conover, NC 28613 E. Edwin Bradford (7) 2700 Garden Hill Drive, Apt 102 3,141 * Raleigh, NC 27614 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 Bruce E. Meisner 1316 2nd Street NE, Suite No. 8 -- * Hickory, NC 28601 All directors and executive officers as a group (11 persons) 3,716,611 64.2%
21 * Less than one percent (1) The actual number of shares outstanding at April 11, 2002 was 5,781,480. Each percentage has been calculated on the basis of such number. (2) All of the shares owned by PF Management are also deemed to be beneficially owned by Messrs. Richardson and Clark in their capacity as directors. Messrs. Richardson, Clark, and Templeton are also shareholders of PF Management. Mr. Templeton disclaims beneficial ownership of Pierre Foods shares owned by PF Management. Mr. Templeton has agreed with PF Management, and Messrs. Richardson and Clark (a) to vote his PF Management shares in the manner directed by Messrs. Richardson and Clark and (b) to give Messrs. Richardson and Clark sole voting and investment power over the Pierre Foods shares owned by PF Management. (3) Consists of 3,630,212 shares deemed to be owned beneficially through PF Management. (4) The information provided for Dimensional Fund Advisors Inc. ("Dimensional") was obtained from a Schedule 13G dated January 30, 2002, filed with the SEC by Dimensional. 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. (5) Includes 30,000 shares issuable upon the exercise of currently exercisable options at an exercise price of $10.50 per share. (6) Includes 5,000 shares issuable upon the exercise of currently exercisable options at an exercise price of $2.00 per share, and 7,500 shares issuable upon the exercise of currently exercisable options at an exercise price of $5.13 per share. Excludes 20,000 shares issuable upon the exercise of options at an exercise price of $2.00 per share, which options are not currently exercisable but will become exercisable immediately prior to completion of the management buyout exchange. (7) Includes 1,200 shares deemed to be 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 Beginning April 25, 2001 and terminating September 3, 2001, PF Management provided management services to Pierre Foods, including strategic planning and the direction of strategic initiatives, including the identification and pursuit of mergers, acquisitions, other investment opportunities (both within and without Pierre Foods industry) and divestitures; management of Pierre Foods' relationships with investment bankers, securities broker-dealers, significant shareholders, note holders, banks, lawyers and accountants; facilitating meetings of the board of directors; and general oversight of Pierre Foods performance. PF Management provided the full time services of Richardson and Clark to Pierre Foods. In exchange for these services, PF Management was entitled to $1,500,000 per year pursuant to a management services agreement. HERTH Management, Inc. previously provided these services to Pierre Foods, but assigned the management services agreement to PF 22 Management as of April 25, 2001. The agreement was subsequently cancelled as of September 3, 2001. Upon termination of the agreement, Richardson and Clark each entered into employment agreements with Pierre Foods. As of April 25, 2001, the shareholders of PF Management were Richardson (52.9%), Clark (35.2%) and Templeton (11.9%). As of April 17, 2001, HERTH was owned only by Richardson and Gregory A. Edgell, a former affiliate of Pierre Foods. Prior to April 17, 2001, the shareholders of HERTH included Richardson (22.0%), Templeton (11.0%) and Columbia Hill, LLC (45.0%), whose equity owners included Clark (45.0%) and Richardson (40.0%). Pierre Foods paid PF Management $967,500 in the fiscal year ended March 2, 2002, consisting of $325,000 under the management services agreement, $350,000 as a cancellation fee, an additional $150,000 as bonuses paid to Richardson, and an additional $142,500 as bonuses paid to Templeton. Pierre Foods paid HERTH $925,000 in the fiscal year ended March 2, 2002, consisting of $325,000 under the management services agreement and an additional $600,000 as bonuses paid to Richardson. Pierre Foods paid HERTH $2,550,000 in fiscal 2001, consisting of $1,300,000 under the management services agreement and an additional $1,250,000 as bonuses paid to Richardson. Pierre Foods paid HERTH $3,241,270 in fiscal 2000, consisting of $1,300,000 under the management services agreement and an additional $1,941,270 as bonuses paid to Richardson. The management services agreement provided for $200,000 of Mr. Clark's annual salary to be paid for by PF Management or HERTH, as applicable. In the fiscal year ended March 2, 2002, Pierre Foods paid $100,000 directly to Clark and reduced the amounts owed under the management services agreement accordingly. In each of fiscal 2001 and 2000, the Company paid $200,000 directly to Clark and reduced the $1,500,000 owed under the management services agreement. In addition, in the fiscal year ended March 2, 2002, Pierre Foods paid approximately $425,000 to PF Management for reimbursement of expenses incurred in connection with the management buyout exchange as required by the amended exchange agreement. On April 9, 2002, the board of directors of Pierre Foods approved the payment of up to $2 million as a bonus to Richardson and up to $2 million as a bonus to Clark. Each bonus is payable in whole or in part at any time, is based on anticipated fiscal 2003 earnings and is subject to repayment in the board's discretion to the extent the anticipated earnings are not realized. Columbia Hill Management, Inc., owned 50% each by Richardson and Clark, provides accounting, tax and administrative services to Pierre Foods, as well as professional services for the management of special projects. During fiscal 2001 and 2002, Columbia Hill Management also provided consulting services for development of new food service programs, and consulting services for assessment and development of alternative warehousing and distribution programs. Fees paid for these services were approximately $1,130,000 in fiscal 2002 and $860,000 in fiscal 2001. During fiscal 2002, 2001 and 2000 Columbia Hill, LLC, owed Pierre Foods as much as $993,247 pursuant to a promissory note payable on demand and bearing interest at the prime rate. Columbia Hill LLC is owned in part by Richardson and Clark, who have unconditionally guaranteed repayment of the note. In April 2001, the note was assumed by PF Management. Columbia Hill Land Company, LLC, owned 50% by each of Richardson and Clark, leases office space to Pierre Foods in Hickory, North Carolina, pursuant to a ten-year lease that commenced in September 1998. Rents paid under the lease were approximately $110,000 in fiscal 2002 and $103,000 in each of fiscal 2001 and 2000. Atlantic Cold Storage of Mocksville, LLC , owned one-third each by Richardson and Clark, plans to construct and finance a public cold storage warehouse which would lease space to Pierre Foods as well as to others. The proposed agreement with Pierre Foods is for 10 years and a minimum of 4,000 pallet positions to be leased as of the first date the facility is operational. Pierre Foods also agreed to pay $250,000 for specialized construction costs. During fiscal 2001, Pierre Foods paid $250,000 to Atlantic Cold Storage for the specialized construction costs. In fiscal 2002, Pierre Foods began to purchase general construction and maintenance services from Phoenix Building Systems, Inc., a company owned 43% by Richardson, but in which Richardson has the right to receive 100% of the profits and losses of Phoenix on a pass-through basis. The amount paid to Phoenix by Pierre Foods during fiscal 2002 was approximately $140,000. 23 In fiscal 2002, the Company began to purchase services from Compass Outfitters, LLC ("Compass"), a company owned 45% by each of Richardson and Clark that provides team-building opportunities for customers and employees. During fiscal 2002, approximately $90,000 was paid to Compass under this arrangement. On December 16, 1999, the board of directors approved a loan to Richardson in an amount up to $8.5 million for the purpose of enabling Richardson to purchase shares of Pierre Foods common stock owned by certain shareholders. The terms of the loan provide that outstanding amounts will bear a simple interest rate of 8 1/2%, with principal and interest due three years from the date of the loan. At the end of fiscal 2000, disbursements under the loan totaled $5 million. No further disbursements have been, or are anticipated to be, made under this loan. PF Purchasing, LLC, owned 50% by each of Richardson and Clark, serves as an exclusive purchasing agent for Pierre Foods, pursuant to a three-year agreement that commenced September 3, 2001. Under the agreement, PF Purchasing will make an incentive payment of $100,000 per quarter in consideration of the opportunity to act as exclusive purchasing agent, and in exchange will be entitled to receive all rebates or discounts receivable by Pierre Foods from suppliers and vendors for orders negotiated and placed by PF Purchasing. In the fiscal year ended March 2, 2002, net fees paid to PF Purchasing were approximately $620,000. On July 1, 1999, Pierre Foods' subsidiary, Pierre Foods, LLC sold a 1% membership interest in Mom 'n' Pop's Country Ham, LLC, Pierre Foods' ham operation, to Richardson for $9,950. In August 1999, effective as of July 2, 1999, Pierre Foods conveyed its 99% membership interest in Mom 'n' Pop's to Hoggs, LLC in exchange for a promissory note in the principal amount of $985,050 due December 31, 1999. As security, each of the members of Hoggs, LLC pledged his or her membership interest in Hoggs to Pierre Foods. Richardson holds a 55% interest in Hoggs, but is entitled to receive 100% of the profits and losses of Hoggs on a pass-through basis. In addition, Pierre Foods provided a revolving credit line of $500,000 to Hoggs for working capital. As of the end of fiscal 2000, Hoggs paid the promissory note and the line of credit in full, and the line of credit has been terminated. In fiscal 2002, Mom `n' Pop's began selling pork products to Pierre Foods. The amount paid by Pierre Foods during fiscal 2002 was approximately $150,000. During the fourth quarter of fiscal 2002, Pierre Foods leased an aircraft from Columbia Hill Aviation, LLC, owned 100% by PF Management. Under the terms of the lease, Pierre Foods was obligated to make monthly payments of approximately $58,000 and paid approximately $170,000 under the lease during fiscal 2002. Under that arrangement, Pierre Foods was to maintain its own flight department and was responsible for all operating costs of the aircraft. Effective March 1, 2002, the December 11, 2001 lease was cancelled and replaced with a non-exclusive lease agreement. Pursuant to this new lease, Pierre Foods is obligated to make 16 quarterly lease payments of $471,500 each for the right to use the aircraft for up to 115 flight hours per quarter, based on availability. Under this lease agreement, Columbia Hill Aviation is responsible for all expenses incurred in the operation of the use of the aircraft, except that Pierre Foods must provide its own crew. On March 1, 2002, Pierre paid Columbia Hill Aviation $943,000 as a refundable deposit under the lease agreement and $471,500 for the first quarterly lease payment. PF Distribution, LLC, owned 50% by each of Richardson and Clark, serves as an exclusive logistics agent for Pierre Foods pursuant to a one-year agreement that commenced on March 3, 2002. Under the agreement, PF Distribution will provide warehousing, fulfillment and transportation services to Pierre Foods. On May 10, 2002, Pierre Foods signed a binding letter agreement with Foothill Capital Corporation ("Foothill Capital"), the terms of which will replace Fleet Capital Corporation as Pierre Foods' principal lender. Under the letter agreement, Foothill Capital will extend a five-year secured credit facility to the Company in an aggregate amount up to $50 million, which includes a $16 million term loan subline, a $10 million capital expenditure subline and a $7 million letter of credit subfacility. The collateral for the facility will include substantially all of Pierre Foods' assets. Richardson and Clark have agreed to guarantee payment of the facility in exchange for guarantee fees. Pierre Foods has agreed to pay such fees to each of Richardson and Clark, annually in advance, equal to 1.5% of the amount committed for lending under the facility. Pierre Foods expects to close on the facility on or before May 31, 2002. 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. The directors obtain and rely upon investment banking "fairness" opinions when considering these transactions to the extent required by the indenture governing the senior notes. 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. 2. 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 27, announcing the delisting of its common stock from the NASDAQ Small Cap Market, and its transfer to the OTC Bulletin Board. (c) Other Filings A revised preliminary proxy statement was filed with the Securities and Exchange Commission on May 15, 2002, in connection with a special meeting of shareholders, at which the shareholders will be asked to adopt and approve the Amended and Restated Agreement and Plan of Share Exchange dated as of December 20, 2001. 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 30, 2002 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 30, 2002 - ----------------------------------------- James C. Richardson, Jr. /s/ DAVID R. CLARK Vice Chairman of the Board May 30, 2002 - ----------------------------------------- (Principal Executive Officer) David R. Clark /s/ NORBERT E. WOODHAMS Chief Executive Officer, President May 30, 2002 - ----------------------------------------- and Director Norbert E. Woodhams /s/ PAMELA M. WITTERS Chief Financial Officer, Treasurer May 30, 2002 - ----------------------------------------- and Secretary (Principal Pamela M. Witters Financial Officer and Principal Accounting Officer) /s/ E. EDWIN BRADFORD Director May 30, 2002 - ----------------------------------------- E. Edwin Bradford /s/ BOBBY G. HOLMAN Director May 30, 2002 - ----------------------------------------- Bobby G. Holman /s/ RICHARD F. HOWARD Director May 30, 2002 - ----------------------------------------- Richard F. Howard /s/ LEWIS C. LANIER Director May 30, 2002 - ----------------------------------------- Lewis C. Lanier /s/ BRUCE E. MEISNER Director May 30, 2002 - ----------------------------------------- Bruce E. Meisner /s/ WILLIAM R. MCDONALD III Director May 30, 2002 - ----------------------------------------- William R. McDonald III
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) 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)) 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) 27 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 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)) 10.9 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) 10.10 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) 10.11 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) 10.12 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) 10.13 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) 28 10.14 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) 10.15 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) 10.16 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) 10.17 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) 10.18 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) 10.19 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) 10.20 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) 10.21 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) 10.22 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) 10.23 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) 10.24 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) 10.25 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) 10.26 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) 29 10.27 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) 10.28 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) 10.29 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) 10.30 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) 10.31 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) 10.32 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) 10.33 Assumption and Assignment Agreement dated as of April 17, 2001, between Columbia Hill, LLC and PF Management, Inc. (incorporated by reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K for its fiscal year ended March 3, 2001) 10.34 Cancellation and Assignment Agreement dated as of April 25, 2001, between David R. Clark, HERTH Management, Inc. and PF Management, Inc. (incorporated by reference to Exhibit 10.40 to the Company's Annual Report on Form 10-K for its fiscal year ended March 3, 2001) 10.35 Amendment No. 1, dated as of May 5, 2001, to Loan and Security Agreement, dated as of May 24, 2000, between the Company and Fleet Capital Corporation, as Lender (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended June 2, 2001) 10.36 Cancellation and Termination on September 3, 2001, of Amended and Restated Management Services Agreement dated as of December 17, 1999, by and between Pierre Foods, Inc. and PF Management, Inc. (the successor by assignment from HERTH Management, Inc.) (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended December 1, 2001) 10.37 Employment Agreement dated as of September 3, 2001, by and between Pierre Foods, Inc. and James C. Richardson, Jr. (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended December 1, 2001) 10.38 Employment Agreement dated as of September 3, 2001, by and between Pierre Foods, Inc. and David R. Clark (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended December 1, 2001) 10.39 Purchasing Agent Agreement dated as of September 3, 2001, by and between Pierre Foods, Inc. and PF Purchasing, LLC (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended December 1, 2001) 30 10.40 Engagement Letter dated December 13, 2001, between PF Management, Inc. and William E. Simon & Sons, LLC (performance by PF Management, Inc. guaranteed by Pierre Foods, Inc.) (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended December 1, 2001) 10.41 Agreement and Restated Agreement and Plan of Share Exchange between Pierre Foods, Inc. and PF Management, Inc., dated as of December 20, 2001 (incorporated by reference to Appendix A to the Company's Preliminary Proxy Statement on Schedule 14A file on January 24, 2002) 10.42 Employment Agreement dated as of December 31, 2001, between the Company and Pamela M. Witters 10.43 Employment Agreement dated as of December 31, 2001, between the Company and Robert C. Naylor 10.44 Non-Exclusive Aircraft Dry Lease dated as of March 1, 2002, between the Company and Columbia Hill Aviation, LLC 10.45 Logistics Agreement dated as of March 3, 2002, between the Company and PF Distribution, LLC 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. 31 INDEX TO FINANCIAL STATEMENTS
PAGE ---- PIERRE FOODS, INC. INDEPENDENT AUDITORS' REPORT................................ F-2 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of March 2, 2002 and March 3, 2001................................................ F-3 Consolidated Statements of Operations for the Years Ended March 2, 2002, March 3, 2001 and March 4, 2000......... F-4 Consolidated Statements of Shareholders' Equity for the Years Ended March 2, 2002, March 3, 2001 and March 4, 2000........................ F-5 Consolidated Statements of Cash Flows for the Years Ended March 2, 2002, March 3, 2001 and March 4, 2000......... F-6 Notes to Consolidated Financial Statements................ F-7
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") as of March 2, 2002 and March 3, 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three fiscal years in the period ended March 2, 2002. 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 2, 2002 and March 3, 2001, and the results of its operations and its cash flows for each of the three fiscal years in the period ended March 2, 2002 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Cincinnati, Ohio April 26, 2002 F-2 PIERRE FOODS, INC. CONSOLIDATED BALANCE SHEETS
MARCH 2, MARCH 3, 2002 2001 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 4,577,982 $ 1,813,185 Certificate of deposit of special purpose entity (Note 16)..................................................... 1,240,000 -- Accounts receivable, net (Notes 3 and 7).................. 21,469,035 18,197,902 Inventories (Notes 4 and 7)............................... 23,852,855 26,804,063 Refundable income taxes (Note 8).......................... 70,622 1,292,667 Deferred income taxes (Note 8)............................ 2,349,617 2,174,642 Prepaid expenses and other current assets................. 1,624,161 1,033,015 ------------ ------------ Total current assets............................... 55,184,272 51,315,474 PROPERTY, PLANT AND EQUIPMENT, NET (Notes 5, 9 and 16)...... 43,281,303 34,916,493 ------------ ------------ OTHER ASSETS: Trade name (Note 6)....................................... 38,808,636 40,286,636 Excess of cost over fair value of net assets of businesses acquired, net (Note 6).................................. 26,848,504 27,871,114 Other intangible assets, net (Note 6)..................... 2,171,067 2,363,956 Note receivable-related party (Notes 3 and 16)............ 993,247 935,044 Deferred loan origination fees, net....................... 2,092,904 2,619,157 Other..................................................... 440,931 -- ------------ ------------ Total other assets................................. 71,355,289 74,075,907 ------------ ------------ Total Assets....................................... $169,820,864 $160,307,874 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current installments of long-term debt (Note 7)........... $ 325,071 $ 67,631 Trade accounts payable.................................... 4,972,870 5,368,066 Accrued payroll and payroll taxes......................... 6,077,062 3,915,799 Accrued interest.......................................... 3,090,624 3,153,280 Accrued promotions (includes related party payables of $32,833 at March 3, 2001)............................... 1,943,479 1,926,650 Accrued taxes (other than income and payroll)............. 566,677 584,206 Other accrued liabilities................................. 1,147,558 409,835 ------------ ------------ Total current liabilities.......................... 18,123,341 15,425,467 LONG-TERM DEBT, less current installments (Note 7).......... 115,047,605 115,097,291 OBLIGATION OF SPECIAL PURPOSE ENTITY (Note 16).............. 5,858,139 -- OTHER LONG-TERM LIABILITIES (Note 16)....................... 1,032,696 1,347,231 DEFERRED INCOME TAXES (Note 8).............................. 2,552,066 1,571,087 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 2, 2002 -- 5,781,480 shares and March 3, 2001 -- 5,781,480 shares.................................................. 5,781,480 5,781,480 Additional paid in capital................................ 23,656,692 23,317,053 Retained earnings......................................... 2,768,845 2,768,265 Note receivable-related party............................. (5,000,000) (5,000,000) ------------ ------------ Total shareholders' equity......................... 27,207,017 26,866,798 ------------ ------------ Total Liabilities and Shareholders' Equity......... $169,820,864 $160,307,874 ============ ============
See accompanying notes to consolidated financial statements. F-3 PIERRE FOODS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED ------------------------------------------ MARCH 2, MARCH 3, MARCH 4, 2002 2001 2000 ------------ ------------ ------------ REVENUES, NET (Note 13): Food processing........................................... $242,605,000 $203,475,325 $176,969,884 Ham curing................................................ -- -- 2,096,052 ------------ ------------ ------------ Total operating revenues, net...................... 242,605,000 203,475,325 179,065,936 ------------ ------------ ------------ COSTS AND EXPENSES: Cost of goods sold (Note 16 -- includes net related party transactions totaling $620,191 in fiscal 2002).......... 160,781,388 133,384,944 115,631,474 Selling, general and administrative expenses (Notes 11 and 16 -- includes related party transactions totaling $3,943,452, $4,199,591 and $3,983,434 in fiscal 2002, 2001 and 2000, respectively)............................ 61,725,969 55,751,791 59,180,564 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............................................... 83,833 27,695 (22,038) Depreciation and amortization............................. 6,437,873 6,237,969 5,661,893 ------------ ------------ ------------ Total costs and expenses........................... 229,029,063 195,402,399 183,309,053 ------------ ------------ ------------ OPERATING INCOME (LOSS)..................................... 13,575,937 8,072,926 (4,243,117) ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest expense (Note 16)................................ (13,206,634) (13,334,022) (14,985,577) Other income, net (Note 16 -- includes related party income totaling $58,203, $61,293 and $137,364 in fiscal 2002, 2001 and 2000, respectively)...................... 364,237 281,600 168,959 ------------ ------------ ------------ Other expense, net................................. (12,842,397) (13,052,422) (14,816,618) ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX....................................................... 733,540 (4,979,496) (19,059,735) INCOME TAX (PROVISION) BENEFIT (Note 8)..................... (732,960) 766,708 4,825,168 ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS.................... 580 (4,212,788) (14,234,567) DISCONTINUED OPERATIONS (Note 1): Income from discontinued restaurant segment (net of income taxes of $1,507,029).................................... -- -- 2,828,367 Gain on disposal of discontinued restaurant segment (net of income taxes of $3,968,525).......................... -- -- 6,801,726 ------------ ------------ ------------ Discontinued operations, net....................... -- -- 9,630,093 INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..................... 580 (4,212,788) (4,604,474) EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT (net of income tax benefit of $258,303 and $35,633 in fiscal 2001 and 2000, respectively)................................... -- (455,238) (52,350) ------------ ------------ ------------ NET INCOME (LOSS)........................................... $ 580 $ (4,668,026) $ (4,656,824) ============ ============ ============ NET INCOME (LOSS) PER COMMON SHARE -- BASIC AND DILUTED Income (loss) from continuing operations.................. $ 0.00 $ (0.73) $ (2.45) Discontinued operations................................... -- -- 1.66 Extraordinary loss from early extinguishment of debt...... -- (0.08) (0.01) ------------ ------------ ------------ Net income (loss).................................. $ 0.00 $ (0.81) $ (0.80) ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING -- BASIC AND DILUTED.... 5,781,480 5,781,319 5,808,075
See accompanying notes to consolidated financial statements. F-4 PIERRE FOODS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CAPITAL IN RECEIVABLE TOTAL COMMON EXCESS OF PAR RETAINED FROM SHAREHOLDERS' STOCK VALUE EARNINGS SHAREHOLDER EQUITY ---------- ------------- ----------- ----------- ------------- BALANCE AT MARCH 6, 1999......... $5,807,049 $23,251,845 $12,093,115 $ -- $41,152,009 Net 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 (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) (510,180) -- -- (578,204) Issuance of common stock......... 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......................... -- -- (4,668,026) -- (4,668,026) Issuance of common stock......... 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 Net income....................... -- -- 580 -- 580 Contributions of special purpose entity (Note 16)............... -- 339,639 -- -- 339,639 ---------- ----------- ----------- ----------- ----------- BALANCE AT MARCH 2, 2002......... $5,781,480 $23,656,692 $ 2,768,845 $(5,000,000) $27,207,017 ========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-5 PIERRE FOODS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED --------------------------------------- MARCH 2, MARCH 3, MARCH 4, 2002 2001 2000 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)......................................... $ 580 $(4,668,026) $(4,656,824) ----------- ----------- ----------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Extraordinary loss on extinguishment of debt before income tax benefit............................................. -- 713,541 87,983 Depreciation and amortization............................. 6,437,873 6,237,969 8,199,039 Amortization of deferred loan origination fees............ 528,202 570,625 899,931 Deferred income taxes..................................... 806,004 199,672 8,400 Net loss on disposition of assets (net of writedowns)..... 83,833 27,695 2,835,122 Net gain on disposal of discontinued operations (Note 1)...................................................... -- -- (10,770,251) Increase in other assets.................................. (440,931) -- -- Increase (decrease) in other long-term liabilities........ (314,535) (291,235) 1,638,466 Other noncash adjustments................................. -- 1,653 705,039 Changes in operating assets and liabilities (net of effects from sales of ham curing operations and restaurant segments) providing (using) cash: Receivables............................................. (3,271,133) (1,004,642) (287,077) Inventories............................................. 2,951,208 (1,778,642) 3,301,173 Refundable income taxes, prepaid expenses and other assets................................................ 630,899 1,302,056 (2,917,660) Trade accounts payable and other accrued liabilities.... 2,440,434 769,300 (5,763,674) ----------- ----------- ----------- Total adjustments................................... 9,851,854 6,747,992 (2,063,509) ----------- ----------- ----------- Net cash provided by (used in) operating activities........................................ 9,852,434 2,079,966 (6,720,333) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES 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................... 1,000 60,300 652,523 Proceeds from sales of assets to other related parties.... -- -- 19,750 (Increase) decrease in related party notes receivables (Note 16)............................................... (58,203) 238,513 441,782 Decrease in other notes receivables....................... -- -- 103,974 Capital expenditures to related parties (Note 16)......... -- (250,000) (316,233) Capital expenditures -- other............................. (5,994,017) (2,514,050) (5,171,445) Certificate of deposit of special purpose entity.......... (1,240,000) -- -- Other investing activities, net........................... -- -- 53,875 ----------- ----------- ----------- Net cash provided by (used in) investing activities........................................ (7,291,220) (2,465,237) 45,166,279 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net repayments under revolving credit agreement........... -- -- (29,000,000) Principal payments on long-term debt (Note 16)............ (134,107) (314,433) (2,415,224) Loan origination fees..................................... (1,949) (188,575) (177,909) Loan to shareholder....................................... -- -- (5,000,000) Purchase of common stock.................................. -- -- (1,020,360) Capital contributions of special purpose leasing entity (Note 16)............................................... 339,639 -- -- Proceeds from exercise of stock options................... -- -- 204,613 ----------- ----------- ----------- Net cash provided by (used in) financing activities........................................ 203,583 (503,008) (37,408,880) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 2,764,797 (888,279) 1,037,066 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 1,813,185 2,701,464 1,664,398 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 4,577,982 $ 1,813,185 $ 2,701,464 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-6 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 Bite(R), Rib-B-Q(R), Chop House(TM), Deli Breaks(TM), Hot 'n' Ready(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. 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. 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. That $75.0 million facility was replaced in fiscal 2000 with a $25 million facility from a new lender (Note 7). 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 F-7 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 ------------- Net operating revenues...................................... $59,583,905 =========== Operating profit............................................ 4,502,401 Other expense, net.......................................... 167,005 Income tax provision........................................ 1,507,029 ----------- Income from discontinued restaurant segment................. $ 2,828,367 =========== 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 ===========
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. On April 26, 2001, the Company signed a definitive exchange agreement documenting a management buyout proposal by PF Management, Inc. ("PF Management"). In July, the Special Committee of the Board of Directors of the Company received a competing proposal from William E. Simon & Sons ("Simon") and Triton Partners ("Triton") in which Simon and Triton proposed to commence a tender offer to purchase the Company's common stock for $2.50 per share, subject to certain F-8 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) MANAGEMENT BUYOUT conditions. The Special Committee was considering the Simon and Triton proposal in light of the exchange agreement and other factors when the Company was contacted in August by counsel to an Ad Hoc Committee of holders of the Company's 10 3/4% Senior Notes Due 2006 who stated that the members of the Ad Hoc Committee, collectively owning at least $90 million in aggregate principal amount of the Senior Notes, were interested in negotiating with the Company to restructure the Company's debt and equity capital. The Special Committee and the Board of Directors decided that the Company should pursue these negotiations; however, when the Company and the Ad Hoc Committee were unable to agree on a mutually acceptable proposal, the Company terminated formal negotiations with the Ad Hoc Committee. On December 13, Simon entered into an agreement with PF Management, guaranteed by the Company, whereby Simon agreed to assist PF Management in completing the management buyout and possible subsequent restructurings of PF Management and the Company. Commensurate with the signing of this agreement, Simon withdrew its offer made in July with Triton. Following the signing of this agreement, PF Management and the Company entered into an amendment of the definitive exchange agreement. The amendment, dated December 20, 2001, provides for an increase in the exchange price to be paid in the management buyout from $1.21 to $2.50 per share. The Company is currently revising its preliminary proxy statement filed April 11, 2002 in preparation for a special meeting of the shareholders to consider the management buyout proposal, tentatively scheduled for June 26, 2002. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. The accompanying consolidated financial statements include Pierre Foods, Inc. and subsidiary, as well as amounts of the special purpose leasing entity (see Note 16). All intercompany transactions have been eliminated. Fiscal Year. The Company reports the results of operations using a 52-53 week basis. Each quarter of the fiscal year contains 13 weeks except for the infrequent fiscal years with 53 weeks. Fiscal 2002, fiscal 2001 and fiscal 2000 represent 52 week periods. The Company's fiscal year ended March 2, 2002 is referred to herein as "fiscal 2002," its fiscal year ended March 3, 2001 is referred to herein as "fiscal 2001," and its fiscal year ended March 4, 2000 is referred to herein as "fiscal 2000." 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 2, 2002. F-9 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. See "New Accounting Pronouncements" following. 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
Deferred Loan Origination Fees. Deferred loan origination fees associated with the Company's revolving credit facility and long-term debt are amortized based on the term of the respective agreements. This amortization expense is included in interest expense. Revenue Recognition. Revenue from sales of food processing products is recorded at the time title transfers. Standard shipping terms are FOB destination, therefore title passes at the time the product is delivered to the customer. Revenue is recognized as the net amount to be received after deductions for estimated discounts, product returns and other allowances. Promotions. Effective with the fiscal year beginning March 4, 2001, promotional expenses associated with rebates, marketing promotions and special pricing arrangements are recorded as a reduction of revenues at the time the sale is recorded, in accordance with EITF 0014. The appropriate reclasses were made for all other fiscal years presented. Certain of these expenses are estimated based on expected future payments to be made under these programs. The Company believes the estimates recorded in the financial statements are reasonable estimates of the Company's future liability. Advertising Costs. The Company expenses advertising costs as incurred. Advertising expense included in continuing operations for fiscal 2002, fiscal 2001 and fiscal 2000 was $810,367, $891,173 and $994,334, respectively. Research and Development. The Company expenses research and development costs as incurred. Research and development expense included in continuing operations for fiscal 2002, fiscal 2001 and fiscal 2000 was $372,797, $464,594 and $354,322, respectively. Distribution Expense. The Company expenses distribution costs as incurred. These costs include warehousing, fulfillment and freight costs, and are included in selling, general and administrative expense. Distribution expense included in continuing operations for fiscal 2002, fiscal 2001 and fiscal 2000 was $17,010,037, $18,219,688 and $16,894,823, 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 2001 and fiscal 2000 have been reclassified, where applicable, to conform to the financial statement presentation used in fiscal 2002. 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 include sales discounts and promotional allowances, inventory reserves, insurance reserves, and useful lives assigned to intangible assets. Actual results could differ from those estimates. F-10 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) New Accounting Pronouncements. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS 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 derivative instruments as either assets or liabilities in its statement of financial position and to measure those instruments at fair value. The Company adopted SFAS No. 133 effective March 4, 2001. The Company purchases natural gas contracts as a means of managing the risk of price changes in forecasted natural gas purchases. As of March 2, 2002, these contracts qualify for the normal purchases and sales exception within SFAS No. 133, and accordingly, the Company has not recorded the fair value of these contracts within the consolidated financial statements. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The adoption of SFAS 141 did not have a material impact on its financial position and results of operations. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for the fiscal year beginning March 3, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. Any impairment loss resulting from transitional impairment test would be recorded as a cumulative effect of a change in accounting principle for the fiscal quarter ending June 1, 2002. The Company is currently assessing the impact of SFAS 142 on its financial position and results of operation. As a result, the assembled work force, with an amortized balance of $2,171,067 at March 2, 2002, will be reclassified as goodwill. In addition, there are preliminary indications that the revised goodwill amount of $29,019,571 may be impaired. The assessment of the impact of SFAS 142 will be completed by the second quarter ending August 31, 2002. The reason for the potential impairment loss is the result of the change (effective March 3, 2002) in the evaluation criteria for goodwill from an undiscounted cash flow approach, which was previously utilized under the guidance in Accounting Principles Board Opinion No. 17, to the fair value approach which is stipulated in SFAS No. 142. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations," which is effective for the Company beginning March 2, 2003. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. The Company does not believe that the adoption of SFAS 143 will have a material impact on its financial position and results of operations. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for the Company's fiscal year beginning March 3, 2002. SFAS 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. The Company does not believe that the adoption of SFAS 144 will have a material impact on its financial position and results of operations. F-11 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable consist of the following:
MARCH 2, MARCH 3, 2002 2001 ----------- ----------- Accounts receivable: Trade accounts receivable (less allowance for doubtful receivables of $219,118 and $244,881 at March 2, 2002 and March 3, 2001).................................... $20,608,422 $17,802,086 Other.................................................... 860,613 395,816 ----------- ----------- Total accounts receivable........................ $21,469,035 $18,197,902 =========== =========== Note receivable (includes accrued interest): Related parties; interest rates 8.25% to 9.0% (Note 16)................................................... $ 993,247 $ 935,044 ----------- ----------- Total noncurrent note receivable................. $ 993,247 $ 935,044 =========== ===========
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 2, MARCH 3, 2002 2001 ----------- ----------- Manufacturing supplies..................................... $ 1,199,647 $ 1,189,481 Raw materials.............................................. 4,974,350 4,404,820 Work in process............................................ 838 4,281 Finished goods............................................. 17,678,020 21,205,481 ----------- ----------- Total............................................ $23,852,855 $26,804,063 =========== ===========
F-12 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT The major components of property, plant and equipment are as follows:
ESTIMATED MARCH 2, MARCH 3, USEFUL LIFE 2002 2001 ----------- ----------- ----------- Land.......................................... $ 1,270,025 $ 1,270,025 Land improvements............................. 10-20 years 382,304 382,304 Buildings..................................... 20-40 years 16,721,925 16,073,803 Leasehold improvements........................ 5-20 years 1,517,143 670,143 Machinery and equipment....................... 5-20 years 30,954,454 28,459,116 Machinery and equipment under capital leases...................................... 5-15 years 763,517 630,650 Furniture and fixtures........................ 5-15 years 4,987,449 4,031,735 Aircraft (Note 16)............................ 16 years 6,200,000 -- Automotive equipment.......................... 2-5 years 542,412 487,504 Construction in progress...................... 1,318,912 636,828 ----------- ----------- Total............................... 64,658,141 52,642,108 Less accumulated depreciation and amortization................................ 21,376,838 17,725,615 ----------- ----------- Property, plant and equipment, net.......... $43,281,303 $34,916,493 =========== ===========
6. INTANGIBLE ASSETS Intangible assets consist of the following:
MARCH 2, MARCH 3, 2002 2001 ----------- ----------- Trade name................................................. $44,340,000 $44,340,000 Less accumulated amortization.............................. (5,531,364) (4,053,364) ----------- ----------- Total............................................ $38,808,636 $40,286,636 =========== =========== Excess of cost over fair value of net assets of businesses acquired................................................. $30,678,287 $30,678,287 Less accumulated amortization.............................. (3,829,783) (2,807,173) ----------- ----------- Total............................................ $26,848,504 $27,871,114 =========== =========== Assembled workforce........................................ $ 2,893,400 $ 2,893,000 Less accumulated amortization.............................. (722,333) (529,044) ----------- ----------- Total............................................ $ 2,171,067 $ 2,363,956 =========== ===========
Amortization expense was $2,693,499 for each of the fiscal years 2002, 2001 and 2000. F-13 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. FINANCING ARRANGEMENTS Long-term debt is comprised of the following:
MARCH 2, 2002 MARCH 3, 2001 ------------- ------------- 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).......................................... 97,291 164,922 ------------ ------------ Total long-term debt........................... 115,097,291 115,164,922 Less current installments...................... 49,686 67,631 ------------ ------------ Long-term debt, excluding current installments........... $115,047,605 $115,097,291 ============ ============
The Senior Notes are unsecured obligations of the Company, subject to certain financial and non-financial covenants. At March 2, 2002, 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. As of March 2, 2002, the Company was in compliance with the financial covenants under this facility. 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 in fiscal 2001. The average rate on the $25 million revolving line of credit was 7.30% and 7.65% for the fiscal years ended March 2, 2002 and March 3, 2001, respectively. The average rate on the $75 million revolving line of credit was 8.27% for the fiscal year ended March 4, 2000. There were no outstanding borrowings under this facility at March 2, 2002 or March 3, 2001.
LONG-TERM DEBT MATURITIES, INCLUDING CAPITAL LEASES (NOTE 9) - ------------------------------------------------------------------- 2003 2004 2005 2006 2007 TOTAL - ------- ------- ------- ------- ------------ ------------ $49,686.. $47,605 $ -- $ -- $115,000,000 $115,097,291
Obligation of special purpose entity is comprised of a seven year variable rate note payable, due in monthly installments with a balloon payment due in December 2008 (see Note 16):
MARCH 2, MARCH 3, 2002 2001 ---------- ---------- Obligation of special purpose entity........................ $6,133,524 $ -- Less current installments................................. 275,385 -- ---------- ---------- Obligation of special purpose entity, excluding current installments.............................................. $5,858,139 $ -- ========== ==========
OBLIGATION OF SPECIAL PURPOSE ENTITY - ----------------------------------------------------------------- 2007 AND 2003 2004 2005 2006 THEREAFTER TOTAL - ------- -------- -------- -------- ---------- ---------- $275,385.. $291,208 $307,941 $325,636 $4,933,354 $6,133,524
F-14 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. INCOME TAXES The income tax provision (benefit) attributable to continuing operations is summarized as follows:
FISCAL YEARS ENDED ------------------------------------ MARCH 2, MARCH 3, MARCH 4, 2002 2001 2000 -------- ----------- ----------- Current: Federal....................................... $(59,063) $(1,201,123) $(5,477,218) State......................................... (13,981) (23,557) 191,094 -------- ----------- ----------- Total current......................... (73,044) (1,224,680) (5,286,124) -------- ----------- ----------- Deferred: Federal....................................... 694,949 675,159 (404,262) State......................................... 111,055 (217,187) 865,218 -------- ----------- ----------- Total deferred........................ 806,004 457,972 460,956 -------- ----------- ----------- Total provision (benefit)............. $732,960 $ (766,708) $(4,825,168) ======== =========== ===========
Actual income tax provision (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 provision (benefit) from continuing operations.
FISCAL YEARS ENDED -------------------------------------------------------------------------------- MARCH 2, 2002 MARCH 3, 2001 MARCH 4, 2000 ------------------------ ------------------------- ------------------------- PERCENT OF PERCENT OF PERCENT OF AMOUNT PRETAX INCOME AMOUNT PRETAX LOSS AMOUNT PRETAX LOSS -------- ------------- ----------- ----------- ----------- ----------- Computed provision (benefit) at statutory rate......... $249,404 34.0% $(1,693,028) (34.0)% $(6,480,310) (34.0)% Tax effect resulting from: State income taxes, net of federal tax provision (benefit)............... 55,857 7.6 (158,889) (3.2) 790,493 4.1 Compensation limitation... 315,941 43.0 442,000 8.9 833,752 4.4 Meals and entertainment... 80,429 11.0 117,368 2.4 90,648 0.5 Other permanent differences............. 31,329 4.3 525,841 10.5 (59,751) (0.3) -------- ---- ----------- ----- ----------- ----- Income tax provision (benefit)............... $732,960 99.9% $ (766,708) (15.4)% $(4,825,168) (25.3)% ======== ==== =========== ===== =========== =====
F-15 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 2002 and fiscal 2001 is as follows:
MARCH 2, 2002 MARCH 3, 2001 -------------------------------------- -------------------------------------- ASSETS LIABILITIES TOTAL ASSETS LIABILITIES TOTAL ---------- ----------- ----------- ---------- ----------- ----------- Current: Allowance for doubtful receivables................. $ 342,421 -- $ 342,421 $ 45,822 $ -- $ 45,822 Inventory..................... 657,455 -- 657,455 811,625 -- 811,625 Accrued promotional expense... 757,957 -- 757,957 751,394 -- 751,394 Accrued vacation pay.......... 487,329 -- 487,329 410,265 -- 410,265 Reserve for returns........... 48,591 -- 48,591 35,721 -- 35,721 Reserves -- other............. 127,726 -- 127,726 34,281 -- 34,281 Prepaid expenses.............. -- (172,885) (172,885) -- (168,178) (168,178) Accrued bonus................. -- -- -- 107,809 -- 107,809 Accrued worker's compensation................ 51,921 -- 51,921 128,937 -- 128,937 Other......................... 49,102 -- 49,102 16,966 -- 16,966 ---------- ----------- ----------- ---------- ----------- ----------- Total current.......... 2,522,502 (172,885) 2,349,617 2,342,820 (168,178) 2,174,642 ---------- ----------- ----------- ---------- ----------- ----------- Noncurrent: Property, plant and equipment................... -- (4,303,962) (4,303,962) -- (3,332,260) (3,332,260) Consulting agreements......... 402,751 -- 402,751 517,359 -- 517,359 Goodwill amortization......... -- (3,650,651) (3,650,651) (2,675,410) (2,675,410) General business credit carryforward................ 1,070,799 -- 1,070,799 1,070,799 -- 1,070,799 Alternative minimum tax credit carryforward................ 654,317 -- 654,317 654,317 -- 654,317 Federal loss carryforward..... 1,980,513 -- 1,980,513 1,427,658 -- 1,427,658 State loss carryforward....... 609,988 -- 609,988 528,718 -- 528,718 Other......................... 703,633 (19,454) 684,179 237,732 -- 237,732 ---------- ----------- ----------- ---------- ----------- ----------- Total noncurrent....... 5,422,001 (7,974,067) (2,552,066) 4,436,583 (6,007,670) (1,571,087) ---------- ----------- ----------- ---------- ----------- ----------- Total current and noncurrent........... $7,944,503 $(8,146,952) $ (202,449) $6,779,403 $(6,175,848) $ 603,555 ========== =========== =========== ========== =========== ===========
At March 2, 2002, federal and state operating loss carryovers of approximately $5,825,000 and $12,200,000, 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 2007 and continuing through fiscal 2022. No valuation allowance has been provided as of March 2, 2002 because management believes that it is more likely than not that the deferred tax assets will be realized. F-16 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $163,256, $279,034 and $394,810 and at March 2, 2002, March 3, 2001 and March 4, 2000, respectively. Certain machinery and equipment are under operating leases with terms that are effective for varying periods until 2008. Certain of these leases have remaining renewal clauses, exercisable at the option of the lessee. Amounts below include leases with related parties (see Note 16). At March 2, 2002, 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 - ----------- ---------- --------- ---------- -------- ---------- 2003............................... $ 581,016 $ (34,260) $ 546,756 $ 56,640 $ 603,396 2004............................... 329,639 (34,260) 295,379 49,805 345,184 2005............................... 218,747 (34,260) 184,487 -- 184,487 2006............................... 634,815 (34,260) 600,555 -- 600,555 2007............................... 126,796 (34,260) 92,536 -- 92,536 Later years........................ 289,200 (34,260) 254,940 -- 254,940 ---------- --------- ---------- -------- ---------- Total minimum lease payments....... $2,180,213 $(205,560) $1,974,653 106,445 $2,081,098 ========== ========= ========== ========== Less amount representing interest......................... (9,154) -------- Present value of minimum lease payments under capital leases (Note 7)......................... $ 97,291 ========
Rental expense charged to continuing operations is as follows:
FISCAL YEAR ENDED ------------------------------------ MARCH 2, MARCH 3, MARCH 4, 2002 2001 2000 ---------- ---------- ---------- Real estate...................................... $ 164,003 $ 185,103 $ 251,340 Equipment........................................ 1,185,738 998,012 808,164 ---------- ---------- ---------- Total............................................ $1,349,741 $1,183,115 $1,059,504 ========== ========== ==========
F-17 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 and $82,707 in fiscal 2001 and 2000, 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 5% of that employee's annual compensation or $11,000 for fiscal 2002. The Company's contributions included in continuing operations were $450,085, $396,883, and $352,773 in fiscal 2002, 2001 and 2000, respectively. The Company provides employee health insurance benefits to employees. During fiscal 2001 and 2000, benefits were provided through both fully insured and self insurance group medical plans which are partially funded by the Company. During fiscal 2000, benefits were also provided through a Voluntary Employee Benefit Association ("VEBA") which is partially funded by the Company. During fiscal 2002, 2001 and 2000, contributions included in continuing operations were $1,579,999, $1,789,926 and $1,844,874, 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. Cash contributions to the Plan were $55,270 and $56,167 during fiscal 2002 and fiscal 2001, respectively. F-18 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. CAPITAL STOCK STOCK OPTIONS The Company's 1987 Incentive Stock Option Plan and 1987 Special Stock Option Plan provided for the issuance of up to 625,000 shares each of the Company's stock to key employees. At March 2, 2002, no options were outstanding under these Plans. 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 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:
1997 INCENTIVE 1997 SPECIAL STOCK OPTION PLAN STOCK OPTION PLAN ------------------------- --------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE -------- -------------- ---------- -------------- 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 Granted............................ 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 Granted............................ 25,000 2.00 -- -- -------- ---------- Balance at March 3, 2001............. 260,800 8.52 237,500 7.04 Forfeited or cancelled............. (80,800) 8.95 (112,500) 3.20 -------- ---------- Balance at March 2, 2002............. 180,000 $8.33 125,000 $10.50 ======== ==========
F-19 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 2, 2002 is as follows:
SHARES WEIGHTED OUTSTANDING AVERAGE AVERAGE AND CONTRACTUAL EXERCISE PRICE EXERCISABLE LIFE -------------- ----------- ----------- 1997 Special Stock Option Plan.................. $10.50 125,000 74 months ------- 125,000 ======= 1997 Incentive Stock Option Plan................ $10.50 131,000 75 months $ 5.13 22,500 82 months $ 5.38 1,500 86 months $ 2.00 25,000 101 months ------- $ 8.33 180,000 =======
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 and 2000 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 2002, 2001, and 2000 would approximate the following pro forma amounts:
FISCAL YEARS ENDED --------------------------------------------------------------------------------- MARCH 2, 2002 MARCH 3, 2001 MARCH 4, 2000 ----------------------- ------------------------- --------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- ----------- ------------ ------------ Net Income (loss) from continuing operations... $580 $(252,854) $(4,212,788) $(4,489,924) $(14,234,567) $(15,363,122) Income from discontinued operations.............. -- -- -- -- 9,630,093 9,051,558 Extraordinary loss........ -- -- (455,238) (455,238) (52,350) (52,350) ---- --------- ----------- ----------- ------------ ------------ Net income (loss)......... $580 $(252,854) $(4,668,026) $(4,945,162) $ (4,656,824) $ (6,363,914) Net income (loss) per common share -- basic and diluted: Net Income (loss) from continuing operations............ $ -- $ (0.04) $ (0.73) $ (0.78) $ (2.45) $ (2.65) Income from discontinued operations............ -- -- -- -- 1.66 1.56 Extraordinary loss...... -- -- (0.08) (0.08) (0.01) (0.01) ---- --------- ----------- ----------- ------------ ------------ Net income (loss)....... $ -- $ (0.04) $ (0.81) $ (0.86) $ (0.80) $ (1.10) Weighted average fair value of options granted................. $ -- $ 1.09 $ 2.87
F-20 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of options granted under the Company's stock option plans during fiscal 2001 and 2000 were estimated on the date of grant using the Black-Scholes option pricing model. No options were issued in fiscal 2002. The weighted-average assumptions used were as follows:
MARCH 3, 2001 MARCH 4, 2000 ------------- ------------- Dividend yield............................................. -- -- Expected volatility........................................ 73.9% 62.6% Risk free interest rate.................................... 4.1% 6.0% Expected lives............................................. 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 2, 2002. 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 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. DISCLOSURES ABOUT FAIR VALUES 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. The estimated fair values of the financial instruments 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. At March 2, 2002, excluding long-term debt, 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. The fair value of the Company's Senior Notes is estimated based on quoted market prices and interest rates currently available for issuance of debt with similar terms and remaining maturities. As of March 2, 2002 and March 3, 2001, the fair value of the Senior Notes was $57,500,000 and $41,975,000, respectively. F-22 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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, 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 ------------ ------------ ------------ Fiscal 2002: Revenues, net from external customers.... $242,605,000 $ -- $242,605,000 Depreciation and amortization............ 6,437,873 -- 6,437,873 Segment profit........................... 13,575,937 -- 13,575,937 Segment assets........................... 169,820,864 -- 169,820,864 Expenditures for capital assets (Note 15)................................... 12,194,017 -- 12,194,017 Fiscal 2001: Revenues, net from external customers.... $203,475,325 $ -- $203,475,325 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, net from external customers.... $176,969,884 $ 2,096,052 $179,065,936 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
F-23 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEARS ENDED --------------------------------------------- MARCH 2, 2002 MARCH 3, 2001 MARCH 4, 2000 ------------- ------------- ------------- Profit or Loss: Total profit for reportable segments........ $13,575,937 $ 8,072,926 $ 15,061,894 Corporate expenses.......................... -- -- (16,447,851) Loss on sale of Mom 'n Pop's Country Ham, LLC....................................... -- -- (2,857,160) Interest and other expense, net............. (12,842,397) (13,052,422) (14,816,618) ----------- ------------ ------------ Income (loss) from continuing operations before income tax provision (benefit).................. $ 733,540 $ (4,979,496) $(19,059,735) =========== ============ ============
SEGMENT CONSOLIDATED TOTALS CORPORATE TOTAL(1) ----------- --------- ------------ Other Significant Items: Fiscal 2002: Expenditures for capital assets............... $12,194,017 $ -- $12,194,017 Depreciation and amortization................. 6,437,873 -- 6,437,873 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
- --------------- (1)Excludes discontinued restaurant segment expenditures for assets and depreciation and amortization. Sales by major product line are as follows:
FISCAL YEARS ENDED --------------------------------------------- MARCH 2, 2002 MARCH 3, 2001 MARCH 4, 2000 ------------- ------------- ------------- Food Processing Fully-cooked protein products............ $138,980,147 $111,221,290 $103,081,473 Microwaveable sandwiches................. 95,779,974 85,196,416 66,389,287 Bakery and other products................ 7,844,879 7,057,619 7,499,124 ------------ ------------ ------------ Total food processing revenues........ $242,605,000 $203,475,325 $176,969,884 ============ ============ ============ Ham Curing Sliced hams.............................. $ -- $ -- $ 1,530,118 Whole hams............................... -- -- 565,934 ------------ ------------ ------------ Total ham curing revenues............. $ -- $ -- $ 2,096,052 ============ ============ ============
Significantly all revenues and long-lived assets are derived and reside in the United States. F-24 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, which expires in fiscal 2003. 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 $225,000, $360,000 and $500,000 in fiscal 2002, fiscal 2001 and fiscal 2000, respectively. In addition, the Company provides secured letters of credit to a limited number of suppliers. Letters of credit for suppliers totaled $500,000 and $250,000 in fiscal 2002 and fiscal 2001, respectively. 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.
COMMITMENTS BY FISCAL YEAR ---------------------------------------------------------------------------- 2007 AND 2003 2004 2005 2006 THEREAFTER TOTAL ----------- ---------- -------- -------- ------------ ------------ Letters of Credit............ $ 2,225,000 $ -- $ -- $ -- $ -- $ 2,225,000 Purchase Commitments for Capital Projects........... 9,610,281 -- -- -- -- 9,610,281 ----------- ---------- -------- -------- ------------ ------------ Total.................... $11,835,281 $ -- $ -- $ -- $ -- $ 11,835,281 =========== ========== ======== ======== ============ ============
CONTRACTUAL OBLIGATIONS BY FISCAL YEAR ---------------------------------------------------------------------------- 2007 AND 2003 2004 2005 2006 THEREAFTER TOTAL ----------- ---------- -------- -------- ------------ ------------ Long-Term Debt............... $ -- $ -- $ -- $ -- $115,000,000 $115,000,000 Capital Lease Obligations.... 49,686 47,605 -- -- -- 97,291 Operating Lease Obligations................ 581,016 329,639 218,747 634,815 415,996 2,180,213 Consulting and Noncompete Agreements................. 339,291 423,651 269,754 -- -- 1,032,696 Obligation of Special Purpose Entity..................... 275,385 291,208 307,941 325,636 4,933,354 6,133,524 ----------- ---------- -------- -------- ------------ ------------ Total.................... $ 1,245,378 $1,092,103 $796,442 $960,451 $120,349,350 $124,443,724 =========== ========== ======== ======== ============ ============
F-25 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and net income taxes refunded is as follows:
FISCAL YEARS ENDED --------------------------------------------- MARCH 3, 2002 MARCH 4, 2001 MARCH 4, 2000 ------------- ------------- ------------- Interest..................................... $12,612,803 $12,790,175 $14,495,414 Income taxes................................. $ 1,164,569 $ 2,760,172 $ 3,585,875
During the fourth quarter of fiscal 2002, the special purpose leasing entity exchanged a note payable in the amount of $6,200,000 for the purchase of an aircraft for $6,200,000, in a non-cash transaction (see Note 16). 16. TRANSACTIONS WITH RELATED PARTIES Related party transactions recorded in continuing operations during fiscal 2002, 2001 and 2000 arose in connection with the following relationships: Under an agreement with a management services entity owned by certain officers and directors, as amended on December 17, 1999, the Company received corporate management services, which included, 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 agreement were in lieu of salary compensation for certain of the Company's senior executives. Amounts paid under the agreement were $925,000 in fiscal 2002, and $1,300,000 during each of fiscal 2001 and 2000. In addition, during fiscal 2001 and 2000 the Company paid bonuses of $1,775,000 and $1,695,522, respectively, to the management services entity and its senior executives. Effective April 25, 2001, the agreement was assigned to another management services entity, owned by certain officers and directors. Fees paid in fiscal 2002 under the assigned agreement were $325,000, with an additional $350,000 paid as a termination fee, and $292,500 paid in bonuses to its senior executives. This agreement was cancelled as of September 3, 2001. In addition, $426,435 was paid to this entity for reimbursement of expenses incurred in connection with the exchange as required by the amended exchange agreement (see Note 1). The Company uses the services of an entity in which the Company's principal shareholders have substantial ownership interests. Services provided by this entity 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 $1,133,850 and $862,400 in fiscal 2002 and 2001, respectively. The Company uses the services of an entity owned by the Company's principal shareholders. This entity serves as an exclusive purchasing agent pursuant to a three-year agreement that commenced September 3, 2001. Under the agreement, the entity pays $100,000 per quarter for the right to serve as exclusive purchasing agent. Net payments to the purchasing entity were $620,191 in fiscal 2002, and are recorded in cost of goods sold. During the fourth quarter of fiscal 2002, the Company leased an aircraft from an entity owned by the Company's principal shareholders. Under this lease, the Company maintained its own flight department and was responsible for all operating costs. Total payments under that lease were $168,263 in fiscal 2002. Effective March 1, 2002, that lease was cancelled and replaced with a four-year non-exclusive operating lease agreement. Pursuant to the new lease, the Company is obligated to make minimum quarterly lease payments of $471,500 each for the right to use the aircraft for a specified number of hours. Under this lease arrangement, the entity is responsible for all expenses incurred in the operation and use of the aircraft, except that the Company must provide its own crew. On March 1, 2002, the Company paid $943,000 as a refundable deposit under the agreement and $471,500 for its first quarterly lease payment. F-26 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aircraft leasing entity is not a subsidiary of the Company, however the Company considers the entity a non-independent special purpose leasing entity. Accordingly, the entity's financial condition, results of operations and cash flows have been included in the Company's consolidated financial statements. Under the terms of the operating lease with the entity, and the financing agreements between the entity and its creditor, the Company does not maintain the legal rights of ownership to the aircraft, nor does the entity's creditor maintain any legal recourse to the Company. The Company has agreed to lease warehouse space from an entity in which the Company's principal shareholders have substantial ownership interests. 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. The Company uses the services of an entity in which one of the Company's principal shareholders has a substantial ownership interest. This entity provides general construction and maintenance services. Total payments for such services were $142,050 in fiscal 2002. The Company uses the services of an entity in which the Company's principal shareholders have substantial ownership interests. This entity provides team-building opportunities for customers and employees. Total payments for such services were $89,250 in fiscal 2002. During fiscal 2000, 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 in fiscal 2000. During fiscal 2000, 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 $58,203, $61,293 and $137,364 in fiscal 2002, 2001 and 2000, respectively, on related party notes receivable. The Company obtained public relations, investor relations and graphic design services from a marketing services entity that was owned by a current director. Payments for these services totaled $7,000 and $221,000, during fiscal 2001 and 2000, respectively. During fiscal 2001, the marketing services entity 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 $109,400 in fiscal 2002, and $103,200 in each of fiscal 2001 and 2000. Until February 2001, two directors had direct and indirect interests in an entity with which a product licensing agreement had been signed. Under the terms of the agreement, the Company could produce and market certain products under brand names owned by the entity in exchange for royalty payments. Production of such a product began in mid-fiscal 1999. Royalties paid totaled $156,000 and $120,000 during fiscal 2001 and 2000, 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. F-27 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 2, 2002, 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 entity'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. 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. On September 3, 2001, the Company entered into Employment Agreements with the Company's current Chairman (Mr. Richardson) and current Vice-Chairman (Mr. Clark). The agreements specify terms relating to salary, bonus and benefits to be paid to the executive during the three-year term of the agreements. 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 $2,857,160. During fiscal 2002, the Company purchased pork products from the ham curing business totaling $150,720. 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 and December 31, 2001, 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 31, 2001, the Company entered into Employment Agreements the Company's current Chief Financial Officer (Ms. Witters) and current Senior Vice President of Sales (Mr. Naylor). The agreements specify terms relating to salary, bonus and benefit amounts to be paid to the executive during the three-year term of the agreements, as well as severance and disposition bonus amounts to be received upon any sale of the Company. F-28 PIERRE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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). 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 during fiscal 2000. 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 during fiscal 2000. 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 On March 3, 2002, the Company entered into a one-year agreement with an entity owned by the Company's principal shareholders that will serve as an exclusive logistics agent for the Company. Under the agreement, warehousing, fulfillment and transportation services will be provided by the entity. On March 27, 2002, the Company filed a current report on Form 8-K, announcing the delisting of its common stock from the Nasdaq Small Cap Market, and its transfer to the Over-the-Counter Bulletin Board. On April 11, 2002, the Company filed a revised preliminary proxy statement with the Securities and Exchange Commission in connection with a special meeting of shareholders, at which the shareholders will be asked to adopt and approve the Amended and Restated Agreement and Plan of Share Exchange dated as of December 20, 2001. F-29 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 F-30 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERS ENDED ------------------------------------------------------- 6/2/2001 9/1/2001 12/1/2001 3/2/2002 ----------- ----------- ----------- ----------- Operating revenues..................... $50,825,924 $57,839,217 $68,021,456 $65,918,403 Gross profit........................... $17,569,859 $19,384,359 $22,685,668 $22,183,726 Income (loss) from continuing operations........................... $ (760,635) $ (251,171) $ 887,587 $ 124,799 Net income (loss)...................... $ (760,635) $ (251,171) $ 887,587 $ 124,799 Loss from continuing operations per common share -- basic and diluted.... $ (0.13) $ (0.04) $ 0.15 $ 0.02
6/3/2000 9/2/2000 12/2/2000 3/3/2001 ----------- ----------- ----------- ----------- Operating revenues..................... $44,333,524 $47,151,034 $58,682,269 $53,308,498 Gross profit........................... $15,114,027 $16,138,529 $19,967,911 $18,869,914 Loss from continuing operations........ $(1,445,351) $(1,022,886) $ (397,851) $(1,346,700) Extraordinary loss..................... $ (455,238)(1) $ -- $ -- $ -- 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)
- --------------- (1)Represents an extraordinary loss from early extinguishment of debt. F-31 EX-10.42 3 g76612exv10w42.txt WITTERS EMPLOYMENT AGREEMENT DATED AS OF 12/31/01 EXHIBIT 10.42 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of the 31st day of December, 2001, by and between Pierre Foods, Inc., a North Carolina corporation (the "Company"), and Pamela M. Witters, a resident of the State of North Carolina ("Executive"). WITNESSETH: WHEREAS, the Board of Directors of the Company has determined that it is the best interests of the Company to retain the services of Executive as Senior Vice President and Chief Financial Officer of the Company; and WHEREAS, the By-laws of the Company permit the Company to enter into contracts for the employment of officers of the Company; and WHEREAS, the Company wishes to assure itself of the services of the Executive for the period provided in this Agreement, and the Executive wishes to serve in the employ of the Company in the capacity and on the terms and conditions hereinafter provided. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties agree as follows: ARTICLE I EMPLOYMENT AND DUTIES Section 1.1 Employment. The Company hereby employs Executive, and Executive accepts employment with the Company as an employee of the Company, upon the terms and subject to the conditions hereinafter set forth. Section 1.2 Duties. Executive shall serve as Senior Vice President and Chief Financial Officer of the Company and serve in the corporate positions of Secretary and Treasurer and shall (a) be responsible for all financial activities of the Company, (b) direct and prepare financial analysis of operations, budgets, and financial forecasts for guidance of management, (c) direct and coordinate the Company's financial affairs according to financial principles and government regulations, (d) prepare Company financial reports, and report recommendations to management and the Board in regard to policies and programs. Executive will report directly to the President and Chief Executive Officer of the Company and to the Board of Directors of the Company (the "Board"). Executive agrees to devote her best efforts to the performance of her duties for the Company, and shall perform such duties in a diligent, trustworthy, and business-like manner, all for the purpose of advancing the business of the Company. Executive acknowledges that the executive offices of the Company are located in Hickory, North Carolina and the principal operations offices are located in Cincinnati, Ohio. Executive acknowledges that the nature of her duties will require her to spend considerable time 1 away from her executive office in the principal operations office and in any other plant facility which the Company may operate. ARTICLE II TERMS OF EMPLOYMENT Section 2.1 Term. Except as otherwise provided in Section 2.2, the term of this Agreement shall be for three (3) years (the "Initial Term"), beginning on the date hereof, and shall be automatically renewed thereafter for successive one (1) year terms (each a "Renewal Term") unless either party gives to the other written notice of termination no fewer than ninety (90) days prior to the expiration of the Initial Term, or any Renewal Term, that it does not wish to extend this Agreement for a successive one-year term. The Initial Term and any Renewal Term, if any, shall be referred to herein as "the term". Section 2.2 Termination. This Agreement, and the employment of Executive hereunder, shall terminate prior to the expiration of the term hereof in the following manner: a. Death or Disability. Immediately upon the death of Executive during the term of her employment hereunder or, at the option of the Company, in the event of Executive's disability, upon thirty (30) days' notice to Executive. The Executive will be considered "disabled" if, as a result of incapacity due to physical or mental illness injury, Executive shall be unable to perform the material duties of her position on a full time basis for a period of two (2) consecutive months or if the Executive shall become eligible to currently receive disability payments under the disability policy referenced in Section 3.2 e hereunder. b. For Cause. For "Cause" upon ten (10) days written notice by the Company to the Executive after compliance in full by the Company with paragraph 3 of this subsection b below. For purposes of this Agreement: 1. A termination will be for "Cause" if: (i) Executive willfully and continuously fails to perform her duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), after a demand for substantial performance has been delivered to Executive by the Board of Directors which specifically identifies the manner in which the Board believes that Executive has not substantially performed her duties, (ii) Executive willfully engages in gross misconduct materially and demonstrably injurious to the Company or (iii) Executive is convicted of a felony. 2. For purposes of this subsection b, no act, or failure to act, on the Executive's part shall be considered "willful" unless unilaterally done by her not in good faith and without reasonable belief that her action or omission was not in the best interest of the Company. 3. Notwithstanding the foregoing, the Executive shall not be deemed to 2 have been terminated for Cause unless and until there shall have been delivered to her a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire authorized membership of the Board of Directors at a meeting of the Board called and held for the purpose , finding that in the good faith opinion of the Board the Executive was guilty of conduct set forth above in clauses (i) or (ii) or (iii) of paragraph 1 above and specifying the particulars thereof in detail. c. Without Cause. At any time after commencement of employment, Company may, without cause, terminate the Executive's employment, effective thirty (30) days after written notice is provided to the Executive. d. Resignation for Good Reason. Immediately by the Executive upon thirty (30) days written notice to the Company of the resignation of the Executive for Good Reason (as defined below). For purposes of this Agreement, the term "Good Reason" shall mean: 1. Without her express written consent, the assignment to the Executive of any duties inconsistent with her positions, duties, responsibilities and status with the Company as described in Section 1.2 hereof, or a material change in her reporting responsibilities, titles or offices, or any removal of the Executive from or any failure to re-elect the Executive to any of such positions, except in connection with the termination of her employment for Cause or as a result of her death or disability or by the Executive other than for Good Reason; 2. Any purported termination of the Executive's employment by the Company which is not effected pursuant to the provisions of this Section 2.2; or 3. The relocation of the executive offices of the Company from Hickory, North Carolina without the express written consent of the Executive. e. Change of Control. Immediately upon a Change of Control. As used herein, the term "Change of Control" shall mean the occurrence of any of the following: (i) In the event that any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, the "Act"), other than one or more of James C. Richardson, Jr., David R. Clark and James C. Templeton, or persons controlled by one or more of them, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Act), directly or indirectly, of more than 50% of the total voting power of the voting stock of the Company or (ii) In the event the Company merges with or into another entity or sells, assigns, conveys, transfers, or otherwise disposes of all or substantially all of its assets to any transferee and immediately after such transaction one or more of James C. Richardson, Jr., David R. Clark and James C. Templeton, or persons controlled by one or more of them, is not the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Act), directly or indirectly, or more than 50% of the voting stock or equity interests of the surviving entity or transferee. 3 Section 2.3 Occurrences Upon Termination. Upon termination of this Agreement, Executive shall be entitled to the following: a. Cessation of Salary and Benefits. The Company's obligation to provide Executive all compensation and benefits as provided herein shall discontinue at the termination date of this Agreement except as otherwise required herein or by law. b. Payment of Bonus. Executive, or her estate if deceased, shall be entitled to any bonus payable for any bonus earned or declared to which Executive was entitled but not yet paid. c. Surrender of Company Property. Promptly upon termination of Executive's employment by the Company for any reason or no reason, Executive or Executive's personal representative shall return to the Company (a) all Confidential Information (hereinafter defined); (b) all other records, designs, patents, business plans, financial statements, manuals, memoranda, lists, correspondence, reports, records, charts, advertising materials, and other data or property delivered to or compiled by Executive by or on behalf of the Company that pertain to the business of the Company, whether in paper, electronic, or other form; and (c) all keys, credit cards, vehicles, and other property of the Company. Executive shall not retain or cause to be retained any copies of the foregoing. Executive hereby agrees that all of the foregoing shall be and remain the property of the Company and be subject at all times to its discretion and control. d. Benefits. With respect to any incentive plans, deferred compensation arrangements or other plans or programs in which the Executive is participating at the time of termination of her employment, the Executive's rights and benefits under each such plan shall be determined in accordance with the terms, conditions, and limitations of the plan and any separate agreement executed by the Executive which may then be in effect. e. Termination Without Cause; Death/Disability; Resignation for Good Reason. During the Initial Term, or any Renewal Term, of this Agreement, if the Executive's employment is terminated by the Company without Cause or the Executive voluntarily terminates her employment with the Company for Good Reason, or Executive's employment is terminated by reason of death or disability, then the Company shall immediately pay to the Executive or her estate a lump sum severance payment equal to the total sum of the Executive's then current base salary as provided in Section 3 as would be due in the aggregate (absent the termination) for the remainder of the entire Initial Term, or Renewal Term, as the case may be, of this Agreement, not to be less than three (3) months of the Executive's then current base salary. Provided, however, in the event the Executive's employment is terminated during the Initial Term or any Renewal Term by reason of death or disability, the Company shall be entitled to an offset against any lump sum payment obligation due under this subsection e as a result of said death or disability an amount equal to (i) any death 4 proceeds payable to the Executive's estate or her designated beneficiary arising from any Company group plan insurance policy insuring the life of the Executive carried by the Company, or (ii) in the event of termination by reason of disability during the Initial Term, by the aggregate disability benefits which the Executive would be eligible to receive during the remainder of the Initial Term under a disability insurance policy on the Executive carried by the Company, or if during any Renewal Term, by an amount equal to the first three months of disability payments to which the Executive is eligible to receive under a disability policy on the Executive carried by the Company. In addition, the Company shall maintain in full force and effect for the continued benefit of the Executive, for the remaining term of this Agreement, all employee benefit plans and programs or arrangements in which the Executive was entitled to participate immediately prior to the date of termination, provided that her continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive with benefits substantially similar to those to which she is entitled to receive under such plans and programs. The Company represents that it will cause to be set aside all necessary funds to satisfy its obligations hereunder. f. Change of Control. If a Change in Control shall occur before the expiration of this Agreement, then the Company shall pay to Executive, in lump sum by bank check or other good funds, within twenty (20) days thereafter (a) three (3) times the amount of the base salary paid or payable by the Company to the Executive for services rendered to the Company during the most recent complete fiscal year of the Company, regardless of when such salary may have been paid or payable, plus (b) three (3) times the amount of the aggregate cash bonus paid or payable by the Company to the Executive for services rendered to the Company during the most recent complete fiscal year of the Company, regardless of when such bonus, may have been paid or payable. ARTICLE III COMPENSATION AND BENEFITS Section 3.1 Compensation. As compensation for services rendered to the Company hereunder during the term of this Agreement, the Company will compensate Executive as follows: a. Base Salary. Commencing on the date hereof, the Company shall pay the Executive an annual base salary of Two Hundred and Ten Thousand and No/Dollars ($210,000.00), pro rated for periods of less than 12 months, or as increased from time to time by the Board of Directors of the Company. Such base salary shall be paid in bi-weekly installments in accordance with the payroll schedule followed by the Company (less applicable withholding and other deductions). Base salary shall be reviewed and adjusted by the Company at least annually. Notwithstanding the foregoing sentence, Executive's base salary shall be increased annually to at least equal the CPI increase for the prior twelve months. The Company may not reduce the Executive's base salary at any time during the term of this Agreement. 5 b. Bonus. In addition to any other compensation or consideration payable to the Executive hereunder, the Executive shall be entitled to receive such bonuses as may be approved by the Executive Compensation Committee and ratified by the Board based on such meritorious performance or such other criteria measuring the performance of the Executive as may be determined from time to time. Section 3.2 Benefits. In addition to, and not in lieu of, base salary, bonus or other compensation payable to the Executive, the Executive shall be entitled to the following benefits: a. Employee Benefits. The Executive shall be entitled to participate in the employee benefit programs generally available to employees of the Company. b. Vacations. Executive shall be entitled to compensated vacation each year in accordance and consistent with Company policy. Upon termination of employment, any unused vacation time shall expire without compensation. c. Holidays. The Executive shall be entitled to such holidays as the Company may approve for all employees of the Company. d. Sick Leave. The Executive shall be entitled to paid sick leave each year because of sickness or accident in accordance and consistent with Company policy. Upon termination of employment, any unused sick leave shall expire without compensation. e. Disability Insurance. The Company shall during the term carry and maintain a disability insurance policy for the benefit of the Executive providing disability coverage under its current disability plan, as may be changed or modified from time to time. f. Life Insurance. The Company shall maintain during the term a life insurance policy insuring the Executive and payable to the Executive's estate or her designated beneficiary in accordance with the Company's group life plan, as may be changed or modified from time to time. g. Reimbursement of Expenses. The Company shall reimburse the Executive for all reasonable out-of-pocket expenses incurred by the Executive in the course of her duties, in accordance with normal Company policies. h. Automobile Allowance. The Executive shall be provided by the Company with an automobile for her use, and the associated expenses of maintenance, repairs and fuel. 6 ARTICLE IV CONFIDENTIAL INFORMATION/NON-COMPETE COVENANT/INVENTIONS Section 4.1 Covenant Not To Disclose Confidential Information. During Executive's position with the Company and during the term of this Agreement, Executive has and will become acquainted with confidential and proprietary information of the Company, in whatever form, whether oral, written, or electronic including, but not limited to, manner of operation, manufacturing processes and know-how, plant design, customer names and representatives, customer files, customer lists, customer specifications and requirements, product recipes, product pricing, special customer matters, sales methods and techniques, merchandising concepts and plans, business plans, sources of supply and vendors, terms and conditions of business relationships with vendors, agents and brokers, promotional materials and information, financial matters, mergers, acquisitions, personnel matters and confidential processes, designs, formulas, ideas, plans, devices and materials and other similar matters that are kept confidential (any and all such information being referred to herein as "Confidential Information"). The parties agree that the use of Confidential Information against the Company would seriously damage business of the Company. Accordingly, Executive agrees that she (individually or in concert with others) during or after the term of this Agreement: a. Shall not, directly or indirectly, use any Confidential Information for any purpose other than to benefit the Company except with the prior, express and written consent of the Company or as required by law; b. Shall not, directly or indirectly, divulge, publish or otherwise reveal or allow to be revealed any Confidential Information as to any individual or entity except with the prior, express and written consent of the Company or as required by law; c. Shall refrain from any action or conduct that might reasonably or foreseeably be expected to compromise the confidentiality or proprietary nature of any Confidential Information; and d. Shall have no rights to apply for, or to obtain any patent, copyright or other form of intellectual property protection regarding, any Confidential Information. This restriction shall not apply to any Confidential Information that (i) becomes known generally to the public through no fault of the Executive; (ii) is required by applicable law, legal process, or any order or mandate of a court or other governmental authority to be disclosed; or (iii) is reasonably believed by Executive, based upon the advice of legal counsel, to be required to be disclosed in defense of a lawsuit or other legal or administrative action brought against Executive; provided, that in the case of clauses (ii) or (iii), Executive shall give the Company reasonable advance written notice of the Confidential Information intended to be disclosed and the reasons and circumstances surrounding such disclosure, in order to permit the Company to seek a 7 protective order or other appropriate request for confidential treatment of the applicable Confidential Information. Section 4.2 Covenant Not To Compete. a. Covenant. Executive hereby stipulates, covenants and agrees that, during the Restrictive Period (as defined below), she, individually or in concert with others, shall not, directly or indirectly, other than on behalf of the Company, without the Company's prior, express and written consent: 1. Engage in Competition (as defined below) in the Territory (as defined below) with the Company or any of their respective successors or assigns; or 2. Employ or solicit the employment of any individual who is at the time or was at any time during the twelve complete calendar months immediately preceding, an employee of the Company. b. Certain Definitions. As used in this Section, the following terms shall have the following meanings: 1. "Business" shall mean the processing and distribution of fully-cooked branded and private label protein and bakery products and microwaveable sandwiches. 2. "Competition" shall mean: (i) Engaging in the Business from an office located in the Territory with a Contact Person; (ii) Assisting any individual or entity who or which has a principal office located in the Territory, whether in a financial, managerial, employment, advisory or other material capacity, to engage in the Business with a Contact Person; or (iii) Owning any interest in, or organizing an entity which has a principal office located within the Territory that engages in the Business with a Contact Person; provided, however, that nothing herein shall preclude Executive, directly or indirectly, from holding not more than one percent of the outstanding shares of common stock of any company whose shares of common stock are listed on a national securities exchange or authorized for quotation by NASDAQ. 3. "Contact Person" shall be (i) any customer, vendor, supplier, agent, distributor or broker having a principal manufacturing plant or principal office located within the Territory with which or with whom the Executive has had contact on behalf of the Company at any time during the eighteen (18) month period preceding the Termination Date, or (ii) any customer, agent, distributor or broker having a principal manufacturing plant or principal office located in the Territory doing business with the Company within the eighteen (18) months preceding the Termination Date who or which 8 made or brokered purchases of product from the Company or made or brokered product on behalf of the Company which purchases or sales were in excess of 3% of the revenues of the Company during such period. 4. "Restrictive Period" shall mean the two-year period beginning on the Termination Date. 5. "Territory" shall mean all fifty states in the United States and all provinces of Canada. Executive acknowledges that the Company conducts significant sales of its product in all of the aforementioned Territory. 6. "Termination Date" shall mean the date upon which the employment of the Executive was terminated by resignation or other voluntary action, or involuntarily by the Company, whether with or without cause. Section 4.3 Inventions. Executive shall disclose promptly to the Company any and all significant conceptions and ideas for inventions, improvements, and valuable discoveries, whether patentable or not, that are conceived or made by Executive, solely or jointly with another, during the period of employment or within one year thereafter, and that are directly related to the business or activities of the Company and that Executive conceives as a result of her employment by the Company, regardless of whether or not such ideas, inventions, or improvements qualify as "works for hire". Executive hereby assigns and agrees to assign all her interests therein to the Company or its nominee. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments, or other instruments that the Company shall deem necessary to apply for and obtain patent registrations in the United States or any foreign country or to otherwise protect the Company's interest therein. Section 4.4 Enforcement and Remedies. a. Executive further covenants, agrees, and recognizes that because the breach or threatened breach of the covenants, or any of them, contained in Section 4.1 or 4.2 or 4.3 will result in immediate and irreparable injury to the Company, the Company shall be entitled to a preliminary and permanent injunction restraining Executive from any violation of Section 4.1 or 4.2 or 4.3 to the fullest extent allowed by law, in addition to any other rights available at law, in equity or otherwise. b. Executive further covenants, agrees and recognizes that in the event of a violation of any of the covenants and agreements contained in Sections 4.1 and 4.2 and 4.3 hereof, the Company, shall be entitled to an accounting of all profits, compensation, commissions, remunerations or benefits which Executive directly or indirectly has realized as a result of, growing out of or in connection with any such violation and shall be entitled to receive all such other amounts to which Executive would be entitled as damages under law or at equity. Section 4.5 Acknowledgement of Adequate Consideration. The parties stipulate 9 and agree that the payment and other benefits owed to Executive by the Company under this Agreement and the performance of the Company's obligations hereunder constitute sufficient consideration to support enforcement of the covenants of this Agreement. Section 4.6 Acknowledgement of Reasonableness. Executive has carefully read and considered the provisions of this Agreement in consultation with attorneys of her choice and agrees that the restrictions set forth herein are fair and reasonably required for the protection of the Company and are legally binding and enforceable and the enforcement thereof will not impair Executive's ability to earn a livelihood. In the event that any provisions relating to any of the Restrictive Period, the Territory or the Contact Persons shall be declared by a court of competent jurisdiction to exceed the maximum time period or maximum geographical area or other restraint such court deems reasonable and enforceable under applicable law, the time period or area of restriction or other restraint considered reasonable and enforceable by the court shall thereafter be the applicable Restrictive Period, Territory, or the Contact Persons under this Agreement. ARTICLE V MISCELLANEOUS PROVISIONS Section 5.1 Waiver of Breach or Violation. The waiver by either party of a breach or violation of any provision of this Agreement shall not operate as or be construed to be a waiver of any subsequent breach of any provision of this Agreement. Section 5.2 Notices. All notices required or permitted to be given under this Agreement will be sufficient if furnished in writing, sent by registered mail to the last known residence of the Executive. Section 5.3 Indemnification. In the event Executive is made a party to any threatened or pending action, suit, or proceeding, whether civil, criminal, administrative or legislative (other than an action by the Company against Executive, and excluding any action by Executive against the Company), by reason of the fact that she is or was performing services under this Agreement or as an officer or director of the Company, then, to the fullest extent permitted by applicable law, the Company shall indemnify the Executive against all expenses (including reasonable attorney's fees), judgments, fines, and amounts paid in settlement, as actually and reasonably incurred by Executive in connection therewith. Such indemnification shall continue as to Executive even if she has ceased to be an employee, officer, or director of the Company and shall inure to the benefit of her heirs and estate. The Company shall advance to Executive all reasonable costs and expenses directly related to the defense of such actions, suit, or proceeding within 20 days after written request therefore by Executive to the Company. In the event that both Executive and the Company are made party to the same third-party action, complaint, suit, or proceeding, the Company will engage competent legal representation, and Executive agrees to use the same representation; provided, that if counsel selected by the Company shall have a conflict of interest that prevents counsel from representing Executive, Executive may engage separate counsel and the Company shall pay all reasonable attorney's fees of such separate counsel. The provisions of this Section are in 10 addition to, and not in derogation of, the indemnification provisions of the Company's By-laws. The foregoing indemnification also shall be applicable to Executive in her capacity as an officer, director, or representative of any subsidiary of the Company or any entity controlled by or affiliated with the Company. Section 5.4 Confidentiality; Covenant Not To Disparage. Each party covenants and agrees with the other not to disclose the existence or terms of this Agreement to any person at any time for any purpose, except that (a) either party may make such disclosures confidentially to the party's lawyers and accountants in connection with the rendition of their professional services or as otherwise required by law and (b) the Company may make such disclosures as it deems to be required by applicable securities laws. Each party covenants and agrees with the other not to disparage the reputation of the other. Section 5.5 Governing Law and Arbitration. This Agreement shall be interpreted, construed, and governed according to the laws of the State of North Carolina. Any disputes or claims, excepting matters warranting injunctive relief under Article IV arising under this Agreement shall be settled between the parties by an arbitration proceeding to be conducted by an arbitration panel mutually acceptable to Company and Executive in accordance with Article 45A of the North Carolina General Statutes. Such proceeding will be conducted pursuant to the rules of procedure of the American Arbitration Association then in effect and the results of the arbitration shall be binding on the parties in complete settlement of the disputes or claims at issue. The direct expense of any arbitration proceeding shall be borne by the Company. Each party shall bear its own counsel fees; provided, the panel as part of the award may in its discretion award attorney fees to the prevailing party. The arbitration shall be held in Hickory, North Carolina. Section 5.6 Headings. The paragraph and section headings contained in this agreement are for convenience only and shall in no manner be construed as a part of this Agreement. Section 5.7 Legal Construction. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision, and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been included in the Agreement. Section 5.8 Prior Agreements Superseded. This Agreement constitutes the sole Agreement of the parties with respect to employment of the Executive and supersedes any prior understandings or written or oral arrangements between the parties respecting the subject hereunder. Section 5.9 Assignment. The Executive may not assign her rights or delegate her duties or obligations hereunder without the written consent of the Company. 11 Section 5.10 Enforcement. In the event either party resorts to legal action to enforce the terms and provisions of the Arbitration award, the prevailing party shall be entitled to recover the costs of such action so incurred, including, without limitation, reasonable attorney's fees. Section 5.11 Gender and Number. Whenever the context hereof requires, the gender of all words shall include the masculine, feminine, and neuter and the number of all words shall include the singular and plural. Section 5.12 Amendments and Agreement Execution. This Agreement may be modified or amended only in writing, signed by the Executive and the Company. Section 5.13 Counterparts. This Agreement (and any written amendment thereto) may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Section 5.14 Executive's Heirs. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. Notwithstanding any other provision herein to the contrary, if the Executive should die while any amounts would still be payable to her hereunder if she had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to her designee or, if there be no such designee, to her estate. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. EXECUTIVE: COMPANY: Pierre Foods, Inc. /s/ Pamela M. Witters By: /s/ David R. Clark ------------------------------- -------------------------------- Pamela M. Witters David R. Clark, Vice Chairman 12 EX-10.43 4 g76612exv10w43.txt NAYLOR EMPLOYMENT AGREEMENT DATED AS OF 12/31/01 EXHIBIT 10.43 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement"), is made and entered into as of the 31st day of December, 2001, by and between Pierre Foods, Inc., a North Carolina corporation (the "Company"), and Robert C. Naylor, a resident of the State of Ohio ("Executive"). WITNESSETH: WHEREAS, the Board of Directors of the Company has determined that it is the best interests of the Company to retain the services of Executive as Senior Vice President-Sales and Marketing of the Company; and WHEREAS, the By-laws of the Company permit the Company to enter into contracts for the employment of officers of the Company; and WHEREAS, the Company wishes to assure itself of the services of the Executive for the period provided in this Agreement, and the Executive wishes to serve in the employ of the Company in the capacity and on the terms and conditions hereinafter provided. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties agree as follows: ARTICLE I EMPLOYMENT AND DUTIES Section 1.1 Employment. The Company hereby employs Executive, and Executive accepts employment with the Company as an employee of the Company, upon the terms and subject to the conditions hereinafter set forth. Section 1.2 Duties. Executive shall serve as Senior Vice President of Sales and Marketing of the Company and shall (a) be primarily responsible for all sales, marketing, and new product development activities of the Company, (b) develop policies, strategies and plans to identify and capitalize on growth and profitability opportunities within all sales divisions, (c) train, evaluate and set performance standards for sales and marketing division managers, develop and implement expense budgets for marketing and sales functions, direct development of sales plans and market and sales incentive programs, and direct and coordinate activities of the sales and marketing personnel. Executive will report directly to the President and Chief Executive Officer of the Company and to the Board of Directors of the Company (the "Board"). Executive agrees to devote his best efforts to the performance of his duties for the Company, and shall perform such duties in a diligent, trustworthy, and business-like manner, all for the purpose of advancing the business of the Company. Executive acknowledges that the executive offices of the Company are located in Hickory, North Carolina and the principal operations offices are located in Cincinnati, Ohio. Executive acknowledges that his primary office location 1 shall be in the principal operations offices in Cincinnati, Ohio. Executive further acknowledges that due to the nature of his duties with respect to marketing and sales he will be required to spend considerable time away from his office dealing with customers, vendors, and suppliers and handling marketing promotions and new product development. ARTICLE II TERMS OF EMPLOYMENT Section 2.1 Term. Except as otherwise provided in Section 2.2, the term of this Agreement shall be for three (3) years (the "Initial Term"), beginning on the date hereof, and shall be automatically renewed thereafter for successive one (1) year terms (each a "Renewal Term") unless either party gives to the other written notice of termination no fewer than ninety (90) days prior to the expiration of the Initial Term, or any Renewal Term, that it does not wish to extend this Agreement for a successive one-year term. The Initial Term and any Renewal Term, if any, shall be referred to herein as "the term". Section 2.2 Termination. This Agreement, and the employment of Executive hereunder, shall terminate prior to the expiration of the term hereof in the following manner: a. Death or Disability. Immediately upon the death of Executive during the term of his employment hereunder or, at the option of the Company, in the event of Executive's disability, upon thirty (30) days' notice to Executive. The Executive will be considered "disabled" if, as a result of incapacity due to physical or mental illness injury, Executive shall be unable to perform the material duties of his position on a full time basis for a period of two (2) consecutive months or if the Executive shall become eligible to currently receive disability payments under the disability policy referenced in Section 3.2 e hereunder. b. For Cause. For "Cause" upon ten (10) days written notice by the Company to the Executive after compliance in full by the Company with paragraph 3 of this subsection b below. For purposes of this Agreement: 1. A termination will be for "Cause" if: (i) Executive willfully and continuously fails to perform his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), after a demand for substantial performance has been delivered to Executive by the Board of Directors which specifically identifies the manner in which the Board believes that Executive has not substantially performed his duties, (ii) Executive willfully engages in gross misconduct materially and demonstrably injurious to the Company or (iii) Executive is convicted of a felony. 2. For purposes of this subsection b, no act, or failure to act, on the 2 Executive's part shall be considered "willful" unless unilaterally done by him not in good faith and without reasonable belief that his action or omission was not in the best interest of the Company. 3. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to his a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire authorized membership of the Board of Directors at a meeting of the Board called and held for the purpose, finding that in the good faith opinion of the Board the Executive was guilty of conduct set forth above in clauses (i) or (ii) or (iii) of paragraph 1 above and specifying the particulars thereof in detail. c. Without Cause. At any time after commencement of employment, Company may, without cause, terminate the Executive's employment, effective thirty (30) days after written notice is provided to the Executive. d. Resignation for Good Reason. Immediately by the Executive upon thirty (30) days written notice to the Company of the resignation of the Executive for Good Reason (as defined below). For purposes of this Agreement, the term "Good Reason" shall mean: 1. Without his express written consent, the assignment to the Executive of any duties inconsistent with his positions, duties, responsibilities and status with the Company as described in Section 1.2 hereof, or a material change in his reporting responsibilities, titles or offices, or any removal of the Executive from or any failure to re-elect the Executive to any of such positions, except in connection with the termination of his employment for Cause or as a result of his death or disability or by the Executive other than for Good Reason; 2. Any purported termination of the Executive's employment by the Company which is not effected pursuant to the provisions of this Section 2.2; or 3. The relocation of the Executive's primary office from Cincinnati, Ohio without the express written consent of the Executive. e. Change of Control. Immediately upon a Change of Control. As used herein, the term "Change of Control" shall mean the occurrence of any of the following: (i) In the event that any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, the "Act"), other than one or more of James C. Richardson, Jr., David R. Clark and James C. Templeton, or persons controlled by one or more of them, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Act), directly or indirectly, of more than 50% of the total voting power of the voting stock of the Company or (ii) In the event the Company merges with or into another entity or sells, assigns, conveys, transfers, or otherwise disposes of all or substantially all of its assets to 3 any transferee and immediately after such transaction one or more of James C. Richardson, Jr., David R. Clark and James C. Templeton, or persons controlled by one or more of them, is not the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Act), directly or indirectly, or more than 50% of the voting stock or equity interests of the surviving entity or transferee. Section 2.3 Occurrences Upon Termination. Upon termination of this Agreement, Executive shall be entitled to the following: a. Cessation of Salary and Benefits. The Company's obligation to provide Executive all compensation and benefits as provided herein shall discontinue at the termination date of this Agreement except as otherwise required herein or by law. b. Payment of Bonus. Executive, or his estate if deceased, shall be entitled to any bonus payable for any bonus earned or declared to which Executive was entitled but not yet paid. c. Surrender of Company Property. Promptly upon termination of Executive's employment by the Company for any reason or no reason, Executive or Executive's personal representative shall return to the Company (a) all Confidential Information (hereinafter defined); (b) all other records, designs, patents, business plans, financial statements, manuals, memoranda, lists, correspondence, reports, records, charts, advertising materials, and other data or property delivered to or compiled by Executive by or on behalf of the Company that pertain to the business of the Company, whether in paper, electronic, or other form; and (c) all keys, credit cards, vehicles, and other property of the Company. Executive shall not retain or cause to be retained any copies of the foregoing. Executive hereby agrees that all of the foregoing shall be and remain the property of the Company and be subject at all times to its discretion and control. d. Benefits. With respect to any incentive plans, deferred compensation arrangements or other plans or programs in which the Executive is participating at the time of termination of his employment, the Executive's rights and benefits under each such plan shall be determined in accordance with the terms, conditions, and limitations of the plan and any separate agreement executed by the Executive which may then be in effect. e. Termination Without Cause; Death/Disability; Resignation for Good Reason. During the Initial Term, or any Renewal Term, of this Agreement, if the Executive's employment is terminated by the Company without Cause or the Executive voluntarily terminates his employment with the Company for Good Reason, or Executive's employment is terminated by reason of death or disability, then the Company shall immediately pay to the Executive or his estate a lump sum severance payment equal to the total sum of the Executive's then current base salary as provided in Section 3 as would be due in the aggregate (absent the termination) for the remainder of the entire Initial Term, or Renewal Term, as the case may be, of this Agreement, not to be less than three (3) months of the Executive's then current base salary. 4 Provided, however, in the event the Executive's employment is terminated during the Initial Term or any Renewal Term by reason of death or disability, the Company shall be entitled to an offset against any lump sum payment obligation due under this subsection e as a result of said death or disability an amount equal to (i) any death proceeds payable to the Executive's estate or his designated beneficiary arising from any Company group plan insurance policy insuring the life of the Executive carried by the Company, or (ii) in the event of termination by reason of disability during the Initial Term, by the aggregate disability benefits which the Executive would be eligible to receive during the remainder of the Initial Term under a disability insurance policy on the Executive carried by the Company, or if during any Renewal Term, by an amount equal to the first three months of disability payments to which the Executive is eligible to receive under a disability policy on the Executive carried by the Company. In addition, the Company shall maintain in full force and effect for the continued benefit of the Executive, for the remaining term of this Agreement, all employee benefit plans and programs or arrangements in which the Executive was entitled to participate immediately prior to the date of termination, provided that his continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive with benefits substantially similar to those to which he is entitled to receive under such plans and programs. The Company represents that it will cause to be set aside all necessary funds to satisfy its obligations hereunder. f. Change of Control. If a Change in Control shall occur before the expiration of this Agreement, then the Company shall pay to Executive, in lump sum by bank check or other good funds, within twenty (20) days thereafter (a) three (3) times the amount of the base salary paid or payable by the Company to the Executive for services rendered to the Company during the most recent complete fiscal year of the Company, regardless of when such salary may have been paid or payable, plus (b) three (3) times the amount of the aggregate cash bonus paid or payable by the Company to the Executive for services rendered to the Company during the most recent complete fiscal year of the Company, regardless of when such bonus, may have been paid or payable. ARTICLE III COMPENSATION AND BENEFITS Section 3.1 Compensation. As compensation for services rendered to the Company hereunder during the term of this Agreement, the Company will compensate Executive as follows: a. Base Salary. Commencing on the date hereof, the Company shall pay the Executive an annual base salary of Two Hundred and Twenty Thousand and No/Dollars ($220,000.00), pro rated for periods of less than 12 months, or as increased from time to time by the Board of Directors of the Company. Such base salary shall be paid in bi-weekly installments in accordance with the payroll schedule followed by the Company 5 (less applicable withholding and other deductions). Base salary shall be reviewed and adjusted by the Company at least annually. Notwithstanding the foregoing sentence, Executive's base salary shall be increased annually to at least equal the CPI increase for the prior twelve months. The Company may not reduce the Executive's base salary at any time during the term of this Agreement. b. Bonus. In addition to any other compensation or consideration payable to the Executive hereunder, the Executive shall be entitled to receive such bonuses as may be approved by the Executive Compensation Committee and ratified by the Board based on such meritorious performance or such other criteria measuring the performance of the Executive as may be determined from time to time. Section 3.2 Benefits. In addition to, and not in lieu of, base salary, bonus or other compensation payable to the Executive, the Executive shall be entitled to the following benefits: a. Employee Benefits. The Executive shall be entitled to participate in the employee benefit programs generally available to employees of the Company. b. Vacations. Executive shall be entitled to compensated vacation each year in accordance and consistent with Company policy. Upon termination of employment, any unused vacation time shall expire without compensation. c. Holidays. The Executive shall be entitled to such holidays as the Company may approve for all employees of the Company. d. Sick Leave. The Executive shall be entitled to paid sick leave each year because of sickness or accident in accordance and consistent with Company policy. Upon termination of employment, any unused sick leave shall expire without compensation. e. Disability Insurance. The Company shall during the term carry and maintain a disability insurance policy for the benefit of the Executive providing disability coverage under its current disability plan, as may be changed or modified from time to time. f. Life Insurance. The Company shall maintain during the term a life insurance policy insuring the Executive and payable to the Executive's estate or his designated beneficiary in accordance with the Company's group life plan, as may be changed or modified from time to time. g. Reimbursement of Expenses. The Company shall reimburse the Executive for all reasonable out-of-pocket expenses incurred by the Executive in the course of his duties, in accordance with normal Company policies. h. Automobile Allowance. The Executive shall be provided by the Company 6 with an automobile for his use, and the associated expenses of maintenance, repairs and fuel. ARTICLE IV CONFIDENTIAL INFORMATION/NON-COMPETE COVENANT/INVENTIONS Section 4.1 Covenant Not To Disclose Confidential Information. During Executive's position with the Company and during the term of this Agreement, Executive has and will become acquainted with confidential and proprietary information of the Company, in whatever form, whether oral, written, or electronic including, but not limited to, manner of operation, manufacturing processes and know-how, plant design, customer names and representatives, customer files, customer lists, customer specifications and requirements, product recipes, product pricing, special customer matters, sales methods and techniques, merchandising concepts and plans, business plans, sources of supply and vendors, terms and conditions of business relationships with vendors, agents and brokers, promotional materials and information, financial matters, mergers, acquisitions, personnel matters and confidential processes, designs, formulas, ideas, plans, devices and materials and other similar matters that are kept confidential (any and all such information being referred to herein as "Confidential Information"). The parties agree that the use of Confidential Information against the Company would seriously damage business of the Company. Accordingly, Executive agrees that he (individually or in concert with others) during or after the term of this Agreement: a. Shall not, directly or indirectly, use any Confidential Information for any purpose other than to benefit the Company except with the prior, express and written consent of the Company or as required by law; b. Shall not, directly or indirectly, divulge, publish or otherwise reveal or allow to be revealed any Confidential Information as to any individual or entity except with the prior, express and written consent of the Company or as required by law; c. Shall refrain from any action or conduct that might reasonably or foreseeably be expected to compromise the confidentiality or proprietary nature of any Confidential Information; and d. Shall have no rights to apply for, or to obtain any patent, copyright or other form of intellectual property protection regarding, any Confidential Information. This restriction shall not apply to any Confidential Information that (i) becomes known generally to the public through no fault of the Executive; (ii) is required by applicable law, legal process, or any order or mandate of a court or other governmental authority to be disclosed; or (iii) is reasonably believed by Executive, based upon the advice of legal counsel, to be required to be disclosed in defense of a lawsuit or other legal or administrative action brought against Executive; provided, that in the case of clauses (ii) or (iii), Executive shall give the Company reasonable advance written notice 7 of the Confidential Information intended to be disclosed and the reasons and circumstances surrounding such disclosure, in order to permit the Company to seek a protective order or other appropriate request for confidential treatment of the applicable Confidential Information. Section 4.2 Covenant Not To Compete. a. Covenant. Executive hereby stipulates, covenants and agrees that, during the Restrictive Period (as defined below), he, individually or in concert with others, shall not, directly or indirectly, other than on behalf of the Company, without the Company's prior, express and written consent: 1. Engage in Competition (as defined below) in the Territory (as defined below) with the Company or any of their respective successors or assigns; or 2. Employ or solicit the employment of any individual who is at the time or was at any time during the twelve complete calendar months immediately preceding, an employee of the Company. b. Certain Definitions. As used in this Section, the following terms shall have the following meanings: 1. "Business" shall mean the processing and distribution of fully-cooked branded and private label protein and bakery products and microwaveable sandwiches. 2. "Competition" shall mean: (i) Engaging in the Business from an office located in the Territory with a Contact Person; (ii) Assisting any individual or entity who or which has a principal office located in the Territory, whether in a financial, managerial, employment, advisory or other material capacity, to engage in the Business with a Contact Person; or (iii) Owning any interest in, or organizing an entity which has a principal office located within the Territory that engages in the Business with a Contact Person; provided, however, that nothing herein shall preclude Executive, directly or indirectly, from holding not more than one percent of the outstanding shares of common stock of any company whose shares of common stock are listed on a national securities exchange or authorized for quotation by NASDAQ. 3. "Contact Person" shall be (i) any customer, vendor, supplier, agent, distributor or broker having a principal manufacturing plant or principal office located within the Territory with which or with whom the Executive has had contact on behalf of the Company at any time during the eighteen (18) month period preceding the Termination Date, or (ii) any customer, agent, distributor or broker having a principal 8 manufacturing plant or principal office located in the Territory doing business with the Company within the eighteen (18) months preceding the Termination Date who or which made or brokered purchases of product from the Company or made or brokered product on behalf of the Company which purchases or sales were in excess of 3% of the revenues of the Company during such period. 4. "Restrictive Period" shall mean the two-year period beginning on the Termination Date. 5. "Territory" shall mean all fifty states in the United States and all provinces of Canada. Executive acknowledges that the Company conducts significant sales of its product in all of the aforementioned Territory. 6. "Termination Date" shall mean the date upon which the employment of the Executive was terminated by resignation or other voluntary action, or involuntarily by the Company, whether with or without cause. Section 4.3 Inventions. Executive shall disclose promptly to the Company any and all significant conceptions and ideas for inventions, improvements, and valuable discoveries, whether patentable or not, that are conceived or made by Executive, solely or jointly with another, during the period of employment or within one year thereafter, and that are directly related to the business or activities of the Company and that Executive conceives as a result of his employment by the Company, regardless of whether or not such ideas, inventions, or improvements qualify as "works for hire". Executive hereby assigns and agrees to assign all his interests therein to the Company or its nominee. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments, or other instruments that the Company shall deem necessary to apply for and obtain patent registrations in the United States or any foreign country or to otherwise protect the Company's interest therein. Section 4.4 Enforcement and Remedies. a. Executive further covenants, agrees, and recognizes that because the breach or threatened breach of the covenants, or any of them, contained in Section 4.1 or 4.2 or 4.3 will result in immediate and irreparable injury to the Company, the Company shall be entitled to a preliminary and permanent injunction restraining Executive from any violation of Section 4.1 or 4.2 or 4.3 to the fullest extent allowed by law, in addition to any other rights available at law, in equity or otherwise. b. Executive further covenants, agrees and recognizes that in the event of a violation of any of the covenants and agreements contained in Sections 4.1 and 4.2 and 4.3 hereof, the Company, shall be entitled to an accounting of all profits, compensation, commissions, renumerations or benefits which Executive directly or indirectly has realized as a result of, growing out of or in connection with any such violation and shall be entitled to receive all such other amounts to which Executive would be entitled as damages under law or at equity. 9 Section 4.5 Acknowledgement of Adequate Consideration. The parties stipulate and agree that the payment and other benefits owed to Executive by the Company under this Agreement and the performance of the Company's obligations hereunder constitute sufficient consideration to support enforcement of the covenants of this Agreement. Section 4.6 Acknowledgement of Reasonableness. Executive has carefully read and considered the provisions of this Agreement in consultation with attorneys of his choice and agrees that the restrictions set forth herein are fair and reasonably required for the protection of the Company and are legally binding and enforceable and the enforcement thereof will not impair Executive's ability to earn a livelihood. In the event that any provisions relating to any of the Restrictive Period, the Territory or the Contact Persons shall be declared by a court of competent jurisdiction to exceed the maximum time period or maximum geographical area or other restraint such court deems reasonable and enforceable under applicable law, the time period or area of restriction or other restraint considered reasonable and enforceable by the court shall thereafter be the applicable Restrictive Period, Territory, or the Contact Persons under this Agreement. ARTICLE V MISCELLANEOUS PROVISIONS Section 5.1 Waiver of Breach or Violation. The waiver by either party of a breach or violation of any provision of this Agreement shall not operate as or be construed to be a waiver of any subsequent breach of any provision of this Agreement. Section 5.2 Notices. All notices required or permitted to be given under this Agreement will be sufficient if furnished in writing, sent by registered mail to the last known residence of the Executive. Section 5.3 Indemnification. In the event Executive is made a party to any threatened or pending action, suit, or proceeding, whether civil, criminal, administrative or legislative (other than an action by the Company against Executive, and excluding any action by Executive against the Company), by reason of the fact that he is or was performing services under this Agreement or as an officer or director of the Company, then, to the fullest extent permitted by applicable law, the Company shall indemnify the Executive against all expenses (including reasonable attorney's fees), judgments, fines, and amounts paid in settlement, as actually and reasonably incurred by Executive in connection therewith. Such indemnification shall continue as to Executive even if he has ceased to be an employee, officer, or director of the Company and shall inure to the benefit of his heirs and estate. The Company shall advance to Executive all reasonable costs and expenses directly related to the defense of such actions, suit, or proceeding within 20 days after written request therefore by Executive to the Company. In the event that both Executive and the Company are made party to the same third-party action, complaint, suit, or proceeding, the Company will engage competent legal representation, and Executive agrees to use the same representation; provided, that if counsel selected by the Company shall have a conflict of interest that prevents counsel from representing 10 Executive, Executive may engage separate counsel and the Company shall pay all reasonable attorney's fees of such separate counsel. The provisions of this Section are in addition to, and not in derogation of, the indemnification provisions of the Company's By-laws. The foregoing indemnification also shall be applicable to Executive in his capacity as an officer, director, or representative of any subsidiary of the Company or any entity controlled by or affiliated with the Company. Section 5.4 Confidentiality; Covenant Not To Disparage. Each party covenants and agrees with the other not to disclose the existence or terms of this Agreement to any person at any time for any purpose, except that (a) either party may make such disclosures confidentially to the party's lawyers and accountants in connection with the rendition of their professional services or as otherwise required by law and (b) the Company may make such disclosures as it deems to be required by applicable securities laws. Each party covenants and agrees with the other not to disparage the reputation of the other. Section 5.5 Governing Law and Arbitration. This Agreement is made in and shall be interpreted, construed, and governed according to the laws of the State of North Carolina. Any disputes or claims, excepting matters warranting injunctive relief under Article IV arising under this Agreement shall be settled between the parties by an arbitration proceeding to be conducted by an arbitration panel mutually acceptable to Company and Executive in accordance with Article 45A of the North Carolina General Statutes. Such proceeding will be conducted pursuant to the rules of procedure of the American Arbitration Association then in effect and the results of the arbitration shall be binding on the parties in complete settlement of the disputes or claims at issue. The direct expense of any arbitration proceeding shall be borne by the Company. Each party shall bear its own counsel fees; provided, the panel as part of the award may in its discretion award attorney fees to the prevailing party. The arbitration shall be held in Hickory, North Carolina. Section 5.6 Headings. The paragraph and section headings contained in this agreement are for convenience only and shall in no manner be construed as a part of this Agreement. Section 5.7 Legal Construction. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision, and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been included in the Agreement. Section 5.8 Prior Agreements Superseded. This Agreement constitutes the sole Agreement of the parties with respect to employment of the Executive and supersedes any prior understandings or written or oral arrangements between the parties respecting the subject hereunder. 11 Section 5.9 Assignment. The Executive may not assign his rights or delegate his duties or obligations hereunder without the written consent of the Company. Section 5.10 Enforcement. In the event either party resorts to legal action to enforce the terms and provisions of the Arbitration award, the prevailing party shall be entitled to recover the costs of such action so incurred, including, without limitation, reasonable attorney's fees. Section 5.11 Gender and Number. Whenever the context hereof requires, the gender of all words shall include the masculine, feminine, and neuter and the number of all words shall include the singular and plural. Section 5.12 Amendments and Agreement Execution. This Agreement may be modified or amended only in writing, signed by the Executive and the Company. Section 5.13 Counterparts. This Agreement (and any written amendment thereto) may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Section 5.14 Executive's Heirs. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. Notwithstanding any other provision herein to the contrary, if the Executive should die while any amounts would still be payable to his hereunder if he had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to his designee or, if there be no such designee, to his estate. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. EXECUTIVE: COMPANY: Pierre Foods, Inc. /s/ Robert C. Naylor By: /s/ David R. Clark --------------------------------- ----------------------------- Robert C. Naylor David R. Clark, Vice Chairman 12 EX-10.44 5 g76612exv10w44.txt NON-EXCLUSIVE AIRCRAFT DRY LEASE DATED 3/1/02 EXHIBIT 10.44 NON-EXCLUSIVE AIRCRAFT DRY LEASE BETWEEN COLUMBIA HILL AVIATION, LLC as Lessor AND PIERRE FOODS, INC. as Lessee Dated as of March 1, 2002 Lease of British Aerospace BAe 125 Series 800A Serial No. 258049 FAA Registration No. N796CH TABLE OF CONTENTS 1. Lease.....................................................................1 2. Definitions...............................................................1 3. Term......................................................................2 4. Rent; Unconditional Obligations; Grant of Security Interest...............3 5. Disclaimer; Assignment of Warranties......................................4 6. Return....................................................................4 7. Representations and Warranties............................................5 8. Liens.....................................................................5 9. Insurance.................................................................5 10. Compliance with Laws; Location, Operation and Maintenance; Additions......6 11. Certain Transactions......................................................7 12. Loss or Damage............................................................7 13. General Indemnity.........................................................8 14. Events of Default.........................................................8 15. Remedies..................................................................9 16. Lessor's Right to Perform.................................................9 17. Assignment or Sublease...................................................10 18. Further Assurances; Financial Information................................10 19. Notices..................................................................10 20. Miscellaneous............................................................10 21. Truth-in-Leasing.........................................................11 EXHIBIT A - BASIC RENT/SECURITY DEPOSIT NON-EXCLUSIVE AIRCRAFT DRY LEASE This Non-exclusive Aircraft Dry Lease, dated as of March 1, 2002, between COLUMBIA HILL AVIATION, LLC, a North Carolina limited liability company ("Lessor"), and PIERRE FOODS, INC., a North Carolina corporation ("Lessee"). 1. Lease. Lessor agrees to lease to Lessee and Lessee agrees to lease from Lessor hereunder, the aircraft ("Aircraft") which is described in Section 2 hereof. It shall be conclusively presumed between the parties that Lessee has fully inspected the Aircraft having knowledge that it is in good condition and repair and that Lessee is satisfied with and has accepted the Aircraft in such condition and repair. 2. Definitions. As used in this Lease, the following terms shall have the following meanings (such definitions to be equally applicable to both the singular and plural forms of the terms defined): "Aircraft" shall mean the Airframe to be leased hereunder together with the Engine(s) to be leased hereunder whether or not any of the Engines may at the time of determination be installed on the Airframe or any other airframe. "Airframe" shall mean one (1) British Aerospace BAe Series 800A aircraft, manufacturer's serial number 258049, FAA Registration No. N796CH, together with any and all Parts thereof. "Aviation Act" means Subtitle VII of Title 47 of the United States Code, as amended from time to time, or any similar legislation of the United States enacted to supersede, amend or supplement such Act. "Business Day" shall mean a day other than a Saturday, Sunday or legal holiday under the laws of the State of North Carolina or New York. "Commencement Date" shall mean March 1, 2002. "Default" shall mean any event or condition which with notice, lapse of time or both would constitute an Event of Default. "Engine(s)" shall mean two Garrett TFE 731-5R-1H jet engines, manufacturer's serial numbers P-91201 and P-91202, which shall be installed on the Airframe as of the Commencement Date, together with any and all Parts thereof. Each engine is rated at seven hundred fifty (750) or more take off horsepower or its equivalent. "Event of Default" shall have the meaning specified in Section 14 hereof. "FAA" shall mean the Federal Aviation Administration or any applicable successor governmental authority. 1 "Late Charge Rate" shall mean an interest rate per annum equal to the Reference Rate plus four percent (4%) per annum but not to exceed the highest rate permitted by applicable law. "Lease" and the terms "hereof," "herein," "hereto" and "hereunder," when used in this Non-exclusive Aircraft Dry Lease, shall mean and include this Non-exclusive Aircraft Dry Lease, as the same may from time to time be amended, modified or supplemented. "Lessor's Liens" shall mean any mortgage, pledge, lien, security interest, charge, encumbrance, financing statement, title retention, taxes or any other right or claim of any person claiming through or under Lessor other than the interest of the Lessor as owner and Lessor of the Aircraft hereunder. "Liens" shall mean any mortgages, pledge, lien, security interest, charge, encumbrance, financing statement, title retention or any other right or claim of any person with respect to the Aircraft, other than any Lessor's Liens. "Parts" shall mean any and all avionics, instruments, appliances, furnishings, repairs, parts, appurtenances, accessories and other equipment and attachments incorporated or installed in or attached to the Airframe or any Engine and from time to time incorporated or installed in or attached to the Airframe or any Engine, together with all additions, attachments or accessions to any of the foregoing and all replacements and substitutions for any of the foregoing. "Person" shall mean an individual, partnership, corporation, business trust, joint stock company, trust, incorporated association, joint venture, governmental authority or other entity of whatever nature. "Reference Rate" shall mean an interest rate per annum equal to (i) the one (1) month London Interbank Offered Rate (LIBOR), as published in the Money Rates section of The Wall Street Journal from time to time; provided, however, in no event shall LIBOR be less than two per cent (2.0%), plus (ii) three and forty-nine hundredths percent (3.49%). "Rent Payment Date" shall mean each date on which an installment of rent is due and payable pursuant to Section 4(a) and (b) hereof. "Security Deposit" shall have the meaning specified in Section 4 hereof. "Term" shall mean the term of the Lease of the Aircraft hereunder specified in Section 3 hereof and any renewal period. 3. Term. a. Initial Term. The lease term of this Lease shall commence on the Commencement Date and shall continue until February 28, 2006. This Lease shall not terminate for any reason, except as expressly provided herein. 2 b. Renewal Option. The initial term of this Lease may be renewed for one (1) additional term upon the same terms and conditions, which shall commence upon March 1, 2006, and shall continue until December 11, 2008. Lessee shall give Lessor at least ninety (90) days prior written notice of Lessee's intent to exercise its option to renew this Lease for the renewal period. 4. Rent; Deposit; Unconditional Obligations . a. Lessee shall pay rent in the manner set forth in Exhibit "A" attached hereto. b. Lessee shall also pay to Lessor, on demand, interest at a rate per annum equal to the Late Charge Rate on any installment of rent and on any other amount owing hereunder which is not paid when due, for any period for which the same shall be overdue. Each payment made under this Lease shall be applied first to the payment of interest then owing and then to rent or other amounts owing hereunder. Interest shall be computed on the basis of a three hundred sixty (360) day year and actual days elapsed. c. Prior to the Commencement Date, Lessee shall remit to Lessor a security deposit in an amount set forth in Exhibit "A" hereto. Such amount shall constitute a security deposit (the "Security Deposit") under this Lease, shall be non-refundable during the Term of this Lease, and shall be held by Lessor as security for the timely and faithful performance by Lessee of all of Lessee's obligations under this Lease and for any damage or excessive wear and tear upon the Aircraft caused by Lessee. Lessee hereby grants Lessor a continuing security interest in the Security Deposit. Any interest accruing on the Security Deposit shall be the income and property of Lessor. If Lessee fails to pay rent hereunder or to pay any other sums due or to perform any of the other terms and provisions of this Lease or is otherwise in Default hereunder, Lessor may (but is not obligated to) use, apply or retain all or any portion of the Security Deposit in partial payment for sums due to Lessor by Lessee, to compensate Lessor for any sums it may in its discretion advance as a result of a Default by Lessee, or to apply toward losses or expenses Lessor may suffer or incur as a result of Lessee's Default hereunder. If Lessor uses or applies all or any portion of such Security Deposit, such application shall not be deemed a cure of any Default, and Lessee shall within five (5) days after written demand therefor deposit with Lessor in cash an amount sufficient to restore the Security Deposit to its original sum and the failure of Lessee to do so shall be a material breach of this Lease by Lessee. Provided Lessee is not in Default under this Lease and subject to the rights of Lessor to offset against amounts owed to Lessor as set forth above, the Security Deposit shall be returned to Lessee upon the expiration of the Term. d. This Lease is a dry lease, and Lessee's obligation to pay all rent and all other amounts payable hereunder is ABSOLUTE AND UNCONDITIONAL under any and all circumstances, except as expressly provided herein and shall not be effected by any circumstances of any character whatsoever, including, without limitation, (i) any set-off, counterclaim, recoupment, defense, abatement or reduction or any right which Lessee may have against Lessor, the manufacturer or supplier of the Aircraft or anyone else for any reason whatsoever; (ii) any defect in the condition, design or operation of, or lack of fitness for use of, for any damage to, or loss of, all or any part of the Aircraft from any cause whatsoever; (iii) the existence of any Liens with respect to the Aircraft; (iv) the invalidity, unenforceability or disaffirmance of this Lease or any 3 other document related hereto; or (v) the prohibition of or interference with the use of possession by Lessee of all or any part of the Aircraft, for any reason whatsoever, including without limitation, by reason of (1) use of the Aircraft by another lessee; (2) claims for patent, trademark or copyright infringement; (3) present or future governmental laws, rules or orders; (4) the insolvency, bankruptcy, or reorganization of any person; and (5) any other cause whether similar or dissimilar to the foregoing, any present or future law to the contrary notwithstanding. Provided, the foregoing shall not be construed as a waiver of the Lessee to assert a claim against the Lessor for breach of this Lease under a separate action. 5. Disclaimer. LESSOR NEITHER MAKES NOR SHALL BE DEEMED TO HAVE MADE AND LESSEE HEREBY EXPRESSLY WAIVES ANY WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE AIRCRAFT INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OR REPRESENTATION AS TO THE DESIGN, QUALITY OR CONDITION OF THE AIRCRAFT OR ANY WARRANTY OF MERCHANTABILITY OR FITNESS OF THE AIRCRAFT FOR ANY PARTICULAR PURPOSE OR TO AS TO ANY OTHER MATTER RELATING TO THE AIRCRAFT OR ANY PART THEREOF, EXCEPT THAT LESSOR WARRANTS THAT ON THE COMMENCEMENT DATE LESSOR HAS GOOD AND MARKETABLE TITLE TO THE AIRCRAFT AND THAT IT HAS THE RIGHT TO LEASE THE AIRCRAFT TO LESSEE PURSUANT TO THIS AGREEMENT. LESSOR WARRANTS THAT THE AIRCRAFT SHALL BE FREE AND CLEAR OF LESSOR'S LIENS DURING THE LEASE TERM. LESSEE CONFIRMS THAT IT HAS SELECTED THE AIRCRAFT AND EACH PART THEREOF ON THE BASIS OF ITS OWN JUDGMENT AND EXPRESSLY DISCLAIMS RELIANCE UPON ANY STATEMENTS, REPRESENTATIONS OR WARRANTIES MADE BY LESSOR, AND LESSEE ACKNOWLEDGES THAT LESSOR IS NOT A MANUFACTURER OR A VENDOR OF ANY PART OF THE AIRCRAFT. LESSOR NEITHER MAKES NOR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY AS TO THE ACCOUNTING TREATMENT TO BE ACCORDED TO THE TRANSACTIONS CONTEMPLATED BY THIS LEASE OR AS TO ANY TAX CONSEQUENCES AND/OR TAX TREATMENT THEREOF. 6. Flight Requests. Lessee shall use its best efforts to provide Lessor with proposed flight schedules in advance of any proposed flight. Lessee acknowledges that Lessee's use of the Aircraft is on a non-exclusive basis and may be subject to prior use by another lessee. Requests for use of the Aircraft shall be in a form, whether written or oral, mutually convenient to, and agreed upon by the parties. In addition to the proposed schedules, Lessee shall provide the following information for each proposed flight at some time prior to Lessee's scheduled departure: (a) Proposed departure point; (b) Destination; (c) Date and time of flight; 4 (d) The nature and extent of the luggage and/or cargo to be carried; (e) The number of anticipated passengers; and (f) The date and time of the return flight. 7. Representations and Warranties. In order to induce Lessor to enter into this Lease and to Lease the Aircraft to Lessee hereunder, Lessee represents and warrants that: a. Organization. Lessee is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina. b. Power and Authority. Lessee has full power, authority and legal right to execute, deliver and perform this Lease, and the execution, delivery and performance of this Lease have been duly authorized by all necessary action of Lessee. c. Enforceability. This Lease has been duly executed and delivered by Lessee and constitutes a legal, valid and binding obligation of Lessee enforceable in accordance with its terms. d. Consents and Permits. The execution, delivery and performance of this Lease does not require any stockholder approval or approval or consent of any trustee or holders of any indebtedness or obligations of Lessee; and will not contravene any law, regulation, judgment or decree applicable to Lessee, or the Articles of Incorporation or Bylaws of Lessee; and will not contravene the provisions of, or constitute a default under, or result in the creation of any Lien upon any property of Lessee under any mortgage, instrument or other agreement to which Lessee is a party or by which Lessee or its assets may be bound or affected. No authorization, approval, license, filing or registration with any court or governmental agency or instrumentality is necessary in connection with the execution, delivery, performance, validity and enforceability of this Lease. 8. Liens. Lessee will not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Aircraft. 9. Insurance. Lessor shall maintain or cause to be maintained at all times on the Aircraft (including the Airframe and Engines), at Lessor's sole expense, "all-risk" aircraft physical damage insurance (covering ground, flight and taxiing exposures) and comprehensive general and aircraft liability insurance (covering bodily injury and property damage exposures) including, but not limited to, passenger liability, third party liability and contractual liability insurance with insurers or recognized; provided, that such insurance shall include, without limitation, the following: (i) "all-risk" physical damage insurance on the Aircraft in an amount which shall not on any date be less than the fair market value of the Aircraft as of such date; (ii) comprehensive aircraft liability insurance in an 5 amount which shall not on any date be less than Twenty Million United States Dollars (US$20,000,000.00) and which shall name Lessee as additional insured; and (iii) coverage against hijacking and acts of terrorism exposures in an amount which will be not less than the fair market value of the Aircraft of such date and which shall name Lessor as loss payee and which, for liability purposes, shall name Lessee as additional insured. Lessor shall bear the cost of paying any deductible amount on any policy of insurance in the event of a claim or loss. If the Aircraft is operated outside the continental United States or Canada, in addition to the above requirements, War Risk Insurance, including Confiscation, Expropriation, Nationalization and Seizure is required to be maintained at the cost of Lessee. 10. Compliance with Laws; Location, Operation and Maintenance; Additions. a. Lessee will use the Aircraft in a careful and proper manner, will comply with and conform to all applicable governmental laws, rules, regulations and orders thereto, and will cause the Aircraft to be operated in accordance with the manufacturer's or supplier's instructions or manuals. Lessee agrees that it will not operate, use or maintain the Aircraft in violation of any airworthiness certificate, license or registration relating to the Aircraft. b. Neither Lessee nor Lessor will make the Aircraft available for hire within the meaning of the Federal Aviation Regulations. The Aircraft is to be operated strictly in accordance with 14 C.F.R. Part 91. Lessee hereby agrees that it will have operational control of the Aircraft at all times while the Aircraft is operated by Lessee under this Lease. c. The Aircraft will be permanently based in the United States, and Lessee will neither permit the Aircraft to be operated outside the continental United States and Canada except that Lessee may permit the Aircraft to be operated outside the Continental United States and Canada, provided that, under no circumstances will Lessee permit the Aircraft to be operated in (A) any area excluded from coverage by any insurance required by the terms of Section 9 hereof (or not specifically and fully covered by such insurance), or any recognized or threatened area of hostilities unless fully covered, without limitation, to Lessor's satisfaction by hull, political, expropriation, hijacking and war risk insurance, in each case unless the Aircraft is operated or used under contract with the government of the United States or any agency or instrumentality thereof under which contract the government assumes the liability in form and substance acceptable to Lessor for substantially the same risk in at least the same amounts as would be covered by such insurance, (B) any jurisdiction as to which a travel advisory or equivalent warning issued by the Bureau of Consular Affairs, United States Department of State is in effect, or any country that is experiencing wide spread civil unrest or wide spread anti-American activity, or (C) any area in which Lessor's title to the Aircraft may reasonably be expected to be jeopardized or not recognized. d. Lessor, at its sole cost and expense, shall at all times: i. cause the Aircraft to be and remain duly registered under the laws of the United States of America in the name of Lessor as owner; ii. keep, service, repair, maintain and overhaul the Aircraft (A) in compliance with the FARs and with all FAA Airworthiness Directive and manufacturers' recommended and mandatory Service Bulletins, (B) in compliance with the applicable manufacturer's or supplier's 6 recommended maintenance, service and overhaul procedures and schedules, (C) in compliance with the recommended procedures and schedules of any overhaul, service or maintenance contract relating to the Engines and thereof with FAA Maintenance, (D) so as to keep the Aircraft in as good repair and operating condition (and to furnish all parts, replacements, mechanisms, devices and services required therefore) as when delivered to Lessor, reasonable wear and tear excepted, and (E) so as to keep the Aircraft in such operating condition as may be necessary to enable the airworthiness certification of the Aircraft to be maintained in good standing at all times under the Aviation Act and so as to comply with the original type certification data sheet. Nothing herein shall prevent Lessor from taking the Aircraft out of service for maintenance or modification permitted hereunder or for storage in accordance with applicable FAA requirements; iii. maintain all records, logs and other materials required by the FAA to be maintained in respect of the Aircraft. All repairs, parts, replacements, mechanisms, devices and services installed or made under this Subsection 10(d) shall immediately, without further act, become the property of Lessor and part of the Aircraft. e. Lessee will not make or authorize any improvement, change, addition or alteration to the Aircraft without the express permission of Lessor. f. Lessee agrees that the Aircraft will be operated only by pilots qualified under applicable FAA requirements and having at least the minimum total pilot hours on the aircraft type required by any of the insurance policies described in Section 9 hereof. Lessee shall be responsible for obtaining and compensating its pilots to operate the Aircraft. 11. Certain Transactions. Except with the prior written consent of Lessor, Lessee will not (a) merge or consolidate with any other corporation, (b) liquidate or dissolve, or (c) sell, transfer or dispose of all of substantially all of its assets, unless, in the case of any transaction described in clause (a) or (c), the entity surviving or resulting from such transaction shall have a tangible net worth equal to or greater than the tangible net worth of Lessee immediately prior to such transaction and shall have assumed or shall otherwise be bound by the obligations of Lessee hereunder. Lessee will not, without thirty (30) days prior written notice to Lessor, change its name or its chief place of business. Lessee agrees to notify Lessor within thirty (30) days of any change in the permanent base of the Aircraft, which shall in any case remain within the United States. 12. Loss or Damage. Lessee shall immediately notify Lessor of each accident involving the Aircraft, which notification shall specify the time, place, and nature of the accident or damage; the names and addresses of parties involved, persons injured, witnesses, and owners of properties damaged; and other information as may be known. Lessee shall advise Lessor of all correspondence, papers, notices, and documents, whatsoever, received by Lessee in connection with any claim or demand involving or relating to the Aircraft or its operation, and shall aid in any investigation instituted by Lessor and in the recovery of damages from third persons liable therefor. 7 13. General Indemnity. Lessee assumes liability for, and shall indemnify, protect, save and keep harmless Lessor and its agents, servants, successors and assigns (an "Indemnitee") from and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, costs and expenses, including reasonable legal expense, of whatsoever kind and nature, imposed on, incurred by or asserted against any Indemnitee, in any way relating to or arising, directly or indirectly, from or in connection with the Lessee's possession, use, operation, condition or return of the Aircraft or any part thereof; provided, however, that Lessee shall not be required to indemnify any Indemnitee for loss or liability arising from acts or events which occur after the Aircraft has been returned to Lessor in accordance with this Lease, or for loss or liability resulting solely from the willful misconduct or gross negligence of such Indemnitee or the breach of its obligations hereunder. The provisions of this Section shall survive the expiration or earlier termination of this Lease. 14. Events of Default. The following events shall each constitute an Event of Default (herein called "Event of Default") under this Lease: a. The defaulting party shall fail to make any payment of rent or other amount owing hereunder when due and payable; or b. The defaulting party shall fail to perform or observe any other covenant, condition or agreement to be performed or observed by it with respect to this Lease and such failure shall continue unremedied for thirty (30) days after the date on which notice thereof shall be given by non-defaulting party to the defaulting party; or c. the entry of a decree or order for relief by a court having jurisdiction of a party, adjudging such party a bankrupt or insolvent, or approving as properly filed a petition seeking a reorganization, arrangement, adjustment, or composition of such party in an involuntary proceeding or case under the federal bankruptcy laws, as now or hereafter constituted or any other applicable federal or state bankruptcy, insolvency or other similar law, or appointing a receiver, liquidator, assignee, custodian, trustee, or sequestrator (or other similar official) of such party or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of sixty (60) days; or d. the institution by a party of proceedings to be adjudicated a bankrupt or insolvent, or the consent by a party to the institution of bankruptcy or insolvency proceedings against it, or the commencement by a party of a voluntary proceeding or case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, or the consent by it to the filing of any such petition or to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, or sequestrator (or other similar official) of a party or of any substantial part of its property, or the making by a party of any assignment for the benefit of creditors or the admission by it of its inability to pay its debts generally as they become due or its willingness to be adjudicated a bankrupt or the failure of a party generally to pay its debts as they become due or the taking of corporate action by a party in furtherance of any of the foregoing. 8 15. Remedies. Upon the occurrence of any Event of Default hereunder and so long as the same shall be continuing, the non-defaulting party may, at its option, declare this Lease to be in default, and at any time thereafter so long as the Event of Default shall be continuing, the non-defaulting party may terminate this Lease and exercise one or more of the following remedies, as the non-defaulting party in its sole discretion shall lawfully elect: a. If the defaulting party is the Lessee, the Lessor may demand that Lessee, and Lessee shall at its expense upon such demand, return the Aircraft promptly to Lessor, at such place in the continental United States of America as Lessor shall specify; or Lessor, at its option, may enter upon the premises where the Aircraft is located and take immediate possession of the Aircraft and remove the same by summary proceedings or otherwise, all without liability for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise; b. If the defaulting party is the Lessor, the Lessee may return the Aircraft to the Lessor at the Hickory North Carolina Municipal Airport. Lessee shall pay all costs and expenses in connection with or incidental to the return of the Aircraft. c. The non-defaulting party may exercise any other right or remedy which may be available to it under applicable law or proceed by appropriate court action to enforce the terms hereof or to recover damages for the breach hereof or to rescind this Lease. In addition, if Lessee is the defaulting party, Lessee shall be liable for any and all unpaid rent and other amounts due hereunder before or during the exercise of any of the foregoing remedies and for all reasonable legal fees and other costs and expense incurred by reason of the occurrence of any Event of Default or the exercise of Lessor's remedies with respect thereto. No remedy referred to in this Section 15 is intended to be exclusive but each shall be cumulative and in addition to any other remedy referred to herein or otherwise available to the non-defaulting party at law or in equity; and the exercise or beginning of exercise by the non-defaulting party of any one or more of such remedies shall not preclude the simultaneous or later exercise by the non-defaulting party of any or all such other remedies. No express or implied waiver by the non-defaulting party of an Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default. In the event the Lessee is the defaulting party, the Lessor shall take such commercially reasonable action including the sell, or lease or otherwise use of the Aircraft, in mitigation of Lessee's damages or losses under this Lease. 16. Lessor's Right to Perform. If Lessee fails to make any payment required to be made by it hereunder or fails to perform or comply with any of its other agreements contained herein, Lessor may itself make such payment or perform or comply with such agreement, and the amount of such payment and the amount of reasonable expenses of Lessor incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be (together with interest thereon at the Late Charge Rate), shall be deemed to be an addition to the rent payable hereunder, which shall be payable by Lessee on demand. 9 17. Assignment or Sublease. Lessee shall not without the prior written consent of Lessor assign this Lease or any interest herein or sublease or otherwise transfer its interest in the Aircraft, provided, that Lessee shall remain liable to Lessor under this Lease during any such sublease or transfer. Any sublease shall not relieve Lessee of any of its obligations hereunder. Lessor may, without the prior consent of Lessee, assign its interest in and to the Aircraft and this Lease to any third party. 18. Further Assurances. Lessee will, at its expense, promptly and duly execute and deliver to Lessor such further documents and assurances and take such further actions as Lessor may from time to time request for the confirmation of this Lease and in order to more effectively establish and protect the rights, interest and remedies created or intended to be created in favor of Lessor hereunder. 19. Notices. All notices, demands and other communications hereunder shall be in writing, and shall be deemed to have been given or made when sent by telefacsimile or five (5) days after deposited in the United States mail, first class postage prepaid, addressed as follows or to such other address as any of the following persons may from time to time designate in writing to the other persons listed below: Lessor: Columbia Hill Aviation, LLC P. O. Box 3967 Hickory, North Carolina 28603 Attention: David R. Clark, Manager Facsimile: 828-304-2330 Lessee: Pierre Foods, Inc. 9990 Princeton RoadCincinnati, Ohio Attention: Pamela M. Witters Facsimile: 513-874-3090 20. Miscellaneous. a. Any provision of this Lease which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, Lessee hereby waives any provision of law which renders any provision hereof prohibited or unenforceable in any respect. b. No terms or provisions of this Lease may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. No delay or failure on the part of Lessor to exercise any power or right hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof, or the exercise of any other power or right. After 10 the occurrence of any Default or Event of Default, regardless of Lessor's knowledge or lack of knowledge thereof, the acceptance of any payment due hereunder from the Lessee by the Lessor shall not constitute a reinstatement of this Lease if this Lease shall have been declared in default by Lessor pursuant to Section 15 hereof or otherwise, unless Lessor shall have agreed in writing to reinstate the Lease and to waive the Default or Event of Default. c. This Lease contains the full, final and exclusive statement of the agreement between Lessor and Lessee relating to the lease of the Aircraft. d. This Lease shall constitute an agreement of lease, and nothing herein shall be construed as conveying to Lessee any right, title or interest in the Aircraft except as Lessee only. e. This Lease and the covenants and agreements contained herein shall be binding upon, and inure to the benefit of, Lessor and its successors and assigns and Lessee and, to the extent permitted by Section 17 hereof, its successors and assigns. f. The headings of the Sections are for convenience of reference only, are not a part of this Lease and shall not be deemed to affect the meaning or construction of any of the provisions hereof. g. This Lease may be executed by the parties hereto on any number of separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. h. This Lease shall be governed by and construed in accordance with the laws of the State of North Carolina. i. LESSOR AND LESSEE IN ANY LITIGATION RELATING TO OR IN CONNECTION WITH THIS LEASE IN WHICH THEY SHALL BE ADVERSE PARTIES WAIVE TRIAL BY JURY. 21. Truth-in-Leasing. a. LESSOR CERTIFIES THAT THE AIRCRAFT HAS BEEN MAINTAINED AND INSPECTED UNDER PART 91 OF THE FEDERAL AVIATION REGULATIONS SINCE INCEPTION OF OPERATIONS. b. LESSOR CERTIFIES THAT THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED UNDER PART 91 OF THE FEDERAL AVIATION REGULATIONS FOR OPERATIONS TO BE CONDUCTED UNDER THIS LEASE. c. LESSEE CERTIFIES THAT DURING THE TERM OF THIS LEASE, WHEN THE AIRCRAFT IS IN USE OR CONTROL BY LESSEE, THEN LESSEE, AND NOT LESSOR, IS CONSIDERED RESPONSIBLE FOR OPERATIONAL CONTROL OF THE AIRCRAFT 11 UNDER THIS LEASE. LESSEE FURTHER CERTIFIES THAT LESSEE UNDERSTANDS ITS RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION REGULATIONS. d. LESSEE UNDERSTANDS THAT AN EXPLANATION OF FACTORS BEARING ON OPERATIONAL CONTROL AND PERTINENT FEDERAL AVIATION REGULATIONS CAN BE OBTAINED FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE. e. LESSEE AGREES TO KEEP A COPY OF THIS LEASE IN THE AIRCRAFT AT ALL TIMES DURING THE LEASE TERM. [Signatures follow on next page] 12 IN WITNESS WHEREOF, Lessor and Lessee have each caused this Non-exclusive Aircraft Dry Lease to be duly executed as of the day and year first above written. COLUMBIA HILL AVIATION, LLC By: /s/ David R. Clark ----------------------------------- David R. Clark, Manager PIERRE FOODS, INC. By: /s/ Pamela M. Witters ----------------------------------- Name: Pamela M. Witters Title: Chief Financial Officer 13 EXHIBIT A BASIC RENT Lessee shall pay to Lessor quarterly rental payments ("Basic Rent") in sixteen (16) consecutive quarterly payments in the amount of Four Hundred Seventy-one Thousand Five Hundred Dollars ($471,500.00) each, prorated for any partial quarter. The Basic Rent shall cover all expenses in the operation and use of the Aircraft, including fuel, taxes and insurance; provided, however, all costs and expenses of the pilots and crew shall be borne solely by Lessee. The first quarterly installment of Basic Rent shall be due on March 1, 2002, and each subsequent quarterly installment of Basic Rent shall be due on the same date of each quarter thereafter or, if such date does not fall on a Business Day, on the Business Day immediately preceding such date. Each installment of rent shall be payable at such address and account as Lessor may designate. In consideration and upon payment of each Basic Rent payment, Lessee shall then have the right to use the Aircraft for up to one hundred fifteen (115) flight hours per quarter (the "Base Quarterly Flight Hours"). In the event Lessee fails to use the Aircraft for the full Base Quarterly Flight Hours , Lessee shall not be able to carry over such unused Quarterly Flight Hours to another quarter and shall not be entitled to any refund of Basic Rent; provided, to the extent Lessee fails to have the availability of the Aircraft for the Base Quarterly Flight Hours by reason of loss or damage caused by persons other than the Lessee, its employees, or agents or other lessee usage, then the unavailable hours may be carried over by the Lessee to a subsequent quarter under this Lease ("Carryover Hours"). In the event Lessee shall use the Aircraft in excess of the Base Quarterly Flight Hours or any Carryover Hours, then Lessee shall be charged at the rate of Four Thousand One Hundred Dollars ($4,100.00) per flight hour for each hour in excess of the Base Quarterly Flight Hours and Carryover Hours. Any unused Carryover Hours at the termination of the Lease shall be refundable to Lessee upon demand at the foregoing rate. SECURITY DEPOSIT The Security Deposit shall be in the amount of Nine Hundred Forty-three Thousand Dollars ($943,000.00). EX-10.45 6 g76612exv10w45.txt LOGISTICS AGREEMENT DATED AS OF 3/3/02 EXHIBIT 10.45 NORTH CAROLINA CATAWBA COUNTY LOGISTICS AGREEMENT This Agreement, made and entered into on this the 3rd day of March, 2002 (the "Effective Date"), by and between Pierre Foods, Inc., a North Carolina corporation with principal offices located in Cincinnati, Ohio (hereinafter "Company") and PF Distribution, LLC, a North Carolina limited liability company with principal offices located in Hickory, North Carolina (hereinafter "Distribution"). W I T N E S S E T H: WHEREAS, Company is currently managing its own warehousing and distribution programs, and WHEREAS, Company desires to simplify the processes involved in its warehousing and distribution process, and WHEREAS, Company desires to contract with a distribution company that provides warehousing and distribution services, and WHEREAS, Distribution has expertise in warehousing and distribution, and is willing to provide such services to the Company, and NOW, THEREFORE, in consideration of the foregoing premises and of the mutual covenants contained herein, and further good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Appointment. Company hereby appoints Distribution as its agent to provide warehousing and distribution services ("Services") as needed in the food processing and distribution business of the Company. 2. Duties of Distribution. Distribution will provide at its cost all logistics services necessary to the Company for its warehousing, fulfillment, and transportation activities. Distribution will perform or provide transportation of finished goods from the Company's plants to local intermediate refrigerated warehouse facilities for the purpose of storage and fulfillment activities. Distribution will also be responsible for procuring storage space for inventory, maintaining the inventory in a safe environment, and overseeing the fulfillment of customer orders in a timely manner as received from the Company. Distribution will provide transportation necessary to deliver finished goods of the Company to the customer. These shipments may originate at the Company's plants or at an intermediate storage warehouse in full truckload or less than truckload (LTL) quantities. Transportation required to balance inventories between warehouses is included under this provision. Distribution will transport goods of the Company in its own fleet equipment or in equipment operated by third party transportation vendors. Distribution will be responsible for any warehouse damage and over/under shipments caused by picking errors at the third party warehouses. Distribution will also administer any damage caused by common carriers during transit. Bill-backs will be made by Distribution to the warehouses or the carriers responsible for the damage or picking errors. 3. Duties of Company. The Company will provide timely orders and instructions to Distribution to allow Distribution adequate lead time to provide the services hereunder. Shipments that are picked up at the plants by the customer (customer pickups) will be scheduled and processed by the Company. These shipments will not be invoiced by Distribution under the terms of this Agreement. The Company will be responsible for damage resulting from case crushing due to packaging design. 4. Rates. All services will be charged on a cents per pound basis. Different rates will be charged for each plant due to the differential of weight and volume characteristics between plant products. Periodically, during the term of this Agreement, and upon the consent of both parties, the rates may be amended. Initial rates are as follows: Warehousing services will be charged to the Company based on monthly weighted average inventory pounds maintained by Distribution on behalf of the Company during the period. Cincinnati: $ .0400 per pound Claremont: $ .1000 per pound Freight services will be charged to the Company based on total pounds shipped and delivered to Company customers by Distribution during the period. Cincinnati: $ .1000 per pound Claremont: $ .1950 per pound 5. Payment. Company will be billed by Distribution once each month net 10 days. Upon the execution of this Agreement, Company has paid to Distribution the sum of $500,000 as an advance payment to be credited and applied to the billings due hereunder in order determined by Distribution. 6. Term. Distribution hereby agrees for an initial term of one (1) year, commencing as of the Effective Date to provide Services for the Company in accordance with Company's needs and the terms of this Agreement. Within the ninety (90) day period prior to the end of the initial term, or any renewal term of Agreement, the parties hereto will discuss whether or not this Agreement may be renewed for a subsequent one (1) year term from the date of expiration of the then current 2 term. Within thirty (30) days prior to each anniversary of this Agreement, the Company shall negotiate with Distribution and agree upon the rates for services for the renewal term. It is expressly agreed that, in the event a binding agreement of renewal is not executed by the parties during the aforesaid ninety (90) day period, this Agreement shall expire and terminate as of the end of the then current term. 7. Insurance. Distribution shall: (a) maintain and/or cause its logistics suppliers, including common carriers and warehousemen to maintain appropriate levels of cargo legal liability insurance, fire and casualty insurance and such other commercial general liability insurance in appropriate coverage amounts as customary and as is required by law and shall provide, and require such logistics suppliers, to provide, as necessary certificates of insurance naming Distribution and/or the Company as an additional insured with no less than thirty (30) days notice of cancellation or non-renewal. (b) maintain workmen's compensation insurance as required by law. 8. Termination. This Agreement may be terminated: (a) for cause by either party, or (b) upon expiration of its legal term or any extension thereof, or (c) without cause upon one hundred-twenty (120) days written notice by either party. Upon termination, the Company shall honor all outstanding orders placed upon the direction of the Company by Distribution. 9. Ancillary Services. Distribution and Company shall coordinate the development of a logistics service support environment, including telecommunications linkage, technical and information systems, and equipment and office space for onsite personnel of Distribution. In consideration of the support function, Distribution shall reimburse the Company on a monthly basis $5,551 for office space, computer time and equipment and support. 10. Confidentiality. Except as necessary to procure logistics commitments, Distribution agrees not to disclose to any persons the existence or terms of this Agreement or the contents of any forecasts, supply needs, specifications and other information relating to the Company, all of which is the proprietary information of the Company, to which Distribution may have access during the term of this Agreement. Distribution further agrees to return all such materials to Company immediately upon termination of this Agreement. The parties agree that this confidentiality agreement shall survive the term of this Agreement. 3 11. Assignment. This Agreement is not assignable by Distribution without the express written consent of the Company. 12. Disputes. Any disputes that may arise out of this Agreement shall be governed under the laws of the State of North Carolina. 13. Severability. Any provision of this Agreement that is prohibited, unenforceable, or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability, or nonauthorization without invalidating the remaining provisions hereof or affecting the validity, enforceability, or legality of such provision in any other jurisdiction. 14. Independent Contractor. Distribution is an independent contractor. No fiduciary relationship exists between the parties. Except as set forth in this Agreement, neither party shall be liable for any debts, accounts, obligations or other liabilities of the other party, its agents or employees. The Company has no proprietary interest in Distribution and has no interest in the business of Distribution, except to the extent expressly set forth in this Agreement. 15. Force Majeure. Neither Distribution nor Company shall be liable for failure of performance hereunder if hindered or prevented by war, strikes, acts of God, accidents, civil disorder, or for any reason beyond the control of Distribution or Company, provided however, that nothing herein shall relieve Distribution from its responsibilities hereunder with respect to indemnity, insurance and loss of or damage to freight or warehoused product. 16. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and completely supersedes all prior undertakings and agreements, both written and oral, between the parties relative hereto. Any modification or amendment of this Agreement shall require the express written consent of both parties. 17. Binding Effect. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by the parties and their respective successors and assigns. 18. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 4 IN WITNESS WHEREOF, the parties hereto have caused this Logistics Agreement to be executed in accordance with law in duplicate originals, one of which is retained by each of the parties, the day and year first above written. PIERRE FOODS, INC. By: /s/ Pamela M. Witters ------------------------------ Pamela M. Witters Senior Vice President and CFO PF DISTRIBUTION, LLC By: /s/ David R. Clark ------------------------------ David R. Clark, Vice President 5 EX-12 7 g76612exv12.txt CALCULATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12 CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES (In Thousands of Dollars, Except for Ratios)
2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Income/(loss) from continuing operations before income tax benefit $ 734 $ (4,979) $(19,060) $ (2,403) $ (5,798) Add Fixed Charges: Interest expense 12,679 12,763 14,086 11,712 1,649 Amortization of financing costs 528 571 900 620 113 --------- -------- -------- -------- -------- Total income (loss) as defined $ 13,941 $ 8,355 $ (4,074) $ 9,929 $ (4,036) ========= ======== ======== ======== ======== Fixed Charges: Interest expense $ 12,679 $ 12,763 $ 14,086 $ 11,712 $ 1,649 Capitalized interest -- -- -- 203 59 Amortization of financing costs 528 571 900 620 113 -------- -------- -------- -------- -------- Total fixed charges $ 13,207 $ 13,334 $ 14,986 $ 12,535 $ 1,821 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 1.06 0.63 (0.27) 0.79 (2.22) Additional income required to meet a 1.0 ratio: $ -- $ 4,979 $ 19,060 $ 2,606 $ 5,857
EX-21 8 g76612exv21.txt SUBSIDIARIES OF PIERRE FOODS, INC. EXHIBIT 21 SUBSIDIARIES OF PIERRE FOODS, INC. Fresh Foods Properties, LLC EX-23 9 g76612exv23.txt INDEPENDENT AUDITORS' CONSENT 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.5, 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.11, each on Form S-8, of our report dated April 26, 2002 appearing in this Annual Report on Form 10-K of Pierre Foods, Inc. for the fiscal year ended March 2, 2002. DELOITTE & TOUCHE LLP Cincinnati, Ohio May 29, 2002 EX-99.1 10 g76612exv99w1.txt RISK FACTORS EXHIBIT 99.1 RISK FACTORS SUBSTANTIAL LEVERAGE; INSUFFICIENT CASH FLOW FROM OPERATIONS At March 2, 2002 the Company had approximately $115.4 million of indebtedness, representing 67.9% 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 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 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. Moreover, given the increased borrowing capacity which the Company will have if the $50 million Foothill Capital credit facility is closed, the Company anticipates that its indebtedness will increase upon consummation of that transaction. 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 2002 operating cash flows were sufficient to provide necessary working capital and to service existing debt, and the Company anticipates that its fiscal 2003 cash requirements for working capital and debt service will be met through a combination of funds provided by operations and borrowings under the anticipated $50 million Foothill Capital credit facility. Significant assumptions underlie this belief, including, among other things, that the Company will succeed in implementing its business strategy and in closing the Foothill Capital credit facility 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 $13.2 million for capital expenditures in fiscal 2003. These expenditures primarily are devoted to a plant expansion in order to maintain the current revenue growth trends. Additional expenditures are devoted to routine food processing capital improvement projects and other miscellaneous expenditures. The Company believes that funds from operations and funds from the anticipated $50 million Foothill Capital 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 other 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 its $25 million credit facility or its anticipated $50 million Foothill Capital 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 other 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 affected on satisfactory terms or that the chosen strategy would enable the Company to avoid defaults under its existing debt instruments. 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 anticipated $50 million credit facility with Foothill Capital will also require 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 anticipated $50 million 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 April 11, 2002, the Company's directors and executive officers (11 persons) beneficially owned, in the aggregate, 3,716,611 shares (or approximately 64.2%) of the Company's outstanding common stock (including as "outstanding" all shares underlying options exercisable by May 29, 2002). 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 29, 2002, there were 5,781,480 shares of the Company's common stock outstanding. Of such amount, at least 2,064,969 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 29, 2002 there were options to purchase 305,000 shares of common stock outstanding at an average exercise price of $9.22 per share. Of such amount, options to purchase 244,530 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. Further, on April 4, 2002, our common stock was delisted from the NASDAQ Small Cap Market and is now quoted on the OTC Bulletin Board, which could have the effect of further reducing liquidity for the stock. 2 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. 3 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 three-year Employment Agreements with its Chairman and Vice-Chairman of the Board, which specify terms relating to salary, bonus and benefits to be paid. The Company has entered into an Incentive Agreement with its President and Chief Executive Officer, which sets forth compensation to be paid, but does not provide for a specified employment term for the President. In addition, the Company has entered into three-year Employment Agreements with its Chief Financial Officer and its Senior Vice President of Sales, which sets forth salary, bonus and benefits to be paid. 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, amended December 20, 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, there will be no further public trading of the stock. Each shareholder will receive $2.50 for each share of the Company's common stock owned by such shareholder. 4 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. 5 -----END PRIVACY-ENHANCED MESSAGE-----