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 6, 2004

Commission File Number—0-7277

PIERRE FOODS, INC.

(Exact name of registrant as specified in its charter)


North Carolina (State or other jurisdiction of incorporation or organization)		56-0945643 (I.R.S. Employer Identification No.)

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:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o

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. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of the last business day of the registrant’s most recently completed second quarter (August 30, 2003) was $0.00.

The number of shares of Pierre Foods, Inc. Common Stock outstanding as of April 30, 2004 was 100,000. The aggregate market value of Pierre Foods, Inc. Common Stock held by non-affiliates of Pierre Foods, Inc. as of April 30, 2004 was $0.00.

PART I

Item 1. Description of Business

General Development of Business

Pierre Foods, Inc. (the “Company” or “Pierre Foods”) is a producer and marketer of fully-cooked branded and private label protein and bakery products and microwaveable sandwiches for the foodservice market. The Company’s predecessor was founded as a North Carolina corporation in 1966 to own and operate restaurants. The Company’s food processing business was originally developed to support its restaurants, but grew independently to become its principal business. In recognition of this fact, in May 1998, the Company, then known as “WSMP, Inc.,” changed its name to “Fresh Foods, Inc.” In June 1998, the Company consummated the purchase of substantially all of the business in Cincinnati, Ohio, and a portion of the business in Caryville, Tennessee (collectively, “Pierre Cincinnati”), conducted by the Pierre Foods Division of Hudson Foods, Inc. (“Hudson”), a subsidiary of Tyson Foods, Inc. (“Tyson”). Pierre Cincinnati was a value-added food processor selling principally to the foodservice and packaged foods markets. In September 1998, the Company implemented a tax-exempt reorganization of its corporate structure. The reorganization established Fresh Foods, Inc. as a holding company, consolidated 32 subsidiaries into 12 subsidiaries and separated the Company’s food processing and restaurant businesses. In July 1999, the Company sold its ham curing business, and in October 1999, the Company disposed of its restaurant segment. The Company now operates solely in the food processing business, its sole segment. 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 2, 2002 is referred to as “fiscal 2002,” its fiscal year ended March 1, 2003 is referred to as “fiscal 2003,” and its fiscal year ended March 6, 2004 is referred to as “fiscal 2004.”

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 product line consists of over 800 stock keeping units (“SKUs”). At its Cincinnati facility, the Company produces specialty beef, chicken 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.

The following table sets forth the Company’s net revenue and percent of revenue contributed during the past three fiscal years by its various product channels and classes:


	Revenues by Source
	Fiscal 2004				Fiscal 2003				Fiscal 2002
	Net Revenues		%		Net Revenues		%		Net Revenues		%
	(in millions)				(in millions)				(in millions)
Food Processing:
Fully-Cooked Protein Products	$	214.7		59.9	$	149.3		54.0	$	139.7		57.4
Microwaveable Sandwiches		136.4		38.0		119.1		43.1		95.8		39.4
Bakery and Other Products		7.4		2.1		7.9		2.9		7.8		3.2

Total Food Processing	$	358.5		100.0	$	276.3		100.0	$	243.3		100.0

Significant Customer

Sales to Carl Karcher Enterprises Inc (“CKE”) accounted for approximately 24% and 11%, of our net sales in fiscal 2004 and 2003, respectively. No other customer accounted for 10% or more of net sales during fiscal years 2004, 2003 and 2002.

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 80 independent food brokers, all of whom are compensated primarily 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, the American Commodity Distribution Association, the National Food Service Management Institute Governing Board and the National Association of Convenience Stores.

Raw Materials

The primary materials used in the Company’s food processing operations include boneless chicken, beef and pork, flour, yeast, seasonings, breading, soy proteins, and packaging supplies. Meat proteins are generally purchased under seven day payment terms, except for the Company’s largest beef supplier, who requires payment at the time the product is shipped. Historically, raw material costs have remained stable and any price increases have generally been passed on to the customer. During fiscal 2004, the Company experienced a significant increase in the price of beef. The Company managed the increase in beef prices by passing on cost increases to customers and by improving the formulation of beef products. 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 except for, as requested by a customer, the utilization of a single source raw material supplier for production specific to that customer. The single source supplier allows for consistent supply and competitive pricing for the Company. Furthermore, the Company 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, Pierre Pizza Parlor^TM, Pierre Main Street Diner^TM, Pierre Select^TM, Fast Bites®, Fast Choice®, Rib-B-Q®, Hot ‘n Ready®, Big AZ®, Chop House®, Deli Breaks™ and Mom ‘n’ Pop’s® brand. The Company regards its trademarks and service marks as having significant value in marketing its food products. Pursuant to licenses acquired, the Company began producing and marketing microwaveable sandwiches under the Checkers, Krystal, Rally’s, Tony Roma’s and Nathan’s Famous brand names 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 rights to distribute products under the Rally’s, Krystal and Checkers name to vending machines, as well as distribution rights for Tony Roma’s and Nathan’s Famous products.

Seasonality

Except for sales to school districts, which represent approximately 19% of the Company’s total sales and which decline significantly during summer, late November and December, 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 nine 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 approximately 150 new SKUs in fiscal 2004. Over 36.1% of fiscal 2004 food processing sales were related to products developed in the last two years, based on the Company’s definition of a new product. In fiscal 2004, 2003 and 2002, the Company spent approximately $886,000, $649,000 and $373,000, 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 compliance with all FDA or 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 substantial material effect upon the capital expenditures, earnings or competitive position of the Company and its subsidiaries.

The Company’s operations are subject to licensing and regulation by a number of state and local governmental authorities, which include health, safety, sanitation, building and fire agencies. Operating costs are affected by increases in costs of providing health care benefits, the minimum hourly wage, unemployment tax rates, sales taxes and other similar matters over which the Company may have 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 6, 2004, the Company employed approximately 1,700 persons. The Company has experienced no work stoppage attributed to labor disputes and considers its employee relations to be good.

Item 2. Properties

Principal Offices. The Company’s main office is located in a 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 $116,000 per year at terms no less favorable than those which could be obtained from an unaffiliated third party. The Company also owns and uses a 23,000 square foot building in Claremont, North Carolina for additional office space.

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 225,000 square feet, following a 25,000 square foot building expansion during fiscal 2003. The Claremont facility occupies buildings totaling approximately 150,000 square feet.

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 are necessary to expand and improve the efficiency of its facilities.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

On July 26, 2002, PF Management, Inc. (“PF Management”) closed its management buyout of the Company. This going-private transaction resulted in the Company becoming a wholly-owned subsidiary of PF Management; accordingly, there is no public trading market for the Company’s common stock. The Company had 5,781,480 shares of common stock issued and outstanding and 2,500,000 shares of preferred stock authorized, none of which were outstanding, immediately before the closing. After the closing, the Company amended and restated its Articles of Incorporation to authorize the issuance of up to 100,000 shares of Class A common stock as the only authorized class of capital stock of the Company. All 100,000 shares of authorized common stock were issued to PF Management in connection with the management buyout. All per share amounts have been retroactively restated in the accompanying Consolidated Financial Statements and Notes to Consolidated Financial Statements for all periods presented to reflect the transaction. See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

The Company did not declare a cash dividend during fiscal 2004 or fiscal 2003. 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.

No securities of the Company were sold by the Company during fiscal 2004.

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 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.


	Fiscal Years Ended
	March 6,			March 1,			March 2,			March 3,			March 4,
	2004			2003			2002			2001			2000
	(dollars in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues, net	$	358,549		$	276,339		$	243,278		$	203,475		$	179,415
Cost of goods sold		254,235			184,092			160,781			133,385			115,968
Selling, general and administrative		79,982			71,352			62,399			55,752			59,193
Loss on sale of Mom ‘n’ Pop’s Country Ham, LLC		—			—			—			—			2,857
Net (gain) loss on disposition of property, plant and equipment		11			89			84			27			(22	)
Depreciation and amortization		4,605			4,125			6,438			6,238			5,662

Operating income (loss)		19,716			16,681			13,576			8,073			(4,243	)
Interest expense		16,979			14,228			13,206			13,334			14,986
Other income, net		—			447			364			281			169
Income tax benefit (provision)		(1,303	)		(1,122	)		(733	)		767			4,825

Income (loss) from continuing operations		1,434			1,778			1			(4,213	)		(14,235	)
Income from discontinued operations (1)		—			—			—			—			2,828
Gain on disposal of discontinued operations (1)		—			—			—			—			6,802
Extraordinary item (2)		—			—			—			(455	)		(52	)
Cumulative effect of accounting change (3)		—			(18,605	)		—			—			—

Net income (loss)	$	1,434		$	(16,827	)	$	1		$	(4,668	)	$	(4,657	)

NET INCOME (LOSS) PER SHARE — BASIC AND DILUTED:
Income (loss) from continuing operations	$	14.34		$	17.78		$	0.01		$	(42.13	)	$	(142.35	)
Income from discontinued operations		—			—			—			—			28.28
Gain on disposal of discontinued operations		—			—			—			—			68.02
Extraordinary item		—			—			—			(4.55	)		(0.52	)
Cumulative effect of accounting change		—			(186.05	)		—			—			—

Net income (loss)	$	14.34		$	(168.27	)	$	0.01		$	(46.68	)	$	(46.57	)

OTHER DATA:
Capital expenditures	$	10,041		$	16,216		$	5,994		$	2,764		$	5,488
BALANCE SHEET DATA:
Working capital	$	46,110		$	40,716		$	37,061		$	35,890		$	36,403
Total assets		175,771			168,781			169,821			160,308			164,727
Total debt		143,694			136,348			121,231			115,165			115,479
Shareholders’ equity		6,621			8,998			27,207			26,867			31,533

(1) Reflects income from discontinued operations in the amount of $2,828 in fiscal 2000. In addition, reflects gain from disposal of discontinued operations of $6,802 in fiscal 2000.

(2) Reflects an extraordinary loss from early extinguishment of debt in the amount of $455 in fiscal 2001 and $52 in fiscal 2000.

(3) Reflects a loss due to a cumulative effect of accounting change in the amount of $18,605 in fiscal 2003. See Note 2– Summary of Significant Accounting Policies— to the consolidated financial statements.

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; 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 other factors, risks and uncertainties identified in Exhibit 99.1 to our Annual Report on Form 10-K filed with the SEC on March 9, 2004. 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

Each quarter of the fiscal year contains 13 weeks except for the infrequent fiscal years with 53 weeks. The results for fiscal 2004 contain 53 weeks. The results for fiscal 2003 and 2002 contain 52 weeks.

Results for fiscal 2004, 2003 and 2002 are shown below:


	Fiscal Years Ended
	March 6,			March 1,			March 2,
	2004			2003			2002
	(in millions)
Revenues, net	$	358.6		$	276.3		$	243.3
Cost of goods sold		254.2			184.1			160.8
Selling, general and administrative		80.0			71.3			62.4
Net loss on disposition of property, plant and equipment		0.1			0.1			0.1
Depreciation and amortization		4.6			4.1			6.4

Operating income		19.7			16.7			13.6
Interest and other expense, net		(17.0	)		(13.8	)		(12.9	)

Income before income tax, and cumulative effect of accounting change		2.7			2.9			0.7
Income tax provision		(1.3	)		(1.1	)		(0.7	)

Income before cumulative effect of accounting change		1.4			1.8			—
Cumulative effect of accounting change		—			(18.6	)		—

Net income (loss)	$	1.4		$	(16.8	)	$	—

Fiscal 2004 Compared to Fiscal 2003

Revenues, net. Net revenues increased by $82.2 million, or 29.7%. The increase in net revenues was primarily due to the substantial development of national business with an existing customer, increased retail business with an existing customer, short term co-packing operations and an increase in sales of existing product lines. Of all core customer channels, which include restaurants, schools, vending and convenience stores, the restaurant channel had the greatest increase in demand.

Cost of goods sold. Cost of goods sold increased by $70.1 million, or 38.1%. As a percentage of revenues, cost of goods sold increased from 66.6% to 70.9%. This increase primarily was due to a change in product mix to lower margin products and increased raw material prices (particularly beef prices), offset by allocating fixed costs over increased production as a result of the Cincinnati plant expansion.. In fiscal 2004, beef, pork and chicken prices increased approximately 13%, 32% and 2%, respectively, compared to fiscal 2003.

Selling, general and administrative. Selling, general and administrative expenses increased by $8.7 million, or 12.1%, primarily due to an increase in distribution expense on higher product volumes and increased marketing costs. As a percentage of revenues, selling, general and administrative expenses decreased from 25.8% to 22.3%.

Depreciation and amortization. Depreciation and amortization increased by $0.5 million, or 11.6%, primarily due to the Cincinnati plant expansion. As a percentage of net operating revenues, depreciation and amortization decreased from 1.5% to 1.3%.

Interest expense and other income, net. The primary component of interest expense and other income, net for fiscal 2004 and fiscal 2003 was interest expense. Interest expense consists primarily of interest on fixed and variable rate long-term debt, in addition to expense incurred due to the early extinguishment of the Company’s $50 million revolving credit loan in fiscal 2004. Net other expense increased by $3.2 million or 23.2% in fiscal 2004 due to increased borrowings under the revolving credit facility and due to the write-off of loan commitment fees and a prepayment penalty associated with the change in credit facilities and early extinguishment of that credit facility, both of which were charged to interest expense (see -— “Liquidity and Capital Resources” below).

Income tax provision. The effective tax rate for fiscal 2004 was 47.6% compared to 38.7% for fiscal 2003. The increase in the effective tax rate is primarily due to an increase in state tax expense of 3.4% and a decrease in the benefit realized from Columbia Hill Aviation.

Fiscal 2003 Compared to Fiscal 2002

Revenues, net. Net revenues increased by $33.1 million, or 13.6%. The increase in net revenues was primarily due to the substantial development of new customers, to the introduction of a new sandwich line within the foodservice distribution channel and to increased revenues in existing product lines. Of all core customer channels, which include restaurants, schools, vending and convenience stores, the restaurant channel had the greatest increase in demand.

Cost of goods sold. Cost of goods sold increased by $23.3 million, or 14.5%. As a percentage of revenues, cost of goods sold increased from 66.1% to 66.6%. This increase primarily was due to a change in product mix to lower margin products and unfavorable insurance and utilities expense, offset by a decrease in the prices of beef, pork and chicken, the Company’s primary raw materials. In fiscal 2003, beef, pork and chicken prices decreased approximately 9%, 34% and 6%, respectively, compared to fiscal 2002. The cost of labor for fiscal 2003 was consistent with fiscal 2002.

Selling, general and administrative. Selling, general and administrative expenses increased by $9.0 million, or 14.3%, primarily due to an increase in overhead costs to support the increased sales volume. As a percentage of revenues, selling, general and administrative expenses increased from 25.6% to 25.8%.

Depreciation and amortization. Depreciation and amortization decreased by $2.3 million, or 35.9%, primarily due to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142 (“SFAS 142”) in fiscal 2003, which discontinued amortization of goodwill and intangibles with indefinite lives, offset by depreciation related to an increase in capital expenditures due to a significant plant expansion. As a percentage of net operating revenues, depreciation and amortization decreased from 2.6% to 1.5%.

Interest expense and other income, net. The primary component of interest expense and other income, net for fiscal 2003 and fiscal 2002 was interest expense, which consists primarily of interest on fixed and variable rate long-term debt. Net other expense increased by $0.9 million, or 7.3%. This increase primarily was due to a change in the credit facility and increased borrowings under that facility (see -— “Liquidity and Capital Resources” below).

Income tax provision. The effective tax rate for fiscal 2003 was 38.7% compared to 99.9% for fiscal 2002. The decrease in the effective tax rate is primarily due to the limitation on the deductibility of executive compensation in fiscal 2002, combined with the effects of permanent differences in fiscal 2002.

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).

Goodwill and Other Intangible Assets. During fiscal 2002 and prior years, Goodwill and other intangible assets were being amortized using the straight line method over a 30 year period. The carrying value of goodwill and other intangible assets was evaluated periodically as events and circumstances indicate a possible inability to recover its carrying amount. Amortization expense recognized for the fiscal year ended March 2, 2002 was $2.7 million.

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 142, “Goodwill and Other Intangible Assets,” which was 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. Upon the Company’s adoption of SFAS 142 on March 3, 2002, the Company ceased amortizing goodwill and indefinite-lived intangibles. Also effective March 3, 2002, the Company reclassified assembled workforce to goodwill.

As prescribed under SFAS 142, the Company tested goodwill for impairment during fiscal 2003 using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of the entity with its net asset value (or carrying amount), including goodwill. If the fair value of the entity exceeds its net asset value, goodwill of the entity is considered not impaired and the second step of the goodwill impairment test is not needed. If the net asset value of the entity exceeds the fair market value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the entity’s goodwill with the carrying amount of that goodwill. If the carrying amount of the entity’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Subsequent to recognizing an impairment loss, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Reversal of a previously recognized impairment loss is prohibited.

During fiscal 2003, upon adoption of SFAS 142, the Company utilized a valuation technique based on market values of publicly-traded equity, as adjusted, plus publicly-owned subordinated notes, which were determined in conjunction with the management buyout in fiscal 2003 (See Note 1 – Basis of Presentation, Acquisition and Discontinued Operations for discussion on Management Buyout). The Company’s analysis showed that the carrying value of the goodwill exceeded its fair value, requiring the Company to determine the implied fair value of its goodwill. Upon completion of that analysis, management determined that the entire net carrying value of its goodwill was impaired. The carrying amount, $29.0 million, net of the related effect on income taxes, $10.4 million, was written-off by the Company and reported as the Cumulative Effect of an Accounting Change, net of income taxes in the statement of operations. See Note 2 –Summary of Significant Accounting Policies for further discussion.

Economic Useful Life of Intangible Assets. The Company reviews the economic useful life of its intangible assets annually. The determination of the economic useful life of an intangible asset requires a significant amount of judgment and entails significant subjectivity and uncertainty.

Promotions. Promotional expenses associated with rebates, marketing promotions and special pricing arrangements are recorded as a reduction of revenues or selling expense at the time the sale is recorded. Certain of these expenses are estimated based on historical trends and 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 liability under the programs.

Going Concern Assumption. Significant assumptions underlie the belief that the Company anticipates that its fiscal 2005 cash requirements for working capital and debt service will be met through a combination of funds provided by operations and borrowings under its $40 million credit facility, including, among other things, that there will be no material adverse developments in the business, liquidity or significant capital requirements of the Company.

New Accounting Pronouncements. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations,” was adopted by 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 adoption of SFAS 143 did not have a material impact on the Company’s financial position and results of operations.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”) — “Accounting for Stock-Based Compensation — Transition and Disclosure.” This statement amends Statement of Financial Accounting Standards 123, “Accounting for Stock-Based Compensation” to provide alternative methods of transition for an entity that changes to the fair value based method of accounting for stock-based employee compensation and changes the disclosure requirements. This statement was effective for financial statements for fiscal years ending after December 15, 2002. The Company adopted SFAS No. 148 effective March 1, 2003. During fiscal 2003, effective with the management buyout discussed in Note 1, all stock option plans were terminated and all outstanding options were cancelled, however, the necessary disclosure requirements of SFAS 148 are presented in Note 2 of the Notes to Consolidated Financial Statements.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (“SFAS 149”), — “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under Statement of Financial Accounting Standards No. 133. SFAS 149 is effective for all contracts entered into or modified after June 30, 2003. This Statement did not have an impact on the Company’s financial statements.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), —“Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement requires certain freestanding financial instruments to be reported as liabilities by their issuers. The provisions of SFAS 150, which also include a number of new disclosure requirements, are effective for instruments entered into or modified after May 31, 2003 and pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. This statement did not have an impact on the Company’s financial statements.

In November 2002, the FASB issued FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), which expands the disclosures a guarantor is required to provide in its annual and interim financial statements regarding its obligations for certain guarantees. Disclosures are required to be included in financial statements issued after December 15, 2002 (see Note 7). FIN 45 also requires the guarantor to recognize a liability for the fair value of an obligation assumed for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the Company’s financial position and results of operations.

In December 2003, the FASB issued FIN 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”), which replaces the same titled FIN 46 that was issued in January 2003. FIN 46R addresses how to identify variable interest entities and the criteria that require a company to consolidate such entities in its financial statements. FIN 46R is effective for the first reporting period that ends after March 15, 2004. The Company does not believe that the adoption of FIN 46R will have a material impact on its financial position and results of operations.

Liquidity and Capital Resources

Net cash provided by operating activities was $3.3 million for fiscal 2004, compared to net cash provided by operating activities of $0.04 million and $9.9 million for fiscal 2003 and fiscal 2002, respectively. The increase in net cash provided by operating activities from fiscal 2003 to fiscal 2004 was primarily due to the increase in net income of $18.3 million. The primary components of net cash provided by operating activities for fiscal 2004 were: (1) a decrease in deferred income taxes of $1.3 million; (2) an increase in trade accounts payable and other accrued liabilities of $2.4 million; and (3) the write-off of deferred loan origination fees of $1.2 million; offset by (4) an increase in inventories of $6.4 million and (5) an increase in receivables of $2.0 million. The decrease in net cash provided by operating activities from fiscal 2002 to fiscal 2003 was primarily due to the decrease in net income of $16.8 million resulting from the loss associated with the cumulative effect of accounting change in fiscal 2003. The primary components of net cash provided by operating activities for fiscal 2003 were: (1) an increase in inventories of $8.7 million; (2) an increase in accounts receivable of $2.2 million and (3) an increase in refundable income taxes, prepaid expenses and other assets of $1.7 million; offset by (4) an increase in trade accounts payable and other accrued liabilities of $4.9 million.

Net cash used in investing activities was $9.8 million for fiscal 2004. The primary components were routine capital expenditures and a significant plant expansion totaling $10.0 million. Net cash used in investing activities was $16.1 million for fiscal 2003. The primary component was routine capital expenditures and a significant plant expansion totaling $16.2 million. Net cash used in investing was $7.3 million for fiscal 2002. The primary components were for routine capital expenditures totaling $6.0 million.

Net cash provided by financing activities was $6.4 million for fiscal 2004. The primary components were (1) borrowings under the new revolving credit facility of $13.3 million and (2) borrowings under the equipment term loan subline and the real estate term loan subline of $5.0 million each, offset by (3) repayment of revolving credit agreement with former lender of $15.1 million; (4) principal payments on long-term debt of $0.8 million and (5) loan origination fees of $0.7 million. Net cash provided by financing activities was $11.8 million for fiscal 2003. The primary components were (1) borrowing under the revolving credit facility of $15.1 million; offset by (2) loan origination fees of $1.6 million incurred in fiscal 2003 that did not occur in fiscal 2002; (3) special purpose entity distributions of $1.4 incurred in fiscal 2003 that did not occur in fiscal 2002 and (4) principal payments on long-term debt of $0.3 million. Net cash provided by financing activities was $0.2 million for fiscal 2002, due to the capital contribution to 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.

Effective August 13, 2003, the Company terminated its five-year variable-rate $50 million revolving credit facility. Existing debt issuance costs related to the Company’s former $50 million facility in the amount of $1.2 million were written off and charged to interest expense in conjunction with the termination of this facility. A prepayment penalty in the amount of $1.0 million was paid to the former lender and charged to interest expense, also in conjunction with the termination of this facility. Also effective August 13, 2003, the Company obtained a three-year variable-rate $40 million revolving credit facility from a new lender, which includes a $5 million real estate term loan subline, a $5 million equipment term loan subline and a $7.5 million letter of credit subfacility. Funds available under this new facility are available for working capital requirements, permitted investments and general corporate purposes. Borrowings under the new 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 Company’s assets. The interest rate for borrowings under the new revolving credit facility at March 6, 2004 was 5% (prime plus 1%). Borrowings under the new facility are due the earlier of ninety days prior to the redemption of the Company’s Senior Notes due 2006 (“the Notes”) or August 13, 2006. Repayment is also required in the amount of the proceeds from the sale of any collateral. The interest rate for the new real estate term loan subline and the equipment term loan subline is 5.25% (prime plus 1.25%). In addition, the Company is required to satisfy certain financial covenants regarding cash flow and capital expenditures.

As of March 6, 2004, the Company had $0.2 million in cash and cash equivalents on hand, had outstanding borrowings under its revolving credit facility of $13.3 million and borrowing availability of approximately $12.9 million. Also, as of March 6, 2004, the Company had borrowings under the real estate subline and the equipment subline of $4.7 million and $4.6 million, respectively. As of March 1, 2003, the Company had $0.3 million in cash and cash equivalents on hand, had outstanding borrowings under the former credit facility of $15.1 million and had approximately $4.6 million of additional borrowing availability.

Fiscal 2004 net cash provided by operating activities was 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 2003, net cash provided by operating activities during fiscal 2004, and borrowings under both the former credit facility and the new credit facility. The Company anticipates that its fiscal 2005 cash requirements for working capital and debt service will be met through a combination of funds provided by operations and borrowings under the new credit facility.

The Company has budgeted approximately $9.9 million for capital expenditures in fiscal 2005. These expenditures are primarily designated for routine food processing capital improvement projects and other miscellaneous expenditures. The Company believes that funds from operations and funds from its 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 the Company 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 Company’s credit facility, the issuance of industrial revenue bonds or equity investment. The incurrence of additional long-term debt is governed and restricted by the Company’s existing debt instruments. Furthermore, there can be no assurance that additional long-term financing will be available on advantageous terms (or any terms) when needed by the Company.

The Company anticipates continued sales growth in key market areas. As noted above, however, this growth will require future capital expansion projects to increase existing plant capacity in order 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. The Company leases 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 entity. Accordingly, Columbia Hill Aviation’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 Columbia Hill Aviation, and the financing agreements between Columbia Hill Aviation and its creditor, the Company does not maintain the legal rights of ownership to the aircraft, nor does Columbia Hill Aviation’s creditor maintain any legal recourse to the Company. On March 8, 2004 the Company took title to the aircraft. See also “Restructuring of Senior Notes” below concerning the Company’s assumption, subsequent to March 6, 2004, of the airplane lease previously held by Columbia Hill Aviation.

Logistics Agreement. Effective March 3, 2002, the Company entered into a one-year logistics agreement with PF Distribution, LLC (“PF Distribution”), owned 100% by PF Management. The agreement was amended on March 2, 2003 to provide for a continuous term. Under the agreement, PF Distribution served as the exclusive logistics agent for the Company, and provided all warehousing, fulfillment and transportation services to the Company. The cost of PF Distribution’s services was based on flat rates per pound, which were calculated based on weight and volume characteristics of products, inventory pounds maintained and inventory pounds shipped. Rates were determined based on historical costs and industry standards. In fiscal 2004, distribution expense recorded in selling, general and administrative expense was approximately $31.1 million, of which approximately $30.1 million had been paid to PF Distribution as of March 6, 2004. In fiscal 2003, distribution expense recorded in selling, general and administrative expense was approximately $21.5 million, of which approximately $21.3 million had been paid to PF Distribution as of March 1, 2003. See also “Restructuring of Senior Notes” below concerning the termination, subsequent to March 6, 2004, of the logistics agreement with PF Distribution.

Restructuring of Senior Notes. On March 8, 2004, following a consent solicitation in which consents of holders of $112.4 million in aggregate principal amount of the Company’s outstanding Notes, representing 97.74% of the outstanding Notes, consented to a Fourth Supplemental Indenture between the Company and U.S. Bank National Association, as trustee (the “Trustee”), the Company entered into the Fourth Supplemental Indenture with the Trustee. Among other things, the Fourth Supplemental Indenture increased the annual interest rate on the Notes from 10.75% to 12.25% through March 31, 2005 and 13.25% thereafter; required the payment of a cash consent fee equal to 3% of the principal amount of Notes held by each consenting noteholder; granted to the noteholders liens on the assets of the Company and its subsidiaries, such liens being junior to the senior liens securing the Company’s current credit facility, granted to noteholders a repurchase right allowing all of the noteholders to require the Company to repurchase their Notes at par plus accrued interest on March 31, 2005, provided for the payment of a portion of certain cash flow of the Company (referred to as “excess cash”) to reduce the principal amount of Notes outstanding at the end of the Company’s fiscal years; added restrictive covenants limiting the compensation payable to certain senior executives of the Company and limiting future related party transactions; required the termination of all related party transactions, except for certain specifically-permitted transactions (see Item 13, “Certain Relationships and Related Transaction”); provided for the assumption by the Company of approximately $15.4 million of subordinated debt of PF Management; required the Company to comply with certain corporate governance standards, including appointing an independent director acceptable to the Company and the noteholders to its board and hiring an independent auditor to monitor the Company’s compliance with the Indenture; and waived any and all defaults of the Indenture existing as of March 8, 2004.

The restrictive covenants limiting compensation payable to certain senior executives of the Company contain provisions for bonuses based on the profitability of the Company and cash payments made on the Notes which could significantly increase the limitation.

Concurrently with the execution of the Fourth Supplemental Indenture the Company took title to an aircraft transferred from a related party subject to existing purchase money debt; forgave the $993,247 related party note receivable from its principal shareholders; cancelled the balances owed by the Company to certain related parties; and assumed the operating leases of PF Distribution in connection with the Fourth Supplemental Indenture. Minimum lease payments on the former PF Distribution operating leases will be $3.0 million during fiscal year 2005, $2.9 million during fiscal year 2006 and $0.5 million during fiscal year 2007.

As noted above, the Company assumed $15.4 million of subordinated debt of PF Management in connection with the Fourth Supplemental Indenture. Principal payments on the former PF Management debt will be $4.8 million during fiscal year 2005, $3.6 million during fiscal year 2006 and $7.0 million during fiscal year 2007. The interest rates on the former PF Management debt range from 4.4% to 25%.

Other Events. On May 11, 2004, the shareholders of PF Management, the sole shareholder of the Company, agreed to sell their shares of stock in PF Management to an affiliate of Madison Dearborn Capital Partners (“MDCP”). The sale is scheduled to close on or around June 30, 2004, subject to the satisfaction or waiver of conditions typical of leveraged buyout transactions, including (among others) these:

• The buyer’s receipt of, and reasonable satisfaction with, consents of certain of the Company’s customers and suppliers and the acquiescence of federal antitrust authorities;

• The absence at the closing of a material adverse change in the assets, liabilities, business, operations, results or condition of the Company and PF Management since November 29, 2003;

• The buyer’s receipt of, and reasonable satisfaction with, audited financial statements of the Company for the fiscal year ended March 6, 2004 and of PF Management for the same fiscal year and the two immediately preceding fiscal years;

• The buyer’s receipt of tenders of not less than a majority of the aggregate principal amount of the Company’s 10-3/4% senior notes due 2006; and

• The buyer’s receipt of financing necessary to consummate the transaction.

The Company’s President and Chief Executive Officer, Norbert E. Woodhams, and its Senior Vice President of Sales and Marketing, Robert C. Naylor, have signed amended employment agreements committing them to continue working for the Company after the sale. The stated term of employment for each executive is one year, but each agreement will renew automatically and continuously year-to-year unless terminated. Messrs. Woodhams and Naylor are both expected to make significant equity investments in the Company under its new owner.

MDCP has received and has accepted commitment letters from Wachovia Bank, N.A. and Bank of America, N.A., and certain of their affiliates, committing to provide debt financing for this transaction. The debt financing commitments are subject to conditions typical of LBO financing, such as:

• The receipt of all consents and approvals necessary or, in the reasonable opinion of the banks, desirable in connection with the transaction;

• The absence at the closing of a material adverse effect on the business of the Company since March 1, 2003; and

• Completion of MDCP’s purchase of the Company, and the remainder of the transaction, consistent with the terms and conditions of the definitive documentation.

There is no assurance that any or all of the conditions to the banks’ obligations to finance this transaction will be satisfied or waived or that any or all of the other conditions to the buyer’s and shareholders’ obligations to close the transaction will be satisfied or waived or that the transaction will close in accordance with the agreed-upon terms (or at all).

Commercial Commitments, Contingencies and Contractual Obligations

The Company provided a secured letter of credit in the amount of $3.5 million in both fiscal 2004 and fiscal 2003 and $1.5 million in fiscal 2002 to its insurance carrier for the underwriting of certain performance bonds. This letter of credit expires in fiscal 2005. 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 $75,000 in both fiscal 2004 and fiscal 2003 and $225,000 in fiscal 2002. In addition, the Company provides secured letters of credit to a limited number of suppliers. Letters of credit for suppliers totaled $250,000 in both fiscal 2004 and fiscal 2003 and $500,000 in fiscal 2002.

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
			Less than 1						More than 5
	Total		Year		1 – 3 Years		3 – 5 Years		Years
Letters of Credit	$	3,825,000	$	3,825,000	$	—	$	—	$	—
Purchase Commitments for Capital Projects		204,517		204,517		—		—		—

Total	$	4,029,517	$	4,029,517	$	—	$	—	$	—


	Contractual Obligations by Fiscal Year
			Less than 1						More than 5
	Total		Year		1 – 3 Years		3 – 5 Years		Years
Long-Term Debt	$	137,842,637	$	1,214,280	$	136,357,374	$	270,983	$	—
Capital Lease Obligations		244,713		100,656		135,016		9,041		—
Operating Lease Obligations		2,514,334		878,482		999,357		446,095		190,400
Consulting and Noncompete Agreements		327,411		327,411		—		—		—
Obligation of Special Purpose Entity		5,606,686		313,344		680,741		660,158		3,952,443

Total	$	146,535,781	$	2,834,173	$	138,172,488	$	1,386,277	$	4,142,843

See Notes 14 and 17 to the Consolidated Financial Statements for a further 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 2004, fiscal 2003 or fiscal 2002. The Company does not expect inflation to have a material impact on its results of operations for fiscal 2005.

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 6, 2004, March 1, 2003 or March 2, 2002. Certain of the Company’s outstanding nonderivative financial instruments at March 6, 2004 are subject to interest rate risk, but not subject to foreign currency or commodity price risk. There was no significant change in market risk from fiscal 2003 to fiscal 2004.

Interest Rate Risk

The Company manages potential loss on long-term debt from changing interest rates by maintaining a combination of fixed and variable rate financial instruments in amounts and with maturities that management considers appropriate. The risks associated with long-term debt at March 6, 2004 have not changed materially since March 1, 2003. Of the long-term debt outstanding at March 6, 2004, the $115.0 million of Notes and the borrowings under the real estate term loan subline and the equipment term loan subline of $4.7 million and $4.6 million, respectively, accrued interest at a fixed rate, while the $13.3 million of outstanding borrowings under the revolving credit facility and the $5.6 million obligation of Columbia Hill Aviation accrued interest at variable rates. A rise in prevailing interest rates could have adverse effects on the Company’s financial condition and results of operations. A 25 basis point increase in the reference rates for the Company’s average variable rate debt outstanding during fiscal 2004 would have decreased the Company’s income for that period by approximately $66,000.

The following table summarizes the Company’s market risks associated with long-term debt outstanding at March 6, 2004. The table presents principal cash outflows and related interest rates by maturity date.


	March 6, 2004
	Expected Maturities in Fiscal Years
	Long-Term Debt
					Weighted Average
	Variable Rate		Fixed Rate		Interest Rate
2005	$	1,527,624	$	100,656		10.81	%
2006		1,545,309		115,089,199		11.62	%
2007		20,492,806		45,817		4.96	%
2008		369,450		280,024		5.53	%
Thereafter		4,243,151		—		5.49	%

Total	$	28,178,340	$	115,515,696		9.61	%

Fair Value	$	28,178,340	$	115,515,696		9.61	%

Foreign Exchange Rate Risk

The Company bills customers in foreign countries in US dollars, with the exception of sales to Canada. The Company does not believe the foreign exchange rate risk on Canadian sales is material. 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 6, 2004 and March 1, 2003, 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, flour, soy and packaging materials used in food processing products. During fiscal 2004, the Company experienced a significant increase in the price of beef. The Company managed the increase in beef prices by passing on cost increases to customers and by improving the formulation of beef products. At March 6, 2004, 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.

Item 8. Financial Statements and Supplementary Data

The information required by this Item is set forth on pages F-1 through F-30.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s President and Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Company’s President and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are designed to ensure that information relating to the Company (including its consolidated subsidiaries) that is required to be included in the Company’s reports filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of this annual report).

PART III

Item 10. Directors and Executive Officers of the Registrant

DIRECTORS AND EXECUTIVE OFFICERS

JAMES C. RICHARDSON, JR., CHAIRMAN, age 54, has been a director since 1987, and became Chairman of the Board of Directors on December 16, 1999. From 1993 until becoming Chairman 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 47, 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.

BOBBY G. HOLMAN, DIRECTOR, age 68, 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 2003, Mr. Holman was a member of the Audit and Special Committees of the Board of Directors, until those committees were disbanded in September 2002.

WILLIAM R. McDONALD III, DIRECTOR, age 69, 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. Mr. McDonald served as Mayor of the City of Hickory, North Carolina, an elective office he held from 1981 to December 2001. During fiscal 2003, he served on the Audit and Sensitive Transactions Committees of the Company’s Board of Directors, until those committees were disbanded in September 2002.

BRUCE E. MEISNER, DIRECTOR, age 54, was elected to the Board of Directors by the Board itself on February 3, 2000 to fill the unexpired term of L. Dent Miller, who had resigned from the Board concurrent with his retirement from the Company. Mr. Meisner is the proprietor of Bruce E. Meisner Appraisal Company in Hickory, North Carolina, a company providing real estate appraisal services. During fiscal 2003, Mr. Meisner served on the Audit, Executive Compensation and Special Committees, until those committees were disbanded in September 2002.

JOHN H. GRIGG, DIRECTOR, age 42, was elected to the Board of Directors on December 11, 2003 to fill the position of a new director following the expansion of the Board of Directors to six members. Mr. Grigg is the founder and President of LTA, LLC, a publishing and event business established in 2001. From 1989 to 2000, he served as Partner and Managing Director of Bowles Hollowell Conner & Co. and First Union Capital Markets, investment banking firms.

NORBERT E. WOODHAMS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, age 58, 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. Mr. Woodhams served as a director from 1998 to September 2002.

PAMELA M. WITTERS, CHIEF FINANCIAL OFFICER, TREASURER AND SECRETARY, age 47, 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 52, 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 for Pierre Cincinnati, including Vice President of Sales.

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”).


	Annual Compensation										Long Term
											Compensation
											Option Awards
											(# of Shares			All Other
Name and	Fiscal		Salary			Bonus			Other		Underlying			Compensation
Principal Position	Year		($)			($)			($) (1)		Options)			($)(2)
James C. Richardson, Jr.		2004	$	1,020,046		$	0		$	188,652	$	0		$	0
Chairman		2003		1,000,800			1,615,000			276,947		0			0
		2002		481,148	(3)		750,000	(4)		207,314		0			0

David R. Clark		2004	$	1,020,046		$	0		$	0	$	0		$	5,500
Vice Chairman		2003		1,000,800			1,750,000			0		0			3,200
		2002		665,604	(5)		1,368,800			18,876		0			3,200

Norbert E. Woodhams		2004	$	356,731		$	518,213		$	0	$	0		$	9,200
President and		2003		350,000			678,563			0		0			3,200
Chief Executive Officer		2002		307,693			324,771			0		0			3,200

Pamela M. Witters		2004	$	214,038		$	278,929		$	0	$	0		$	7,400
Chief Financial Officer,		2003		210,000			407,137			0		0	(6)		3,200
Treasurer and Secretary		2002		184,669			201,000			0		0			3,200

Robert C. Naylor		2004	$	224,231		$	314,592		$	0	$	0		$	8,000
Senior Vice		2003		220,000			427,140			0		0	(7)		1,040
President of		2002		193,860			202,416			0		0			1,040
Sales

(1) Represents the value of life insurance premiums. 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) Represents 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. 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. See Note 16 to the consolidated financial statements “Transactions with Related Parties.”

(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.

(5) For fiscal 2002, excludes $100,000 paid by the Company and offset from amounts owing to HERTH. See Note 16 to the consolidated financial statements “Transactions with Related Parties.”

(6) Effective July 26, 2002, Ms. Witters received $12,500 in exchange for the cancellation of all outstanding options to purchase common stock that had been issued and were outstanding, including options not yet exercisable as of the date of cancellation.

(7) Effective July 26, 2002, Mr. Naylor cancelled all outstanding options to purchase common stock that had been issued and were outstanding, including options not yet exercisable as well as options exercisable as of the date of cancellation. No value was received in connection with the cancellation of the options due to the excess of the exercise price of the options over the market value of the common stock.

COMPENSATION OF DIRECTORS

During fiscal 2004, directors were paid $5,000 per board meeting attended except that directors who were employees of the Company received no payment for services 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 “Executive Compensation.” 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.

As described under the heading “Restructuring of Senior Notes” in Item 7, the Company entered into a Fourth Supplemental Indenture on March 8, 2004. Among other things, the Fourth Supplemental Indenture limits the annual compensation payable to Messrs. Richardson and Clark, as well as the value of the benefits and perquisites provided to them. The Fourth Supplemental Indenture provides that annual bonuses may be paid to Messrs. Richardson and Clark in accordance with formulas set forth in the Fourth Supplemental Indenture.

In the case of Mr. Clark, the Employment Agreement dated as of September 3, 2001 replaced 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 the superseded 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.”

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 was 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 Woodhams Incentive Agreement was further amended (the “Third Amendment”) on May 11, 2004 to provide that, in the event of a change of control of the Company within six months following May 11, 2004, Mr. Woodhams will receive a bonus equal to 4% of the net proceeds received by the Company’s shareholder and other executives, after certain adjustments, reductions and deposits. Concurrently with the execution of the Third Amendment, Mr. Woodhams executed a Waiver of Payment under which he waived all rights to all other payments provided for in the Woodhams Incentive Agreement upon a change of control of the Company. Accordingly, the only payment Mr. Woodhams will receive upon a change of control is that set forth in the Third Amendment. The term of the Woodhams Incentive Agreement expires on June 8, 2004 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 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 “Executive Compensation.” 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, the employment agreements provided that Ms. Witters and Mr. Naylor would 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. On May 11, 2004, however, each of Ms. Witters and Mr. Naylor entered into amendments to their employment agreements (the “Amendments”). The Amendments provide that, in the event of a change of control of the Company within six months following May 11, 2004, each of Ms. Witters and Mr. Naylor will receive a bonus equal to 3% of the net proceeds received by the Company’s shareholder and other executives, after certain adjustments, reductions and deposits. Concurrently with the execution of the Third Amendment, each of Ms. Witters and Mr. Naylor executed a Waiver of Payment under which they waived all rights to all other payments provided for in their employment agreements upon a change of control of the Company. Accordingly, the only payments that Ms. Witters and Mr. Naylor will receive upon a change of control is that set forth in the Amendments.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

PRINCIPAL SHAREHOLDERS

The following table shows, as of April 30, 2004, except as otherwise indicated, the holdings of Pierre Foods common stock by (1) the sole entity or persons known to us to be the beneficial owner of more than five percent of the outstanding shares, and (2) 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		100,000		100	%
Hickory, NC 28601
James C. Richardson, Jr. (3) P.O. Box 3967		100,000		100	%
Hickory, NC 28603
David R. Clark (3) P.O. Box 3967		100,000		100	%
Hickory, NC 28603
James M. Templeton (3) P.O. Box 1295		100,000		100	%
Claremont, NC 28610
All directors and executive officers as a group (8 persons)		100,000		100	%

(1) The actual number of shares outstanding at April 30, 2004 was 100,000.

(2) All of the shares owned by PF Management are also deemed to be beneficially owned by Messrs. Richardson, Clark, and Templeton, who are shareholders of PF Management.

(3) Consists of 100,000 shares deemed to be owned beneficially through PF Management

Item 13. Certain Relationships and Related Transactions

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

As described in “Liquidity and Capital Resources – Restructuring of Senior Notes” above, on March 8, 2004 the Company and the Trustee under the Company’s Indenture executed a Fourth Supplemental Indenture and, pursuant to the terms of the Fourth Supplemental Indenture, the Company terminated substantially all of its related party transactions. The following related party transactions are specifically permitted under the terms of the Fourth Supplemental Indenture:

• Columbia Hill Land Company, LLC, owned 50% by each of Messrs. Richardson and Clark, leases office space to the Company in Hickory, North Carolina, pursuant to a ten-year lease that commenced in September 1998. Rents paid under the lease were approximately $116,000 in fiscal 2004.

• As described above, on August 13, 2003, the Company obtained a three year variable rate $40 million revolving credit facility from Fleet Capital Corporation. Messrs. Richardson and Clark have provided guarantees of value and validity of the collateral securing this credit facility; they did not, however, guarantee payment of the facility, nor are they receiving guarantee fees (see further discussion in “Liquidity and Capital Resources”).

• On March 8, 2004 the Company took title to an aircraft that was transferred from Columbia Hill Aviation, LLC (“CHA”), owned 100% by PF Management, subject to existing purchase money debt. The aircraft was originally leased by the Company from CHA beginning in the fourth quarter of fiscal 2002. Effective March 1, 2002, the original lease was cancelled and replaced with a non-exclusive lease agreement. Pursuant to this new lease, the Company was 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, CHA was responsible for all expenses incurred in the operation of the use of the aircraft, except that the Company provided its own flight crew. During fiscal 2004, the Company paid CHA approximately $2.6 million in lease payments. CHA was not a subsidiary of the Company; however, the Company considered CHA a non-independent special purpose leasing entity. Accordingly, CHA’s financial condition, results of operations and cash flows have been included in the Company’s consolidated financial statements included herein. Under the terms of the operating lease with CHA, and the financing agreements between CHA and its creditor, the Company did not maintain the legal rights of ownership to the aircraft, nor did CHA’s creditor maintain any legal recourse to the Company.

Any related party transactions described below that were in effect at March 6, 2004 were subsequently terminated as of March 8, 2004 pursuant to the terms of the Fourth Supplemental Indenture. As a result of the termination of these related party transactions, subsequent to March 8, 2004, the Company will perform the purchasing and distribution services internally. Other related party services will be outsourced as necessary at comparable cost.

Columbia Hill Management, Inc. (“Columbia Hill”), owned 50% by each of Messrs. Richardson and Clark, provided accounting, tax and administrative services to Pierre Foods, as well as professional services for the management of special projects. Fees paid for these services were approximately $203,000 in fiscal 2004.

During fiscal 2004, PF Management owed the Company as much as $993,247 pursuant to a promissory note payable on demand and bearing interest at the prime rate. PF Management is owned in part by Messrs. Richardson and Clark, who have unconditionally guaranteed repayment of the note. As of March 8, 2004, this note was forgiven and included in the debt assumed per the Fourth Supplemental Indenture.

Effective February 21, 2003, Messrs. Richardson and Clark sold their net assets in Compass Outfitters, LLC, a company that provides team-building opportunities for customers and employees of the Company, to the Company for a total of $270,983. In exchange for the net assets, the Company issued notes in the amount of $135,491 to each of Messrs. Richardson and Clark. The notes are five-year notes, bearing interest at 6% per annum, with interest and principal due at maturity.

PF Purchasing, LLC (“PFP”), owned 100% by PF Management, served as the exclusive purchasing agent for the Company, pursuant to a three-year agreement that commenced September 3, 2001. Under the agreement, PFP made an incentive payment of $100,000 per quarter to the Company in consideration of the opportunity to act as exclusive purchasing agent, and in exchange is entitled to receive all rebates or discounts receivable by Pierre Foods from suppliers and vendors for orders negotiated and placed by PFP. In fiscal 2004, net fees paid to PFP were approximately $2,122,000.

Effective March 3, 2002, the Company entered into a logistics agreement with PF Distribution, LLC (“PF Distribution”), owned 100% by PF Management. Under the agreement, PF Distribution served as the exclusive logistics agent for the Company, and provided all warehousing, fulfillment and transportation services to the Company. The cost of PF Distribution’s services was based on flat rates per pound, which were calculated based on weight and volume characteristics of products, inventory pounds maintained and inventory pounds shipped. Rates were determined based on historical costs and industry standards. In fiscal 2004, distribution expense recorded in selling, general and administrative expense was approximately $31,126,000 of which approximately $30,999,000 million had been paid to PF Distribution as of March 6, 2004.

Atlantic Cold Storage of Mocksville, LLC (“ACS”), owned one-third each by Messrs. Richardson and Clark, plans to construct and finance a public cold storage warehouse which would lease space to the Company as well as to others. The proposed agreement with the Company is for 10 years and a minimum of 4,000 pallet positions to be leased as of the first date the facility is operational. The Company also agreed to pay $250,000 for specialized construction costs. During fiscal 2001, the Company paid $250,000 to ACS for the specialized construction costs.

All material transactions with affiliates of the Company were reviewed by the entire Board of Directors, where they were approved by a majority of the independent directors. The directors obtained and relied upon investment banking “fairness” opinions when considering these transactions to the extent required by the indenture governing the senior notes.

Item 14. Principal Accountant Fees and Services

The following table presents fees billed for professional audit services rendered by Deloitte & Touche LLP for the audit of our annual financial statements for the years ended March 6, 2004, and March 1, 2003, and for other services rendered by Deloitte & Touche LLP during those periods:


	Fiscal Years Ended
	March 6,		March 1,
	2004		2003
Audit Fees (1)	$	281,000	$	295,650
Audit Related Fees (2)		—		2,520
Tax Fees (3)		80,700		47,829
All Other Fees (4)		—		—

	$	361,700	$	345,999

(1) Audit fees consisted of audit work performed in the preparation of financial statements, as well as work generally only the independent auditor can reasonably be expected to provide, such as statutory audits.

(2) Audit related fees consisted principally of services provided for consultation on accounting standards.

(3) Tax fees include all tax services relating to tax compliance, tax planning and reporting.

(4) No other fees for professional services rendered to the Company during fiscal 2004 or fiscal 2003.

(5) The Board considered the impact on auditor’s independence in connection with non-audit services and concluded that there is no adverse effect on their independence.

Policy on Board of Directors Pre-Approval of Audit and Permissible Non-audit Services of Independent Auditors

Consistent with SEC policies regarding auditor independence, the Board of Directors has responsibility for appointing, setting compensation and overseeing the work of the independent auditor. In recognition of this responsibility, the Board of Directors has established a policy to pre-approve all audit and permissible non-audit services provided by the independent auditor.

PART IV

Item 15. 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 below.

(b) Reports On Form 8-K.

A current report on Form 8-K was filed on December 30, 2003 to provide information about the Company’s results of operations to holders of the Notes while the Company negotiated the terms of a restructuring of its Notes. Included in this filing were the unaudited balance sheets, statements of operations and statements of cash flows for the fiscal year ended March 1, 2003, as well as the first two quarters of the Company’s fiscal year 2004, which quarters ended May 31, 2003 and August 30, 2003.

A current report on Form 8-K was filed on January 28, 2004 to provide information about the Company’s results of operations to holders of the Notes while the Company negotiated the terms of a restructuring of its Notes. Included in this filing were the unaudited balance sheet, statement of operations and statement of cash flows for the third fiscal quarter of 2004 ended November 29, 2003.

A current report on Form 8-K was filed on January 30, 2004, announcing the Company had completed negotiations of a restructuring of its Notes and had distributed consent solicitation materials to holders of the Notes.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 17, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below 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. James C. Richardson, Jr.	Chairman of the Board	May 17, 2004
/s/ David R. Clark David R. Clark	Vice Chairman of the Board	May 17, 2004
/s/ Norbert E. Woodhams Norbert E. Woodhams	Chief Executive Officer and President (Principal Executive Officer)	May 17, 2004
/s/ Pamela M. Witters Pamela M. Witters	Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer)	May 17, 2004
/s/ Bobby G. Holman Bobby G. Holman	Director	May 17, 2004
/s/ Bruce E. Meisner Bruce E. Meisner	Director	May 17, 2004
/s/ William R. McDonald III William R. McDonald III	Director	May 17, 2004
/s/ JOHN H. GRIGG John H. Grigg	Director	May 17, 2004

INDEX TO EXHIBITS


Exhibit No.		Description
3.1		Articles of Restatement of Pierre Foods, Inc., dated July 30, 2002 incorporating Restated Articles of Incorporation (incorporated by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended August 31, 2002)

3.2		Amended and Restated Bylaws of Pierre Foods, Inc., dated September 18, 2002 (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended August 31, 2002)

3.3		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)

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		Form of Global Note

4.4		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))

4.5		Second Supplemental Indenture dated as of February 26, 1999 among the Company, State Street Bank and Trust Company, Trustee, and Fresh Foods Restaurant Group, LLC (incorporated by reference to Exhibit 4.9 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended December 4, 1999)

4.6		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)

4.7		Fourth Supplemental Indenture dated as of March 8, 2004 between the Company and U.S. Bank National Association, Trustee (incorporated by reference to Exhibit 4.8 to the Company’s Annual Report on Form 10-K for its fiscal year ended March 1, 2003)

10.1		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)

10.2		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)


Exhibit No.		Description
10.3		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)

10.4		Employment Agreement dated as of December 31, 2001, between the Company and Pamela M. Witters (incorporated by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K for its fiscal year ended March 2, 2002)

10.5		Employment Agreement dated as of December 31, 2001, between the Company and Robert C. Naylor (incorporated by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K for its fiscal year ended March 2, 2002)

10.6		Assignment and Assumption and Subordination Agreement dated as of March 8, 2004, between Pierre Foods, Inc. and PF Management, Inc. (incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for its fiscal year ended March 1, 2003)

10.7		Termination Agreement dated as of March 8, 2004, between Columbia Hill Aviation, LLC and Pierre Foods, Inc. (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for its fiscal year ended March 1, 2003)

10.8		Termination Agreement dated as of March 8, 2004, between PF Purchasing, LLC and Pierre Foods, Inc. (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for its fiscal year ended March 1, 2003)

10.9		Termination Agreement dated as of March 8, 2004, between PF Distribution, LLC and Pierre Foods, Inc. (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for its fiscal year ended March 1, 2003)

10.10		Loan and Security Agreement, dated as of August 13, 2003, between the Company, PF Management, Inc. and Fleet Capital Corporation, as Lender

10.11		Amendment No. 1 to, and Consent Under Loan and Security Agreement, dated as of March 8, 2004, between Pierre Foods, Inc., PF Management, Inc. and Fleet Capital Corporation

10.12		Stock Purchase Agreement, dated as of May 11, 2004, between PF Management, Inc., the PF Management, Inc. Shareholders, David R. Clark and Pierre Holding Corp

10.13		Third Amendment to Incentive Agreement, dated as of May 11, 2004, between the Company and Norbert E. Woodhams

10.14		Amendment to Employment Agreement, dated as of May 11, 2004, between the Company and Pamela M. Witters

10.15		Amendment to Employment Agreement, dated as of May 11, 2004, between the Company and Robert C. Naylor

12		Calculation of Ratio of Earnings to Fixed Charges

21		Subsidiaries of Pierre Foods, Inc.

31.1		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer

32		Section 1350 Certifications of the Chief Executive Officer and the Chief Financial Officer

99.1		Risk Factors (incorporated by reference to Exhibit 99.1 to the Company’s Annual Report on Form 10-K for its fiscal year ended March 1, 2003)

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.

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 6, 2004 and March 1, 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three fiscal years in the period ended March 6, 2004. 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 6, 2004 and March 1, 2003, and the results of its operations and its cash flows for each of the three fiscal years in the period ended March 6, 2004 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the financial statements, effective March 3, 2002 the Company changed its method of accounting for goodwill.

DELOITTE & TOUCHE LLP
Cincinnati, Ohio
May 17, 2004

F-2

PIERRE FOODS, INC.

CONSOLIDATED BALANCE SHEETS


	March 6,			March 1,
	2004			2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	204,865		$	274,329
Certificate of deposit of special purpose entity		1,240,000			1,240,000
Accounts receivable, net		25,641,608			23,654,358
Inventories		38,974,018			32,584,777
Refundable income taxes		—			165,829
Deferred income taxes		3,569,766			2,642,526
Prepaid expenses and other current assets (includes related party amounts of $24,000 and $375,000 in fiscal 2004 and fiscal 2003, respectively)		3,236,867			3,264,746

Total current assets		72,867,124			63,826,565
PROPERTY, PLANT AND EQUIPMENT, NET		60,695,455			55,549,083

OTHER ASSETS:
Tradename, net		38,808,636			38,808,636
Note receivable-related party		993,247			993,247
Deferred income taxes		482,215			6,283,871
Deferred loan origination fees, net		1,627,601			2,950,109
Other		296,694			369,500

Total other assets		42,208,393			49,405,363

Total Assets	$	175,770,972		$	168,781,011

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt	$	1,628,276		$	369,467
Trade accounts payable		7,170,004			9,422,256
Accrued payroll and payroll taxes		5,745,950			5,929,464
Accrued interest		3,242,623			3,056,662
Accrued promotions		3,064,769			2,280,788
Income taxes payable		39,248			—
Accrued taxes (other than income and payroll)		901,693			561,642
Other accrued liabilities (includes related party amounts of $4,503,219 and $425,330 in fiscal 2004 and fiscal 2003, respectively)		4,964,703			1,490,086

Total current liabilities		26,757,266			23,110,365
LONG-TERM DEBT, less current installments		136,772,418			130,387,174
OBLIGATION OF SPECIAL PURPOSE ENTITY		5,293,342			5,591,813
OTHER LONG-TERM LIABILITIES		327,411			693,750
DEFERRED INCOME TAXES		—			—
COMMITMENTS AND CONTINGENCIES		—			—
SHAREHOLDERS’ EQUITY:
Common stock — Class A, 100,000 shares authorized, issued and outstanding at March 6, 2004 and March 1, 2003		29,438,172			29,438,172
Accumulated deficit		(17,817,637	)		(15,440,263	)
Note receivable-related party		(5,000,000	)		(5,000,000	)

Total shareholders’ equity		6,620,535			8,997,909

Total Liabilities and Shareholders’ Equity	$	175,770,972		$	168,781,011

See accompanying notes to consolidated financial statements.

F-3

PIERRE FOODS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	Fiscal Years Ended
	March 6,			March 1,			March 2,
	2004			2003			2002
REVENUES, NET:	$	358,549,316		$	276,338,823		$	243,277,822
COSTS AND EXPENSES:
Cost of goods sold (includes net related party transactions totaling $5,295,036, $4,283,025 and $620,191 in fiscal 2004, 2003 and 2002, respectively)		254,235,016			184,091,572			160,781,388
Selling, general and administrative expenses (includes related party transactions totaling $32,487,545, $23,155,405 and $3,943,452 in fiscal 2004, 2003 and 2002, respectively)		79,982,134			71,351,817			62,398,791
Net loss on disposition of property, plant and equipment		11,042			88,937			83,833
Depreciation and amortization		4,604,954			4,124,641			6,437,873

Total costs and expenses		338,833,146			259,656,967			229,701,885

OPERATING INCOME		19,716,170			16,681,856			13,575,937

OTHER INCOME (EXPENSE):
Interest expense		(16,979,028	)		(14,228,220	)		(13,206,634	)
Other income, net (includes related party income totaling $371,610 and $58,203 in fiscal 2003 and 2002, respectively)		—			446,825			364,237

Other expense, net		(16,979,028	)		(13,781,395	)		(12,842,397	)

INCOME BEFORE INCOME TAX AND CUMMULATIVE EFFECT OF ACCOUNTING CHANGE		2,737,142			2,900,461			733,540
INCOME TAX PROVISION		(1,303,347	)		(1,122,478	)		(732,960	)

INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		1,433,795			1,777,983			580
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (net of income tax benefit of $10,415,037)		—			(18,604,534	)		—

NET INCOME (LOSS)	$	1,433,795		$	(16,826,551	)	$	580

NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED
Income before cumulative effect of accounting change	$	14.34		$	17.78		$	0.01
Cumulative effect of accounting change		—			(186.05	)

Net income (loss) per common share - basic and diluted	$	14.34		$	(168.27	)	$	0.01

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED		100,000			100,000			100,000

See accompanying notes to consolidated financial statements.

F-4

PIERRE FOODS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


				Common		Additional			Retained			Receivable			Total
	Common			Stock		Paid in			Earnings			From			Shareholders’
	Stock			Class A		Capital			(Deficit)			Shareholder			Equity
BALANCE AT MARCH 3, 2001	$	5,781,480			—	$	23,317,053		$	2,768,265		$	(5,000,000	)	$	26,866,798
Net income		—			—		—			580			—			580
Capital Contributions to special purpose entity		—			—		339,639			—			—			339,639

BALANCE AT MARCH 2, 2002		5,781,480			—		23,656,692			2,768,845			(5,000,000	)		27,207,017
Recapitalization		(5,781,480	)		29,438,172		(23,656,692	)		—			—			—
Net loss		—			—		—			(16,826,551	)		—			(16,826,551	)
Distributions of special purpose entity		—			—		—			(1,382,557	)		—			(1,382,557	)

BALANCE AT MARCH 1, 2003		—			29,438,172		—			(15,440,263	)		(5,000,000	)		8,997,909
Net income		—			—		—			1,433,795			—			1,433,795
Distribution to parent — tax benefit		—			—		—			(3,578,169	)		—			(3,578,169	)
Distributions of special purpose entity		—			—		—			(233,000	)		—			(233,000	)

BALANCE AT MARCH 6, 2004	$	—		$	29,438,172	$	—		$	(17,817,637	)	$	(5,000,000	)	$	6,620,535

See accompanying notes to consolidated financial statements.

F-5

PIERRE FOODS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Fiscal Years Ended
	March 6,			March 1,			March 2,
	2004			2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	1,433,795		$	(16,826,551	)	$	580

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Cumulative effect of accounting change		—			18,604,534			—
Depreciation and amortization		4,604,954			4,124,641			6,437,873
Amortization of deferred loan origination fees		769,587			746,262			528,202
Deferred income taxes		1,296,247			1,286,191			806,004
Write-off of deferred loan origination fees		1,233,530			—			—
Net loss on disposition of assets (net of writedowns)		11,042			88,937			83,833
(Increase) decrease in other assets		72,806			79,831			(440,931	)
Decrease in other long-term liabilities		(366,339	)		(338,946	)		(314,535	)
Changes in operating assets and liabilities providing (using) cash:
Receivables		(1,987,250	)		(2,170,878	)		(3,271,133	)
Inventories		(6,389,241	)		(8,731,922	)		2,951,208
Refundable income taxes, prepaid expenses and other assets		193,708			(1,726,478	)		630,899
Trade accounts payable and other accrued liabilities		2,388,092			4,906,862			2,440,434

Total adjustments		1,827,136			16,869,034			9,851,854

Net cash provided by operating activities		3,260,931			42,483			9,852,434

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of assets to others		278,400			83,000			1,000
Increase in related party notes receivables		—			—			(58,203	)
Capital expenditures		(10,040,768	)		(16,216,292	)		(5,994,017	)
Certificate of deposit of special purpose entity		—			—			(1,240,000	)

Net cash used in investing activities		(9,762,368	)		(16,133,292	)		(7,291,220	)

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (repayment) of revolving credit agreement with former lender		(15,085,147	)		15,085,147			—
Net borrowings under new revolving credit agreement		13,279,986			—			—
Borrowings under equipment term loan subline		5,000,000			—			—
Borrowings under real estate term loan subline		5,000,000			—			—
Principal payments on long-term debt		(849,257	)		(311,967	)		(134,107	)
Loan origination fees		(680,609	)		(1,603,467	)		(1,949	)
Capital contributions to (distributions of) special purpose entity		(233,000	)		(1,382,557	)		339,639

Net cash provided by financing activities		6,431,973			11,787,156			203,583

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(69,464	)		(4,303,653	)		2,764,797
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		274,329			4,577,982			1,813,185

CASH AND CASH EQUIVALENTS, END OF YEAR	$	204,865		$	274,329		$	4,577,982

See accompanying notes to consolidated financial statements.

F-6

PIERRE FOODS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND ACQUISITION

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 Pierre and Design^TM, Pierre Pizza Parlor^TM, Pierre Main Street Diner^TM, Pierre Select^TM, Fast Bites®, Fast Choice®, Rib-B-Q®, Hot ‘n Ready®, Big AZ®, Chop House®, Deli Breaks™ and Mom ‘n’ Pop’s® brand names.

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 value of the underlying assets was allocated to goodwill, trade name and assembled work force and was being amortized on a straight-line basis over lives ranging from fifteen to thirty years until fiscal 2003, at which time, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 (“SFAS 142”), which requires, among other things, the discontinuance of goodwill amortization (Note 2).

Management Buyout. On April 26, 2001, the Company signed a definitive exchange agreement documenting a management buyout proposal by PF Management. In July 2001, 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 2001 by counsel to an Ad Hoc Committee of holders of the Company’s 10.75% 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 2001 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, provided for an increase in the exchange price to be paid in the management buyout from $1.21 to $2.50 per share.

On June 25, 2002, a definitive proxy statement was filed with the Securities and Exchange Commission in connection with a special meeting of shareholders, at which the shareholders were asked to approve the Amended and Restated Agreement and Plan of Share Exchange dated as of December 20, 2001, and amended as of June 20, 2002.

On July 26, 2002, the Company’s shareholders approved the Amended and Restated Agreement and Plan of Share Exchange dated as of December 20, 2001, and amended as of June 20, 2002 and the management buyout of the Company was completed on July 26, 2002. This going-private transaction resulted in the Company becoming a wholly-owned subsidiary of PF Management; accordingly, there is no public market for the Company’s common stock. The Company had 5,781,480 shares issued and outstanding immediately before the closing and 2,500,000 shares of preferred stock authorized, none of which were outstanding. After the closing, the Company amended and restated its Articles of Incorporation to authorize the issuance of up to 100,000 shares of Class A common stock as the only authorized class of capital stock of the Company. All 100,000 shares of authorized common stock have been issued to PF Management. All per share amounts have been retroactively restated in the accompanying Consolidated Financial Statements and Notes to Consolidated Financial Statements for all periods presented to reflect the transaction.

F-7

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The accompanying consolidated financial statements include Pierre Foods, Inc. and subsidiaries, as well as the accounts 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 2004 represents a 53 week period. Fiscal 2003 and fiscal 2002 represent 52 week periods.

The Company’s fiscal year ended March 6, 2004 is referred to herein as “fiscal 2004,” its fiscal year ended March 1, 2003 is referred to herein as “fiscal 2003,” and its fiscal year ended March 2, 2002 is referred to herein as “fiscal 2002.”

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 existed at March 6, 2004 or March 1, 2003.

Goodwill and Other Intangible Assets. During fiscal 2002 and prior years, Goodwill and other intangible assets were being amortized using the straight line method over a 30 year period. The carrying value of goodwill and other intangible assets was evaluated periodically as events and circumstances indicated a possible inability to recover its carrying amount. Amortization expense recognized for the fiscal year ended March 2, 2002 was $2,693,499.

In adopting SFAS 142, the Company considered valuations based discounted cash flow models and on market values of publicly-traded equity, as adjusted, plus publicly-owned subordinated notes, which were determined in conjunction with the Management Buyout in fiscal 2003 (See Note 1 – Basis of Presentation, Acquisition and Discontinued Operations for discussion on Management Buyout). The Company’s analysis determined that the entire carrying amount of the goodwill balance at March 3, 2002 was impaired. The carrying amount, $29,019,571 was written-off as the Cumulative Effect of an Accounting Change, net of income taxes of $10,415,037, in the statement of operations.

F-8

Prior to adopting SFAS 142, the Company had the following acquired intangible assets recorded as of March 2, 2002:


	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Goodwill	$	33,571,687	$	(4,552,116	)	$	29,019,571

Intangible assets with indefinite lives:
Trade name	$	44,340,000	$	(5,531,364	)	$	38,808,636

Total	$	77,911,687	$	(10,083,480	)	$	67,828,207

As required by SFAS 142, the results for fiscal 2002 have not been restated. The table below presents the effect on net income (loss) and income (loss) per share as if SFAS 142 had been in effect for fiscal 2002:


	Fiscal		Fiscal			Fiscal
	Year Ended		Year Ended			Year Ended
	March 6, 2004		March 1, 2003			March 2, 2002
Reported net income (loss)	$	1,433,795	$	(16,826,551	)	$	580
Add back goodwill and tradename amortization (net of tax)		—		—			1,688,823

Adjusted net income (loss)	$	1,433,795	$	(16,826,551	)	$	1,689,403

Basic and diluted net
Income (loss) per share
Reported net income (loss)	$	14.34	$	(168.27	)	$	0.01
Add back goodwill and tradename amortization (net of tax)		—		—			16.88

Adjusted net income (loss)	$	14.34	$	(168.27	)	$	16.89

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.

F-9

Significant Customer. Sales to Carl Karcher Enterprises Inc (“CKE”) accounted for approximately 24% and 11%, of our net sales in fiscal 2004 and 2003, respectively. No other customer accounted for 10% or more of net sales during fiscal years 2004, 2003 and 2002.

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, in accordance with Emerging Issues Task Force Issue No. 01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of a Vendor’s Products)”. 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 liability.

Advertising Costs. The Company expenses advertising costs as incurred. Advertising expense for fiscal 2004, fiscal 2003 and fiscal 2002 was $558,689, $652,927 and $810,367, respectively.

Research and Development. The Company expenses research and development costs as incurred. Research and development expense for fiscal 2004, fiscal 2003 and fiscal 2002 was $885,575, 648,774 and $372,797, 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 operations for fiscal 2004, fiscal 2003 and fiscal 2002 was $31,126,379, $21,544,140 and $17,828,859, respectively (See Note 16).

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 2003 and fiscal 2002 have been reclassified, where applicable, to conform to the financial statement presentation used in fiscal 2004.

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.

Going Concern Assumption. Significant assumptions underlie the belief that the Company anticipates that its fiscal 2005 cash requirements for working capital and debt service will be met through a combination of funds provided by operations and borrowings under its $40 million credit facility, including among other things, that there will be no material adverse developments in the business, liquidity or significant capital requirements of the Company.

F-10

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses how to identify variable interest entities and the criteria that require a company to consolidate such entities in its financial statements. As originally issued, FIN 46 was effective on February 1, 2003 for new transactions and on July 1, 2003 for existing transactions. In December 2003, the FASB deferred the effective date for transactions entered into prior to February 1, 2003, to the first reporting period that ends after March 15, 2004. The Company does not believe that the adoption of FIN 46 will have a material impact on its financial position and results of operations.

F-11

3. ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable consist of the following:


	March 6,		March 1,
	2004		2003
Accounts receivable:
Trade accounts receivable (less allowance for doubtful receivables of $353,543 and $309,741 at March 6, 2004 and March 1, 2003)	$	24,300,201	$	23,072,351
Other receivables		1,341,407		582,007

Total accounts receivable	$	25,641,608	$	23,654,358

Related party note receivable (includes accrued interest) (Note 16):	$	993,247	$	993,247

Total noncurrent note receivable	$	993,247	$	993,247

See Note 16 regarding a $5,000,000 note receivable from a significant shareholder presented as a reduction of shareholders’ equity.

The following is a summary of activity in the allowance for doubtful receivables for the three years in the period ended March 6, 2004 :


			Additions		Deduction
	Balance		Charged to		Amounts		Balance
	Beginning		Costs and		Charged		End of
Year Ended	of Period		Expenses		Off-Net		Period
March 6, 2004	$	309,741		507,077		463,275	$	353,543
March 1, 2003		219,118		108,646		18,023		309,741
March 2, 2002		244,881		199,840		225,603		219,118

4. INVENTORIES

A summary of inventories, by major classification, follows:


	March 6,		March 1,
	2004		2003
Manufacturing supplies	$	1,572,212	$	1,361,313
Raw materials		5,427,936		6,688,473
Work in process		1,157		3,955
Finished goods		31,972,713		24,531,036

Total	$	38,974,018	$	32,584,777

F-13

5. PROPERTY, PLANT AND EQUIPMENT

The major components of property, plant and equipment are as follows:


	Estimated	March 6,		March 1,
	Useful Life	2004		2003
Land		$	1,270,025	$	1,304,018
Land improvements	10-20 years		585,729		382,204
Buildings	20-40 years		26,492,579		23,454,089
Leasehold improvements	5-20 years		1,145,737		1,521,889
Machinery and equipment	5-20 years		45,793,907		38,915,741
Machinery and equipment under capital leases	5-15 years		325,871		389,873
Furniture and fixtures	5-15 years		5,798,747		5,653,632
Furniture and fixtures under capital leases	5-15 years		58,102		58,102
Aircraft (Note 16 and Note 17)	16 years		6,200,000		6,200,000
Automotive equipment	2-5 years		644,926		816,353
Construction in progress			338,357		1,962,435

Total			88,653,980		80,658,336
Less accumulated depreciation and amortization			27,958,525		25,109,253

Property, plant and equipment, net		$	60,695,455	$	55,549,083

6. INTANGIBLE ASSETS

Intangible assets consist of the following:


	March 6,		March 1,
	2004		2003
Tradename	$	38,808,636	$	38,808,636

The Company adopted SFAS 142, “Goodwill and Other Intangible Assets,“on March 3, 2002. Upon adoption, the Company ceased amortizing goodwill and indefinite-lived intangibles. The Company recorded no amortization expense in fiscal 2004 and fiscal 2003.

F-14

7. FINANCING ARRANGEMENTS

Long-term debt is comprised of the following:


	March 6,		March 1,
	2004		2003
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
Revolving line of credit, maximum borrowings of $40 million, with floating interest rates maturing 2007		13,279,985		15,085,147
5.25% Term loan subline—equipment		4,583,339		—
5.25% Term loan subline—real estate		4,708,331		—
6% Notes Payable maturing 2008 (Note 16)		270,983		270,983
4.89% to 11.9% capitalized lease obligations maturing 2008 (Note 9)		244,713		110,655

Total long-term debt		138,087,351		130,466,785
Less current installments		1,314,933		79,611

Long-term debt, excluding current installments	$	136,772,418	$	130,387,174

The Senior Notes are unsecured obligations of the Company, subject to certain financial and non-financial covenants. At March 6, 2004, the Company believes it was in compliance with all covenants under the Senior Notes; but continued compliance will depend on future cash flows and net income, which are not assured (See also Note 17).

Effective August 13, 2003, the Company terminated its five-year variable-rate $50 million revolving credit facility. Also effective August 13, 2003, the Company obtained a three-year variable rate $40 million revolving credit facility from a new lender, which includes a $5 million real estate term loan subline, a $5 million equipment term loan subline and a $7.5 million letter of credit subfacility. Funds available under this new facility are available for working capital requirements, permitted investments and general corporate purposes. Borrowings under the new 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 Company’s assets. The interest rate for borrowings under the new facility at March 6, 2004 was 5% (prime plus 1%). Borrowings under the new facility are due the earlier of ninety days prior to the redemption of the Senior Notes or August 13, 2006. Repayment is also required in the amount of the proceeds from the sale of any collateral. In addition, the Company is required to satisfy certain financial covenants regarding cash flow and capital expenditures.

The average rate on the $40 million revolving credit line was 5.66% for the fiscal year ended March 6, 2004. The average rate on the $50 million revolving credit line was 8.23% for the fiscal year ended March 1, 2003. At March 6, 2004, the Company had outstanding borrowings under this new revolving credit facility of $13.3 million and borrowing availability of approximately $12.9 million. Also, at March 6, 2004, the Company had borrowings under the real estate subline and the equipment subline of $4.7 million and $4.6 million, respectively. At March 1, 2003, the Company had outstanding borrowings under the revolving credit facility of $15.1 million, and had approximately $4.6 million of additional borrowing availability.

F-15

8. INCOME TAXES

The income tax provision (benefit) is summarized as follows:


	Fiscal Years Ended
	March 6,		March 1,			March 2,
	2004		2003			2002
Current:
Federal	$	—	$	(232,761	)	$	(59,063	)
State		7,100		69,048			(13,981	)

Total current		7,100		(163,713	)		(73,044	)

Deferred:
Federal		1,077,657		1,161,298			694,949
State		218,590		124,893			111,055

Total deferred		1,296,247		1,286,191			806,004

Total provision (benefit)	$	1,303,347	$	1,122,478		$	732,960

Actual income tax provision are different from amounts computed by applying a statutory federal income tax rate to income or loss. The computed amount is reconciled to total income tax provision.


	Fiscal Years Ended
	March 6, 2004						March 1, 2003						March 2, 2002
				Percent of						Percent of					Percent of
	Amount			Pretax Income			Amount			Pretax Income			Amount		Pretax Loss
Computed provision at statutory rate	$	930,628			34.0	%	$	986,156			34.0	%	$	249,404		34.0	%
Tax effect resulting from:
State income taxes, net of federal tax provision		214,720			7.8			128,001			4.4			55,857		7.6
Compensation limitation		—			0.0			18,360			0.6			315,941		43.0
Income of Columbia Hill Aviation		(260,504	)		(9.5	)		(403,663	)		(13.9	)		—
Meals and entertainment		359,165			13.1			386,830			13.3			80,429		11.0
Other permanent differences		59,338			2.2			6,794			0.3			31,329		4.3

Income tax provision	$	1,303,347			47.6	%	$	1,122,478			38.7	%	$	732,960		99.9	%

F-17

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 2004 and fiscal 2003 is as follows:


	March 6, 2004								March 1, 2003
	Assets		Liabilities			Total			Assets		Liabilities			Total
Current:
Allowance for doubtful receivables	$	641,274				$	641,274		$	355,239	$	—		$	355,239
Inventory		1,033,554					1,033,554			1,102,107		—			1,102,107
Accrued promotional expense		1,213,601					1,213,601			840,698		—			840,698
Accrued vacation pay		479,528					479,528			419,132		—			419,132
Reserve for returns		70,155					70,155			45,925		—			45,925
Reserves - other		3,634					3,634			18,865		—			18,865
Prepaid expenses				(254,633	)		(254,633	)				(257,087	)		(257,087	)
Accrued worker’s compensation		218,037					218,037			142,396		—			142,396
Consulting Agreements		116,362					116,362
Other		48,254					48,254			—		(24,749	)		(24,749	)

Total current		3,824,399		(254,633	)		3,569,766			2,924,362		(281,836	)		2,642,526

Noncurrent:
Property, plant and equipment				(6,948,257	)		(6,948,257	)		—		(5,237,655	)		(5,237,655	)
Consulting agreements		—					—			270,562		—			270,562
Goodwill amortization		3,368,976					3,368,976			5,331,733		—			5,331,733
General business credit carryforward		1,070,799					1,070,799			1,070,799		—			1,070,799
Alternative minimum tax credit carryforward		206,421					206,421			206,421		—			206,421
Federal loss carryforward		1,807,420					1,807,420			3,510,287		—			3,510,287
State loss carryforward		181,922					181,922			430,000		—			430,000
Charitable contribution carryforward		177,155					177,155			231,758		—			231,758
Other		617,779					617,779			469,966		—			469,966

Total noncurrent		7,430,472		(6,948,257	)		482,215			11,521,526		(5,237,655	)		6,283,871

Total current and noncurrent	$	11,254,871	$	(7,202,890	)	$	4,051,981		$	14,445,888	$	(5,519,491	)	$	8,926,397

The Company will file a consolidated federal income tax return, with its parent corporation, PF Management, for fiscal 2004. Under consolidated tax return rules, PF Management will be able to utilize the net operating loss and certain other deductions of the Company that could not otherwise be currently utilized by the Company on a separate return basis. The tax sharing agreement between PF Management and the Company does not require PF Management to reimburse the Company for the net operating loss and other deductions that could not be currently utilized on a separate return basis. Accordingly, the Company recorded a noncash distribution to PF Management in the amount of $3,578,169 for the utilization of the Company’s deferred tax assets in PF Management’s consolidated federal income tax return.

At March 6, 2004, federal and state loss carryovers of approximately $5,316,000 and $9,858,000, respectively, are available to offset future federal and state taxable income. The carryover periods range from fifteen to twenty years, which will result in expirations of varying amounts beginning in fiscal 2015 and continuing through fiscal 2022.

Realization of certain deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. Although realization is not assured, management believes it is more likely than not the deferred tax assets will be realized.

F-18

9. LEASED PROPERTIES

The Company operates certain machinery and equipment and furniture and fixtures under leases classified as capital leases. The leases have original terms ranging from one to eight years. The assets covered under these leases have carrying values of $310,904 and $162,358 at March 6, 2004 and March 1, 2003, respectively.

Certain machinery and equipment and real estate are under operating leases with terms that are effective for varying periods until 2012. 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 6, 2004, minimum rental payments required under operating and capital leases are summarized as follows:


	Minimum Rental Payments
	Operating		Capital
Fiscal Year	Leases		Leases			Total
2005	$	878,482	$	114,764		$	993,246
2006		614,704		95,841			710,545
2007		384,653		47,694			432,347
2008		288,645		9,139			297,784
2009		157,450		—			157,450
Later years		190,400		—			190,400

Total minimum lease payments	$	2,514,334		267,438		$	2,781,772

Less amount representing interest				(22,725	)

Present value of minimum lease payments under capital leases (Note 7)			$	244,713

Rental expense charged to continuing operations is as follows:


	Fiscal Year Ended
	March 6,		March 1,		March 2,
	2004		2003		2002
Real estate	$	525,830	$	192,396	$	164,003
Equipment		928,190		981,533		1,185,738

Total	$	1,454,020	$	1,173,929	$	1,349,741

F-19

10. EMPLOYEE BENEFITS

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 $13,000 for fiscal 2004. The Company’s contributions were $494,203, $484,639, and $450,085 in fiscal 2004, 2003 and 2002, respectively.

The Company provides employee health insurance benefits to employees. During fiscal 2002, benefits were provided through both fully insured and self insurance group medical plans, which are partially funded by the Company. During fiscal 2004 and fiscal 2003, medical benefits were provided primarily through self insurance group medical plans. During fiscal 2004, 2003 and 2002, contributions included in operations were $4,139 We had to subtract stop loss reimbursements.,845, $2,833,789 and $1,579,999, 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 $43,839 and $55,270 during fiscal 2003 and fiscal 2002, respectively. Effective December 31, 2002, the Company terminated the plan.

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11. STOCK OPTIONS

The Company’s 1997 Incentive Stock Option Plan, as amended, provided 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, provided 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 the grant.

During fiscal 2003, effective with the management buyout discussed in Note 1 — Basis of Presentation, Acquisition and Discontinued Operations, all stock option plans were terminated and all outstanding options were cancelled.

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 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
Forfeited or cancelled		(180,000	)		8.33		(125,000	)		10.50
Exercised		—			—		—			—

Balance at March 1, 2003		—			—		—			—

F-21

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 6, 2004 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 maturities. As of March 6, 2004 and March 1, 2003, the fair value of the Senior Notes was $115,000,000 and $85,100,000, respectively.

13. MAJOR BUSINESS SEGMENT

During fiscal 2004, fiscal 2003 and fiscal 2002, the Company operated solely in the food manufacturing segment. Sales by major product line are as follows:


	Net Revenues by Source
	Fiscal Years Ended
	March 6, 2004		March 1, 2003		March 2, 2002
Food Processing:
Fully-Cooked Protein Products	$	214,738,933	$	149,302,819	$	139,634,468
Microwaveable Sandwiches		136,423,374		119,087,550		95,779,980
Bakery and Other Products		7,387,009		7,948,454		7,863,374

Total Food Processing	$	358,549,316	$	276,338,823	$	243,277,822

Significantly all revenues and long-lived assets are derived from and reside in the United States.

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14. COMMITMENTS AND CONTINGENCIES

The Company’s new three year variable rate $40 million revolving credit facility includes letter of credit subfacilities in the amount of $7.5 million. The Company provides a secured letter of credit in the amount of $3,500,000 to its insurance carrier for the underwriting of certain performance bonds, which expires in fiscal 2005. 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 $75,000 in fiscal 2004. In addition, the Company provides secured letters of credit to a limited number of suppliers. Letters of credit for suppliers totaled $250,000 in fiscal 2004.


	Commitments by Fiscal Year
									2009 and
	2005		2006		2007		2008		Thereafter		Total
Letters of Credit	$	3,825,000	$	—	$	—	$	—	$	—	$	3,825,000
Purchase Commitments for Capital Projects		204,517		—		—		—		—		204,517

Total	$	4,029,517	$	—	$	—	$	—	$	—	$	4,029,517


	Contractual Obligations by Fiscal Year
									2009 and
	2005		2006		2007		2008		Thereafter		Total
Long-Term Debt	$	1,214,280	$	116,214,280	$	20,143,095	$	270,983	$	—	$	137,842,638
Capital Lease Obligations		100,653		89,199		45,817		9,041		—		244,710
Operating Lease Obligations		878,482		614,704		384,653		288,645		347,850		2,514,334
Consulting and Noncompete Agreements		327,411		—		—		—		—		327,411
Obligation of Special Purpose Entity		313,344		331,029		349,712		369,450		4,243,151		5,606,686

Total	$	2,834,170	$	117,249,212	$	20,923,277	$	938,119	$	4,591,001	$	146,535,779

See Note 17 to the Consolidated Financial Statements for a further discussion of commitments, contingencies and contractual obligations.

F-23

15. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest, income taxes refunded and non-cash transactions consisting of notes issued for assets acquired, capital lease additions and certain tax benefits utilized by the Parent accounted for as a distribution to the Parent are as follows:


	Fiscal Years Ended
	March 6, 2004		March 1, 2003		March 2, 2002
Interest	$	14,857,594	$	13,515,920	$	12,612,803
Income taxes refunded	$	197,977	$	68,506	$	1,164,569
Notes issued for assets acquired	$	—	$	270,983		—
Capital lease additions	$	273,208	$	73,475		—
Distribution to parent – tax benefit	$	3,578,167	$	—		—

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 during fiscal 2004, 2003 and 2002 arose in connection with the following relationships:

As discussed in Note 17 – “Restructuring of Senior Notes,” on March 8, 2004 the Company executed a Fourth Supplemental Indenture and, pursuant to the terms of the Fourth Supplemental Indenture, the Company terminated substantially all of its related party transactions. The following related party transactions are specifically permitted under the terms of the Fourth Supplemental Indenture:

• Columbia Hill Land Company, LLC, owned 50% by each of Messrs. Richardson and Clark, Chairman and Vice-Chairman, respectively, leases office space to the Company in Hickory, North Carolina, pursuant to a ten-year lease that commenced in September 1998. Rents paid under the lease were approximately $116,000 in fiscal 2004.

F-24

related party transactions, subsequent to March 8, 2004, the Company will perform the purchasing and distribution services internally. Other related party services will be outsourced as necessary at comparable cost.

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. 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 approximately $203,000, $650,000 and $1,130,000 in fiscal 2004, 2003 and 2002, respectively.

The Company uses the services of an entity owned 100% by PF Management. This entity serves as the 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 approximately $2,122,000, $3,960,000 and $620,000 in fiscal 2004, fiscal 2003 and fiscal 2002, respectively, and are recorded in cost of goods sold.

During the fourth quarter of fiscal 2002, the Company leased an aircraft from an entity owned 100% by PF Management. Under this lease, the Company maintained its own flight department and was responsible for all operating costs. Total payments under that lease were approximately $168,000 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. During fiscal 2004 and fiscal 2003, the Company paid approximately $2,597,000 and $3,188,000, respectively for the aircraft lease.

The aircraft leasing entity is owned 100% by PF Management and the Company considers the entity a non-independent special purpose leasing entity. Accordingly, the entity’s assets and liabilities, 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 did not maintain the legal rights of ownership to the aircraft, nor does the entity’s creditor maintain any legal recourse to the Company.

Effective March 3, 2002, the Company entered into a one-year logistics agreement with PF Distribution, LLC (“PF Distribution”), owned 100% by PF Management. Under the agreement, PF Distribution will serve as the exclusive logistics agent for the Company, and will provide all warehousing, fulfillment and transportation services to the Company. The cost of PF Distribution’s services is based on flat rates per pound, which are calculated based on weight and volume characteristics of products, inventory pounds maintained and inventory pounds shipped. Rates were determined based on historical costs and industry standards. In fiscal 2004, distribution expense recorded in selling, general and administrative expense was approximately $31,126,000 million, of which approximately $30,999,000 million had been paid to PF Distribution as of March 6, 2004. In fiscal 2003, distribution expense recorded in selling, general and administrative expense was approximately $21,544,000 million, of which approximately $21,254,000 million had been paid to PF Distribution as of March 1, 2003.

Effective May 29, 2002, the Company terminated its $25 million credit facility with Fleet Capital. Also, effective May 29, 2002, the Company obtained a five-year variable-rate $50 million revolving credit facility from Foothill Capital Corporation, which includes a $16 million term loan subline, a $10 million capital expenditures subline and a $7 million

F-25

letter of credit subfacility. Funds available under this facility were available for working capital requirements, permitted investments and general corporate purposes. Borrowings under the facility were bearing interest at floating rates based upon the interest rate option selected from time to time by the Company and were secured by a first-priority security interest in substantially all of the Company’s assets. In addition, the Company was required to satisfy certain financial covenants regarding cash flow and capital expenditures. The collateral for the facility included substantially all of the Company’s assets. Messrs. Richardson and Clark guaranteed payment of the facility in exchange for guarantee fees. The Company paid such fees to each of Messrs. Richardson and Clark, annually in advance, equal to 1.5% of the amount committed for lending under the facility. In fiscal 2003, the Company paid each of Messrs. Richardson and Clark $750,000.

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 approximately $142,000 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 approximately $530,000 and $90,000 in fiscal 2003 and fiscal 2002, respectively. During fiscal 2003, Messrs. Richardson and Clark each became 50% owners of the entity. Effective February 21, 2003, Messrs. Richardson and Clark sold their net assets in the entity to the Company for a total of $270,983. In exchange for the net assets, the Company issued notes in the amount of $135,491 to each of Messrs. Richardson and Clark. The notes are five-year notes, bearing interest at 6% per annum, with interest and principal due at maturity.

During fiscal 2004, 2003 and 2002, the Company maintained a $993,247 note receivable from its principal shareholders. Note is payable on demand and bears interest at the prime rate through the end of fiscal 2002, none thereafter.

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 approximately $260,000 in fiscal 2004, $176,000 in fiscal 2003 and $103,000 in fiscal 2002.

On January 14, 2000, the Company entered into a Consulting and Noncompete Agreement with Mr. Charles F. Connor, Jr., who at the time was 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, who at the time was a significant shareholder, former President of Claremont Restaurant Group and former member of the Company’s Board of Directors. The agreement, which has a five-year term, provides payments of $200,000 per year. The net present value of payments under the agreement is estimated to be $807,000. This amount was expensed in selling, general and administrative expense during the fourth quarter of fiscal 2000, and the balance is reflected in other long-term liabilities. Mr. Miller resigned from his position as a member of the Board of Directors of the Company, pursuant to his Consulting and Noncompete Agreement. Subsequent to fiscal 2000, Mr. Miller is no longer a shareholder or related party.

On December 16, 1999, the Board of Directors approved a loan to Mr. James C. Richardson, the Company’s current Chairman, of an amount up to $8.5 million for the purpose of enabling Mr. Richardson to purchase shares of the Company’s common stock owned by certain shareholders. The terms of the loan provide that outstanding amounts will bear a simple interest rate of 8.5%, with principal and interest due on demand. At March 4, 2000, disbursements under the loan approval totaled $5 million. Due to the nature of the loan, the outstanding balance is presented as a reduction of shareholders’ equity.

F-26

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 provided that, if a change in control of the Company occurred, the following benefits would 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. The Richardson Change in Control Agreement was cancelled on October 21, 2002, and the Clark Change in Control Agreement was cancelled October 17, 2002.

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.

The Company purchases pork products from an entity in which one of the Company’s Principal Shareholders has a substantial ownership interest. During fiscal 2003 and 2002, the Company purchased pork products totaling $194,170 and $150,720, respectively.

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 with 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.

17. SUBSEQUENT EVENTS

Restructuring of Senior Notes.

In November 2002, the Company received a notice alleging that the Company was in violation of certain non-financial covenants under the Indenture covering the Senior Notes. The Company disagreed that it had violated any Indenture covenants.

On March 8, 2004, following a consent solicitation in which consents of holders of $112.4 million in aggregate principal amount of the Company’s outstanding Notes, representing 97.74% of the outstanding Notes, consented to a Fourth Supplemental Indenture between the Company and U.S. Bank National Association, as trustee (the “Trustee”), the Company entered into the Fourth Supplemental Indenture with the Trustee. Among other things, the Fourth Supplemental Indenture increased the annual interest rate on the Notes from 10.75% to 12.25% through March 31, 2005 and 13.25% thereafter; required the payment of a cash consent fee equal to 3% of the principal amount of Notes held by each consenting noteholder; granted to the noteholders liens on the assets of the Company and its subsidiaries, such liens being junior to the senior liens securing the Company’s current credit facility, granted to noteholders a repurchase right allowing all of the noteholders to require the Company to repurchase their Notes at par plus accrued interest on March 31, 2005, provided for the payment of a portion of certain cash flow of the Company (referred to as “excess cash”) to reduce the principal amount of Notes outstanding at the end of the Company’s fiscal years; added restrictive covenants limiting the compensation payable to certain senior executives of the Company and limiting future related party transactions; required the termination of all related party transactions, except for certain specifically-permitted transactions (see Note 16, “Transactions with Related Parties”); provided for the assumption by the Company of approximately $15.4 million of subordinated debt of PF Management; required the Company to comply with certain corporate governance standards, including appointing an independent director acceptable to the Company and the noteholders to its board and hiring an independent auditor to monitor the Company’s compliance with the Indenture; and waived any and all defaults of the Indenture existing as of March 8, 2004.

F-27

Other Events

On May 11, 2004, the shareholders of PF Management, the sole shareholder of the Company, agreed to sell their shares of stock in PF Management to an affiliate of Madison Dearborn Capital Partners (“MDCP”). The sale is scheduled to close on or around June 30, 2004, subject to the satisfaction or waiver of conditions typical of leveraged buyout transactions, including (among others) these:

• The buyer’s receipt of, and reasonable satisfaction with, consents of certain of the Company’s customers and suppliers and the acquiescence of federal antitrust authorities;

• The absence at the closing of a material adverse change in the assets, liabilities, business, operations, results or condition of the Company and PF Management since November 29, 2003;

• The buyer’s receipt of tenders of not less than a majority of the aggregate principal amount of the Company’s 10-3/4% senior notes due 2006; and

• The buyer’s receipt of financing necessary to consummate the transaction.

There is no assurance that any or all of the conditions to the buyer’s and shareholders’ obligations to close the transaction will be satisfied or waived or that the transaction will close in accordance with the agreed-upon terms (or at all).

F-28

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.

F-30 EX-4.3 2 g89090exv4w3.txt EX-4.3 Exhibit 4.3 FORM GLOBAL NOTE FACE OF NOTE PIERRE FOODS, INC. No. Fast 2 CUSIP No. 358034AC0 [THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO PIERRE FOODS, INC. OR A SUCCESSOR THEREOF OR THE REGISTRAR FOR REGISTRATION OF TRANSFER OR EXCHANGE AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER ENTITY AS HAS BEEN REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS HAS BEEN REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFER OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFER IN WHOLE, AND NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSORS NOMINEE.] GLOBAL NOTE REPRESENTING 10 3/4% SENIOR NOTES DUE 2006 Pierre Foods, Inc., a North Carolina corporation, for value received, hereby promises to pay to Cede & Co., or its registered assigns, the principal sum indicated on Schedule A hereof, on June 1, 2006. Interest Payment: Dates: June 1 and December 1, commencing December 1. 1998. Record Dates: May 15 and November 15. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purposes. 2 IN WITNESS WHEREOF, Pierre Foods, Inc. has caused this Note to be duly executed. PIERRE FOODS, INC. By: /s/ Pamela M. Witters Pamela M. Witters Chief Financial Officer, Treasurer and Secretary Attest: /s/ Robin S. Queen Dated: March 8, 2004 TRUSTEE'S CERTIFICATE OF AUTHENTICATION U.S. Bank National Association, as Trustee, certifies that this is one of the Notes referred to in the Indenture By: /s/ Alison D. B. Nadeau Authorized Signatory 3 REVERSE SIDE NOTE PIERRE FOODS, INC. NOTE REPRESENTING 10-3/4% SENIOR NOTES DUE 2006 1. Indenture This Note is one of a duly authorized issue of debt securities of the Company (as defined below) designated as its "10-3/4% Senior Notes Due 2006" (herein called the "Notes") limited in aggregate principal amount to $115,000,000, issued under an indenture dated as of June 9, 1998, as supplemented from time to time, the "Indenture") among the Company, as issuer and the guarantors listed on Annex A hereto (collectively, the "Guarantors"), and U.S. Bank, National Association, as trustee (the "Trustee," which term includes any successor trustee under the Indenture). The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb). The Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and such Act for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Guarantors, the Trustee and each Holder and of the terms upon which the Notes are, and are to be, authenticated and delivered. The summary of the terms of this Note contained herein does not purport to be complete and is qualified by reference to the Indenture. To the extent permitted by applicable law, in the event of any inconsistency between the terms of this Note and the terms of the Indenture, the terms of the Indenture shall control. All capitalized terms used in this Note which are not defined herein shall have the meanings assigned to them in the Indenture. The Indenture restricts, among other things, the Company's ability to incur additional indebtedness, pay dividends or make certain other restricted payments, incur liens to secure pari passu or subordinated indebtedness, sell stock of Restricted Subsidiaries, apply net proceeds from certain asset sales, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company or enter into certain transactions with affiliates. The Indenture permits, under certain circumstances, Restricted Subsidiaries of the Company to be deemed Unrestricted Subsidiaries and thus not subject to the restrictions of the Indenture. 2. Principal and Interest Pierre Foods, Inc., a North Carolina corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay the principal amount set forth on Schedule A of this Note to the Holder hereof on June 1, 2006. The Company shall pay interest at a rate of (i) 10.75% per annum, from the Issue Date or from the most recent Interest Payment Date thereafter to which interest has been paid or duly provided for until March 8, 2004, (ii) 12.25% per annum from March 9, 2004 or the most recent Interest Payment Date thereafter to which interest has been paid or duly provided for 4 until March 31, 2005 and (iii) 13.25% per annum from April 1, 2005 or from the most recent Interest Payment Date thereafter to which interest has been paid or duly provided for, in each case, semiannually in arrears on June 1 and December 1 of each year, in cash, to the Holder hereof until the principal amount hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, subject to certain exceptions provided in the Indenture, be paid to the Person in whose name this Note (or the Note in exchange or substitution for which this Note was issued) is registered at the close of business on the Record Date for interest payable on such Interest Payment Date. The Record Date for any interest payment is the close of business on May 15 or November 15, as the case may be, whether or not a Business Day, immediately preceding the Interest Payment Date on which such interest is payable. Any such interest not so punctually paid or duly provided for ("Defaulted Interest") shall forthwith cease to be payable to the Holder on such Record Date and shall be paid as provided in Section 2.11 of the Indenture. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Each payment of interest in respect of an Interest Payment Date will include interest accrued through the day before such Interest Payment Date. If an Interest Payment Date falls on a day that is not a Business Day, the interest payment to be made on such Interest Payment Date will be made on the next succeeding Business Day with the same force and effect as if made on such Interest Payment Date, and no additional interest will accrue as a result of such delayed payment. To the extent lawful, the Company shall pay interest on overdue principal, overdue premium and Defaulted interest at the applicable interest rate borne on this Note. The Company's obligation pursuant to the previous sentence shall apply whether such overdue amount is due at its maturity, as a result of the Company's obligations pursuant to Section 3.05, Section 4.11, Section 4.14 or Section 4.22 of the Indenture, or otherwise. 3. Method of Payment The Company, through the Paying Agent, shall pay interest on this Note to the registered Holder of this Note, as provided above. The Holder must surrender this Note to a Paying Agent to collect principal payments. The Company will pay principal, premium, if any, and interest and Liquidated Damages, if any, in money of the United States of America that at the time of payment is legal tender for payment of all debts public and private. Principal, premium, if any, and interest and Liquidated Damages, if any, shall be paid by check mailed to the registered Holders at their registered addresses; provided that all payments with respect to Notes the Holders of which have given wire transfer instructions to the Company will be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. 4. Paying Agent and Registrar Initially, the Trustee will act as Paying Agent and Registrar under the Indenture. The Company may, upon written notice to the Trustee, appoint and change any Paying Agent or Registrar. The Company or any of its Affiliates may act as Paying Agent or Registrar, provided that if the Company or such Affiliate is acting as Paying Agent, the Company or such Affiliate 5 shall segregate all funds held by it as Paying Agent and hold them in trust for the benefit of the Holders or the Trustee. 5. Guarantees This Note is entitled to the benefits of the Guarantees made by the Guarantors listed on Annex A hereto and may thereafter be entitled to Guarantees made by other Guarantors for the benefit of the Holders of Notes. Each present Guarantor has, and each future Guarantor will, irrevocably and unconditionally, jointly and severally, guarantee on a senior unsecured basis the punctual payment when due, whether at Stated Maturity, by acceleration, in connection with a Change of Control Offer, an Asset Sale Offer or redemption, or otherwise, of all obligations of the Company under the Indenture and this Note, whether for payment of principal of, premium, if any, interest or Liquidated Damages, if any, on the Notes, expenses, indemnification or otherwise. A Guarantor shall be released from its Guarantee upon the terms and subject to the conditions set forth in the Indenture. 6. Redemption (a) Optional Redemption. The Notes are subject to redemption at the option of the Company, in whole or in part, on at least 30 calendar days, but not more than 60 calendar days, prior notice, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon, if any, and Liquidated Damages, if any, to the applicable Redemption Date (subject to the right of each Holder of record on the relevant Record Date to receive interest due on the relevant Interest Payment Date), if redeemed during the twelve-month period beginning June 1 of the years indicated below:

(b) Mandatory Redemption Within 30 days following the delivery by the Company to the Trustee and the Senior Lender of the audited financial statements for the Company and its Subsidiaries for the 2005 and 2006 Fiscal Years, but in no event later than 120 days following the end of each such Fiscal Year, the Company shall make a payment to the Trustee equal to 60% of the Company's Consolidated Excess Cash for such Fiscal Year (the "Cash Sweep Payment"), if, but only if, each of the Cash Sweep Payment Conditions are first satisfied. The Cash Sweep Payment shall be used to redeem, on a pro rata basis, outstanding Notes, at a redemption price in cash equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest thereon to the Redemption Date. 7. Notice of Redemption At least 20 calendar days but not more than 60 calendar days before a Redemption Date, the Company shall deliver to the Trustee and send, by first-class mail, postage prepaid, to 6 Holders of Notes to be redeemed at the addresses of such Holders as they appear in the Note Register, a notice of redemption. In the case of a redemption pursuant to Section 6(a) above, if fewer than all the Notes are to be redeemed at any time, the Trustee shall select the Notes to be redeemed pro rata or by lot or by a method that complies with applicable legal and securities exchange requirements, if any, and that the Trustee considers fair and appropriate and in accordance with methods generally used at the time of selection by fiduciaries in similar circumstances. In the case of a redemption pursuant to Section 6(b) above, if fewer than all the Notes are to be redeemed at any time, the Trustee shall select the Notes to be redeemed pro rata. In either case, the Trustee shall make the selection from outstanding Notes not previously called for redemption; provided that the Trustee may select for redemption portions (equal to $1,000 or any integral multiple thereof) of the principal of Notes that have denominations larger than $1,000 (Notes in denominations of $1,000 or less may be redeemed only in whole). If any Note is redeemed subsequent to a Record Date with respect to any Interest Payment Date specified above and on or prior to such Interest Payment Date, then any accrued interest will be paid on such Interest Payment Date to the Holder of the Note on such Record Date. If money in an amount sufficient to pay the Redemption Price of all Notes (or portions thereof) to be redeemed on the Redemption Date is deposited with the Paying Agent on or before the applicable Redemption Date and certain other conditions are satisfied, interest on the Notes or portions thereof to be redeemed on the applicable Redemption Date will cease to accrue. 8. Repurchase at the Option of Holders upon Change of Control Upon the occurrence of a Change of Control, each Holder shall have the right in accordance with the terms hereof and the Indenture to require the Company to purchase such Holder's Notes, in whole or in part, in a principal amount that is an integral multiple of $1,000, pursuant to a Change of Control Offer, at a purchase price in cash equal to l0l% of the principal amount of such Notes (or portions thereof) plus accrued and unpaid interest and Liquidated Damages, if any, to the Change of Control Payment Date. Within 30 calendar days following any Change of Control, the Company shall send, or cause to be sent, by first-class mail, postage prepaid, a notice regarding the Change of Control Offer to each Holder with a copy to the Trustee. The Holder of this Note may elect to have this Note or a portion hereof in an authorized denomination purchased by completing the form entitled "Option of Holder to Elect Purchase" appearing below and tendering this Note pursuant to the Change of Control Offer. Unless the Company defaults in the payment of the Change of Control Purchase Price with respect thereto, all Notes or portions thereof accepted for payment pursuant to the Change of Control Offer will cease to accrue interest from and after the Change of Control Payment Date. 9. Repurchase at the Option of Holders upon Asset Sale If at any time the Company or any Restricted Subsidiary engages in any Asset Sale, as a result of which the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company shall, within 30 calendar days of the date the amount of Excess Proceeds exceeds $5.0 million, use the then-existing Excess Proceeds to make an offer to purchase from all Holders of Notes, on 7 a pro rata basis, Notes in an aggregate principal amount equal in amount to the then-existing Excess Proceeds, at a purchase price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon and Liquidated Damages to the Asset Sale Purchase Date (subject to the right of each Holder of record on the relevant Record Date to receive interest due on the relevant Interest Payment Date). Upon completion of an Asset Sale Offer (including payment of the Asset Sale Purchase Price for accepted Notes), any surplus Excess Proceeds that were the subject of such offer shall cease to be Excess Proceeds, and the Company may then use such amounts for general corporate purposes. Within 30 calendar days of the date the amount of Excess Proceeds exceeds $5.0 million, the Company shall send, or cause to be sent, by first-class mail, postage prepaid, a notice regarding the Asset Sale Offer to each Holder. The Holder of this Note may elect to have this Note or a portion hereof in an authorized denomination purchased by completing the form entitled "Option of Holder to Elect Purchase" appearing below and tendering this Note pursuant to the Asset Sale Offer. Unless the Company defaults in the payment of the Asset Sale Purchase Price with respect thereto, all Notes, or portions thereof selected for payment pursuant to the Asset Sale Offer will cease to accrue interest from and after the Asset Sale Purchase Date. 10. Repurchase at the Option of Holders on March 31, 2005 At least thirty (30) days prior to January 1, 2005, the Company shall send or cause to be sent, by first-class mail, postage prepaid, a notice regarding the 2005 Offer to each Holder. Pursuant to the 2005 Offer, the Holder of this Note may elect to have this Note or a portion hereof in an authorized denomination purchased by completing the form entitled "Option of Holder to Elect Purchase" appearing below and tending this Note to the Paying Agent no later than January 15, 2004. On March 31, 2005, the Company shall purchase all Notes from Holders electing to have their Notes purchased on such date at a purchase price in cash equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to the 2005 Offer Purchase Date. Unless the Company defaults in the payment of the 2005 Offer Purchase Price with respect thereto, all Notes, or portions thereof, tendered for payment pursuant to the 2005 Offer will cease to accrue interest from and after March 31, 2005. 11. Collateral Documents. The Notes are entitled to the benefits of the Collateral Documents which set forth, among other things, the Collateral securing the obligations of the Notes. Each Holder, by accepting a Note, agrees to be bound by all of the terms and provisions of the Collateral Documents, as the same may be amended from time to time. Each Holder, by accepting a Note, further agrees the Liens securing the Notes granted pursuant to the Indenture and the Collateral Documents are subordinated in right of priority to all of the Liens granted as security for the Senior Debt to the extent and in the manner provided in the Subordination Agreement. 12. The Global Note. So long as this Global Note is registered in the name of the Depositary or its nominee, members of, or participants in, the Depositary ("Agent Members") shall have no rights under the Indenture with respect to this Note held on their behalf by the Depositary or the Trustee as its 8 custodian, and the Depositary may be treated by the Company, the Guarantors, the Trustee and any agent of the Company, the Guarantors or the Trustee as the absolute owner of this Note for all purposes. Notwithstanding the foregoing, nothing herein shall (i) prevent the Company, the Guarantors, the Trustee or any agent of the Company, the Guarantors or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by the Depositary or (ii) impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder. The Holder of this Global Note may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests in this Global Note through Agent Members, to take any action which a Holder is entitled to take under the Indenture or the Notes. Whenever, as a result of optional or mandatory redemption by the Company, a Change of Control Offer, an Asset Sale Offer or the 2005 Offer, this Global Note is redeemed, repurchased or exchanged in part, this Global Note shall be surrendered by the Holder thereof to the Trustee who shall cause an adjustment to be made to Schedule A hereof so that the principal amount of this Note will be equal to the portion not redeemed, repurchased or exchanged and shall thereafter return this Note to such Holder; provided that this Note shall be in a principal amount of $1,000 or an integral multiple of $1,000. 13. Transfer and Exchange A Holder may transfer or exchange Notes as provided in the Indenture and subject to certain limitations therein set forth. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes, fees and expenses required by law or permitted by the Indenture. 14. Denominations The Notes are issuable only in registered form without coupons in denominations of $1,000 and integral multiples thereof of principal amount. 15. Discharge and Defeasance Subject to certain conditions, the Company at any time may terminate some or all of the obligations of the Company and the Guarantors under the Notes, the Guarantees and the Indenture if the Company irrevocably deposits in trust with the Trustee cash or U.S. Government Obligations for the payment of principal, premium, if any, interest and Liquidated Damages, if any, on the Notes to redemption or maturity, as the case may be. 16. Amendment; Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Holders of at least a majority in principal amount of the outstanding Notes (which consent may, but need not, be given in connection with any tender offer or exchange offer for the Notes) and (ii) any past Default and its consequences or any compliance with any provisions of the Indenture may be waived with the written consent of the Holders of at least a majority in principal amount of the outstanding Notes. Subject to certain 9 exceptions set forth in the Indenture, without the consent of any Holder, the Company and the Trustee may amend the Indenture or the Notes (i) to evidence the succession of another Person to the Company and the assumption by such successor of the covenants of the Company under the Indenture and contained in the Notes; (ii) to add to the covenants of the Company, for the benefit of the Holders of all of the Notes, or to surrender any right or power conferred on the Company under the Indenture; (iii) to provide for uncertificated Notes in addition to or in place of Certificated Notes; (iv) to secure the Notes; (v) to cure any ambiguity, omission, defect or inconsistency in the Indenture, provided that such actions shall not adversely affect the interests of the Holders of Notes in any material respect; (vi) to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the TIA; or (vii) to evidence the agreement or acknowledgment of a Restricted Subsidiary that it is a Guarantor for all purposes under the Indenture (including, without limitation, Article 11 thereof). 17. Defaults and Remedies Under the Indenture, Events of Default include: (i) a default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Notes (whether or not prohibited by the subordination provisions of the Indenture); (ii) a default in the payment when due of the principal of or premium, if any, on the Notes (whether or not prohibited by the subordination provisions of the Indenture); (iii) failure by the Company to observe or perform certain covenants, conditions, agreements or other provisions of the Indenture or this Note (and, in the case of certain covenants, agreements or other provisions, such failure has continued for 30 calendar days after written notice by the Trustee or the Holders of at least 25% in principal amount of the Notes); (iv) a default in the payment of Indebtedness of the Company or any of its Significant Subsidiaries within any applicable grace period after final maturity or acceleration of such Indebtedness in an amount in excess of $5.0 million in the aggregate; (v) certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries; (vi) certain undischarged judgments in excess of $5.0 million against the Company or any of its Significant Subsidiaries; or (vii) the Guarantee of any Guarantor ceasing for any reason to be in full force and effect (other than in accordance with the terms of the Indenture) or any Guarantor denying or disaffirming its obligations under its Guarantee. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Notes, subject to certain limitations, may declare all the Notes to be immediately due and payable. Certain events of bankruptcy or insolvency shall result in the Notes being immediately due and payable upon the occurrence of such Events of Default without any further act of the Trustee or any Holder. Holders of Notes may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Notes may direct the Trustee in its exercise of any trust or power under the Indenture. The Holders of a majority in principal amount of the then outstanding Notes, by written notice to the Trustee and the Company, may rescind any declaration of acceleration and its consequences if the rescission would not conflict with any judgment or decree, and if all existing Events of Default have been cured or waived, except nonpayment of principal, interest, 10 premium or Liquidated Damages that has become due solely because of acceleration. No such rescission shall affect any subsequent Default or impair any right consequent thereto. 18. Individual Rights of Trustee Subject to certain limitations imposed by the TIA, the Trustee or any Paying Agent or Registrar, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with the Company, the Guarantors or their Affiliates with the same rights it would have if it were not Trustee, Paying Agent or Registrar, as the case may be, under the Indenture. 19. No Recourse Against Certain Others No director, officer, employee, incorporator or stockholder of the Company or any Guarantor, as such, shall have any liability for any obligations of the Company or such Guarantor under the Notes, the Guarantees or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation, solely by reason of its status as a director, officer, employee, incorporator or stockholder of the Company or such Guarantor. By accepting a Note, each Holder waives and releases all such liability (but only such liability) as part of the consideration for issuance of such Note to such Holder. 20. Authentication This Note shall not be valid until the Trustee or an authenticating agent signs the certificate of authentication on the other side of this Note. 21. Abbreviations Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM ( tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with rights of survivorship and not as tenants in common), CUST (= custodian), and U/G/MIA (Uniform Gift to Minors Act). 22. CUSIP Numbers Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders of Notes. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 11 23. Governing Law THE INDENTURE AND THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE. The Company will furnish to any Holder upon written request and without charge to the Holder a copy of the Indenture. Requests may be made to: Pierre Foods, Inc. 9990 Princeton Road Cincinnati, Ohio 45246 Attention: Chief Financial Officer 12 SCHEDULE A SCHEDULE OF PRINCIPAL AMOUNT The initial principal amount at maturity of this Note shall be $___________________. The following decreases/increases in the principal amount in denominations of $1,000 or integral multiples thereof at maturity of this Note have been made:

13 ASSIGNMENT (To be executed by the registered Holder if such Holder desires to transfer this Note) FOR VALUE RECEIVED __________________________ hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAX IDENTIFYING NUMBER OF TRANSFEREE ________________________________________________________________________________ (Please print name and address of transferee) ________________________________________________________________________________ this Note, together with all right, title and interest herein, and does hereby irrevocably constitute and appoint ________________________ Attorney to transfer this Note on the Note Register, with full power of substitution. Date: ________________________ ________________________________ __________________________________ Signature of Holder Signature Guaranteed: NOTICE: The signature to the foregoing Assignment must correspond to the Name as written upon the face of this Note in every particular, without alteration or any change whatsoever. SIGNATURE GUARANTEED: Signature must be guaranteed by an Eligible Guarantor Institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15. 14 OPTION OF HOLDER TO ELECT PURCHASE (check as appropriate) [ ] In connection with the Change of Control Offer made pursuant to Section 4.14 of the Indenture, the undersigned hereby elects to have [ ] the entire principal amount [ ] $______________ ($1,000 in principal amount or an integral multiple thereof) of this Note repurchased by the Company. The undersigned hereby directs the Trustee or Paying Agent to pay it or _____________________ an amount in cash equal to 101% of the principal amount indicated in the preceding sentence plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the Change of Control Payment Date. [ ] In connection with the Asset Sale Offer made pursuant to Section 4.11 of the Indenture, the undersigned hereby elects to have [ ] the entire principal amount [ ] $______________ ($1,000 in principal amount or an integral multiple thereof) of this Note repurchased by the Company. The undersigned hereby directs the Trustee or Paying Agent to pay it or _____________________ an amount in cash equal to 100% of the principal amount indicated in the preceding sentence plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the Asset Sale Purchase Date. [ ] In connection with the 2005 Offer made pursuant to Section 4.22 of the Indenture, the undersigned elects to have [ ] the entire principal amount [ ] $______________ ($1,000 in principal amount or an integral multiple thereof) of this Note repurchased by the Company. The undersigned hereby directs the Trustee or Paying Agent to pay it or _____________________ an amount in cash equal to 100% of the principal amount indicated in the preceding sentence plus accrued and unpaid interest, if any, to the 2005 Offer Purchase Date. 15 Dated: __________ _________________________________ ________________________________ Signature of Holder Signature Guaranteed: NOTICE: The signature to the foregoing Assignment must correspond to the Name as written upon the face of this Note in every particular, without alteration or any change whatsoever. SIGNATURE GUARANTEED: Signature must be guaranteed by an Eligible Guarantor Institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15. 16 ANNEX A Fresh Foods Properties LLC Compass Outfitters LLC EX-10.10 3 g89090exv10w10.txt EX-10.10 Exhibit 10.10 ----------------------------------------- PIERRE FOODS, INC. PF MANAGEMENT, INC. ----------------------------------------- ----------------------------------------- LOAN AND SECURITY AGREEMENT Date: August 13, 2003 $40,000,000 ----------------------------------------- ------------------------------------------ FLEET CAPITAL CORPORATION ------------------------------------------ TABLE OF CONTENTS

10.3 Waiver of Conditions Precedent......................................................................... 47 SECTION 11 EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT.............................................. 47 11.1 Events of Default...................................................................................... 47 11.2 Acceleration of the Obligations........................................................................ 49 11.3 Other Remedies......................................................................................... 50 11.4 Remedies Cumulative; No Waiver......................................................................... 51 SECTION 12 MISCELLANEOUS......................................................................................... 51 12.1 Power of Attorney...................................................................................... 51 12.2 Indemnity.............................................................................................. 52 12.3 Survival of Indemnities................................................................................ 53 12.4 Modification of Agreement; Sale of Interest............................................................ 53 12.5 Severability........................................................................................... 53 12.6 Successors and Assigns................................................................................. 53 12.7 Cumulative Effect; Conflict of Terms................................................................... 53 12.8 Execution in Counterparts.............................................................................. 54 12.9 Notice................................................................................................. 54 12.10 Lender's Consent.................................................................................... 55 12.11 Credit Inquiries.................................................................................... 55 12.12 Time of Essence..................................................................................... 55 12.13 Entire Agreement; Appendix A and Exhibits........................................................... 55 12.14 Interpretation...................................................................................... 55 12.15 GOVERNING LAW; CONSENT TO FORUM..................................................................... 55 12.16 WAIVERS BY PARENT AND BORROWER...................................................................... 56

LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT is made this 13th day of August, 2003, by and among FLEET CAPITAL CORPORATION ("Lender"), a Rhode Island corporation with an office at 6100 Fairview Road, Suite 200, Charlotte, North Carolina 28210; and PIERRE FOODS, INC. ("Borrower"), a North Carolina corporation with its chief executive office and principal place of business at 9990 Princeton Road, Cincinnati, Ohio 45246, and PF MANAGEMENT, INC. ("Parent"), a North Carolina corporation with its chief executive office and principal place of business at 361 Second Street, NW, Hickory, North Carolina 28603. Capitalized terms used in this Agreement have the meanings assigned to them in Appendix A, General Definitions, attached hereto. 1. CREDIT FACILITY Subject to the terms and conditions of, and in reliance upon the representations and warranties made in, this Agreement and the other Loan Documents, Lender agrees to make a total credit facility of $40,000,000 available upon Borrower's request therefor as follows: 1.1 Revolver Loans. 1.1.1 Form of Revolver Loans. Lender agrees, for so long as no Default or Event of Default exists and subject to the provisions of Section 10 below, to make Revolver Loans to Borrower from time to time, as requested by Borrower in the manner set forth in Section 3.1 hereof, up to a maximum principal amount at any time outstanding equal to the lesser of the Revolver Facility Amount or the Borrowing Base at such time. The Revolver Loans may be repaid and reborrowed in accordance with the provisions of this Agreement. Each Revolver Loan shall, at the option of Borrower, be made or continued as, or converted into, an Alternate Base Rate Loan or a LIBOR Rate Loan, upon the terms set forth herein. 1.1.2 Reduction of Revolver Facility Amount. Borrower shall have the right to terminate or reduce the amount of the Revolver Facility Amount at any time or from time to time upon not less than two (2) Business Days' prior written notice to Lender of each such reduction, which notice shall specify the effective date thereof and the amount of any such reduction (which shall be in a minimum amount of $1,000,000 or a whole multiple of $100,000 in excess thereof) and shall be irrevocable and effective only upon receipt by Lender. 1.1.3 Use of Proceeds. On the Closing Date, the initial Revolver Loans shall be used for (i) the payment in full of all Indebtedness for Money Borrowed owing by Borrower to Wells Fargo Foothill Corporation, the payment of the transaction costs associated with the closing of the transactions contemplated hereby, and (iii) to make the payment under the Affiliate Agreements permitted by Section 9.2.3(ii)(c) hereof. After the Closing Date, all Revolver Loans shall be used solely by Borrower for Borrower's general operating and capital needs in a manner consistent with the provisions of this Agreement and Applicable Law and for any other purpose not inconsistent with the provisions of this Agreement. 1.2 Term Loans. 1.2.1 Real Estate Term Loan. Lender agrees to make a term loan to Borrower on the Closing Date in the principal amount of $5,000,000, which shall be repayable in accordance with the terms of the Real Estate Term Note and shall be secured by all of the Collateral. The proceeds of the Real Estate Term Loan shall be used solely for purposes for which the proceeds of the Revolver Loans are authorized to be used. 1.2.2 Equipment Term Loan. Lender agrees to make a term loan to Borrower on the Closing Date in the principal amount of $5,000,000, which shall be repayable in accordance with the terms of the Equipment Term Note and shall be secured by all of the Collateral. The proceeds of the Equipment Term Loan shall be used solely for purposes for which the proceeds of the Revolver Loans are authorized to be used. 1.3 Letters of Credit; Letter of Credit Guaranties. 1.3.1 Issuance of Letters of Credit and Letter of Credit Guaranties. Lender agrees, for so long as no Default or Event of Default exists and subject to the provisions of Section 10 below, to issue its, or cause to be issued its Affiliate's, Letters of Credit and Letter of Credit Guaranties, as requested by Borrower, provided that the Letter of Credit Amount at any time shall not exceed $7,500,000 and no Letter of Credit or Letter of Credit Guaranty may have an expiration date that is after the last day of the Original Term. Any amounts paid by Lender under any Letter of Credit Guaranty or in connection with any Letter of Credit shall be treated as Revolver Loans, shall be secured by all of the Collateral and shall bear interest and be payable at the same rate and in the same manner as Revolver Loans that are Alternate Base Rate Loans. 1.3.2 Reimbursement Obligations. All indebtedness, liabilities or obligations whatsoever arising or incurred in connection with any Letters of Credit or Letter of Credit Guaranties shall be incurred solely as an accommodation to Borrower and for Borrower's account. Borrower hereby unconditionally agrees to reimburse Lender for the total amount of all sums paid by Lender on Borrower's behalf under the terms of any Letter of Credit or Letter of Credit Guaranty, any drawing or demand under any Letter of Credit or Letter of Credit Guaranty or any additional or further liability which may accrue against Lender in connection with the same, immediately upon the date of payment by Lender. Any such sum paid or liability incurred by Lender in connection with any Letter of Credit or Letter of Credit Guaranty shall, if not reimbursed by Borrower on the date paid or incurred by Lender, be treated for all purposes and shall have the same force and effect as if such amount had been loaned by Lender to Borrower as a Revolver Loan, shall be secured by all of the Collateral and shall bear interest and be payable at the same rate and in the same manner as Revolver Loans that are Alternate Base Rate Loans. 1.3.3 Rights and Remedies. In the event that, coincident with or subsequent to the occurrence of a Default or an Event of Default, Lender becomes aware of the possibility of a draw, or enforcement of Lender's obligations, under a Letter of Credit or Letter of Credit Guaranty, Lender, at its option, may, but shall not be required to, pay Borrower's obligations to the beneficiary or holder of such Letter of Credit or Letter of Credit Guaranty directly to such beneficiary or holder, and, in such event, the amount of any such payment made 2 by Lender shall be treated for all purposes and shall have the same force and effect as if such amount had been loaned by Lender to Borrower as a Revolver Loan, shall be secured by all of the Collateral and shall bear interest and be payable at the same rate and in the same manner as Revolver Loans that are Alternate Base Rate Loans. Additionally, in the event of Borrower's failure to reimburse Lender for the total amount of all sums paid by Lender on Borrower's behalf under the terms of any Letter of Credit or Letter of Credit Guaranty, any drawing or demand under any Letter of Credit or Letter of Credit Guaranty or any additional or further liability which may accrue against Lender in connection therewith, Lender, in addition to its rights under the Code and under this Agreement, shall be fully subrogated to the rights and remedies of the issuer of the Letter of Credit under any agreement made with Borrower relating to the issuance of such Letter of Credit, each such agreement being incorporated herein by reference, and Lender shall be entitled to exercise all such rights and remedies thereunder and under law in such regard as fully as if it were the issuer of the Letter of Credit. If any Letter of Credit is drawn upon to discharge any obligation of Borrower to the beneficiary of such Letter of Credit, in whole or in part, Lender shall be fully subrogated to the rights of such beneficiary with respect to the obligation of Borrower to such beneficiary discharged with the proceeds of such Letter of Credit. 1.3.4 Indemnification. Borrower hereby unconditionally agrees to indemnify Lender and hold Lender harmless from any and all losses, claims or liabilities arising from any transactions or occurrences relating to Letters of Credit or Letter of Credit Guaranties issued, established, opened or accepted for Borrower's account, and any drafts or acceptances thereunder, and all Letter of Credit Obligations incurred in connection therewith. 1.3.5 Termination. In the event that this Agreement is terminated for any reason by either party as herein provided, in addition to Lender's other rights under this Agreement, unless all outstanding Letters of Credit and Letter of Credit Guaranties are terminated or canceled and Lender and its Affiliates released from all liability thereunder, Lender shall be entitled to pay and discharge all Letter of Credit Obligations with respect to all outstanding Letters of Credit and Letter of Credit Guaranties which are not terminated or canceled, whether such Letter of Credit Obligations are absolute or contingent, and all sums paid by Lender in connection therewith shall be deemed to have been loaned by Lender to Borrower as a Revolver Loan, shall be secured by all of the Collateral and shall bear interest and be payable at the same rate and in the same manner as Revolver Loans that are Alternate Revolver Loans. 2. INTEREST, FEES AND CHARGES 2.1 Interest. 2.1.1 Rates of Interest. Subject to the provisions of Section 2.1.6 of this Agreement, Borrower agrees to pay interest on the unpaid principal amount of the Loans outstanding from the respective dates such principal amounts are advanced until paid (whether at stated maturity, on acceleration, or otherwise) at a variable rate per annum equal to the applicable rate indicated below: 3 (i) For Loans made or outstanding as Alternate Base Rate Loans, the Alternate Base Rate in effect from time to time plus the Applicable Margin then in effect; or (ii) For Loans made or outstanding as LIBOR Rate Loans, the relevant Adjusted LIBOR Rate for the applicable Interest Period selected by Borrower in conformity with this Agreement plus the Applicable Margin then in effect. 2.1.2 Computation of Interest. Upon determining the Adjusted LIBOR Rate for any Interest Period requested by Borrower, Lender shall promptly notify Borrower thereof by telephone or in writing. Such determination shall, absent manifest error, be final, conclusive and binding on all parties and for all purposes. The applicable rates of interest with respect to all Alternate Base Rate Loans shall be increased or decreased, as the case may be, by an amount equal to any increase or decrease in the Base Rate and the Federal Funds Effective Rate, with such adjustments to be effective as of the opening of business on the day that any such change in the Base Rate or the Federal Funds Effective Rate becomes effective. Interest on each Loan shall accrue from and including the date of such Loan to but excluding the date of any repayment thereof. 2.1.3 Conversions and Continuations. (i) Borrower may on any Business Day, subject to the giving of a proper Notice of Conversion/Continuation, elect to (a) continue all or any part of the principal amount of a LIBOR Rate Loan by selecting a new Interest Period therefor, to commence on the last day of the immediately preceding Interest Period, or (b) convert all or any part of a Loan of one Type into a Loan of another Type; provided, however, that no outstanding Loans may be converted into or continued as LIBOR Rate Loans when any Default or Event of Default has occurred and is continuing, and no conversion of any LIBOR Rate Loans into Alternate Base Rate Loans shall be made except on the last day of the Interest Period for such LIBOR Rate Loans. (ii) Whenever Borrower desires to convert or to continue Loans under Section 2.1.3(i) hereof, Borrower shall give Lender written notice (or telephonic notice promptly confirmed in writing), substantially in the form of EXHIBIT A attached hereto (a "Notice of Conversion/Continuation"), signed by an authorized officer of Borrower, at least one (1) Business Day before the requested conversion into an Alternate Base Rate Loan and at least two (2) Business Days before the requested conversion into or continuation of a LIBOR Rate Loan. Each such Notice of Conversion/Continuation shall be irrevocable and shall specify the aggregate principal amount of the Loans to be converted or continued, the date of such conversion or continuation (which shall be a Business Day), and whether the Loans are being converted into or continued as LIBOR Rate Loans (and, if so, the duration of the Interest Period to be applicable thereto) or Alternate Base Rate Loans. If, upon the expiration of any Interest Period in respect of any LIBOR Rate Loans, Borrower shall have failed to deliver a Notice of Conversion/Continuation, Borrower shall be deemed to have elected to convert such LIBOR Rate Loans to Alternate Base Rate Loans. 4 2.1.4 Interest Periods. In connection with the making or continuation of, or conversion into, each Borrowing of LIBOR Rate Loans, Borrower shall select an interest period (each an "Interest Period") to be applicable to such LIBOR Rate Loan, which interest period shall commence on the date such LIBOR Rate Loan is made and shall end on a numerically corresponding day in the first (1st), second (2nd), third (3rd), or sixth (6th) month thereafter; provided, however, that: (i) The initial Interest Period for a LIBOR Rate Loan shall commence on the date of such Borrowing (including the date of any conversion from an Interest Period occurring thereafter in respect of a Loan of another Type) and each such Loan shall commence on the date on which the next preceding Interest Period expires; (ii) If any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided that if any Interest Period in respect of LIBOR Rate Loans would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (iii) Any Interest Period which begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period shall expire on the last Business Day of such calendar month; (iv) No Interest Period shall extend beyond the last day of the Original Term; and (v) No Interest Period with respect to any portion of principal of a Loan shall extend beyond a date on which Borrower is required to make a scheduled payment of such portion of principal. 2.1.5 Interest Rate Not Ascertainable. If Lender shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) that on any date for determining the Adjusted LIBOR Rate for any Interest Period, by reason of any changes affecting the London interbank market or Lender's or Bank's position in such market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Adjusted LIBOR Rate, then, and in any such event, Lender shall forthwith give notice (by telephone confirmed in writing) to Borrower of such determination. Until Lender notifies Borrower that the circumstances giving rise to the suspension described herein no longer exist, the obligation of Lender to make LIBOR Rate Loans shall be suspended, and such affected Loans then outstanding shall, at the end of the then applicable Interest Period or at such earlier time as may be required by Applicable Law, bear the same interest as Alternate Base Rate Loans. 2.1.6 Default Rate of Interest. During the existence of an Event of Default, the principal amount of all Loans (and, to the extent permitted by Applicable Law, all accrued interest that is past due) shall bear interest at a rate per annum equal to two percent (2%) above the interest rate otherwise applicable thereto (the "Default Rate"). 5 2.2 Fees. 2.2.1 Closing Fee. Borrower shall pay to Lender a closing fee of $400,000, which shall be fully earned and non-refundable on the Closing Date and shall be paid concurrently with and from the proceeds of the initial Loan hereunder, after Lender's applying to the payment of the closing fee any balance remaining of the $200,000 expense deposit previously paid by Borrower to Lender after payment in full of all of Lender's costs and expenses for which Borrower has agreed to reimburse Lender pursuant to the provisions of this Agreement or otherwise. 2.2.2 Collateral Management Fee. Borrower shall pay to Lender a monthly collateral management fee in the amount of $3,500 payable on the Closing Date and on the first day of each calendar month thereafter. 2.2.3 Unused Line Fee. Borrower shall pay to Lender a fee equal to the Applicable Margin then in effect for the unused line fee times the amount by which the Revolver Facility Amount exceeds the Average Monthly Revolver Loan Balance. The unused line fee shall begin to accrue on the Closing Date and shall be payable monthly in arrears on the first day of each calendar month after the Closing Date and upon the termination of this Agreement. 2.2.4 Letter of Credit and Letter of Credit Guaranty Fees. For each Letter of Credit and Letter of Credit Guaranty issued under this Agreement, Borrower shall pay to Lender a fee equal to: (a) the Applicable Margin for Revolver Loans that are LIBOR Rate Loans times the aggregate face amount of all Letters of Credit and Letter of Credit Guaranties issued from time to time pursuant to Section 1.2 of this Agreement, plus (b) one eighth of one percent (0.125%) of the undrawn face amount of each such Letter of Credit or Letter of Credit Guaranty which shall be payable to Bank. Borrower shall also pay all other normal and customary charges associated with the issuance of each Letter of Credit and Letter of Credit Guaranty. All such fees and charges for Letter of Credit and Letter of Credit Guaranty shall be deemed fully earned upon issuance of each such Letter of Credit and Letter of Credit Guaranty, shall be due and payable in advance upon the issuance of each Letter of Credit and Letter of Credit Guaranty and shall not be subject to rebate or proration upon the termination of this Agreement for any reason. 2.2.5. Audit and Appraisal Fees. Borrower shall pay to Lender audit fees in the amount of Eight Hundred Fifty Dollars ($850) per Person for each day spent by such Person employed by Lender. Borrower shall also reimburse Lender for all reasonable out-of-pocket costs and expenses from time to time incurred by Lender in connection with all audits of Borrower's books and records and all appraisals of the Collateral and such other matters related thereto as Lender shall deem appropriate. 2.3 Computation of Interest and Fees. All interest, fees and other charges provided for in this Agreement shall be calculated daily and shall be computed on the actual number of days elapsed over a year of 360 days. For the purpose of computing interest hereunder, all items of payment received by Lender shall be deemed applied by Lender on account of the Obligations (subject to final payment of such items) on the first (1st) Business Day after receipt by Lender of 6 such items in immediately available funds in Lender's operating account at Bank, and Lender shall be deemed to have received such item of payment on the date specified in Section 4.5 hereof. 2.4 Reimbursement of Expenses. If, at any time or times regardless of whether or not an Event of Default then exists, Lender incurs legal or accounting expenses or any other costs or out-of-pocket expenses in connection with (i) any amendment of or modification of this Agreement or any of the other Loan Documents; (ii) the administration of this Agreement or any of the other Loan Documents and the transactions contemplated hereby and thereby, including reasonable charges for appraisers, examiners, auditors or similar Persons (but specifically excluding any overhead costs of Lender) whom Lender may engage from time to time to audit, inspect or render opinions concerning the books, records and financial condition of Borrower and the condition and value of the Collateral; (iii) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lender, Borrower or any other Person) in any way relating to the Collateral, this Agreement or any of the other Loan Documents or Borrower's affairs; (iv) any attempt to enforce any rights of Lender against Borrower or any other Person which may be obligated to Lender by virtue of this Agreement or any of the other Loan Documents, including, without limitation, the Account Debtors; (v) any attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or realize upon the Collateral; or (vi) any filing and recording of the financing statements and all other documents required by Lender to perfect or continue the perfection of Lender's Lien in the Collateral which may occur after the Closing Date, including, without limitation, any documentary stamp tax or any other taxes incurred because of such filing or recording, and the conducting of searches after the Closing Date in all filing offices at such intervals as Lender may determine to confirm the priority of Lender's Lien in the Collateral; then all such reasonable legal and accounting expenses, other costs and out of pocket expenses of Lender shall be charged to Borrower. All amounts chargeable to Borrower under this Section 2.4 shall be Obligations secured by all of the Collateral, shall be payable in accordance with Section 3.1.1(ii) hereof as a request for a Revolver Loan on the due date thereof, and if not so paid, shall be payable to Lender on demand, and shall thereafter bear interest from the date such demand is made until paid in full at the rate applicable to Revolver Loans constituting Alternate Base Rate Loans. Borrower shall also reimburse Lender for expenses incurred by Lender in its administration of the Collateral to the extent and in the manner provided in Section 7 hereof or in any of the Loan Documents. Lender shall promptly provide Borrower upon Borrower's request with a detailed explanation of all reimbursable expenses charged to Borrower's Loan Account pursuant to either this Section 2.4 or Section 7 hereof. 2.5 Bank Charges. Borrower shall pay to Lender, on demand, any and all fees, costs or expenses which Lender pays to a bank or other similar institution arising out of or in connection with (i) the forwarding to Borrower or any other Person on behalf of Borrower by Lender of proceeds of Loans made by Lender to Borrower pursuant to this Agreement and (ii) the depositing for collection by Lender of any Payment Item received or delivered to Lender on account of the Obligations. Borrower acknowledges and agrees that Lender may charge such costs, fees and expenses to Borrower based upon Lender's good faith estimate of such costs, fees and expenses as they are incurred by Lender. 7 2.6 Illegality. Notwithstanding anything to the contrary contained elsewhere in this Agreement, if (i) any change in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration thereof shall make it unlawful for Lender to make or maintain a LIBOR Rate Loan or to give effect to its obligations as contemplated hereby with respect to a LIBOR Rate Loan or (ii) at any time Lender determines that the making or continuance of any LIBOR Rate Loan has become impracticable as a result of a contingency occurring after the date hereof which adversely effects the London interbank market or the position of Lender or Bank in such market, then, by written notice to Borrower, Lender may (1) declare that LIBOR Rate Loans will not thereafter be made by Lender, whereupon any request by Borrower for a LIBOR Rate Loan shall be deemed a request for an Alternate Base Rate Loan unless Lender's declaration shall be subsequently withdrawn; and (2) require that all outstanding LIBOR Rate Loans made by Lender be converted to Alternate Base Rate Loans, in which event all such LIBOR Rate Loans shall be automatically converted to Alternate Base Rate Loans as of the date of Borrower's receipt of the aforesaid notice from Lender. 2.7 Increased Costs. If, by reason of (i) after the date hereof, the introduction of or any change (including, without limitation, any change by way of imposition or increase of Statutory Reserves or other reserve requirements) in or in the interpretation of any law or regulation, or (ii) the compliance with any guideline or request from any central bank or other governmental authority or quasi-governmental authority exercising control over banks or financial institutions generally (whether or not having the force of law): (a) Lender shall be subject to any tax, duty or other charge with respect to any LIBOR Rate Loan or its obligation to make LIBOR Rate Loans (other than (1) any tax based on or measured by net income or otherwise in the nature of a net income tax, including, without limitation, any franchise tax or any similar tax based on capital, net worth or comparable basis for measurement and (2) any tax collected by a withholding on payments and which neither is computed by reference to the net income of the payee nor is in the nature of an advance collection of a tax based on or measured by the net income of the payee), or shall change the basis of taxation of payment to Lender of the principal of or interest on its LIBOR Rate Loans or its obligation to make LIBOR Rate Loans (other than in respect of (1) any tax based on or measured by net income or otherwise in the nature of a net income tax, including, without limitation, any franchise tax or any similar tax based on capital, net worth or comparable basis for measurement and (2) any tax collected by a withholding on payments and which neither is computed by reference to the net income of the payee nor is in the nature of an advance collection of a tax based on or measured by the net income of the payee); or (b) any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System), special deposits or similar requirement against assets of, deposits with or for the account of, or credit extended by, Lender shall be imposed or deemed applicable or any other condition affecting the LIBOR Rate Loans or the obligation of Lender to make LIBOR Rate Loans shall be imposed on Lender or the London interbank market; 8 and as a result thereof there shall be any increase in the cost to Lender of agreeing to make or making, funding or maintaining LIBOR Rate Loans (except to the extent already included in the determination of the applicable Adjusted LIBOR Rate for LIBOR Rate Loans), or there shall be a reduction in the amount received or receivable by Lender, then Borrower shall from time to time, upon written notice from and demand by Lender, pay to Lender, within five (5) Business Days after the date specified in such notice and demand, an additional amount sufficient to indemnify Lender against such increased cost. A certificate as to the amount of such increased cost, submitted to Borrower by Lender, shall, except for manifest error, be final, conclusive and binding for all purposes. If Lender shall advise Borrower at any time that, because of the circumstances described in this Section 2.7 or any other circumstances affecting Lender or the London interbank market or Lender's or Bank's position in such market, the Adjusted LIBOR Rate, as determined by Lender, will not adequately and fairly reflect the cost to Lender of funding LIBOR Rate Advances, then, and in any such event: (1) Lender shall forthwith give notice (by telephone confirmed in writing) to Borrower of such advice; (2) Borrower's right to request and Lender's obligation to make LIBOR Rate Loans shall be immediately suspended and Borrower's right to continue a LIBOR Rate Loan as such beyond the then applicable Interest Period shall also be suspended, until each condition giving rise to such suspension no longer exists; and (3) Lender shall make a Loan as part of the requested Borrowing of LIBOR Rate Loans as an Alternate Base Rate Loan, which Alternate Base Rate Loan shall, for all purposes, be considered part of such Borrowing. For purposes of this Section 2.7, all references to Lender shall be deemed to include any bank holding company or bank parent of Lender. 2.8 Capital Adequacy. If after the date hereof Lender determines that (i) the adoption of any Applicable Law regarding capital requirements for banks or bank holding companies or the subsidiaries thereof, (ii) any change in the interpretation or administration of any such law, rule or regulation by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or (iii) compliance by Lender or its holding company with any request or directive of any such governmental authority, central bank or comparable agency regarding capital adequacy (whether or not having the force of law), has the effect of reducing the return on Lender's capital to a level below that which Lender could have achieved (taking into consideration Lender's and its holding company's policies with respect to capital adequacy immediately before such adoption, change or compliance and assuming that Lender's capital was fully utilized prior to such adoption, change or compliance) but for such adoption, change or compliance as a consequence of Lender's commitment to make the Loans pursuant hereto by any amount deemed by Lender to be material: 9 (a) Lender shall promptly, after Lender's determination of such occurrence, give notice thereof to Borrower; and (b) Borrower shall pay to Lender, as an additional fee from time to time, within five (5) Business Days after Lender's demand therefor, such amount as Lender certifies to be the amount that will compensate Lender for such reduction. A certificate of Lender claiming entitlement to compensation as set forth above shall, except for manifest error, be final, conclusive and binding. Such certificate will set forth the nature of the occurrence giving rise to such compensation, the additional amount or amounts to be paid to Lender, and the method by which such amounts were determined. In determining such amount, Lender may use any reasonable averaging and attribution method. For purposes of this Section 2.8 all references to Lender shall be deemed to include any bank holding company or bank parent of Lender. 2.9 Funding Losses. Borrower shall reimburse Lender for any loss, cost, expense or liability (including, without limitation, any interest paid by Lender to lenders of funds borrowed by Lender to make or carry the LIBOR Rate Loans to the extent not recovered by Lender in connection with the re-employment of such funds) sustained or incurred by Lender if for any reason (other than a default by Lender): (i) a Borrowing of, or conversion to or continuation of, a LIBOR Rate Loan does not occur on the date specified therefor in a Notice of Borrowing or Notice of Conversion/Continuation (whether or not withdrawn); (ii) any repayment (including any conversions pursuant to Section 2.1.3 hereof) of any LIBOR Rate Loans occurs on a date that is not the last day of an Interest Period applicable thereto; or (iii) Borrower defaults in its obligation to repay LIBOR Rate Loans when required by the terms of this Agreement. Borrower shall pay such amount within five (5) Business Days after presentation by Lender of a statement setting forth the amount and Lender's calculation thereof pursuant hereto, which statement shall, except for manifest error, be final, conclusive and binding. For purposes of this Section 2.9, all references to Lender shall be deemed to include any bank holding company or bank parent of Lender. 2.10 Maximum Interest. Regardless of any provision contained in this Agreement or any of the other Loan Documents, in no contingency or event whatsoever shall the aggregate of all amounts that are contracted for, charged or collected pursuant to the terms of this Agreement or any of the other Loan Documents and that are deemed interest under Applicable Law exceed the highest rate permissible under any Applicable Law. No agreements, conditions, provisions or stipulations contained in this Agreement or any of the other Loan Documents, or the exercise by Lender of the right to accelerate the payment or the maturity of all or any portion of the Obligations, or the exercise of any option whatsoever contained in any of the Loan Documents, or the prepayment by Borrower of any of the Obligations, or the occurrence of any contingency whatsoever, shall entitle Lender to charge or receive in any event, interest or any charges, amounts, premiums or fees deemed interest by Applicable Law (such interest, charges, amounts, premiums and fees referred to herein collectively as "Interest") in excess of the Maximum Rate and in no event shall Borrower be obligated to pay Interest exceeding such Maximum Rate, and all agreements, conditions or stipulations, if any, which may in any event or contingency whatsoever operate to bind, obligate or compel Borrower to pay Interest exceeding the 10 Maximum Rate shall be without binding force or effect, at law or in equity, to the extent only of the excess of Interest over such Maximum Rate. If any Interest is charged or received in excess of the Maximum Rate ("Excess"), Borrower acknowledges and stipulates that any such charge or receipt shall be the result of an accident and bona fide error, and such Excess, to the extent received, shall be applied first to reduce the principal Obligations and the balance, if any, returned to Borrower, it being the intent of the parties hereto not to enter into a usurious or otherwise illegal relationship. The right to accelerate the maturity of any of the Obligations does not include the right to accelerate any interest that has not otherwise accrued on the date of such acceleration, and Lender does not intend to collect any unearned interest in the event of any such acceleration. Borrower recognizes that, with fluctuations in the rates of interest set forth in Section 2.1.1 of this Agreement, and in the Maximum Rate, such an unintentional result could inadvertently occur. All monies paid to Lender hereunder or under any of the other Loan Documents, whether at maturity or by prepayment, shall be subject to any rebate of unearned interest as and to the extent required by Applicable Law. By the execution of this Agreement, Borrower covenants that (i) the credit or return of any Excess shall constitute the acceptance by Borrower of such Excess, and (ii) Borrower shall not seek or pursue any other remedy, legal or equitable, against Lender, based in whole or in part upon contracting for, charging or receiving any Interest in excess of the Maximum Rate. For the purpose of determining whether or not any Excess has been contracted for, charged or received by Lender, all interest at any time contracted for, charged or received from Borrower in connection with any of the Loan Documents shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated and spread in equal parts throughout the full term of the Obligations. Borrower and Lender shall, to the maximum extent permitted under Applicable Law, (i) characterize any non-principal payment as an expense, fee or premium rather than as Interest and (ii) exclude voluntary prepayments and the effects thereof. The provisions of this Section shall be deemed to be incorporated into every Loan Document (whether or not any provision of this Section is referred to therein). All such Loan Documents and communications relating to any Interest owed by Borrower and all figures set forth therein shall, for the sole purpose of computing the extent of Obligations, be automatically recomputed by Borrower, and by any court considering the same, to give effect to the adjustments or credits required by this Section. 3. LOAN ADMINISTRATION 3.1 Manner of Borrowing Revolver Loans and Disbursements. Borrowings pursuant to Section 1.1.1 shall be made and funded as follows: 3.1.1 Notice of Borrowing. (i) Whenever Borrower desires to make a Borrowing under Section 1.1.1 of this Agreement (other than a Borrowing resulting from a conversion or continuation pursuant to Section 2.1.3 hereof), Borrower shall give Lender prior written notice (or telephonic notice promptly confirmed in writing) of such Borrowing request (a "Notice of Borrowing"), which shall be in the form of EXHIBIT B hereto and signed by an authorized officer of Borrower. Such Notice of Borrowing shall be given by Borrower no later than 11:00 a.m., Charlotte, North Carolina time, at the office of Lender designated by Lender from time to time (a) on the Business Day of the requested date of such Borrowing in the 11 case of all Alternate Base Rate Loans, and (b) at least two (2) Business Days prior to the requested date of such Borrowing in the case of LIBOR Rate Loan. Notices received after 11:00 a.m. shall be deemed received on the next Business Day. All Loans made on the Closing Date shall be made as Alternate Base Rate Loans and thereafter may be made, continued as or converted into Alternate Base Rate Loans or LIBOR Rate Loans. Each Notice of Borrowing shall be irrevocable and shall specify (a) the principal amount of the Borrowing, (b) the date of Borrowing (which shall be a Business Day), (c) whether the Borrowing is to consist of Alternate Base Rate Loans or LIBOR Rate Loans and the amount of each such Loan, and (d) in the case of LIBOR Rate Loans, the duration of the Interest Period to be applicable thereto. Borrower may not request any LIBOR Rate Loans if a Default or Event of Default exists or if there are four (4) LIBOR Rate Loans outstanding at such time. (ii) Unless payment is otherwise timely made by Borrower, the becoming due of any amount required to be paid under this Agreement or any of the other Loan Documents as principal, accrued interest, fees or other charges shall be deemed irrevocably to be a request by Borrower for a Revolver Loan on the due date of, and in an aggregate amount required to pay, such principal, accrued interest, fees or other charges, and the proceeds of each such Revolver Loan may be disbursed by Lender by way of direct payment of the relevant Obligation and shall bear interest as an Alternate Base Rate Loan. Lender shall have no obligation to Borrower to honor any deemed request for a Revolver Loan when an Overadvance Condition exists or would result therefrom, but may do so in its sole discretion and without regard to the existence of, and without being deemed to have waived, any Default or Event of Default. If an Overadvance Condition exists and Lender does not intend to make a Revolver Loan pursuant to this Section to pay any installment of principal, accrued interest, fees or other charges then owing, Lender shall exercise reasonable efforts to notify Borrower of Lender's intention not to make such Revolver Loan. (iii) As an accommodation to Borrower, Lender may permit telephonic requests for Borrowings and electronic transmittal of instructions, authorizations, agreements or reports to Lender by Borrower or any other Person designated by Borrower; provided, however, that Borrower shall confirm each telephonic request for a Borrowing of a LIBOR Rate Loan by delivery of the required Notice of Borrowing to Lender by facsimile transmission promptly, but in no event later than 5:00 p.m. on the same day. Unless Borrower specifically directs Lender in writing not to accept or act upon telephonic or electronic communications from Borrower or such designated Person, Lender shall have no liability to Borrower for any loss or damage suffered by Borrower as a result of Lender's honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to it telephonically or electronically and purporting to have been sent to Lender by Borrower or such designated Person and Lender shall have no duty to verify the origin of any such communication or the identity or authority of the Person sending it. 3.1.2 Disbursement Authorization. Borrower hereby irrevocably authorizes Lender to disburse the proceeds of each Revolver Loan requested by Borrower, or 12 deemed to be requested, pursuant to Section 3.1.1 hereof, as follows: (i) the proceeds of each Revolver Loan requested under Section 3.1.1(i) shall be disbursed by Lender, in the case of the initial Borrowing, in accordance with the terms of the written disbursement letter from Borrower, and in the case of each subsequent Borrowing, by wire transfer to such bank account as may be agreed upon by Borrower and Lender from time to time or elsewhere if pursuant to a written direction from Borrower; and (ii) the proceeds of each Revolver Loan requested under Section 3.1.1(ii) shall be disbursed by Lender by way of direct payment of the relevant interest or other Obligation. 3.2 Special Provisions Governing LIBOR Rate Loans. 3.2.1 Number of LIBOR Rate Loans. In no event may the number of LIBOR Rate Loans outstanding at any time exceed four (4). 3.2.2 Minimum Amount of each LIBOR Rate Loan. Each election of a LIBOR Rate Loan pursuant to Section 3.1.1(i), and each continuation of or conversion into a LIBOR Rate Loan pursuant to Section 2.1.3 hereof, shall be in a minimum amount of $1,000,000 and integral multiples of $100,000 in excess of that amount. 3.2.3 LIBOR Lending Office. Lender's initial LIBOR Lending Office is set forth opposite its name on the signature pages hereof. Lender shall have the right at any time and from time to time to designate a different office of itself or any Affiliate as Lender's LIBOR Lending Office, and to transfer any outstanding LIBOR Loans to such LIBOR Lending Office. No such designation or transfer shall result in any liability on the part of Borrower for increased costs or expenses resulting solely from such designation or transfer (except any such transfer that is made by Lender pursuant to Sections 2.6 or 2.7 hereof, or otherwise for the purpose of complying with Applicable Law). Increased costs for expenses resulting from a change in Applicable Law occurring subsequent to any such designation or transfer shall be deemed not to result solely from such designation or transfer. 4. PAYMENTS 4.1 General Payment Provisions. All payments (including all prepayments) of the principal of, and interest on, the Loans and all of the other Obligations that are payable to Lender shall be made to Lender in Dollars without any offset or counterclaim and free and clear of (and without deduction for) any present or future Taxes, and, with respect to payments made other than by application of balances in the Payment Account, in immediately available funds no later than 12:00 noon, Charlotte, North Carolina time, on the due date (and payment made after such time, on the due date shall be deemed to have been made on the next succeeding Business Day). If any payment under this Agreement or the other Loan Documents shall be specified to be made upon a day which is not a Business Day, it shall be made on the next succeeding day which is a Business Day, and such extension of time shall in such case be included in computing interest and fees, if any, in connection with such payment. 13 4.2 Payment of Principal. 4.2.1 Payment of Principal of Revolver Loans. The outstanding principal amounts of the Revolver Loans shall be due and payable as follows: (i) Any portion of the Revolver Loans consisting of the principal amount of Alternate Base Rate Loans shall be paid by Borrower to Lender unless converted to a LIBOR Rate Loan in accordance with this Agreement, immediately upon the earlier of (a) the receipt by Lender or Borrower of any proceeds of any of the Collateral, to the extent of such proceeds or (b) the termination of this Agreement by Borrower or Lender pursuant to Section 5 hereof. (ii) Any portion of the Revolver Loans consisting of the principal amount of LIBOR Rate Loans shall be paid by Borrower to Lender, unless converted to an Alternate Base Rate Loan or continued as a LIBOR Rate Loan in accordance with the terms of this Agreement, upon the earlier of (a) the last day of the Interest Period applicable thereto or (b) the termination of this Agreement by Borrower or Lender pursuant to Section 5 hereof. In no event shall Borrower be authorized to pay any LIBOR Rate Loan prior to the last day of the Interest Period applicable thereto unless otherwise agreed in writing by Lender or Borrower is otherwise expressly authorized or required by any other provision of this Agreement to pay any LIBOR Rate Loan outstanding on a date other than the last day of the Interest Period applicable thereto, and Borrower pays to Lender concurrently with any prepayment of a LIBOR Rate Loan the amount due Lender under Section 2.9 hereof as a result of such prepayment. (iii) Notwithstanding anything to the contrary contained elsewhere in this Agreement, if an Overadvance Condition shall exist, Borrower shall, without the necessity of a demand, repay the outstanding Revolver Loans that are Alternate Base Rate Loans in an amount sufficient to reduce the aggregate unpaid principal amount of all such Revolver Loans by an amount equal to such excess; and, if such payment of Alternate Base Rate Loans is not sufficient to cure the Overadvance Condition, then Borrower shall immediately either (a) deposit with Lender, for application to any outstanding Revolver Loans bearing interest as LIBOR Rate Loans as the same become due and payable at the end of the applicable Interest Periods, cash in an amount sufficient to cure such Overadvance Condition and the amount of any such cash shall be credited by Lender to the Cash Collateral Account, pending disbursement of same to Lender, but subject to Lender's Lien therein and rights of offset with respect thereto, or (b) pay the Revolver Loans that are LIBOR Rate Loans to the extent necessary to cure such Overadvance Condition and also pay to Lender any and all amounts required by Section 2.9 hereof to be paid by reason of the prepayment of a LIBOR Rate Loan prior to the last day of the Interest Period applicable thereto. 4.2.2 Payment of Principal of the Term Loans. Borrower shall repay the principal balance of the Term Loans in substantially consecutive monthly installments of principal, commencing on the first (1st) day of the month following the Closing Date and continuing on the first (1st) day of each month thereafter, each in an amount equal to: (a) in the 14 case of the Real Estate Term Loan, the sum of $41,667, and, in the case of the Equipment Term Loan, the sum of $59,523, with a final maturity on the last day of the Original Term. 4.3 Payment of Interest. Interest accrued on all of the Loans shall be paid upon the earlier of (i) the first calendar day of each month for the immediately preceding month, computed through the last calendar day of the preceding month, or (ii) the termination of this Agreement by Borrower or Lender pursuant to Section 5 hereof. 4.4 Payment of Other Obligations. Borrower shall pay all costs, fees and charges pursuant to this Agreement as and when provided in Section 2.2 hereof, to Lender, or to any other Person designated by Lender in writing. The balance of the Obligations requiring the payment of money shall be payable by Borrower to Lender as and when provided in this Agreement, the Other Agreements or the Security Documents, or, if no date of payment is otherwise specified in the Loan Documents, on demand. 4.5 Prepayments of Term Loans. 4.5.1 Mandatory Prepayments. In addition to the payments on the Term Loans set forth in Section 4.2.2 hereof and in the Term Notes, Borrower shall make mandatory payments of principal on the Term Loans as follows: (i) Upon the termination of this Agreement by Lender or Borrower pursuant to Section 5 hereof, Borrower shall prepay the Term Loans in full; and (ii) If any Net Proceeds are received by Parent, Borrower or any of its respective Subsidiaries, Borrower shall pay or cause to be paid to Lender, unless otherwise agreed by Lender or unless otherwise provided in this Agreement, as and when so received by Parent, Borrower or any of its respective Subsidiaries, a sum equal to such Net Proceeds. 4.5.2 Optional Prepayments. Borrower may, at its option, prepay the principal owing on the Term Loans at any time in whole and from time to time in part in amounts aggregating $250,000 or any greater multiple of $50,000, and if such prepayment is made of a LIBOR Rate Loan and on a date other than the last day of any applicable Interest Period, by paying all charges as set forth in Section 2.9 hereof. Borrower shall give written notice (or telephonic notice confirmed in writing) to Lender of any intended prepayment not less than one (1) Business Day prior to any prepayment of Base Rate Loans and not less than two (2) Business Days prior to any prepayment of LIBOR Rate Loans. Such notice, once given, shall be irrevocable. 4.5.3 Application of Prepayments. Any such mandatory or optional prepayment shall be applied to the installments of principal due under the Term Notes in the inverse order of their maturities until payment thereof in full. 15 4.6 Application of Payments and Collections. All items of payment received by Lender by 12:00 noon, Charlotte, North Carolina time, in immediately available funds on any Business Day shall be deemed received on that Business Day. All items of payment received after 12:00 noon, Charlotte, North Carolina time, in immediately available funds on any Business Day shall be deemed received on the following Business Day. Borrower irrevocably waives the right to direct the application of any and all payments and collections at any time or times hereafter received by Lender from or on behalf of Borrower, and Borrower does hereby irrevocably agree that Lender shall have the continuing exclusive right to apply and reapply any and all such payments and collections received at any time or times hereafter by Lender or its agent against the Obligations, in such manner as Lender may deem advisable, notwithstanding any entry by Lender upon any of its books and records. If as the result of collections of Accounts as authorized by Section 7.2.6 hereof a credit balance exists in the Loan Account, such credit balance shall not accrue interest in favor of Borrower, but shall be available to Borrower at any time or times for so long as no Default or Event of Default exists. Lender may, at its option, offset such credit balance against any of the Obligations during the existence of an Event of Default. 4.7 Marshalling; Payments Set Aside. Lender shall be under no obligation to marshall any assets in favor of Borrower or any other Person or against or in payment of any or all of the Obligations. To the extent that Borrower makes a payment or payments to Lender or Lender receives payment from the proceeds of any Collateral or exercises its right of setoff, and such payment or payments or the proceeds of such setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. The provisions of the immediately preceding sentence of this Section 4.7 shall survive any termination of this Agreement and payment in full of the Obligations. 4.8 Loan Account. Lender shall enter all Revolver Loans as debits to Borrower's Loan Account and shall also record in the Loan Account all payments made by Borrower on the Revolver Loans and all proceeds of Collateral which are finally paid to Lender, and may record therein, in accordance with customary accounting practice, other debits and credits, including interest and all charges and expenses properly chargeable to Borrower. 4.9 Statements of Account. Lender will account to Borrower monthly with a statement of Loans, charges and payments made pursuant to this Agreement, and such account rendered by Lender shall be deemed final, binding and conclusive upon Borrower unless Lender is notified by Borrower in writing to the contrary within thirty (30) days after the date on which such accounting is deemed to have been sent pursuant to section 12.9. Such notice shall only be deemed an objection to those items specifically objected to therein. 16 5. TERM AND TERMINATION OF AGREEMENT 5.1 Term of Agreement. Subject to Lender's right to cease making Loans to Borrower during the existence of any Default or Event of Default, this Agreement shall be in effect for a period commencing on the Closing Date and ending on the Credit Facility Termination Date (such period the "Original Term"), unless terminated as provided in Section 5.2 hereof. 5.2 Termination. 5.2.1 Termination by Lender. Lender may terminate this Agreement without notice during the existence of an Event of Default. 5.2.2 Termination by Borrower. Upon at least ninety (90) days prior written notice to Lender, Borrower may, at its option, terminate this Agreement; provided, however, no such termination shall be effective until Borrower has paid all of the Obligations in immediately available funds. Any notice of termination given by Borrower shall be irrevocable unless Lender otherwise agrees in writing, and Lender shall have no obligation to make any Loans on or after the termination date stated in such notice and thereafter, provided the Obligations are paid and satisfied in full and Lender has no commitment to make any loans or advances hereunder, no further fees shall accrue under Section 2.2.2 hereof. Borrower may elect to terminate this Agreement in its entirety only. No Section of this Agreement or Type of Loan available hereunder may be terminated singly. 5.2.3 Termination Charges. On the effective date of termination of this Agreement for any reason, Borrower shall pay to Lender (in addition to the then outstanding principal, accrued interest and other charges owing under the terms of this Agreement and any of the other Loan Documents) as liquidated damages for the loss of the bargain and not as a penalty, an amount equal to the product obtained by multiplying the amount of the Total Credit Facility times one percent (1%) if termination occurs at any time before the first anniversary of the Closing Date; and zero percent (0%) if termination occurs any time thereafter; provided, however, if Borrower pays any amounts to Lender pursuant to Sections 2.6, 2.7 or 2.8 of this Agreement, then Borrower may terminate this Agreement without the payment of any termination charge pursuant to this Section 5.2.3 if termination occurs no later than one hundred twenty (120) days after Borrower's making of such payment. 5.2.4 Effect of Termination. On the effective date of termination of this Agreement, all of the Obligations shall be immediately due and payable. All undertakings, agreements, covenants, warranties and representations of Borrower contained in the Loan Documents shall survive any such termination and Lender shall retain its Liens in the Collateral and all of its rights and remedies under the Loan Documents notwithstanding such termination until Borrower has paid the Obligations to Lender, in full, in the manner set forth in Section 5.2.2. Notwithstanding the payment in full of the Obligations, Lender shall not be required to terminate its Liens in the Collateral unless, with respect to any loss or damage Lender may incur as a result of the dishonor or return of any Payment Item applied to the Obligations, Lender shall, at its option, (i) have received a written agreement, executed by Borrower and by any Person 17 whose loans or other advances to Borrower are used in whole or in part to satisfy the Obligations, indemnifying Lender from any such loss or damage, or (ii) have retained such monetary reserves and Liens on the Collateral for such period of time as Lender, in its reasonable discretion, may deem necessary to protect Lender from any such loss or damage. 6. SECURITY INTERESTS 6.1 Security Interest in Collateral. To secure the prompt payment and performance to Lender of the Obligations, Borrower hereby grants to Lender a continuing Lien upon all of Borrower's assets, including all of the following Property and interests in Property of Borrower, whether now owned or existing or hereafter created, acquired or arising and wheresoever located: (i) Accounts; (ii) Certificated Securities; (iii) Chattel Paper; (iv) Computer Hardware and Software and all rights with respect thereto, including, any and all licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications, and any substitutions, replacements, additions or model conversions of any of the foregoing; (v) Contract Rights; (vi) Deposit Accounts; (vii) Documents; (viii) Equipment; (ix) Financial Assets; (x) Fixtures; (xi) General Intangibles, including Payment Intangibles and Software; (xii) Goods (including all of its Equipment, Fixtures and Inventory), and all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor; (xiii) Instruments, including, without limitation, the Richardson Note; (xiv) Intellectual Property; 18 (xv) Inventory; (xvi) Investment Property; (xvii) money (of every jurisdiction whatsoever); (xviii) Letter-of-Credit Rights; (xix) Payment Intangibles; (xx) Security Entitlements; (xxi) Software; (xxii) Supporting Obligations; (xxiii) Uncertificated Securities; and (xxiv) to the extent not included in the foregoing, all other personal property of any kind or description; together with all books, records, writings, data bases, information and other property relating to, used or useful in connection with, or evidencing, embodying, incorporating or referring to any of the foregoing, and all Proceeds, products, offspring, rents, issues, profits and returns of and from any of the foregoing; provided that to the extent that the provisions of any lease or license of Computer Hardware and Software or Intellectual Property expressly prohibit (which prohibition is enforceable under applicable law) any assignment thereof, and the grant of a security interest therein, Lender will not enforce its security interest in Borrower's rights under such lease or license (other than in respect of the Proceeds thereof) for so long as such prohibition continues, it being understood that upon request of Lender, Borrower will in good faith use reasonable efforts to obtain consent for the creation of a security interest in favor of Lender (and to Lender's enforcement of such security interest) in such Lender's rights under such lease or license. 6.2 Other Collateral. 6.2.1 Commercial Tort Claims. Borrower shall promptly notify Lender in writing upon incurring or otherwise obtaining a Commercial Tort Claim after the Closing Date against any third party and, upon request of Lender, promptly enter into an amendment to this Agreement and do such other acts or things deemed appropriate by Lender to give Lender a security interest in any such Commercial Tort Claim. 6.2.2 Other Collateral. Borrower shall promptly notify Lender in writing upon acquiring or otherwise obtaining any Collateral after the date hereof consisting of Deposit Accounts, Investment Property, Letter-of-Credit Rights or Electronic Chattel Paper and, upon the request of Lender, promptly execute such other documents, and do such other acts or things deemed appropriate by Lender to deliver to Lender control with respect to such Collateral; 19 promptly notify Lender in writing upon acquiring or otherwise obtaining any Collateral after the date hereof consisting of Documents or Instruments and, upon the request of Lender, will promptly execute such other documents, and do such other acts or things deemed appropriate by Lender to deliver to Lender possession of such Documents which are negotiable and Instruments, and, with respect to nonnegotiable Documents, to have such nonnegotiable Documents issued in the name of Lender; and with respect to Collateral in the possession of a third party, other than Certificated Securities and Goods covered by a Document and obtain an acknowledgement from the third party that it is holding the Collateral for the benefit of Lender. 6.2.3 Cash Collateral. The Obligations shall also be secured by the Cash Collateral to the extent provided herein and all of the other items of Property from time to time described in any of the Security Documents as security for any of the Obligations. 6.3 Lien Perfection; Further Assurances. Borrower shall execute such UCC-1 financing statements as are required by the UCC, and such other instruments, assignments or documents, as are necessary to perfect Lender's Lien upon any of the Collateral, and shall also take such other action, including, without limitation, obtaining Control Agreements with respect to each of its Deposit Accounts, as may be required to perfect or to continue the perfection of Lender's Lien upon all of the Collateral. Unless prohibited by Applicable Law, Borrower hereby irrevocably authorizes Lender to execute and file any such financing statements, including, without limitation, financing statements that indicate the Collateral (i) as all assets of Borrower or words of similar effect, or (ii) as being of an equal or lesser scope, or with greater or lesser detail, than as set forth in Section 6.1, on Borrower's behalf. Borrower also hereby ratifies its authorization for Lender to have filed in any jurisdiction any like financing statements or amendments thereto if filed prior to the date hereof. The parties agree that a photographic or other reproduction of this Agreement shall be sufficient as a financing statement and may be filed in any appropriate office in lieu thereof. At Lender's request, Borrower shall also promptly execute or cause to be executed and shall deliver to Lender any and all documents, instruments and agreements deemed necessary by Lender to give effect to or carry out the terms or intent of the Loan Documents. 6.4 Lien on Realty. The due and punctual payment and performance of the Obligations shall also be secured by the Lien created by the Mortgages upon all real Property of Borrower described therein. The Mortgages shall be executed by Borrower in favor of Lender and shall be duly recorded, at Borrower's expense, in each office where such recording is required to constitute a fully perfected Lien on the real Property covered thereby. Borrower shall deliver to Lender, at Borrower's expense, mortgagee title insurance policies issued by a title insurance company satisfactory to Lender, which policies shall be in form and substance satisfactory to Lender and shall insure a valid, first Lien in favor of Lender on the Property covered thereby, subject only to those exceptions acceptable to Lender. Borrower shall deliver to Lender such other documents, including, without limitation, as-built survey prints of the real Property, as Lender may request relating to the real Property subject to the Mortgages. 20 7. COLLATERAL ADMINISTRATION 7.1 General Provisions 7.1.1 Location of Collateral. All tangible items of Collateral, other than Inventory in transit, shall at all times be kept by Borrower at one or more of the business locations set forth in SCHEDULE 7.1.1 hereto and shall not, without the prior written approval of Lender, be moved therefrom except, prior to an Event of Default and Lender's acceleration of the maturity of the Obligations in consequence thereof, for (i) sales of Inventory in the ordinary course of business; and (ii) the storage of Collateral at locations within the continental United States other than those shown in SCHEDULE 7.1.1 hereto if, (a) Borrower gives Lender written notice of such a location at least sixty (60) days prior to storing Collateral at such location, (b) Lender's Lien in such Collateral is and continues to be a duly perfected Lien thereon (and Borrower shall have taken such action as may be required pursuant to Section 6.3 hereof to perfect Lender's Lien thereon) subject to no other Lien thereon except for Permitted Liens, (c) neither Borrower's nor Lender's right of entry upon the premises where such Collateral is stored, or its right to remove the Collateral therefrom, is in any way restricted, and (d) the owner of such premises agrees with Lender not to assert any landlord's, bailee's or other Lien in respect of the Collateral for unpaid rent or storage charges; provided, however, clauses (a), (c) and (d) above shall not apply to new locations at which Collateral is located which are established after the Closing Date if (1) no Default or Event of Default has occurred and is continuing, (2) such locations are disclosed to Lender in the Borrowing Base Certificates required to be provided to Lender, and (3) the aggregate value of the Inventory, calculated at the lower of cost or market (on a first-in, first-out basis), at such locations does not exceed $3,500,000 at any one time; and provided further, clause (b) above shall not apply to new locations at which Collateral is located which are established after the Closing Date if (1) no Default or Event of Default has occurred and is continuing, (2) such locations are disclosed to Lender in the Borrowing Base Certificates required to be provided to Lender, and (3) the aggregate value of the Inventory, calculated at the lower of cost or market (on a first-in, first-out basis), at such locations does not exceed $250,000 at any one time. 7.1.2 Insurance of Collateral. Borrower shall maintain and pay for insurance upon all Collateral wherever located and with respect to Borrower's business, covering casualty, hazard, public liability, product recall, product contamination, business interruption and such other risks in such amounts and with such insurance companies as are reasonably satisfactory to Lender. Borrower shall deliver the originals or certified copies of such policies to Lender with satisfactory lender's loss payable endorsements naming Lender as sole loss payee, assignee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than thirty (30) days prior written notice to Lender in the event of cancellation of the policy for any reason whatsoever other than non-payment and ten (10) days prior written notice to Lender in the even of cancellation of the policy for non-payment of premium and a clause specifying that the interest of Lender shall not be impaired or invalidated by any act or neglect of Borrower or the owner of the Property or by the occupation of the premises for purposes more hazardous than are permitted by said policy. If Borrower fails to provide and pay for such insurance, Lender may, at its option, but shall not be required to, procure the same and charge Borrower therefor. Borrower agrees to deliver to 21 Lender, promptly as rendered, true copies of all reports made in any reporting forms to insurance companies. In addition to the insurance required herein with respect to the Collateral, Borrower shall maintain, with financially sound and reputable insurers, insurance with respect to its Property and business against such casualties and contingencies of such type (including product liability, product recall, business interruption, larceny, embezzlement, or other criminal misappropriation insurance) and in such amounts as is customary in the business of Borrower, or as otherwise required by Lender, but in no event, in the case of Borrower's business interruption insurance, in an amount less than $10 million, and, in the case of Borrower's product recall insurance, less than $10 million. Borrower shall also execute and file with any insurance company that issues its product recall and business interruption insurance policy such assignments and other documents which Lender shall deem necessary to perfect Lender's Liens in such policies and all proceeds of insurance payable thereon. All proceeds of insurance received by Borrower or Lender on account of any casualty to the Collateral or other insured risk in which Lender has an insurable interest shall be applied as follows: (i) if an Event of Default exists, all such insurance proceeds shall, at Lender's option, be deemed Net Proceeds and paid to Lender as a mandatory prepayment of the Loans; and (ii) if no Event of Default exists, all such insurance proceeds of any claim of less than $50,000 shall be released to Borrower for the purpose of Borrower's repairing, replacing or restoring the damaged or destroyed Collateral (and, if replaced, the replacement Collateral shall be subject to Lender's duly perfected Lien therein and no other Liens), and all such insurance proceeds of any claim of more than $50,000 shall be, in Lender's sole discretion, (a) remitted to Lender for application to the Obligations, or (b) released to Borrower for the aforesaid purpose. 7.1.3 Protection of Collateral. All expenses of protecting, storing, warehousing, insuring, handling, maintaining and shipping the Collateral, all Taxes imposed by any Applicable Law on any of the Collateral or in respect of the sale thereof, and all other payments required to be made by Lender to any Person to realize upon the Collateral, shall be borne and paid by Borrower. If Borrower fails to promptly pay any portion thereof when due, Lender may, at its option, but shall not be required to, pay the same and charge Borrower therefor. Lender shall not be liable or responsible in any way for the safekeeping of any of the Collateral or for any loss or damage thereto (except for reasonable care in the custody thereof while any Collateral is in Lender's actual possession) or for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency, or other person whomsoever, but the same shall be at Borrower's sole risk. 7.1.4 Borrowing Base Certificate. Promptly upon Lender's request, but in no event less frequently than weekly on the last Business Day of each week, Borrower shall submit to Lender a Borrowing Base Certificate in the form of EXHIBIT C executed by the Chief Financial Officer of Borrower; provided, however, if Availability for any consecutive period of sixty (60) days after the Senior Notes Restructuring Closing Date is at least $10 million, Borrower shall thereafter submit to Lender such Borrowing Base Certificate executed by the Chief Financial Officer of Borrower no less than frequently than monthly; and provided further 22 that in all events, both before and after the Senior Notes Restructuring Closing Date and regardless of the amount of Availability at any time, each Borrowing Base Certificate shall be submitted by Borrower to Lender promptly upon Lender's request. 7.2 Administration of Accounts. 7.2.1 Records and Schedules of Accounts. Borrower shall keep accurate and complete records of its Accounts and all payments and collections thereon and shall submit to Lender: (i) On such periodic basis as Lender shall request but no less frequently than monthly, a sales and collections report for the preceding period; (ii) On or before the twentieth (20th) day of each monthly period, a detailed aged trial balance of all Accounts which are existing as of the last day of the preceding monthly period, specifying the names, addresses, face value, dates of invoices and due dates for each Account Debtor obligated on an Account so listed ("Schedule of Accounts"); and (iii) Upon Lender's request therefor, copies of proof of delivery, invoices or invoice registers and the original copies of all documents, including, without limitation, repayment histories and present status reports, relating to the Accounts so scheduled and such other matters and information relating to the Accounts as Lender shall reasonably request. In addition, if Accounts owing by any Account Debtor in an aggregate amount in excess of $200,000 cease to be Eligible Accounts in whole or in part, Borrower shall notify Lender of such occurrence no later than the fifth (5th) Business Day following such occurrence and the Borrowing Base shall thereupon be adjusted to reflect such occurrence. 7.2.2 Discounts, Allowances, Disputes. If Borrower grants any discounts, allowances or credits that are not shown on the face of the invoice for the Account involved, Borrower shall report such discounts, allowances or credits, as the case may be, to Lender as part of the next required Schedule of Accounts. In the event any amounts due and owing in excess of $200,000 are in dispute between Borrower and any Account Debtor, Borrower shall provide Lender with written notice thereof at the time of submission of the next Schedule of Accounts, explaining in detail the reason for the dispute, all claims related thereto and the amount in controversy. 7.2.3 Taxes. If an Account includes a charge for any Tax payable to any governmental taxing authority, Lender is authorized, in its sole discretion, to pay the amount thereof to the proper taxing authority for the account of Borrower and to charge Borrower therefor; provided, however, that Lender shall not be liable for any Taxes that may be due by Borrower. 23 7.2.4 Account Verification. Whether or not a Default or an Event of Default exists, Lender shall have the right, at any time, in the name of Lender, any designee of Lender or Borrower, to verify the validity, amount or any other matter relating to any Accounts of Borrower by verbal or written communications. Borrower shall cooperate fully with Lender in an effort to facilitate and promptly conclude any such verification process. 7.2.5 Maintenance of Dominion Account. Borrower shall maintain a Dominion Account pursuant to a lockbox arrangement with Bank. Borrower shall deposit all proceeds of the Collateral or cause the same to be deposited in kind in the Dominion Account. All funds deposited in the Dominion Account shall be subject to Lender's Lien, and Borrower shall obtain the agreement by Bank in favor of Lender to waive any offset rights against the funds so deposited. Lender assumes no responsibility for such lockbox arrangement, including, without limitation, any claim of accord and satisfaction or release with respect to deposits accepted by Bank. 7.2.6 Collection of Accounts, Proceeds of Collateral. To expedite collection, Borrower shall endeavor in the first instance to make collection of its Accounts for Lender. All remittances received by Borrower on account of Accounts, together with the proceeds of any other Collateral, shall be held as Lender's property by Borrower as trustee of an express trust for Lender's benefit and Borrower shall immediately deposit the same in kind in the Dominion Account. Lender retains the right at all times during the existence of an Event of Default to notify Account Debtors that Accounts have been assigned to Lender and to collect Accounts directly in its own name and to charge the collection costs and expenses, including reasonable attorneys' fees, to Borrower. 7.3 Administration of Inventory. 7.3.1 Records and Reports of Inventory. Borrower shall keep accurate and complete records of its Inventory. Borrower shall furnish to Lender Inventory reports in form and detail satisfactory to Lender at such times as Lender may request, but at least once each monthly period, not later than the twentieth (20) day of such monthly period for Inventory of Borrower as of the end of the preceding monthly period. Borrower shall conduct a physical inventory no less frequently than annually and shall provide to Lender a report based on each such physical inventory promptly thereafter, together with such supporting information as Lender shall request. 7.3.2 Returns of Inventory by Account Debtor. If at any time or times hereafter any Account Debtor returns any Inventory to Borrower the shipment of which generated an Account on which such Account Debtor is obligated in excess of $150,000, Borrower shall notify Lender of the same, specifying the reason for such return and the location, condition and intended disposition of the returned Inventory, no later than the fifth (5th) Business Day following such return and the Borrowing Base shall thereupon be adjusted accordingly. 7.3.3 Returns of Inventory by Borrower. Borrower shall not return any of its Inventory to a supplier or vendor thereof, or any other Person, whether for cash, credit 24 against future purchases or then existing payables, or otherwise which has a value in excess of $250,000 during any monthly period. 7.4 Administration of Equipment. 7.4.1 Records and Schedules of Equipment. Borrower shall keep accurate records itemizing and describing the kind, type, quality, quantity and value of its Equipment and of the Equipment of all of its Subsidiaries and all dispositions made in accordance with subsection 7.4.2 hereof, and shall furnish Lender with a current schedule containing the foregoing information on at least an annual basis and more often if requested by Lender. Immediately on request therefor by Lender, Borrower shall deliver to Lender any and all evidence of ownership, if any, of any of its Equipment and any of the Equipment of any Subsidiary. 7.4.2 Dispositions of Equipment. Without the prior written consent of Lender in each instance, Borrower will not sell, lease or otherwise dispose of or transfer any of its Equipment or any part thereof, nor permit any Subsidiary of Borrower to sell, lease or otherwise dispose of or transfer any of the Equipment of such Subsidiary or any part thereof; provided, however, that the foregoing restriction shall not apply, for so long as no Default or Event of Default exists, to (i) dispositions of Equipment by Borrower and all Subsidiaries which, in the aggregate during any consecutive twelve month period, has a fair market value or book value, whichever is less, of $250,000 or less, provided that all proceeds thereof are remitted to Lender for application to the Loans, or (ii) replacements of Equipment by Borrower and its Subsidiaries that is substantially worn, damaged or obsolete with Equipment of like kind, function and value, provided that the replacement Equipment shall be acquired prior to or concurrently with any disposition of the Equipment that is to be replaced, the replacement Equipment shall be free and clear of Liens other than Permitted Liens that are not Purchase Money Liens, and Borrower shall have given Lender at least five (5) days prior written notice of such disposition of Equipment having a fair market value or book value, whichever is greater, of $100,000 or more. 7.5 Payment of Charges. All amounts chargeable to Borrower under Section 7 hereof shall be Obligations secured by all of the Collateral, shall be payable on demand and shall bear interest from the date such advance was made until paid in full at the rate applicable to Revolver Loans that are Alternate Base Rate Loans from time to time. 8. REPRESENTATIONS AND WARRANTIES 8.1 General Representations and Warranties. To induce Lender to enter into this Agreement and to make Loans hereunder, Parent and Borrower each warrants, represents and covenants to Lender that: 8.1.1 Organization and Qualification. Parent, Borrower and each of its respective Subsidiaries is each a corporation or limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization. Parent, Borrower and each of its respective Subsidiaries is each duly qualified and 25 is authorized to do business and is in good standing as a foreign entity in each state or jurisdiction listed on SCHEDULE 8.1.1 hereto and in all other states and jurisdictions where the character of its Property or the nature of its activities make such qualification necessary or in which the failure of Parent, Borrower or any of its respective Subsidiaries to be so qualified would have a Material Adverse Effect. 8.1.2 Power and Authority. Parent, Borrower and each of its respective Subsidiaries is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and each of the other Loan Documents to which it is a party. The execution, delivery and performance of this Agreement and each of the other Loan Documents by Parent, Borrower and each of its respective Subsidiaries that are parties thereto have been duly authorized by all necessary action and do not and will not (i) require any consent or approval of the shareholders of Parent, Borrower and each of its respective Subsidiaries which has not been obtained; (ii) contravene Parent's, Borrower's or any of its respective Subsidiary's charter, articles or certificate of incorporation or organization, or by-laws or operating agreement, as the case may be; (iii) violate, or cause Parent, Borrower or any of its respective Subsidiaries to be in default under, any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award in effect having applicability to Parent, Borrower or any of its respective Subsidiaries; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which Parent, Borrower and each of its respective Subsidiaries is a party or by which it or its respective Property may be bound or affected; or (v) result in, or require, the creation or imposition of any Lien (other than Permitted Liens) upon or with respect to any of the Property now owned or hereafter acquired by Parent, Borrower or any of its respective Subsidiaries. 8.1.3 Legally Enforceable Agreement. This Agreement is, and each of the other Loan Documents when delivered under this Agreement will be, a legal, valid and binding obligation of Parent, Borrower and each of its respective Subsidiaries that are parties hereto or thereto, enforceable against each of them in accordance with its respective terms. 8.1.4 Organizational Structure. As of the date hereof, SCHEDULE 8.1.4 hereto states (i) the correct name of Parent, Borrower and each of its respective Subsidiaries as it appears in official filing in the state of its incorporation or organization, the state of incorporation or organization, and, for each Subsidiary of Parent, the percentage of its Voting Stock or membership interests owned by Parent, and, for each Subsidiary of Borrower, the percentage of its Voting Stock or membership interests owned by Borrower (ii) the type of entity of each of Parent, Borrower and its respective Subsidiaries, (iii) the organizational number assigned to each such entity by its state of incorporation or organization, or a statement that no such number was assigned, (iv) the name of each of Parent's and Borrower's corporate, limited liability company or joint venture Affiliates and the nature of the affiliation, and (v) the number of authorized, issued and treasury shares or membership interests of Parent, Borrower and each Subsidiary of Parent and Borrower. Except as set forth in SCHEDULE 8.1.4 hereto, Parent and Borrower each has good title to all of the shares of stock or membership interests it purports to own of each of its respective Subsidiaries, free and clear in each case of any Lien other than Permitted Liens. All such shares or membership interests have been duly issued and are fully paid and non-assessable. 26 Each of Parent, Borrower and its respective Subsidiaries has only one state of incorporation or organization. 8.1.5 Corporate or Organizational Names. Neither Parent, Borrower nor any of its respective Subsidiaries has been known as or used any corporate, organizational, fictitious or trade names except those listed on SCHEDULE 8.1.5 hereto. Except as set forth on SCHEDULE 8.1.5, neither Parent, Borrower nor any of its respective Subsidiaries has been the surviving entity of a merger or consolidation or acquired all or substantially all of the assets of any Person. 8.1.6 Business Locations; Agent for Process. Each of Parent's, Borrower's and each of its respective Subsidiary's chief executive office and other places of business are as listed on SCHEDULE 7.1.1 hereto. During the preceding five-year period, neither Parent, Borrower nor any of its respective Subsidiaries has had an office, place of business or agent for service of process other than as listed on SCHEDULE 7.1.1 hereto. Except as shown on SCHEDULE 7.1.1 hereto, no Inventory of Borrower is stored with a bailee, warehouseman or similar party, nor is any Inventory consigned to any Person. 8.1.7 Title to Property; Priority of Liens. Each of Parent, Borrower and its respective Subsidiaries has good, indefeasible and marketable title to and fee simple ownership of, or valid and subsisting leasehold interests in, all of its real Property, and good title to all of the Collateral and all of its other Property, in each case, free and clear of all Liens except for Permitted Liens and the Liens set forth on SCHEDULE 8.1.4 hereto. Each of Parent, Borrower and its respective Subsidiaries has paid or discharged all lawful claims which, if unpaid, might become a Lien against any Property of Parent, Borrower or any of its respective Subsidiaries that is not a Permitted Lien. The Liens granted to Lender under Section 6 hereof are first priority Liens, subject only to those Permitted Liens that are expressly stated to have priority over the Liens of Lender. 8.1.8 Accounts. Lender may rely, in determining which Accounts of Borrower are Eligible Accounts, on all statements and representations made by Borrower with respect to any Account or Accounts. Unless otherwise indicated in writing to Lender, with respect to each Account: (i) It is genuine and in all respects what it purports to be, and it is not evidenced by a judgment, Instrument, Document or Chattel Paper; (ii) It arises out of a completed, bona fide sale and delivery of goods by Borrower in the ordinary course of its business and in accordance with the terms and conditions of all purchase orders, contracts or other documents relating thereto and forming a part of the contract between Borrower and the Account Debtor; (iii) It is for a liquidated amount maturing as stated in the duplicate invoice covering such sale, a copy of which has been furnished or is available to Lender; 27 (iv) To the best knowledge of Borrower, such Account, and Lender's Lien therein, is not, and will not (by voluntary act or omission of Borrower) be in the future, subject to any offset, deduction, defense, dispute, counterclaim or any other adverse condition except for disputes resulting in returned goods where the amount in controversy is deemed by Lender to be immaterial, and each such Account is absolutely owing to Borrower and is not contingent in any respect or for any reason; (v) Borrower has made no agreement with any Account Debtor thereunder for any extension, compromise, settlement or modification of any such Account or any deduction therefrom, except discounts or allowances which are granted by Borrower in the ordinary course of its business for prompt payment and which are reflected in the calculation of the net amount of each respective invoice related thereto and are reflected in the Schedules of Accounts submitted to Lender pursuant to Section 7.2.1 hereof; (vi) To the best knowledge of Borrower, there are no facts, events or occurrences which in any way impair the validity or enforceability of any Accounts or tend to reduce the amount payable thereunder from the face amount of the invoice and statements delivered to Lender with respect thereto; (vii) To the best of Borrower's knowledge, the Account Debtor thereunder (a) had the capacity to contract at the time any contract or other document giving rise to the Account was executed and (b) such Account Debtor is Solvent; (viii) To the best of Borrower's knowledge, there are no proceedings or actions which are threatened or pending against any Account Debtor thereunder which might result in any material adverse change in such Account Debtor's financial condition or the collectibility of such Account; and (ix) Any contract under which such Account arose does not condition or restrict Borrower's right to assign to Lender the right to payment thereunder unless Borrower has obtained the Account Debtor's consent to such collateral assignment or complied with conditions to such assignment (regardless of whether under the Code or other Applicable Law any such restrictions are ineffective to prevent the grant of a Lien upon such Account in favor of Lender). 8.1.9 Financial Statements; Fiscal Year. (i) The balance sheets of Parent, PF Distribution and PF Purchasing as of May 30, 2003 and June 30, 2003, and the Consolidated and consolidating balance sheets of Borrower and its Subsidiaries (including Columbia Hill Aviation as a special purpose entity) as of March 3, 2001, March 2, 2002, and June 30, 2003, and the related statements of income, changes in stockholder's equity, cash flows, and changes in financial position for the periods ended on such dates, have been prepared in accordance with GAAP, and present fairly the financial position of Parent, PF Distribution and PF Purchasing and Borrower and its Subsidiaries (including Columbia Hill Aviation as a special purpose 28 entity), as the case may be, at such dates and the results of operations of Parent, PF Distribution and PF Purchasing and Borrower and its Subsidiaries (including Columbia Hill Aviation as a special purpose entity), as the case may be, for such periods. Since June 30, 2003, there has been no material change in the condition, financial or otherwise, of Parent, PF Distribution or PF Purchasing as shown on their respective balance sheets as of such date (except for the acquisition by Parent of its Subsidiaries PF Distribution and PF Purchasing), and since March 2, 2002, there has been no material change in the condition, financial or otherwise, of Borrower and its Subsidiaries (including Columbia Hill Aviation as a special purpose entity) as shown on the Consolidated balance sheet as of such date (except for the acquisition by Borrower of its Subsidiary Compass), and the related statements of income, changes in stockholder's equity, cash flows, and changes in financial position for the period then ending, and no change in the aggregate value of Equipment and real Property owned by Parent, Borrower and its respective Subsidiaries, except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse; (ii) The Consolidated and consolidating balances sheets of Parent and its Subsidiaries, and the related statements of income, cash flows, changes in stockholder's equity, and changes in financial position, which are from time to time delivered by Parent to Lender pursuant to Section 9.1.3 of this Agreement fairly present the financial position of Parent, Borrower and each of its respective Subsidiaries at such dates and the results of the operations of Parent, Borrower and each of its respective Subsidiaries for the periods set forth therein; and (iii) The Fiscal Year of Parent, Borrower and each of its respective Subsidiaries means twelve (12) periods consisting of four (4) or (5) weeks each determined based on a 52-53 week accounting period, the last week of which ends on the last day of February if it falls on a Saturday, and, if not, on the first Saturday in March of each year. 8.1.10 Full Disclosure. The financial statements referred to in Section 8.1.9 hereof do not, nor does this Agreement or any other written statement of Parent, Borrower or any of its respective Subsidiaries to Lender, contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading. To the best of Parent's and Borrower's knowledge, there is no fact which Parent or Borrower has failed to disclose to Lender in writing which materially affects adversely or, so far as Parent and Borrower can now foresee, will materially affect adversely the Property, business, prospects, profits or condition (financial or otherwise) of Parent, Borrower or any of its respective Subsidiaries or the ability of Parent, Borrower or any of its respective Subsidiaries to perform this Agreement or the other Loan Documents. 8.1.11 Solvent Financial Condition. Borrower and its Subsidiaries are now, and, after giving effect to the Loans to be made hereunder, will be, Solvent. 8.1.12 Surety Obligations. Neither Parent, Borrower nor any of its respective Subsidiaries is obligated as surety or indemnitor under any surety or similar bond or other contract issued or entered into to assure payment, performance or completion of per- 29 formance of any undertaking or obligation of any Person, other than indemnity and surety agreements issued in support of commodity processing contracts which are executed by Borrower in the normal course of its business. 8.1.13 Taxes. The federal tax identification number of Parent, Borrower and each of its respective Subsidiaries is shown on SCHEDULE 8.1.13 hereto. Parent, Borrower and each of its respective Subsidiaries have filed all federal, state and local tax returns and other reports it is required by law to file and has paid, or made provision for the payment of, all Taxes upon it, its income and Property as and when such Taxes are due and payable, except to the extent being Properly Contested. The provision for Taxes on the books of Parent, Borrower and each of its respective Subsidiaries is adequate for all years not closed by applicable statutes, and for its current Parent Indebtedness for Money Borrowed . 8.1.14 Brokers. There are no claims for brokerage commissions, finder's fees or investment banking fees in connection with the loan transaction contemplated by this Agreement. 8.1.15 Patents, Trademarks, Copyrights and Licenses. Parent, Borrower and each of its respective Subsidiaries owns or possesses all the patents, trademarks, service marks, trade names, copyrights and licenses necessary for the present and, to the best of Parent's and Borrower's knowledge, planned future conduct of its business, without any known conflict with the rights of others. All such patents, trademarks, service marks, tradenames, copyrights, licenses and other similar rights are listed on SCHEDULE 8.1.15 hereto. 8.1.16 Governmental Consents. Parent, Borrower and each of its respective Subsidiaries has, and is in good standing with respect to, all governmental consents, approvals, licenses, authorizations, permits, certificates, inspections and franchises necessary to continue to conduct its business as heretofore or proposed to be conducted by it and to own or lease and operate its Property as now owned or leased by it. 8.1.17 Compliance with Laws. Parent, Borrower and each of its respective Subsidiaries has duly complied with, and its Property, business operations and leaseholds are in compliance in all material respects with, the provisions of all Applicable Law and there have been no citations, notices or orders of noncompliance issued to Parent, Borrower or any of its respective Subsidiaries under any such law, rule or regulation where such non-compliance could reasonably be expected to have a Material Adverse Effect. Parent, Borrower and each of its respective Subsidiaries has established and maintains an adequate monitoring system to insure that it remains in compliance with all federal, state and local laws, rules and regulations applicable to it, including, without limitation, the Fair Labor Standards Act (29 U.S.C. Section 201 et seq.), as amended. 8.1.18 Restrictions. Neither Parent, Borrower nor any of its respective Subsidiaries is a party or subject to any contract, agreement, or charter or other corporate restriction, which materially and adversely affects its business or the use or ownership of any of its Property. Except as set forth on SCHEDULE 8.1.18 hereto, neither Parent, Borrower nor any of its respective Subsidiaries is a party or subject to any contract or agreement which restricts its 30 right or ability to incur Indebtedness, none of which prohibit the execution of or compliance with this Agreement or the other Loan Documents by Parent, Borrower or any of its respective Subsidiaries, as applicable. 8.1.19 Litigation. Except as set forth on SCHEDULE 8.1.19 hereto, there are no actions, suits, proceedings or investigations pending on the date hereof, or to the knowledge of Parent or Borrower, threatened on the date hereof, against or affecting Parent, Borrower or any of its respective Subsidiaries, or the business, operations, Property, prospects, profits or condition of Parent, Borrower or any of its respective Subsidiaries, and no such action, suit or proceeding will, if decided adversely, have a Material Adverse Effect. Neither Parent, Borrower nor any of its respective Subsidiaries is in default on the date hereof with respect to any order, writ, injunction, judgment, decree or rule of any court, governmental authority or arbitration board or tribunal. 8.1.20 No Defaults. No event has occurred and no condition exists which would, upon or after the execution and delivery of this Agreement or Parent's or Borrower's performance hereunder, constitute a Default or an Event of Default. Neither Parent, Borrower nor any of its respective Subsidiaries is in default, and no event has occurred and no condition exists which constitutes, or which with the passage of time or the giving of notice or both would constitute, a default in the payment of any Indebtedness to any Person for Money Borrowed. 8.1.21 Leases. SCHEDULE 8.1.21 hereto is a complete listing of all capitalized and operating leases of Parent, Borrower and its respective Subsidiaries on the date hereof. Parent, Borrower and each of its respective Subsidiaries is in full compliance with all of the terms of each of its respective capitalized and operating leases. 8.1.22 Pension Plans. Except as disclosed on SCHEDULE 8.1.22 hereto, neither Parent, Borrower nor any of its respective Subsidiaries has any Plan on the date hereof. Parent, Borrower and each of its respective Subsidiaries is in full compliance with the requirements of ERISA and the regulations promulgated thereunder with respect to each Plan. No fact or situation that could result in a Material Adverse Effect exists in connection with any Plan. Neither Parent, Borrower nor any of its respective Subsidiaries has any withdrawal liability in connection with a Multiemployer Plan. 8.1.23 Trade Relations. There exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship between Parent, Borrower or any of its respective Subsidiaries and any customer or any group of customers whose purchases individually or in the aggregate are material to the business of Parent, Borrower or any of its respective Subsidiaries, or with any material supplier, and, to the best of Parent's and Borrower's knowledge, there exists no present condition or state of facts or circumstances which would materially affect adversely Parent, Borrower or any of its respective Subsidiaries or prevent Parent, Borrower or any of its respective Subsidiaries from conducting such business after the consummation of the transactions contemplated by this Agreement in substantially the same manner in which it has heretofore been conducted. 31 8.1.24 Labor Relations. Except as described on SCHEDULE 8.1.24 hereto, neither Parent, Borrower nor any of its respective Subsidiaries is a party on the date hereof to any collective bargaining agreement. There are no material grievances, disputes or controversies with any union or any other organization of Parent's, Borrower's or any of its respective Subsidiary's employees, or threats of strikes, work stoppages or any asserted pending demands for collective bargaining by any union or organization. 8.1.25 Investment Company Act; Public Utility Holding Company Act. Neither Parent, Borrower nor any of its respective Subsidiaries is an "investment company" or "person directly or indirectly controlled by or acting on behalf of an investment company" within the meaning of the Investment Company Act of 1940, or a "holding company" or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935. 8.1.26 Margin Stock. Neither Parent, Borrower nor any of its respective Subsidiaries is engaged, principally or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. 8.1.27 Bank Facility. The Loans, Obligations and Liens contemplated by this Agreement and the other Loan Documents constitute "Permitted Indebtedness" and "Permitted Liens" (as such terms are defined in the Indenture) under the Indenture. 8.2 Continuous Nature of Representations and Warranties. Each representation and warranty contained in this Agreement and the other Loan Documents shall be continuous in nature and shall remain accurate, complete and not misleading at all times during the term of this Agreement, except for changes in the nature of Parent's, Borrower's or any of its respective Subsidiary's business or operations that may occur after the date hereof, so long as Lender has consented to such changes or such changes are not prohibited by the terms of this Agreement. 8.3 Survival of Representations and Warranties. All representations and warranties of Parent, Borrower and each of its respective Subsidiaries contained in this Agreement or any of the other Loan Documents shall survive the execution, delivery and acceptance thereof by Lender and the parties thereto and the closing of the transactions described therein or related thereto. 9. COVENANTS AND CONTINUING AGREEMENTS 9.1 Affirmative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Parent and Borrower each covenants that, unless otherwise consented to by Lender in writing, it shall: 9.1.1 Visits and Inspections. Permit representatives of Lender, from time to time, as often as may be reasonably requested, but only during normal business hours, to visit and inspect the Property of Parent, Borrower and each of its respective Subsidiaries, inspect, audit and make extracts from its books and records, and discuss with its officers, its employees 32 and its independent accountants, Parent's, Borrower's and each of its respective Subsidiary's business, assets, liabilities, financial condition, business prospects and results of operations. 9.1.2 Notices. Notify Lender in writing (i) of the occurrence of any event or the existence of any fact which renders any representation or warranty in this Agreement or any of the other Loan Documents inaccurate, incomplete or misleading in any material respect; (ii) promptly after Parent's or Borrower's learning thereof, of the commencement of any litigation affecting Parent, Borrower or any of its respective Subsidiaries or any of its respective Property, whether or not the claim is considered by Parent or Borrower to be covered by insurance, and of the institution of any administrative proceeding which, in either case, may have a Material Adverse Effect; (iii) at least sixty (60) days prior thereto, of the opening of any new office or place of business by Parent, Borrower or any of its respective Subsidiaries or the closing of any existing office or place of business by Parent, Borrower or any of its respective Subsidiaries; (iv) promptly after Parent's or Borrower's learning thereof, of any organized labor dispute to which Parent, Borrower of any of its respective Subsidiaries may become a party, any strikes or walkouts by organized labor relating to any of its plants or other facilities, and the expiration of any collective bargaining agreement to which it is a party or by which it is bound; (v) promptly after Parent or Borrower's learning thereof, of any material default by Parent, Borrower or any of its respective Subsidiaries under any note, indenture, loan agreement, mortgage, lease, deed, guaranty or other similar agreement relating to any Indebtedness of Parent, Borrower or any of its respective Subsidiaries exceeding $500,000; (vi) promptly after the occurrence thereof, of any Default or Event of Default; (vii) promptly after the occurrence thereof, of any default by any obligor under any note or other evidence of Indebtedness in excess of $200,000 payable to Parent, Borrower or any of its respective Subsidiaries; and (viii) promptly after the rendition thereof, of any judgment rendered against Parent, Borrower or any of its respective Subsidiaries in an amount exceeding $100,000 which is not fully covered by insurance. 9.1.3 Financial Statements. Keep, and cause each of its respective Subsidiaries to keep, adequate records and books of account with respect to its business activities in which proper entries are made in accordance with GAAP reflecting all its financial transactions; and cause to be prepared and furnished to Lender the following (all to be prepared in accordance with GAAP applied on a consistent basis, unless Parent's or Borrower's certified public accountants concur in any change therein and such change is disclosed to Lender and is consistent with GAAP): (i) not later than ninety (90) days after the close of each Fiscal Year of Borrower, (A) audited financial statements of Borrower and its Subsidiaries as of the end of such year, on a Consolidated and consolidating basis, certified by a firm of independent certified public accountants of recognized standing selected by Borrower but acceptable to Lender (except for a qualification for a change in accounting principles with which the accountant concurs); (ii) not later than forty-five (45) days after the end of each Fiscal Quarter hereafter, including the last Fiscal Quarter of Parent's Fiscal Year, unaudited, interim financial statements of Parent and its Subsidiaries as of the end of such Fiscal Quarter 33 and of the portion of Parent and its Subsidiaries' financial year then elapsed, including statements of cash flow, on a Consolidated and consolidating basis, certified by the principal financial officer of Parent as prepared in accordance with GAAP and fairly presenting the Consolidated financial position and results of operations of Parent and its Subsidiaries for such Fiscal Quarter and period subject only to changes from audit and year-end adjustments and except that such statements need not contain notes; (iii) not later than (a) thirty (30) days after the end of each fiscal monthly period within a Fiscal Quarter hereafter, and (b) the earlier of (i) forty-five (45) days after the end of each Fiscal Quarter hereafter, or (ii) the filing of any quarterly or annual statement pursuant to clause (iv) below, unaudited interim financial statements of Parent and its Subsidiaries and of Borrower and its Subsidiaries, including statements of cash flows, each as of the end of such month and of the portion of Fiscal Year then elapsed, on a Consolidated and consolidating basis, certified by the chief financial officer of Parent and of Borrower, as the case may be, as prepared in accordance with GAAP and fairly presenting the Consolidated financial position and results of operations of Parent and its Subsidiaries and of Borrower and its Subsidiaries for such month and period subject only to changes from audit and year-end adjustments and except that such statements need not contain notes; (iv) promptly after the sending or filing thereof, as the case may be, copies of any proxy statements, financial statements or reports which Parent, Borrower or any of its respective Subsidiaries has made available to its shareholders and copies of any regular, periodic and special reports or registration statements which Parent, Borrower or any of its Subsidiaries files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or any national securities exchange; (v) not later than twenty (20) days after the end of each monthly period hereafter, an accurate and complete report of the accounts payable of Borrower and its Subsidiaries, in form and substance satisfactory to Lender; (vi) promptly after the filing thereof, copies of any annual report to be filed with ERISA in connection with each Plan; and (vii) such other data and information (financial and otherwise) as Lender, from time to time, may reasonably request, bearing upon or related to the Collateral or financial condition of Parent, Borrower or any of its respective Subsidiaries or the results of their respective operations. Concurrently with the delivery of the financial statements described in clause (i) of this Section 9.1.3, Borrower shall forward to Lender a copy of the accountants' letter to Borrower's management that is prepared in connection with such financial statements. Within forty-five (45) days of the end of each quarterly period (or, if the Consolidated Fixed Charge Coverage Ratio/Covenant Testing Period is monthly, then within thirty (30) days of the end of each monthly period) and concurrently with the delivery of the financial statements to be delivered pursuant to clause (i) of this Section 9.1.3, or more frequently if requested by Lender, 34 Parent and Borrower shall cause to be prepared and furnished to Lender a Compliance Certificate in the form of EXHIBIT D hereto executed by the Chief Financial Officer of Parent and Borrower. 9.1.4 Landlord and Storage Agreements. Provide Lender with copies of all agreements between Parent, Borrower or any of its respective Subsidiaries and any landlord or warehouseman which owns any premises at which any Inventory may, from time to time, be kept. 9.1.5 Projections. No later than thirty (30) days prior to the end of each Fiscal Year of Parent and Borrower, deliver to Lender Projections of Parent and its Subsidiaries and of Borrower and its Subsidiaries, in each case for the forthcoming Fiscal Year, by monthly period. 9.1.6 Taxes and Liens. Pay and discharge, and cause each of its respective Subsidiaries to pay and discharge, all Taxes prior to the date on which such Taxes become delinquent or penalties attach thereto, except and only to the extent that such Taxes are being Properly Contested. Parent, Borrower and each of its respective Subsidiaries shall also pay, discharge or provide a bond with respect to, any lawful claims which, if unpaid or unbonded, might become a Lien against any Property of Parent, Borrower or any of its respective Subsidiaries, except for Permitted Liens. 9.1.7 Tax Returns. File, and cause each of its respective Subsidiaries to file, all federal, state and local tax returns and other reports Parent, Borrower or any of its respective Subsidiaries is required by law to file and maintain adequate reserves for the payment of all Taxes imposed upon it, its income or its profits, or upon any Property belonging to it. 9.1.8 Compliance with Applicable Laws. Comply, and cause each of its respective Subsidiaries to comply, with all Applicable Laws, and obtain and keep in force any and all licenses, permits, franchises or other governmental authorizations necessary to the ownership of its Property or to the conduct of its business, which violation or failure to obtain might have a Material Adverse Effect. 9.1.9 Subordinations. Provide Lender with a debt subordination agreement, in form and substance satisfactory to Lender, executed by any Person who is an officer, director or Affiliate of Parent, Borrower or any of its respective Subsidiaries to whom Parent, Borrower or any of its respective Subsidiaries is or hereafter becomes indebted for Money Borrowed, subordinating in right of payment and claim all of such Indebtedness to the full and final payment and performance of the Obligations. 9.1.10 Administration of Equipment. Keep, and cause each of its respective Subsidiaries to keep, accurate records itemizing and describing the kind, type, quality, quantity and value of its Equipment, and maintain, and cause each of its respective Subsidiaries to maintain, its Equipment in good operating condition and repair, and make all necessary replacements of and repairs thereto so that the value and operating efficiency of its Equipment shall be maintained and preserved, reasonable wear and tear excepted. 35 9.1.11 Conduct of Business; Maintenance of Existence. Conduct, and cause each of its respective Subsidiaries to conduct, its business substantially as now conducted or as otherwise permitted hereunder and preserve all of its rights, privileges and franchises necessary and desirable in connection therewith. 9.2. Negative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Parent and Borrower each covenants that, unless Lender has first consented thereto in writing, it will not: 9.2.1 Fundamental Changes. (i) Merge or consolidate, or permit any of its respective Subsidiaries to merge or consolidate, with any Person; nor (ii) acquire, nor permit any of its respective Subsidiaries to acquire, all or any substantial part of the Property of any Person; nor (iii) change, or permit any of its respective Subsidiaries to change, its name as it appears in official filings in the state of its incorporation or organization, or the type of legal entity it is, or the state of its incorporation or organization or the organizational identification number, if any, assigned to it by such state; or (iv) form or create any other Subsidiaries other than the Subsidiaries in existence on the Closing Date. 9.2.2 Loans. Make, or permit any Subsidiary of Parent to make, any loans or other advances of money (other than for travel advances, advances against commissions and other similar advances in the ordinary course of business) to any Person (including a loan or advance from one Subsidiary of Parent to another Subsidiary of Parent) except for the loans and advances in existence on the Closing Date and which are set forth on SCHEDULE 9.2.2 attached to this Agreement. 9.2.3 Affiliate Transactions. Enter into, or be a party to, or permit any of its respective Subsidiaries to enter into or be a party to, any transaction with any Subsidiary of Parent or any Affiliate of Parent or any Affiliate of any stockholder of Parent, except for the following (which are described in more detail on SCHEDULE 9.2.3 attached to this Agreement): (i) the Office Lease; (ii) the transactions contemplated by the Affiliate Agreements during the period from the Closing Date until the Senior Notes Restructuring Closing Date, unless and only to the extent that: (a) such transactions are in strict compliance with each of the terms and provisions of the Affiliate Agreements as in effect on the Closing Date; (b) no Default or Event of Default shall exist; (c) the aggregate amount of consideration paid by Borrower under the Affiliate Agreements during any period shall not exceed the actual amount due and owing for such period under the Affiliate Agreements as in effect on the Closing Date; provided, however, on the Closing Date from the proceeds of the initial Loans made to Borrower hereunder, Borrower may also pay unpaid 36 amounts accrued and owing under the Affiliate Agreements as of the Closing Date which in the aggregate shall not exceed the amount and shall be used solely for the purposes set forth in SCHEDULE 9.2.3(ii)(c) hereof; (d) During any month, Parent and its Subsidiaries, PF Distribution, PF Purchasing and Columbia Hill Aviation shall not make, or permit to be made, any payments of cash to any Person except for (1) the amount of reasonable and necessary taxes and other operating expenses incurred by Parent, PF Distribution, Columbia Hill Aviation and PF Purchasing in the ordinary course of its respective business during such month (which under no circumstances shall include expenses owing to any Affiliate of either Parent, Borrower or any of their respective Subsidiaries), plus (2) the amount of regularly scheduled payments on the Parent Indebtedness for Money Borrowed and the Columbia Hill Aviation Indebtedness for Money Borrowed becoming due and payable during such month in accordance with the terms therefor as in effect on the Closing Date; and (e) all transactions contemplated by the Affiliate Agreements, and all payments of any kind thereunder, shall be terminated upon the Senior Notes Restructuring Closing Date. 9.2.4 Limitation on Liens. Create or suffer to exist, or permit any of its respective Subsidiaries to create or suffer to exist, any Lien upon any of its Property, income or profits, whether now owned or hereafter acquired, except: (i) Liens at any time granted in favor of Lender; (ii) Liens for taxes (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due or that are being Properly Contested; (iii) statutory Liens arising in the ordinary course of the business of Parent, Borrower or any of its respective Subsidiaries by operation of law or regulation, but only if payment in respect of any such Lien is not at the time required or such Liens are being Properly Contested and do not, in the aggregate, materially detract from the value of the Property of Parent, Borrower or such Subsidiary or materially impair the use thereof in the operation of Parent's, Borrower's or such Subsidiary's business; (iv) Purchase Money Liens securing Permitted Purchase Money Indebtedness; (v) the Purchase Money Lien securing the Columbia Hill Aviation Purchase Money Indebtedness; (vi) Liens set forth on SCHEDULE 9.2.4 hereto; 37 (vii) reservations, exceptions, easements, rights-of-way and other similar encumbrances affecting the real Property of Parent, Borrower and its respective Subsidiaries that do not interfere with the ordinary conduct of the business of Parent, Borrower and its respective Subsidiaries; (viii) interests of lessors under leases which are required to be capitalized for financial reporting purposes in accordance with GAAP; (ix) Liens in favor of warehousemen, processors, fillers and packers arising in the ordinary course of business of Parent, Borrower or any of its respective Subsidiaries, but only if payment in respect of any such Lien is not at the time required or such Liens are being Properly Contested and do not, in the aggregate, materially detract from the value of the Property of Parent, Borrower or such Subsidiary or materially impair the use thereof in the operation of Parent's, Borrower's or such Subsidiary's business; (x) from and after the Senior Notes Restructuring Closing Date, Liens in the Collateral as security for the Senior Notes; and (xi) such other Liens as Lender may hereafter approve in writing. 9.2.5 Total Indebtedness. Create, incur, assume, or suffer to exist, or permit any of its respective Subsidiaries to create, incur or suffer to exist, any Indebtedness for Money Borrowed, except: (i) Obligations owing to Lender; (ii) Subordinated Debt; (iii) Permitted Purchase Money Indebtedness; (iv) the Senior Notes; (v) the Parent Indebtedness for Money Borrowed; (vi) the Columbia Hill Aviation Purchase Money Indebtedness; and (vii) Refinancing Indebtedness for Money Borrowed of the Indebtedness for Money Borrowed described in clauses (ii) through (vi) above. 9.2.6 Subordinated Debt. Make, or permit any of its respective Subsidiaries to make, any payment of any Subordinated Debt or take any other action or omit to take any other action in respect of any Subordinated Debt, except in accordance with the agreement relative to such Subordinated Debt. 38 9.2.7 Distributions. Declare or make, or permit any of its respective Subsidiaries to declare or make, any Distributions; provided, however, until the Senior Notes Restructuring Closing Date, and only for so long as no Default or Event of Default shall exist or would result therefrom, Borrower, PF Distribution, PF Purchasing and Columbia Hill Aviation may make Distributions to Parent during any month in an aggregate amount up to, but not in excess of, the sum of (i) the aggregate amount of regularly scheduled payments on the Parent Indebtedness for Money Borrowed becoming due and payable during such month in accordance with the terms therefor as in effect on the Closing Date, and (ii) the amount of reasonable and necessary taxes and other operating expenses incurred by Parent in the ordinary course of its business during such month (which under no circumstances shall include expenses owing to any Affiliate of either Parent, Borrower or any of their respective Subsidiaries), to be used solely and exclusively by Parent for making payments, in the case of the foregoing clause (i), of the Parent Indebtedness for Money Borrowed, and, in the case of the foregoing clause (ii), of such taxes and operating expenses. 9.2.8 Disposition of Assets. Sell, lease or otherwise dispose of any of, or permit any of its respective Subsidiaries to sell, lease or otherwise dispose of, its respective Property, including any disposition of Property as part of a sale and leaseback transaction, to or in favor of any Person, except (i) sales of Inventory in the ordinary course of business for so long as no Event of Default exists hereunder, or (ii) dispositions expressly authorized by this Agreement. 9.2.9 Bill-and-Hold Sales, Etc. Make a sale or permit any of its respective Subsidiaries to make a sale, to any customer on a bill-and-hold, guaranteed sale, sale and return, sale on approval or consignment basis, or any sale on a repurchase or return basis. 9.2.10 Restricted Investment. Make or have, or permit any of its respective Subsidiaries to make or have, any Restricted Investment. 9.2.11 Tax Consolidation. File or consent to the filing of any consolidated income tax return with any Person other than a Subsidiary of Parent. 9.2.12 Fiscal Year. Change its Fiscal Year from the first Saturday in March of each year. 9.2.13 Guaranties. Become liable upon, or permit any of its respective Subsidiaries to become liable upon, the obligations of any Person, by assumption, endorsement or guaranty thereto or otherwise (other than to Lender), except the endorsement of checks in the ordinary course of business. 9.2.14 Prepayment of Senior Notes; Amendment of Indenture. (i) Make any payment of the principal on the Senior Notes prior to the stated maturity date thereof; provided, however, after the Senior Notes Restructuring Closing Date, Borrower may make a Senior Notes Cash Sweep Prepayment if each of the Senior Notes Cash Sweep Payments Conditions are first satisfied; nor (ii) amend or modify in any way the terms or provisions of the Indenture or the Senior Notes from those in effect on the Closing Date; provided, however, if the 39 Senior Notes Restructuring Conditions shall first be satisfied, Parent and its Subsidiaries may amend the Indenture and the Senior Notes in connection with the Senior Notes Restructuring to the extent contemplated thereby. 9.2.15 Excess Cash. Permit Parent, PF Distribution, PF Purchasing and Columbia Hill Aviation to have cash or Cash Equivalents on hand at any time (excluding, in the case of Columbia Hill Aviation, the cash or Cash Equivalents on which there is a Permitted Lien) in excess of $1,000,000 in the aggregate. 9.2.16 Parent Indebtedness for Money Borrowed; Columbia Hill Aviation Purchase Money Indebtedness. Amend or modify in any way the terms or provisions of the Parent Indebtedness for Money Borrowed or the Columbia Hill Aviation Purchase Money Indebtedness from those in effect on the Closing Date; provided, however, if the Senior Notes Restructuring Conditions shall first be satisfied, Parent and its Subsidiaries may amend the Parent Indebtedness for Money Borrowed and the Columbia Hill Aviation Purchase Money Indebtedness in connection with the Senior Notes Restructuring to provide for the assumption thereof by Borrower and, in the case of the Parent Indebtedness for Money Borrowed, for the subordination to the payment of the Obligations and the Senior Notes as contemplated by the Senior Notes Restructuring. 9.2.17 Deposit Accounts. Parent, Borrower and its respective Subsidiaries shall not open after the Closing Date, and, commencing ninety (90) days after the Closing Date, shall not thereafter maintain, any Deposit Account (other than (i) Borrower's existing bank account at Branch Banking and Trust which shall not at any time have a balance of more than $100,000, (ii) Borrower's four (4) existing employee benefit plan accounts - group medical, dental, workman's compensation and group medical - which shall not at any time have a combined balance of more than $500,000, and (iii) a payroll account which shall not at any time have a balance in an amount in excess of one regular payroll), except in each case at Bank and for which a Control Agreement shall be obtained. 9.3 Specific Financial Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Parent and Borrower each covenants that, unless otherwise consented to by Lender in writing, it shall comply with the following financial covenants: 9.3.1 Consolidated Net Worth. Parent and its Subsidiaries shall maintain a Consolidated Net Worth, as of the end of each Fiscal Quarter, commencing with the end of the 3rd Fiscal Quarter of the Fiscal Year ending 2004, of not less than the sum of (i) the product of (a) the Consolidated Net Worth of Parent and its Subsidiaries as of the end of the 2nd Fiscal Quarter of the Fiscal Year ending 2004 times (b) a percentage equal to 85% if such Consolidated Net Worth is positive and 115% if such Consolidated Net Worth is negative, plus (ii) seventy-five percent (75%) of Consolidated Net Income of Parent and its Subsidiaries for (a) the 3rd Fiscal Quarter of the Fiscal Year ending 2004 and (b) each Fiscal Quarter thereafter (in each case with no deduction if Consolidated Net Income of Parent and its Subsidiaries for any Fiscal Quarter is less than zero). 40 9.3.2 Consolidated Fixed Charge Coverage Ratio/Covenant. (a) Parent and its Subsidiaries shall maintain a Consolidated Fixed Charge Coverage Ratio for each Consolidated Fixed Charge Coverage Ratio/Covenant Testing Period set forth below of not less than the amount corresponding thereto:
CONSOLIDATED FIXED CHARGE TESTING PERIOD COVERAGE RATIO/COVENANT - -------------- ------------------------- Months Elapsed during the 3rd Fiscal Quarter of Fiscal Year Ending 2004 1.25 to 1.00 Months Elapsed during the 3rd and 4th Fiscal Quarters of Fiscal Year Ending 2004 1.25 to 1.00 Months Elapsed during the 3rd and 4th Fiscal Quarters of Fiscal Year Ending 2004 and 1st Fiscal Quarter of Fiscal Year Ending 2005 1.25 to 1.00 Months Elapsed during the 3rd and 4th Fiscal Quarters of Fiscal Year Ending 2004 and 1st and 2nd Fiscal Quarters of Fiscal Year Ending 2005 1.25 to 1.00 Each Twelve Month Period thereafter 1.25 to 1.00
The "Consolidated Fixed Charge Coverage Ratio/Covenant Testing Period" shall be quarterly as of the end of each Fiscal Quarter, commencing with the end of the third Fiscal Quarter of the Fiscal Year ending 2004; provided, however, if Availability on any day during a month shall be less than $3,000,000, then, commencing with the end of such month, the Consolidated Fixed Charge Coverage Ratio/Covenant Testing Period shall be the month then ending and each month thereafter (in each case for that portion of the elapsed portion of the period then ending). (b) Borrower and its Subsidiaries shall maintain a Consolidated Fixed Charge Coverage Ratio for the Fiscal Year ending 2005 and each Fiscal Year thereafter of not less than 1.25 to 1.00. 9.3.3 Capital Expenditures. Parent, Borrower and their respective Subsidiaries shall not make Capital Expenditures (including, without limitation, by way of capitalized leases) during any period which, in the aggregate, exceed the amount shown below corresponding to such period: 41 ]
PERIOD MAXIMUM CAPITAL EXPENDITURES - ------ ----------------------------- 3rd Fiscal Quarter of Fiscal Year Ending 2004 $2,000,000 3rd and 4th Fiscal Quarters of Fiscal Year Ending 2004 $3,000,000 3rd and 4th Fiscal Quarters of Fiscal Year Ending 2004 and 1st Fiscal Quarter of Fiscal Year Ending 2005 $4,500,000 3rd and 4th Fiscal Quarters of Fiscal Year Ending 2004 and 1st and 2nd Fiscal Quarters of Fiscal Year Ending 2005 $6,000,000 Period of four (4) consecutive periods ending with the 3rd Fiscal Quarter Ending 2005 and each period of four (4) consecutive Fiscal Quarters thereafter $6,000,000
9.3.4 Executive Compensation Limits. Parent, Borrower and each of its respective Subsidiaries shall not permit the aggregate amount of compensation in any form payable directly or indirectly to the Executives in any Fiscal Year to be more than $2,200,000 in salary and $500,000 in benefits and other perquisites, and, in the case of benefits and other perquisites, those must be similar in type to the benefits and perquisites set forth on SCHEDULE 9.3.4 attached hereto. In addition, if Consolidated EBITDA of Borrower and its Subsidiaries is equal to or greater than $35,000,000 in any of the Fiscal Years ending 2004, 2005 or 2006, then the Executives shall be entitled to receive for such Fiscal Year bonus amounts which may be awarded by the Board of Directors in its sole discretion but which shall be limited as follows: (i) the annual bonus shall not exceed the sum of $1,200,000 to be allocated by the Board of Directors among the Executives; plus (ii) after the Senior Notes Restructuring Closing Date (but not before), an additional annual bonus payable solely from any Executive Bonus Pool earned for such Fiscal Year. 9.3.5 Consolidated EBITDA. Borrower and its Subsidiaries shall achieve Consolidated EBITDA for each period set forth below of not less than the amount corresponding thereto:
PERIOD CONSOLIDATED EBITDA - --------------------------------------------- ------------------- ~~3rd Fiscal Quarter of Fiscal Year Ending 2004 $ 2,000,000 Fiscal Year Ending 2004 $20,000,000~~
42 10. CONDITIONS PRECEDENT 10.1 Conditions Precedent to Term Loans and Initial Revolver Loan on Closing Date. Notwithstanding any other provision of this Agreement or any of the other Loan Documents, and without affecting in any manner the rights of Lender under the other sections of this Agreement, it is understood and agreed that Lender will have no obligation to make the Term Loans or the initial Revolver Loan under Section 1 of this Agreement on the Closing Date unless and until, in addition to each of the conditions set forth in Section 10.2 hereof, each of the following conditions has been satisfied: 10.1.1 Documentation. Lender shall have received the following documents, each to be in form and substance satisfactory to Lender and its counsel: (a) Certified copies of casualty insurance policies of Parent, Borrower and each of its respective Subsidiaries, together with loss payable endorsements on Lender's standard form of Loss Payee Endorsement naming Lender as loss payee as its interests may appear, and certified copies of the liability insurance policies of Parent, Borrower and their respective Subsidiaries, together with endorsements naming Lender as a coinsured; (b) Copies of all filing receipts or acknowledgments issued by any governmental authority to evidence any filing or recordation necessary to perfect the Liens of Lender in the Collateral and evidence in a form acceptable to Lender that such Liens constitute valid and perfected first priority security interests and Liens, subject only to those Permitted Liens which are expressly stated to have priority over the Liens of Lender; (c) Copies of the articles of incorporation or organization of Parent, Borrower and each of its respective Subsidiaries, and all amendments thereto, certified by the Secretary of State or other appropriate official of its respective jurisdiction of incorporation or organization; (d) Good standing certificates for Parent, Borrower and each of its respective Subsidiaries issued by the Secretary of State or other appropriate official of its respective jurisdiction of incorporation or organization and each jurisdiction where the conduct of the business activities of Parent, Borrower or any of its respective Subsidiaries necessitates qualification and in which the failure of Parent, Borrower or any of its respective Subsidiaries to be so qualified would have a material adverse effect on the financial condition, business or Properties of Parent, Borrower, or any of its respective Subsidiaries; (e) A closing certificate signed by an authorized officer of Parent and Borrower, dated as of the Closing Date, stating that (i) the representations and warranties set forth in Section 8 hereof are true and correct in all material respects on and as of such date, (ii) Parent, Borrower and each of its respective Subsidiaries is on such date in compliance in all material respects with all the terms and provisions set forth in this 43 Agreement and the other Loan Documents and (iii) on such date no Default or Event of Default exists; (f) The Security Documents duly executed, accepted and acknowledged by or on behalf of each of the signatories thereto; (g) The Other Agreements duly executed and delivered by Parent, Borrower and each of its Subsidiaries that are parties thereto; (h) The favorable, written opinion of counsel to Parent, Borrower and all Guarantors as to the transactions contemplated by this Agreement and the other Loan Documents; (i) Written instructions from Borrower directing the application of proceeds of the Term Loans and of the initial Revolver Loan made to Borrower pursuant to this Agreement on the Closing Date; (j) Certificates of the Secretary, Assistant Secretary or Manager of Parent, Borrower and each of its respective Subsidiaries certifying (i) that attached thereto is a true and complete copy of the Bylaws or Operating Agreement of Parent, Borrower or such Subsidiary, as in effect on the date of such certification, (ii) that attached thereto is a true and complete copy of the resolutions adopted by the Board of Directors or Managers of Parent, Borrower or such Subsidiary, authorizing the execution, delivery and performance of this Agreement and the other Loan Documents to which Parent, Borrower or such Subsidiary is a party and the consummation of the transactions contemplated hereby and thereby, and (iii) as to the incumbency and genuineness of the signature of each officer of Parent, Borrower or such Subsidiary executing this Agreement or any of the Loan Documents; (k) Duly executed agreement for the establishment of the Dominion Account; (l) Fully paid mortgagee title insurance policies (or binding commitments to issue title insurance policies, marked to Lender's satisfaction to evidence the form of such policy to be delivered after the Closing Date), in standard ALTA form (including a revolving credit endorsement, comprehensive endorsement, tie-in endorsement and such other endorsements as Lender may request), issued by a title insurance company satisfactory to Lender, in an aggregate amount as specified by Lender, insuring the Mortgages to create a valid Lien on the real Property encumbered thereby with no exceptions which Lender shall not have approved in writing and no general survey exceptions; (m) As-built surveys with respect to each tract of real Property encumbered by the Mortgages, which surveys shall indicate the following: (i) an accurate metes and bounds or lot, block and parcel description of such tract of real Property; (ii) the correct location of all buildings, structures and other improvements on such real Property, including, without limitation, all streets, easements, rights of way and utility lines; (iii) 44 the location of ingress and egress from such real Property, and the location of any set-back or other building lines affecting such real Property; and (iv) a certificate by a registered land surveyor in form and substance acceptable to Lender, certifying to Lender the accuracy and completeness of such survey and to such other matters relating to such real Property and surveys as Lender shall require; (n) Copies of Phase I assessments and other environmental reports with respect to each tract of the real Property encumbered by the Mortgages conducted at the expense of Borrower by an environmental engineer selected by Borrower and reasonably acceptable to Lender each in form and substance satisfactory to Lender, together with a letter from such environmental engineer addressed to Lender advising Lender that it is entitled to rely on such environmental reports in extending the credit contemplated by this Agreement; (o) Zoning letters for each parcel of the real Property encumbered by the Mortgages, issued by the appropriate authority in form and substance satisfactory to Lender, certifying as to the zoning of each parcel of such Property and the permitted uses under such zoning classification and that such real Property is not being operated in violation of any such zoning ordinances; (p) Landlord or warehouseman agreements with respect to all premises leased by Parent, Borrower or any of its respective Subsidiaries and which are disclosed on SCHEDULE 7.1.1 hereto; (q) Written confirmations from all Persons which have been granted Liens (other than Permitted Liens) in any Collateral of the balance due on the Indebtedness owed to them as of the Closing Date and that simultaneously with the receipt thereof such Persons will execute and deliver to Lender such releases and terminations as may be necessary to release and cancel of record their Liens in any Collateral; (r) Subordination Agreements duly executed by Clark and Richardson subordinating the payment of the Subordinated Debt owing to Clark and Richardson to the prior payment in full of the Obligations; and (s) Such other documents, instruments and agreements as Lender shall reasonably request in connection with the foregoing matters. 10.1.2 No Injunction, etc. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement or the Loan Documents or the consummation of the transactions contemplated hereby or which, in Lender's sole judgment, would make it inadvisable to consummate the transactions contemplated by this Agreement or any of the other Loan Documents. 45 10.1.3 Consents. All approvals, licenses, consents and filings necessary to permit the transactions contemplated by this Agreement shall have been obtained and made. 10.1.4 Material Adverse Change. There shall not have occurred any material adverse change in the financial condition, results of operations or business of Parent, Borrower or any of its respective Subsidiaries or the value of the Collateral from June 30, 2003 to the Closing Date, or any event, condition or state of facts which would reasonably be expected to have a material adverse effect on the financial condition, business or Properties of Parent, Borrower or any of its respective Subsidiaries, as reasonably determined by Lender. 10.1.5 Availability. Lender shall have determined that immediately after the closing of the transactions contemplated by this Agreement and Lender's making of the initial Loans and issuance of the initial Letters of Credit and LC Guaranties contemplated hereby, and all closing and other transaction costs incurred in connection with the transactions contemplated hereby have been paid, and after giving pro forma effect to the payment of all fees expected to be paid in connection with the closing of the Senior Notes Restructuring, Availability shall not be less than $5,000,000. 10.1.6 Liens. Lender shall be satisfied that this Agreement and the other Loan Documents create or will create, as security for the Obligations, a valid and enforceable perfected first priority security interest in and Lien upon all of the Collateral in favor of Lender, subject to no other Liens other than Permitted Liens which are expressly stated to have priority over the Liens of Lender. 10.1.7 Financial Statements. Lender shall have received (i) balance sheets of Parent, PF Distribution and PF Purchasing as of May 30, 2003 and June 30, 2003, and Consolidated and consolidating balance sheets of Borrower and its Subsidiaries (including Columbia Hill Aviation as a special purpose entity) as of May 30, 2003 and June 30, 2003, and the related statements of income, changes in stockholder's equity, cash flows, and changes in financial position for the periods ended on such dates, each prepared in accordance with GAAP, and (ii) pro-forma Consolidated and consolidating balance sheets of Parent and its Subsidiaries as of May 30, 2003 and June 30, 2003, and the related statements of income, changes in stockholder's equity, cash flows, and changes in financial position for the periods ended on such dates, as if PF Distribution, PF Purchasing and Columbia Hill Aviation had been Subsidiaries of Parent during the entire period covered by such financial statements. 10.2 Conditions Precedent to All Loans and Letters of Credit and Letter of Credit Guaranties. Notwithstanding any of the provisions of this Agreement or the other Loan Documents, and without affecting in any manner the rights of Lender under the other Sections of this Agreement, it is understood and agreed that Lender will have no obligation to make any Loan (including the initial Revolver Loan) or issue any Letter of Credit or Letter of Credit Guaranty unless and until, in addition to the conditions set forth in Section 10.1, each of the following conditions has been and continues to be satisfied: 10.2.1 Events of Default. No Default, Event of Default or Overadvance Condition shall exist. 46 10.2.2 Delivery of Documents. Lender shall have received copies of all documents, reports and information required to be delivered to Lender hereunder. 10.2.3 Representations and Warranties. The representations and warranties contained in Section 8 of this Agreement and in the Loan Documents shall be true and correct in all material respects except for changes in the nature of Parent's or any of its Subsidiary's business or operations after the date of this Agreement, so long as Lender has consented to such changes or such changes are not prohibited by this Agreement. 10.2.4 Performance of Agreement. All covenants and agreements on the part of Parent and its Subsidiaries to be performed under this Agreement and the other Loan Documents shall have been performed and, unless otherwise expressly agreed, any conditions precedent set forth in Section 10.1 hereof shall have been fulfilled. 10.2.5 Subordinated Debt. The Loan, if made, would enjoy the benefits and privileges of being senior in right of payment to all Subordinated Debt then outstanding. 10.3 Waiver of Conditions Precedent. If Lender makes any Loan or issues any Letter of Credit or Letter of Credit Guaranty prior to the fulfillment of any of the conditions precedent set forth in Sections 10.1 and 10.2 hereof, the making of such Loan or the issuance of such Letter of Credit or Letter of Credit Guaranty shall constitute only an extension of time for the fulfillment of such condition and not a waiver thereof, and Borrower shall thereafter use their best efforts to fulfill such condition promptly. 11. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 11.1 Events of Default. The occurrence of one or more of the following events shall constitute an "Event of Default": 11.1.1 Payment of Loans. Borrower shall fail to make any payment of principal, interest or premium, if any, owing on the Loans on the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise). 11.1.2 Payment of Other Obligations. Borrower shall fail to pay any of the other Obligations (other than those dealt with specifically in Section 11.1.1 hereof) on the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise) and such failure shall continue for a period of five (5) Business Days after Lender's giving Borrower written notice thereof. 11.1.3 Misrepresentations. Any representation, warranty or other statement made or furnished to Lender by or on behalf of Parent, Borrower or any of its respective Subsidiaries in this Agreement, any of the other Loan Documents or any instrument, certificate or financial statement furnished in compliance with or in reference thereto proves to have been false or misleading in any material respect when made or furnished or when reaffirmed pursuant to Section 8.2 hereof. 47 11.1.4 Breach of Specific Covenants. Parent, Borrower or any of its respective Subsidiaries shall fail or neglect to perform, keep or observe any covenant contained in Sections 6.3, 7.1.1, 7.2.5, 9.1.1, 9.1.3, 9.2 or 9.3 hereof on the date that Parent, Borrower or any of its Subsidiaries is required to perform, keep or observe such covenant. 11.1.5 Breach of Other Covenants/Other Agreements. Parent, Borrower or any of its respective Subsidiaries shall fail or neglect to perform, keep or observe any covenant contained in this Agreement (other than a covenant which is dealt with specifically elsewhere in Section 11.1 hereof) or the Other Agreements and the breach of such other covenant or the Other Agreements is not cured to Lender's satisfaction within fifteen (15) days after the sooner to occur of Parent's or Borrower's receipt of notice of such breach from Lender or the date on which such failure or neglect first becomes known to any officer of Parent or Borrower. 11.1.6 Default Under Security Documents/Other Agreements. Any event of default shall occur under, or Parent, Borrower or any of its respective Subsidiaries shall default in the performance or observance of any term, covenant, condition or agreement contained in, any of the Security Documents or Other Agreements and such default shall continue uncured beyond any applicable grace period. 11.1.7 Other Defaults. There shall occur any default or event of default on the part of Parent, Borrower or any of its respective Subsidiaries under any agreement, document or instrument to which Parent, Borrower or any of its respective Subsidiaries is a party or by which Parent, Borrower or any of its respective Subsidiaries or any of its respective Property is bound, creating or relating to any Indebtedness (other than the Obligations) and such default or event of default shall continue uncured beyond any grace period applicable thereto. 11.1.8 Uninsured Losses. Any material loss, theft, damage or destruction of any of the Collateral not fully covered (subject to such deductibles as Lender shall have permitted) by insurance. 11.1.9 Insolvency and Related Proceedings. Parent, Borrower or any of its respective Subsidiaries shall cease to be Solvent or shall suffer the appointment of a receiver, trustee, custodian or similar fiduciary, or shall make an assignment for the benefit of creditors, or any petition for an order for relief shall be filed by or against Parent, Borrower or any of its respective Subsidiaries under the Federal Bankruptcy Code (if against Parent, Borrower or any of its respective Subsidiaries, the continuation of such proceeding for more than sixty (60) days), or Parent, Borrower or any of its respective Subsidiaries shall make any offer of settlement, extension or composition to its unsecured creditors generally. 11.1.10 Business Disruption; Condemnation. Parent, Borrower or any of its respective Subsidiaries shall suffer the loss or revocation of any license or permit now held or hereafter acquired by Parent, Borrower or any of its respective Subsidiaries which is necessary to the continued or lawful operation of its business; or Parent, Borrower or any of its respective Subsidiaries shall be enjoined, restrained or in any way prevented by court, governmental or administrative order from conducting all or any material part of its business affairs; or any material lease or agreement pursuant to which Parent, Borrower or any of its respective 48 Subsidiaries leases, uses or occupies any Property shall be canceled or terminated prior to the expiration of its stated term; or any material part of the Collateral shall be taken through condemnation or the value of such Property shall be materially impaired through condemnation. 11.1.11 Change of Control. A Change of Control shall occur. 11.1.12 ERISA. A Reportable Event shall occur which Lender, in its sole discretion, shall determine in good faith constitutes grounds for the termination by the Pension Benefit Guaranty Corporation of any Plan or for the appointment by the appropriate United States district court of a trustee for any Plan, or if any Plan shall be terminated or any such trustee shall be requested or appointed, or if Parent, Borrower or any of its respective Subsidiaries is in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan resulting from Parent, Borrower or any of its respective Subsidiary's complete or partial withdrawal from such Plan. 11.1.13 Challenge to Agreement. Parent, Borrower or any of its respective Subsidiaries, or any Affiliate of any of them, shall challenge or contest in any action, suit or proceeding the validity or enforceability of this Agreement, or any of the other Loan Documents, the legality or enforceability of any of the Obligations or the perfection or priority of any Lien granted to Lender. 11.1.14 Criminal Forfeiture. Parent, Borrower or any of its respective Subsidiaries shall be criminally indicted or convicted under any law that could lead to a forfeiture of any Property of Parent, Borrower or any of its respective Subsidiaries. 11.1.15 Judgments. One or more money judgments, writs of attachment or similar process is filed against Parent, Borrower or any of its respective Subsidiaries or any of their respective Property which require the payment of money in excess of $50,000 in the aggregate, and the same is not released, discharged or bonded within thirty (30) days after the same becomes a Lien. 11.1.16 Repudiation of or Default Under Guaranty Agreement. Any Guarantor shall revoke or attempt to revoke the Guaranty Agreement signed by such Guarantor, or shall repudiate such Guarantor's liability thereunder or shall be in default under the terms thereof. 11.2 Acceleration of the Obligations. Without in any way limiting the right of Lender to demand payment of any portion of the Obligations payable on demand in accordance with the provisions of this Agreement, upon or at any time after the occurrence of an Event of Default, all or any portion of the Obligations shall, at the option of Lender and without presentment, demand, protest or further notice by Lender, become at once due and payable and Borrower shall forthwith pay to Lender the full amount of such Obligations, provided, that upon the occurrence of an Event of Default specified in Section 11.1.9 hereof, all of the Obligations shall become automatically due and payable without declaration, notice or demand by Lender. 49 11.3 Other Remedies. Upon and after the occurrence of an Event of Default, Lender shall have and may exercise from time to time the following rights and remedies: 11.3.1 All of the rights and remedies of a secured party under the Code or under other applicable law, and all other legal and equitable rights to which Lender may be entitled, all of which rights and remedies shall be cumulative and shall be in addition to any other rights or remedies contained in this Agreement or any of the other Loan Documents, and none of which shall be exclusive. 11.3.2 The right to terminate this Agreement as provided in Section 5.2.1 hereof. 11.3.3 The right to notify Account Debtors to make remittance to Lender of all sums due on Accounts of Borrower, collect such Accounts directly from the Account Debtors, and take such other and further action with respect thereto as set forth in Section 12.1.2 hereof. 11.3.4 The right to take immediate possession of the Collateral, and to (i) require Borrower to assemble the Collateral, at Borrower's expense, and make it available to Lender at a place designated by Lender which is reasonably convenient to both parties, and (ii) enter any premises where any of the Collateral shall be located and to keep and store the Collateral on said premises until sold (and if said premises be the Property of Borrower, Borrower agrees not to charge Lender for storage thereof). 11.3.5 The right to sell or otherwise dispose of all or any Collateral in its then condition, or after any further manufacturing or processing thereof, at public or private sale or sales, with such notice as may be required by law, in lots or in bulk, for cash or on credit, all as Lender, in its sole discretion, may deem advisable. Borrower agrees that ten (10) days written notice to Borrower of any public or private sale or other disposition of Collateral shall be reasonable notice thereof, and such sale shall be at such locations as Lender may designate in said notice. Lender shall have the right to conduct such sales on Borrower's premises, without charge therefor, and such sales may be adjourned from time to time in accordance with applicable law. Lender shall have the right to sell, lease or otherwise dispose of the Collateral, or any part thereof, for cash, credit or any combination thereof, and Lender may purchase all or any part of the Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Obligations. The proceeds realized from the sale of any Collateral may be applied, after allowing two (2) Business Days for collection, first, to the costs, expenses and attorneys' fees incurred by Lender in collecting the Obligations, enforcing the rights of Lender under the Loan Documents and collecting, retaking, completing, protecting, removing, storing, advertising for sale, selling and delivering any Collateral; second, to the interest due upon any of the Obligations; and third, to the principal of the Obligations. If any deficiency shall arise, Borrower and each Guarantor of the Obligations shall remain jointly and severally liable to Lender therefor. 11.3.6 Lender is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, 50 tradenames, trademarks and advertising matter, or any Property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral, and Borrower's rights, subject to the rights of the licensor or franchisor, under all licenses and all franchise agreements shall inure to Lender's benefit. 11.3.7 With respect to the face amount of all Letters of Credit and Letter of Credit Guaranties then outstanding, Lender may, at its option, require Borrower to deposit with Lender funds equal to one hundred five percent (105%) of such undrawn face amount, and if Borrower fails promptly to make such deposit, Lender may advance such amount as a Revolver Loan. Any such deposit or advance shall be held by Lender in the Cash Collateral Account as a reserve to fund future payments on such Letters of Credit or Letter of Credit Guaranties. At such time as all Letters of Credit and Letter of Credit Guaranties have expired or have been canceled or terminated and Lender and its Affiliates released from all liability thereunder, any amounts remaining in such reserves shall be applied against any outstanding Obligations, or, to the extent all Obligations have been indefeasibly paid in full, returned to Borrower. 11.4 Remedies Cumulative; No Waiver. All covenants, conditions, provisions, warranties, guaranties, indemnities, and other undertakings of Parent, Borrower and each of its respective Subsidiaries contained in this Agreement and the other Loan Documents, or in any document referred to herein or contained in any agreement supplementary hereto or in any schedule or contained in any other agreement between Lender and Parent, Borrower and each of its respective Subsidiaries, heretofore, concurrently, or hereafter entered into, shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions, or agreements of Parent, Borrower and each of its respective Subsidiaries herein contained. The failure or delay of Lender to require strict performance by Parent, Borrower and each of its respective Subsidiaries of any provision of this Agreement or the other Loan Documents or to exercise or enforce any rights, Liens, powers, or remedies hereunder or under any of the aforesaid agreements or other documents or security or Collateral shall not operate as a waiver of such performance, Liens, rights, powers and remedies, but all such requirements, Liens, rights, powers, and remedies shall continue in full force and effect until all Loans and all other Obligations owing or to become owing to Lender shall have been fully satisfied. None of the undertakings, agreements, warranties, covenants and representations of Parent, Borrower and each of its respective Subsidiaries contained in this Agreement or any of the other Loan Documents and no Event of Default under this Agreement or any other Loan Documents shall be deemed to have been suspended or waived by Lender, unless such suspension or waiver is by an instrument in writing specifying such suspension or waiver and is signed by a duly authorized representative of Lender and directed to Borrower. 12. MISCELLANEOUS 12.1 Power of Attorney. Borrower hereby irrevocably designates, makes, constitutes and appoints Lender (and all Persons designated by Lender) as Borrower's true and lawful attorney (and agent-in-fact) and Lender, or Lender's agent, may, without notice to Borrower and in either Borrower's or Lender's name, but at the cost and expense of Borrower: 51 12.1.1 At such time or times as Lender or said agent, in its sole discretion, may determine, endorse Borrower's name on any checks, notes, acceptances, drafts, money orders or any other evidence of payment or proceeds of the Collateral which come into the possession of Lender or under Lender's control. 12.1.2 At such time or times upon or after the occurrence of an Event of Default as Lender or its agent in its sole discretion may determine: (i) demand payment of the Accounts from the Account Debtors, enforce payment of the Accounts by legal proceedings or otherwise, and generally exercise all of Borrower's rights and remedies with respect to the collection of the Accounts; (ii) settle, adjust, compromise, discharge or release any of the Accounts or other Collateral or any legal proceedings brought to collect any of the Accounts or other Collateral; (iii) sell or assign any of the Accounts and other Collateral upon such terms, for such amounts and at such time or times as Lender deems advisable; (iv) take control, in any manner, of any item of payment or proceeds relating to any Collateral; (v) prepare, file and sign Borrower's name to a proof of claim in bankruptcy or similar document against any Account Debtor or to any notice of lien, assignment or satisfaction of lien or similar document in connection with any of the Collateral; (vi) receive, open and dispose of all mail addressed to Borrower and notify postal authorities to change the address for delivery thereof to such address as Lender may designate; (vii) endorse the name of Borrower upon any of the items of payment or proceeds relating to any Collateral and deposit the same to the account of Lender on account of the Obligations; (viii) endorse the name of Borrower upon any Chattel Paper, Document, Instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Accounts, Inventory and any other Collateral; (ix) use Borrower's stationery and sign the name of Borrower to verifications of the Accounts and notices thereof to Account Debtors; (x) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Accounts, Inventory and any other Collateral; (xi) make and adjust claims under policies of insurance; and (xii) do all other acts and things necessary, in Lender's determination, to fulfill Borrower's obligations under this Agreement. 12.2 Indemnity. Borrower hereby agrees to indemnify Lender and hold Lender harmless from and against any liability, loss, damage, suit, action or proceeding ever suffered or incurred by Lender (including reasonable attorneys fees and legal expenses) as the result of the failure of Parent, Borrower or any of its respective Subsidiaries to observe, perform or discharge its duties hereunder or under any of the Loan Documents. In addition, Borrower shall defend Lender against and save it harmless from all claims of any Person with respect to the Collateral. Without limiting the generality of the foregoing, these indemnities shall extend to any claims asserted against Lender by any Person under any Environmental Laws or similar laws by reason of the failure of Parent Borrower or any of its respective Subsidiaries or any other Person to comply with laws applicable to solid or hazardous waste materials or other toxic substances. Additionally, if any Taxes (excluding Taxes imposed upon or measured by the net income of Lender, but including, without limitation, any intangibles tax, stamp tax, recording tax or franchise tax) shall be payable by Lender or by Parent, Borrower or any of its respective Subsidiaries on account of the execution or delivery of this Agreement, or the execution, delivery, issuance or recording of any of the other Loan Documents, or the creation of any of the Obligations, by reason of any Applicable Law now or hereafter in effect, Borrower will pay (or will promptly reimburse Lender for the payment of) all such Taxes, including, without limitation, 52 any interest and penalties thereon, and will indemnify and hold Lender harmless from and against all liability in connection therewith. 12.3 Survival of Indemnities. Notwithstanding any contrary provision in this Agreement, the obligation of Parent, Borrower and each of its respective Subsidiaries with respect to each indemnity given by it in this Agreement or any of the other Loan Documents shall survive the payment in full of the Obligations and the termination of this Agreement. 12.4 Modification of Agreement; Sale of Interest. This Agreement may not be modified, altered or amended, except by an agreement in writing signed by Parent, Borrower and Lender. Neither Parent nor Borrower may sell, assign or transfer any interest in this Agreement, any of the other Loan Documents, or any of the Obligations, or any portion thereof, including, without limitation, its rights, title, interests, remedies, powers, and duties hereunder or thereunder. Parent and Borrower each hereby consents to Lender's participation, sale, assignment, transfer or other disposition, at Lender's sole cost and expense, at any time or times hereafter, of this Agreement and any of the other Loan Documents, or of any portion hereof or thereof, including, without limitation, Lender's rights, title, interests, remedies, powers, and duties hereunder or thereunder. In the case of an assignment, the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as it would if it were "Lender" hereunder and Lender shall be relieved of all obligations hereunder upon any such assignments. Parent and Borrower each agrees that it will use its best efforts to assist and cooperate with Lender in any manner reasonably requested by Lender to effect the sale of participations in or assignments of any of the Loan Documents or any portion thereof or interest therein, including, without limitation, assisting in the preparation of appropriate disclosure documents. Parent and Borrower each further agrees that Lender may disclose credit information regarding Parent, Borrower and each of its respective Subsidiaries to any potential participant or assignee. 12.5 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under Applicable Law, but if any provision of this Agreement shall be prohibited by or invalid under Applicable Law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 12.6 Successors and Assigns. This Agreement, the Other Agreements and the Security Documents shall be binding upon and inure to the benefit of the successors and assigns of Parent, Borrower and Lender. 12.7 Cumulative Effect; Conflict of Terms. The provisions of the Other Agreements and the Security Documents are hereby made cumulative with the provisions of this Agreement. Except as otherwise provided in any of the other Loan Documents by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in direct conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 53 12.8 Execution in 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 counterparts taken together shall constitute but one and the same instrument. 12.9 Notice. All notices, requests and demands to or upon a party hereto, to be effective, shall be in writing and shall be sent by certified or registered mail, return receipt requested, by personal delivery against receipt, by overnight courier or by facsimile transmission and, unless otherwise expressly provided herein, shall be deemed to have been validly served, given or delivered immediately when delivered against receipt, three (3) Business Days after deposit in the mail, postage prepaid, or, in the case of facsimile transmission, when received (if on a Business Day and, if not received on a Business Day, then on the next Business Day after receipt), addressed as follows: If to Lender: Fleet Capital Corporation 6100 Fairview Road, Suite 200 Charlotte, North Carolina 28210 Attention: Southeast Loan Administration Facsimile No. 704-553-6738 With a copy to: Carruthers & Roth, P.A. 235 North Edgeworth Street Greensboro, North Carolina 27401 Attention: Kenneth M. Greene, Esq. Facsimile No. 336-273-7885 If to Borrower: Pierre Foods, Inc. 9990 Princeton Road Cincinnati, Ohio 45246 Attention: Chief Financial Officer Facsimile No. 513-682-7158 If to Parent: PF Management, Inc. 361 Second Street, N.W. Hickory, North Carolina 28603 Attention: Chief Financial Officer Facsimile No. 828-304-2301 In each case, with a copy to: T. Stewart Gibson, PLLC The Power Plant, Suite 302-B 1701 Sunset Avenue Rocky Mount, North Carolina 27804 Attention: T. Stewart Gibson, Esq. Facsimile No. 252-977-0600 54 or to such other address as each party may designate for itself by notice given in accordance with this Section 12.9; provided, however, that any notice, request or demand to or upon Lender pursuant to Section 3.1.1 or 5.2.2 hereof shall not be effective until received by Lender. Any written notice or demand that is not sent in conformity with the provisions hereof shall nevertheless be effective on the date that such notice is actually received by the noticed party. 12.10 Lender's Consent. Whenever Lender's consent is required to be obtained under this Agreement, any of the Other Agreements or any of the Security Documents as a condition to any action, inaction, condition or event, Lender shall be authorized to give or withhold such consent in its sole and absolute discretion and to condition its consent upon the giving of additional collateral security for the Obligations, the payment of money or any other matter. 12.11 Credit Inquiries. Parent and Borrower each hereby authorizes and permits Lender, at its discretion and without any obligation to do so, to respond to credit inquiries from third parties concerning Parent, Borrower or any of its respective Subsidiaries. 12.12 Time of Essence. Time is of the essence of this Agreement, the Other Agreements and the Security Documents. 12.13 Entire Agreement; Appendix A and Exhibits. This Agreement and the other Loan Documents, together with all other instruments, agreements and certificates executed by the parties in connection therewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and inducements, whether express or implied, oral or written. Appendix A and each of the exhibits attached hereto are incorporated into this Agreement and by this reference made a part hereof. 12.14 Interpretation. No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision. 12.15 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN CHARLOTTE, NORTH CAROLINA. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA; PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN NORTH CAROLINA, THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF LENDER'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF NORTH CAROLINA. AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE 55 DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF PARENT OR BORROWER, PARENT AND BORROWER EACH HEREBY CONSENTS AND AGREES THAT THE SUPERIOR COURT OF MECKLENBURG COUNTY, NORTH CAROLINA, OR, AT LENDER'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA, CHARLOTTE DIVISION, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN PARENT OR BORROWER AND LENDER PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. PARENT AND BORROWER EACH EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND PARENT AND BORROWER EACH HEREBY WAIVES ANY OBJECTION WHICH PARENT OR BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. PARENT AND BORROWER EACH HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO PARENT AND BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF PARENT'S OR BORROWER'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. 12.16 WAIVERS BY PARENT AND BORROWER. PARENT AND BORROWER EACH WAIVES (i) TO THE FULLEST EXTENT PROVIDED BY APPLICABLE LAW, THE RIGHT TO TRIAL BY JURY (WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL; (ii) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY LENDER ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER LENDER MAY DO IN THIS 56 REGARD; (iii) NOTICE PRIOR TO TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES; (iv) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; AND (v) NOTICE OF ACCEPTANCE HEREOF. PARENT AND BORROWER EACH ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWER. PARENT AND BORROWER EACH WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. [Signatures Begin on the Next Page] 57 IN WITNESS WHEREOF, this Agreement has been duly executed under seal on the day and year specified at the beginning of this Agreement. PIERRE FOODS, INC. ("BORROWER") By: /s/ David R. Clark --------------------------------------- Title: Vice Chairman PF MANAGEMENT, INC. ("PARENT") By: /s/ David R. Clark --------------------------------------- Title: President FLEET CAPITAL CORPORATION ("LENDER") By: /s/ Rodney J. McSwain --------------------------------------- Title: Senior Vice President LIBOR LENDING OFFICE: 6100 Fairview Road, Suite 200 Charlotte, North Carolina 28210 58 APPENDIX A GENERAL DEFINITIONS When used in the Loan and Security Agreement, dated of even date herewith, by and between FLEET CAPITAL CORPORATION, PF MANAGEMENT, INC. and PIERRE FOODS, INC., the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): Account - shall have the meaning ascribed to the term "account" under the Code. Account Debtor - any Person who is or may become obligated under or on account of an Account, Contract Right, Chattel Paper or General Intangible. Adjusted LIBOR Rate - with respect to each Interest Period for a LIBOR Rate Loan, an interest rate per annum (rounded to the nearest 1/8 of 1% or, if there is no nearest 1/8 of 1%, the next higher 1/8 of 1%) equal to the quotient of (i) the LIBOR Rate in effect for such Interest Period divided by (ii) a percentage (expressed as a decimal) equal to 100% minus Statutory Reserves. Affiliate - as to any Person, any other Person (other than a Subsidiary): (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such Person; (ii) which beneficially owns or holds 5% or more of any class of the Voting Stock of such Person; or (iii) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by such Person or a Subsidiary of such Person. Affiliate Agreements - the PF Purchasing Agreement, the PF Distribution Agreement, the Columbia Hill Aviation Agreement and the Marsh Lake Lease. The Affiliate Agreements shall not include the Office Lease. Agreement - the Loan and Security Agreement referred to in the first sentence of this Appendix A, as the same may hereafter be amended, modified, supplemented or restated from time to time, all exhibits hereto and this Appendix A. Alternate Base Rate - on any date, the higher of (i) the Base Rate or (ii) the sum of the Federal Funds Effective Rate plus one-half of one percent (0.5%) per annum. Alternate Base Rate Loan - a Loan, or portion thereof, during any period in which it bears interest at a rate based upon the Alternate Base Rate. Applicable Law - all laws, rules and regulations applicable to the Person, conduct, transaction, covenant or Loan Documents in question, including, but not limited to, all applicable common law and equitable principles; all provisions of all applicable state and A- 1 federal constitutions, statutes, rules, regulations and orders of governmental bodies; orders, judgments and decrees of all courts and arbitrators. Applicable Margin - for any day, the rate per annum set forth below opposite the applicable Level then in effect, it being understood that the Applicable Margin for (i) the Revolver Loans that are LIBOR Rate Loans shall be the percentage set forth in Table I under the column Applicable Margin for LIBOR Rate Loans, (ii) the Revolver Loans that are Alternate Base Rate Loans shall be the percentage set forth in Table I under the column Applicable Margin for Alternate Base Rate Loans, (iii) the Term Loans that are LIBOR Rate Loans shall be the percentage set forth in Table II under the column Applicable Margin for LIBOR Rate Loans, (iv) the Term Loans that are Alternate Base Rate Loans shall be the percentage set forth in Table II under the column Applicable Margin for Alternate Base Rate Loans, and (v) the unused line fee shall be the percentage set forth in Table III under the column Applicable Margin for Unused Line Fee: TABLE I REVOLVER LOANS
Applicable Margin for Applicable Margin for Level LIBOR Rate Loans Alternate Base Rate Loans - ----- --------------------- -------------------------- Level I 2.75% 1.00% Level II 2.50% 0.75% Level III 2.25% 0.50% Level IV 2.00% 0.25%
TABLE II TERM LOANS
Applicable Margin for Applicable Margin for Level LIBOR Rate Loans Alternate Base Rate Loans - ----- --------------------- ------------------------- Level I 3.25% 1.25% Level II 3.00% 1.00% Level III 2.75% 0.75% Level IV 2.50% 0.50%
TABLE III UNUSED LINE FEE
Level Applicable Margin for Unused Line Fee - ----- ------------------------------------- ~~Level I 0.375% Level II 0.375% Level III 0.375% Level IV 0.250%~~
A- 2 The Applicable Margin shall, in each case, be determined after receipt by Lender of the financial statements which are required to be delivered to Lender in accordance with the provisions of Section 9.1.3 of the Agreement, commencing with the 4th Fiscal Quarter of the Fiscal Year ending 2004, and shall be adjusted effective on the fifth (5th) Business Day following the receipt by Lender of such financial statements and the Compliance Certificate in the form of EXHIBIT O to the Agreement executed by the Chief Financial Officer of Parent and Borrower (each, an "Adjustment Date"). Such Applicable Margin shall be effective from such Adjustment Date until the next such Adjustment Date. The initial Applicable Margins shall be based on Level I until receipt of the financial statements and Compliance Certificates referred to above. If the financial statements and the Compliance Certificate are not received by the date required by Section 8.1.3 of the Agreement, the Applicable Margin shall be based on Level 1 until such time as the financial statements and Compliance Certificate are received and any Event of Default resulting from a failure timely to deliver such financial statements or Compliance Certificate is waived in writing by Lender; provided, however, Lender shall be entitled to accrue and receive interest at the Default Rate to the extent authorized by Section 2.1.6 of the Agreement and, on each date that the Default Rate accrues on any Loan, the Applicable Margin on such date shall be based on Level 1 (without regard to the actual Applicable Margin). The Applicable Margin shall be determined, for the 4th Fiscal Quarter in the Fiscal Year 2004, based upon the audited financial statements of Borrower and its Subsidiaries for the Fiscal Year then ended delivered pursuant to Section 9.1.3(i) of the Agreement, and, for each Fiscal Quarter thereafter, based upon the unaudited financial statements of Borrower and its Subsidiaries for the period then ended delivered pursuant to Section 9.1.3(ii) of the Agreement; provided, however, in the case of the last Fiscal Quarter of the Fiscal Year ending 2005 and each Fiscal Year thereafter, if upon delivery of the audited financial statements required to be submitted to Lender for such Fiscal Year, Borrower has not met the criteria for reduction of the Applicable Margin pursuant to the terms set forth herein for the final Fiscal Quarter of such Fiscal Year then ended, (i) such Applicable Margin reduction shall be terminated and, effective on the first day of the month following the receipt by Lender of such audited financial statements, the Applicable Margin shall be the Applicable Margin that would have been in effect if such reduction had not been implemented based upon the unaudited financial statements of Borrower for the final Fiscal Quarter of the Fiscal Year then ended, and (ii) Borrower shall pay to Lender, on the first day of the month following receipt by Lender of such audited financial statements, an amount equal to the difference between the amount of interest and fees that would have been paid using the Applicable Margin determined based upon such audited financial statements and the amount of interest and fees actually paid during the period in which the reduction of the Applicable Margin was in effect based upon the unaudited financial statements for the final Fiscal Quarter of the Fiscal Year then ended. Availability - the amount of money which Borrower is entitled to borrow from time to time as Revolver Loans, such amount being the difference derived when the sum of the principal amount of Revolver Loans then outstanding (including any amounts which Lender may have paid for the account of Borrower pursuant to any of the Loan Documents and which have not been reimbursed by Borrower) is subtracted from the A- 3 lesser of the Revolver Facility Amount or the Borrowing Base. If the amount outstanding is equal to or greater than the Borrowing Base, Availability is zero (0). Availability Reserve - on any date of determination thereof, an amount equal to the sum of (i) all amounts of past due rent or other charges owing at such time by Borrower to any landlord of any premises where any of the Collateral is located; (ii) any amounts which Borrower is obligated to pay pursuant to the provisions of the Loan Documents but does not pay when due and which Lender elects to pay pursuant to any of the Loan Documents for the account of Borrower; (iii) an amount equal to the Letter of Credit Obligations outstanding on such date; (iv) the Rent Reserve; and (v) such additional reserves established by Lender in such amounts, and with respect to such matters, events, conditions or contingencies as to which Lender, in its credit judgment based upon its usual and customary credit and collateral considerations, determines reserves should be established from time to time, including, without limitation, with respect to (1) price adjustments, damages, unearned discounts, returned products or other matters for which credit memoranda are issued in the ordinary course of Borrower's business, (2) shrinkage, spoilage and obsolescence of Inventory, (3) slow moving Inventory, (4) any diminution in the quantity, quality or value of any of the Collateral, and (5) other sums chargeable against Borrower's Loan Account as Revolver Loans under any Section of the Agreement. Average Monthly Revolver Loan Balance - the amount obtained by adding the aggregate unpaid balance of all Revolver Loans and Letter of Credit Obligations owing by Borrower to Lender at the end of each day during the month in question and by dividing that sum by the number of days in such month. Bank - Fleet National Bank, a national banking association, and its successors and assigns. Base Rate - the rate of interest generally announced or quoted by Bank from time to time as its base rate for commercial loans, whether or not such rate is the lowest rate charged by Bank to its most preferred borrowers; and, if such base rate for commercial loans is discontinued by Bank as a standard, a comparable reference rate designated by Bank as a substitute therefor shall be the Base Rate. Board of Governors - the Board of Governors of the Federal Reserve System of the United States. Borrower Subordinated Debt - the two promissory notes, each dated February 21, 2003, owing by Borrower to Clark and Richardson which, in the case of the promissory note owing to Clark, is in the original principal amount of $135,491.46, and, in the case of the promissory note owing to Richardson, is in the original principal amount of $135,491.45. Borrowing - a borrowing of one or more Loans made on the same day by Lender. A- 4 Borrowing Base - as at any date of determination thereof, an amount equal to the lesser of: (i) the Revolver Facility Amount; or (ii) an amount equal to: (a) eighty-five percent (85%) (or such lesser percentage as Lender, in its sole credit judgment, determines from time to time) of the net amount of Eligible Accounts outstanding at such date; provided, however, that if dilution of Borrower's Accounts for any month exceeds five percent (5%), then Lender may, in its sole and unfettered discretion, reduce the foregoing percentage; PLUS (b) The lesser of (1) $20,000,000 or (2) sixty percent (60%) (or such lesser percentage as Lender, in its sole credit judgment, determine from time to time) of the value of Borrower's Eligible Inventory at such date, calculated on the basis of lower of cost or market with cost (which shall exclude any capitalized favorable variances or capitalized costs associated with the processing of donated meat) calculated on a first-in, first-out basis; MINUS (iii) the Availability Reserve. For purposes hereof, the net amount of Eligible Accounts at any time shall be the face amount of such Eligible Accounts less any and all returns, rebates, discounts (which may, at Lender's option, be calculated on shortest terms), sales taxes, credits, marketing promotion or other allowances of any nature, bid pricing deductions, or excise taxes of any nature at any time issued, owing, claimed by Account Debtors, granted, outstanding or payable in connection with such Accounts at such time. Business Day - any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of North Carolina or is a day on which banking institutions located in such states are closed, provided, however, that when used with reference to a LIBOR Rate Loan (including the making, continuing, prepaying or repaying of any LIBOR Rate Loan for an Interest Period), the term "Business Day" shall also exclude any day on which banks are not opened for dealings in dollar deposits on the London interbank market. Business Interruption Insurance Policy Assignment - the Collateral Assignment of Insurance Proceeds to be executed by Borrower on or about the Closing Date by which Borrower shall assign to Lender, and grant to Lender a security interest in, as security for A- 5 the Obligations, all of Borrower's right, title and interest in its policy of business interruption insurance and all proceeds payable thereunder. Capital Expenditures - expenditures made or liabilities incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the total principal portion of Capitalized Lease Obligations. Capitalized Lease Obligation - any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. Cash Collateral - cash or Cash Equivalents, and interest earned thereon, deposited with Lender in accordance with the Agreement as security for the Obligations to the extent provided in the Agreement. Cash Collateral Account - an account established by Lender on its books and to which Lender shall credit all Cash Collateral deposited with Lender in accordance with the Agreement. Cash Equivalents - (i) marketable direct obligations issued or unconditionally guaranteed by the United States Government and backed by the full faith and credit of the United States Government having maturities of not more than twelve (12) months from the date of acquisition; (ii) domestic certificates of deposit and time deposits having maturities of not more than twelve (12) months from the date of acquisition, banker's acceptances having maturities of not more than twelve (12) months from the date of acquisition and overnight bank deposits, in each case issued by any commercial bank organized under the laws of the United States, any state thereof or the District of Columbia, which at the time of acquisition are rated A-1 or better by Standard & Poor's Corporation or P-1 or better by Moody's Investors Services, Inc., and (unless issued by Lender) not subject to offset rights in favor of such bank arising from any banking relationship with such bank; (iii) repurchase obligations with a term of not more than thirty (30) days for underlying securities of the types described in clauses (i) and (ii) entered into with any financial institution meeting the qualifications specified in clause (ii); and (iv) commercial paper having at the time of investment therein or a contractual commitment to invest therein a rating of A-1 or better by Standard & Poor's Corporation or P-1 or better by Moody's Investors Services, Inc., and having a maturity within nine (9) months after the date of acquisition thereof. Certificated Security - shall have the meaning ascribed to the term "certificated security" under the Code. Change of Control - the failure of (i) Richardson and Clark, or members of their immediate families or trusts established for their benefit, to own and control, directly or indirectly, beneficially and of record, at least eighty-five percent (85%) of the issued and outstanding capital stock of Parent; or (ii) Parent to own and control, directly or A- 6 indirectly, beneficially and of record, no less than one hundred percent (100%) of the issued and outstanding capital stock of Borrower. Chattel Paper - shall have the meaning ascribed to "chattel paper" under the Code. Clark - David R. Clark, a resident of the State of North Carolina. Closing Date - the date on which all of the conditions precedent in Section 10 of the Agreement are satisfied and the initial Loan is made or the initial Letter of Credit or Letter of Credit Guaranty is issued under the Agreement. Code - the Uniform Commercial Code as adopted and in force in the State of North Carolina, as from time to time in effect. Collateral - all of the Property and interests in Property described in Section 6 of the Agreement, and all other Property and interests in Property that now or hereafter secure the payment and performance of any of the Obligations. Columbia Hill Aviation - Columbia Hill Aviation, LLC, a North Carolina limited liability company, and wholly owned Subsidiary of Parent. Columbia Hill Aviation Lease - the Aircraft Dry Lease, dated March 1, 2002, between Columbia Hill Aviation and Borrower, pursuant to which Columbia Hill Aviation has agreed to lease an aircraft to Borrower, as in effect on the Closing Date. Columbia Hill Aviation Purchase Money Indebtedness - the Purchase Money Indebtedness owing by Columbia Hill Aviation to Bombardier Capital, Inc. under a Term Loan Agreement, dated December 11, 2001 as amended March 1, 2002, to finance the purchase by Columbia Hill Aviation of a British Aerospace BAe 125 Series 800A aircraft, serial number 258049, FAA Registration No. N796CH, and two Garrett TFE 731-5R-1H jet engines, manufacturer's serial numbers P-91201 and P-91202. Columbia Hill Land - Columbia Hill Land Company, LLC, a North Carolina limited liability company. Commercial Tort Claim - shall have the meaning assigned to "commercial tort claim" under the Code. Compass - Compass Outfitters, LLC, a North Carolina limited liability company, and a wholly owned Subsidiary of Borrower. Computer Hardware and Software - with respect to any Person, all of such Person's rights (including rights as licensee and lessee) with respect to (i) computer and other electronic data processing hardware, including all integrated computer systems, central processing units, memory units, display terminals, printers, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, A- 7 generators, power equalizers, accessories, peripheral devices and other related computer hardware; (ii) all Software and all software programs designed for use on the computers and electronic data processing hardware described in clause (i) above, including all operating system software, utilities and application programs in any form (source code and object code in magnetic tape, disk or hard copy format or any other listings whatsoever); (iii) any firmware associated with any of the foregoing; and (iv) any documentation for hardware, Software and firmware described in clauses (i), (ii) and (iii) above, including flow charts, logic diagrams, manuals, specifications, training materials, charts and pseudo codes. Consolidated - the consolidation in accordance with GAAP of the accounts or other items as to which such term applies. Consolidated Adjusted Net Earnings From Operations - with respect to any fiscal period for any Person, the net earnings (or loss) after provision for income taxes for such fiscal period of such Person, as reflected on the financial statement of such Person supplied to Lender pursuant to subsection 8.1.3 of the Agreement, but excluding: (i) any gain or loss arising from the sale of capital assets; (ii)any gain arising from any write-up of assets; (iii) earnings of any Subsidiary of such Person accrued prior to the date it became a Subsidiary; (iv) earnings of any corporation, substantially all the assets of which have been acquired in any manner by such Person, realized by such corporation prior to the date of such acquisition; (v) net earnings of any business entity (other than a Subsidiary of such Person) in which such Person has an ownership interest unless such net earnings shall have actually been received by such Person in the form of cash distributions; (vi) any portion of the net earnings of any Subsidiary of such Person which for any reason is unavailable for payment of dividends to such Person; (vii) the earnings of any other Person to which any assets of such Person shall have been sold, transferred of disposed of, or into which such Person shall have merged, or been a party to any consolidation or other form of reorganization, prior to the date of such transaction; (viii) any gain arising from the acquisition of any Securities of such Person; (ix) any gain arising from extraordinary or non-recurring items which amount has been agreed to by Lender. A- 8 Consolidated EBITDA - with respect to any fiscal period for any Person, the sum of (i) Consolidated Adjusted Net Earnings From Operations of such Person for such fiscal period, plus (ii) interest, taxes, depreciation and amortization expenses of such Person for such fiscal period which were subtracted from earnings in calculating the Consolidated Adjusted Net Earnings From Operations of such Person for such fiscal period. Consolidated Excess Cash - for any Fiscal Year of Borrower ending after the Senior Notes Restructuring Closing, the amount by which the sum of (i) Consolidated EBITDA of Borrower and its Subsidiaries for such Fiscal Year, less (ii) Capital Expenditures made during such Fiscal Year by Borrower and its Subsidiaries which are permitted by the Agreement, and (iii) cash payments made during such Fiscal Year by Borrower and its Subsidiaries for taxes, assessments and governmental charges levied or imposed upon Borrower or any of its Subsidiaries by reason of the income, profits or Property of Borrower or any of its Subsidiaries, is greater than one hundred ten percent (110%) of the sum of (a) the Consolidated Interest Expense of Borrower and its Subsidiaries for such Fiscal Year, plus (b) principal payments required to be made during the following Fiscal Year by Borrower and its Subsidiaries on Indebtedness for Money Borrowed, including, without limitation, the Parent Indebtedness for Money Borrowed and the Columbia Hill Aviation Purchase Money Indebtedness assumed by Borrower as part of the Senior Notes Restructuring. Consolidated Fixed Charge Coverage Ratio/Covenant - with respect to any period of determination for any Person, the ratio of (i) the sum of (a) Consolidated EBITDA of such Person for such period minus (b) Capital Expenditures not financed by Permitted Purchase Money Indebtedness which are incurred by such Person during such fiscal period minus (c) federal and state income taxes actually paid by such Person during such period to (ii) the sum of (a) payments on Indebtedness for Money Borrowed of such Person scheduled to be made during such period (specifically excluding any Senior Notes Cash Sweep Prepayment made during such period) plus (b) Consolidated Interest Expense of such Person for such period. Consolidated Fixed Charge Coverage Ratio/Pricing - with respect to any period of four (4) consecutive Fiscal Quarters for any Person, the ratio of (i) the sum of (a) Consolidated EBITDA of such Person for such period minus (b) Capital Expenditures not financed by Permitted Purchase Money Indebtedness which are incurred by such Person during such fiscal period minus (c) federal and state income taxes actually paid by such Person during such period to (ii) the sum of (a) payments on Indebtedness for Money Borrowed of such Person scheduled to be made during the following period of four (4) consecutive Fiscal Quarters (specifically excluding any Senior Notes Cash Sweep Prepayment scheduled to be made in such following period), plus (b) Consolidated Interest Expense of such Person for such period. Consolidated Fixed Charge Coverage Ratio/Covenant Testing Period - as defined in Section 9.3.2 of the Agreement. A- 9 Consolidated Interest Expense - for any fiscal period for any Person, the total interest expense of such Person, as determined in accordance with GAAP. Consolidated Net Income - with respect to any fiscal period for any Person, the Consolidated net income (or loss) after taxes of such Person for such period, determined in accordance with GAAP. Consolidated Net Worth - at any date of determination thereof for any Person, the total shareholders' equity (including capital stock, additional paid-in capital and retained earnings after deducting treasury stock) appearing on a balance sheet of such Person prepared as of such date in accordance with GAAP; provided that, in the calculation of the Consolidated Net Worth of Parent and its Subsidiaries or of Borrower and its Subsidiaries, the amount outstanding under the Richardson Note shall not be included in the calculation of Consolidated Net Worth. Contract Right - with respect to any Person, any right of such Person to payment under a contract for the sale or lease of goods or the rendering of services, which right is at the time not yet earned by performance. Control Agreement - with respect to any Deposit Account, a control agreement, in form and substance satisfactory to Lender, executed and delivered by the owner of such Deposit Account, Lender, and a bank with respect to such Deposit Account, which shall perfect the Lien of Lender in such Deposit Account and all funds on deposit therein from time to time. Credit Facility Termination Date - the earliest to occur of any of the following: (i) August 13, 2006, (ii) ninety (90) days before the date on which the Senior Noteholders, or the Indenture Trustee on behalf of the Senior Noteholders, may have the right and option to require Borrower to redeem or repurchase all or any part of the Senior Notes, or (iii) ninety (90) days before the Senior Notes Stated Maturity Date. Default - an event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, become an Event of Default. Default Rate - as defined in Section 2.1.6 of the Agreement. Deposit Account - shall have the meaning ascribed to "deposit account" under the Code. Distribution - in respect of any corporation or limited liability company means and includes: (i) the payment of any dividends or other distributions on capital stock of the corporation or membership interests of the limited liability company (except distributions in such stock or membership interests) and (ii) the redemption or acquisition of Securities (or any warrant or option for the purchase of any such Securities) unless made contemporaneously from the net proceeds of the sale of Securities. A- 10 Document shall have the meaning ascribed to the term "document" under the Code. Dollars - and the sign "$" shall refer to currency of the United States of America. Dominion Account - a special account of Lender established by Borrower at Bank, and over which Lender shall have sole and exclusive access and control for withdrawal purposes. Electronic Chattel Paper - shall have the meaning ascribed to the term "electronic chattel paper" under the Code. Eligible Account - an Account of Borrower arising in the ordinary course of Borrower's business from the sale of goods or rendition of services which is payable in Dollars and which Lender, in its sole credit judgment, based upon its usual and customary credit and collateral considerations, deems to be an Eligible Account. Without limiting the generality of the foregoing, no Account shall be an Eligible Account if: (i) it arises out of a sale made by Borrower to a Subsidiary, or an Affiliate of Borrower, or to a Person controlled by an Affiliate of Borrower; or (ii) it is unpaid for more than sixty (60) days after the original due date shown on the invoice; or (iii) it is due or unpaid more than ninety (90) days after the original invoice date; provided, however, Accounts in the aggregate amount of no more than $700,000 which satisfy all other eligibility criteria and which are unpaid more than sixty (60) days but less than ninety (90) days after the respective original invoice date shall be considered Eligible Accounts; or (iv) twenty percent (20%) or more of the Accounts from the Account Debtor are not deemed Eligible Accounts hereunder; or (v) the total unpaid Accounts of the Account Debtor exceed twenty percent (20%) of the net amount of all Eligible Accounts, to the extent of such excess; or (vi) any covenant, representation or warranty contained in the Agreement with respect to such Account has been breached; or (vii) the Account Debtor is also Borrower's creditor or supplier, or the Account Debtor has disputed liability with respect to such Account, or the Account Debtor has made any claim with respect to any other Account due from such Account Debtor to Borrower, or the Account otherwise is or may become subject to any right of setoff by the Account Debtor; or A- 11 (viii) the Account Debtor has commenced a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or made an assignment for the benefit of creditors, or a decree or order for relief has been entered by a court having jurisdiction in the premises in respect of the Account Debtor in an involuntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other petition or other application for relief under the federal bankruptcy laws has been filed against the Account Debtor, or if the Account Debtor has failed, suspended business, ceased to be Solvent, or consented to or suffered a receiver, trustee, liquidator or custodian to be appointed for it or for all or a significant portion of its assets or affairs; or (ix) it arises from a sale to an Account Debtor outside the United States or Canada, unless the sale is on letter of credit, guaranty or acceptance terms, in each case acceptable to Lender in its sole discretion and the proceeds thereof are assigned to Lender; or (x) it arises from a sale to the Account Debtor on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or any other repurchase or return basis; or (xi) the Account Debtor is the United States of America or any department, agency or instrumentality thereof, unless Borrower assigns its right to payment of such Account to Lender, in a manner satisfactory to Lender, so as to comply with the Assignment of Claims Act of 1940 (31 U.S.C. Section 203 et seq., as amended); or (xii) the Account is subject to a Lien other than a Permitted Lien; or (xiii) the goods giving rise to such Account have not been delivered to and accepted by the Account Debtor or the services giving rise to such Account have not been performed by Borrower and accepted by the Account Debtor or the Account otherwise does not represent a final sale; or (xiv) the Account is evidenced by Chattel Paper or an Instrument of any kind, or has been reduced to judgment; or (xv) Borrower has made any agreement with the Account Debtor for any deduction therefrom, except for discounts or allowances which are made in the ordinary course of business for prompt payment and which discounts or allowances are reflected in the calculation of the face value of each invoice related to such Account; or (xvi) Borrower has made an agreement with the Account Debtor to extend the time of payment thereof; or A- 12 (xvii) Borrower has failed to comply with the provisions of Section 7.2.1 with respect to such Account and the Account Debtor obligated thereon; or (xviii) the Account Debtor is located in a state in which Borrower is deemed to be doing business under the laws of such state and which denies creditors access to its courts in the absence of qualification to transact business in such state or of the filing of any reports with such state, unless Borrower has qualified as a foreign corporation authorized to transact business in such state or has filed all required reports; or (xix) the Account Debtor is located in any state imposing a prohibition on the right of a creditor to collect Accounts in such state, unless Borrower has either qualified to transact business in such state as a foreign corporation or has filed a Notice of Business Activities Report with the appropriate officials in such state for the then current year; or (xx) the Accounts of the Account Debtor exceed a credit limit established by Lender, in its sole credit judgment, to the extent such Accounts exceed such limit. Eligible Inventory - such Inventory of Borrower (other than packaging materials and supplies) which Lender, in its sole credit judgment, based upon its usual and customary credit and collateral considerations, deems to be Eligible Inventory. Without limiting the generality of the foregoing, no Inventory shall be Eligible Inventory unless: (i) it is, in Lender's opinion, readily marketable in its current form; (ii) it is in good, new and saleable condition; (iii) it is not slow-moving, obsolete or unmerchantable; (iv) it meets all standards imposed by any governmental agency or authority; (v) it conforms in all respects to the warranties and representations set forth in the Agreement; (vi) it is at all times subject to Lender's duly perfected Lien and no other Lien except a Permitted Lien; (vii) it is situated at a location in compliance with the Agreement or is in transit; (viii) it is stored on premises owned by Borrower or stored with, or located on premises owned by, a landlord, warehouseman or other Person from whom Borrower has procured for Lender's benefit a written agreement of such A- 13 Person, in form and substance acceptable to Lender, to afford Lender access to and the right to repossess or take possession of such Inventory at any time free of any Lien of such Person and to use any such premises for a reasonable period of time, without any obligation to such Person (other than regular rent or storage fees on a per diem basis, to store or dispose of such Inventory); (ix) is not the subject of any Document that has not been assigned to, and in the possession of, Lender; (x) it is owned outright by Borrower and not held by Borrower on consignment or other sale or return basis; (xi) it is not subject to any license or other agreement that would condition or restrict Borrower's or Lender's right to sell or otherwise dispose of such Inventory; (xii) it is not work-in-process Inventory; and (xiii) the location at which such Eligible Inventory is located has at least $100,000 of Inventory deemed Eligible Inventory hereunder. Environmental Laws - all federal, state and local laws, rules, regulations, ordinances, programs, permits, guidances, orders and consent decrees relating to health, safety and environmental matters. Equipment - shall have the meaning ascribed to the term "equipment" under the Code. Equipment Term Loan - the Loan described in Section 1.2.2 of the Agreement. Equipment Term Note - the Equipment Term Note to be executed by Borrower on or about the Closing Date in favor of Lender to evidence the Equipment Term Loan, which shall be in the form of EXHIBIT E to the Agreement. ERISA - the Employee Retirement Income Security Act of 1974, as amended, and all rules and regulations from time to time promulgated thereunder. Eurocurrency Liabilities - shall have the meaning ascribed thereto in Regulation D issued by the Board of Governors. Event of Default - as defined in Section 11.1 of the Agreement. Executives - Clark, Richardson and Templeton. Executive Bonus Pool - a bonus pool available for the payment of bonus compensation to the Executives for each Fiscal Year, the amount of which shall be A- 14 calculated each Fiscal Year as follows: The Bonus Pool for each Fiscal Year shall be equal to a percentage of each $2,000,000 paid by Borrower in the Senior Notes Cash Sweep Prepayment for such Fiscal Year, with the percentage increasing in increments of 5% per $2,000,000 paid, as follows: (i) if the Senior Notes Cash Sweep Prepayment for the Fiscal Year is equal to or less than $2,000,000, 0% of this amount will be included in the Executive Bonus Pool for such Fiscal Year; (ii) if the Senior Notes Cash Sweep Prepayment for the Fiscal Year is between $2,000,001 and $4,000,000, 5% of this amount will be included in the Executive Bonus Pool for such Fiscal Year; (iii) if the Senior Notes Cash Sweep Prepayment for the year is between $4,000,001 and $6,000,000, 10% of this amount will be included in the Executive Bonus Pool for such Fiscal Year; (iv) if the Senior Notes Cash Sweep Prepayment for the Fiscal Year is between $6,000,001 and $8,000,000, 15% of this amount will be included in the Executive Bonus Pool for such Fiscal Year; (v) for each additional $2,000,000 per Fiscal Year paid in the Senior Notes Cash Sweep Prepayment, the percentage of such amount that will go into the Executive Bonus Pool will increase by 5%. The Executive Bonus Pool for a Fiscal Year shall be based only on the Senior Notes Cash Sweep Prepayment for such Fiscal Year; no other repayments of the Senior Notes will be included in the calculation of the Executive Bonus Pool and if the amount of the Senior Notes Cash Sweep Prepayment for any Fiscal Year is zero, then the Executive Bonus Pool shall likewise be zero. Federal Funds Effective Rate - for any period, a fluctuating interest rate per annum equal for each date during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) in Charlotte, North Carolina, by the Federal Reserve Bank of Charlotte, or if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Lender from three (3) federal funds brokers of recognized standing selected by Lender. Financial Asset - shall have the meaning ascribed to the term "financial asset" under the Code. Fiscal Quarter - each of the four (4) fiscal quarters in a Fiscal Year. Fiscal Year - the fiscal year of Parent, Borrower and each of its respective Subsidiaries which means twelve (12) periods consisting of four (4) or (5) weeks each determined based on a 52-53 week accounting period, the last week of which ends on the last day of February if it falls on a Saturday, and, if not, on the first Saturday in March of each year. When a year is used in connection with a year, such as Fiscal Year 2004, such reference shall mean the Fiscal Year ending on the day before the first Saturday of March of such year. Fixture - shall have the meaning ascribed to the term "fixture" under the Code. A- 15 Fresh Foods Properties - Fresh Foods Properties, LLC, a North Carolina limited liability company. GAAP - generally accepted accounting principles in the United States of America in effect from time to time. General Intangibles - shall have the meaning ascribed to the term "general intangibles" under the Code. Goods - shall have the meaning ascribed to the term "goods" under the Code. Guarantors - shall mean (i) Parent and all present and future Subsidiaries of Parent (other than Borrower), including, without limitation, PF Distribution, PF Purchasing, Fresh Foods Properties, Columbia Hill Aviation, and any other Person who may hereafter guarantee payment or performance of the whole or any part of the Obligations, and (ii) the Validity Guarantors who shall guaranty the validity of the Collateral. Guaranty Agreements - in the case of Parent, the Guaranty Agreement, in the case of the Validity Guarantors, the Validity Guaranty Agreements, and, in the case of each of the other Guarantors, the Guaranty and Security Agreements, executed by each Guarantor in form and substance satisfactory to Lender. Indebtedness - as applied to a Person means, without duplication (i) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined, including, without limitation, Capitalized Lease Obligations, (ii) all obligations of other Persons which such Person has guaranteed, (iii) all reimbursement obligations in connection with letters of credit or letter of credit guaranties issued for the account of such Person, and (iv) in the case of Borrower (without duplication), the Obligations. Indenture - the Indenture, dated as of June 9, 1998, among Borrower, each of several Subsidiaries of Borrower that is a party thereto, and the Indenture Trustee, as supplemented by the First Supplemental Indenture dated as of September 5, 1998, among Borrower, the Indenture Trustee and Pierre Leasing, LLC, a North Carolina limited liability company, as further supplemented by the Second Supplemental Indenture, dated as of February 26, 1999, among Borrower, the Indenture Trustee and Fresh Foods Restaurant Group, LLC, a Delaware limited liability company, and as further supplemented by the Third Supplemental Indenture, dated as of October 8, 1999, between Borrower and the Indenture Trustee. A- 16 Indenture Trustee - U.S. Bank, N.A., in its capacity as trustee under the Indenture. Instrument - shall have the meaning ascribed to the term "instrument" under the Code. Intellectual Property - all past, present and future: trade secrets, know-how and other proprietary information; trademarks, internet domain names, service marks, trade dress, trade names, business names, designs, logos, slogans (and all translations, adaptations, derivations and combinations of the foregoing) indicia and other source and/or business identifiers, and the goodwill of the business relating thereto and all registrations or applications for registrations which have heretofore been or may hereafter be issued thereon throughout the world; copyrights (including copyrights for computer programs) and copyright registrations or applications for registrations which have heretofore been or may hereafter be issued throughout the world and all tangible property embodying the copyrights, unpatented inventions (whether or not patentable); patent applications and patents; industrial design applications and registered industrial designs; license agreements related to any of the foregoing and income therefrom; books, records, writings, computer tapes or disks, flow diagrams, specification sheets, computer software, source codes, object codes, executable code, data, databases and other physical manifestations, embodiments or incorporations of any of the foregoing; the right to sue for all past, present and future infringements of any of the foregoing; all other intellectual property; and all common law and other rights throughout the world in and to all of the foregoing. Intellectual Property Security Agreements - the Intellectual Property Security Agreement to be executed by Borrower and each Guarantor on or about the Closing Date by which Borrower and each Guarantor shall assign to Lender, and grant to Lender a security interest in, as security for the Obligations, all of Borrower's and such Guarantor's right, title and interest in all Intellectual Property more particularly described on SCHEDULE 8.1.15 to this Agreement. Interest Period - as defined in Section 2.1.4 of the Agreement. Internal Revenue Code - the Internal Revenue Code of 1986, as amended from time to time. Inventory - shall have the meaning ascribed to the term "inventory" under the Code. Investment Property - shall have the meaning ascribed to the term "investment property" under the Code. Letter of Credit - any letter of credit issued by Lender or any of Lender's Affiliates for the account of Borrower. A- 17 Letter of Credit Amount - at any time, the aggregate undrawn face amount of all Letters of Credit and Letter of Credit Guaranties then outstanding. Letter of Credit Guaranty - any guaranty issued by Lender pursuant to which Lender shall guarantee the payment or performance by Borrower of its reimbursement obligations under a Letter of Credit. Letter of Credit Obligations - that portion of the Obligations constituting Borrower's obligation to reimburse Lender for all amounts paid by Lender under or with respect to a Letter of Credit Guaranty. Letter-of-Credit Rights - shall have the meaning ascribed to the term "letter-of-credit rights" under the Code. Level - as at the determination thereof at the end of each Fiscal Quarter of Borrower and its Subsidiaries, the level set forth below corresponding to the Consolidated Fixed Charge Coverage Ratio/Pricing for the period of four (4) consecutive Fiscal Quarters then ending:
Level Ratio - ----- ----- ~~Level I < or = 1.25 Level II >1.25 but < or = 1.50 Level III >1.50 but < or = 1.75 Level IV >1.75~~
LIBOR Lending Office - with respect to Lender, the office designated as the LIBOR Lending Office for Lender on the signature pages hereof and such other office of Lender or any of its Affiliates that is hereafter designated by notice to Borrower. LIBOR Rate - with respect to an Interest Period, the rate per annum determined by Lender at which deposits of Dollars of amounts equal to or comparable to the amount of the LIBOR Rate Loan to which such Interest Period relates and for a term comparable to such Interest Period are offered to Bank by prime banks in the London interbank foreign currency deposits market at approximately 11:00 a.m., London time, two (2) Business Days prior to the first day of such Interest Period. Each determination by Lender of any LIBOR Rate shall, in the absence of manifest error, be conclusive. LIBOR Rate Loan - a Loan, or portion thereof, during any period in which it bears interest at a rate based upon the applicable Adjusted LIBOR Rate. Lien - any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on common law, statute or contract. The term "Lien" shall also include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of the A- 18 Agreement, Borrower shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. Loan - the Revolver Loans, the Term Loans and all other loans and advances of any kind made by Lender, and/or any affiliate of Lender, pursuant to the Agreement and the other Loan Documents. Loan Account - the loan account established on the books of Lender pursuant to Section 4.7 of the Agreement. Loan Documents - the Agreement, the Other Agreements and the Security Documents. Margin Stock - shall have the meaning ascribed to it in Regulation U and Regulation G of the Board of Governors. Marsh Lake Lease - the Lease Agreement, dated October 1, 2002, between Borrower, as lessee, and Columbia Hill Land, a North Carolina limited liability company, as lessor, of a beach house used for customer/employee entertainment located in Marsh Lake Villas, DeBordieu Colony, Georgetown County, South Carolina. Material Adverse Effect - the effect of any event or condition which, alone or when taken together with other events or conditions occurring or existing concurrently therewith, (i) has or may be reasonably expected to have a material adverse effect upon the business, operations, Property, condition (financial or otherwise) of Parent, Borrower or any of its respective Subsidiaries; (ii) has or may be reasonably expected to have any material adverse effect whatsoever upon the validity or enforceability of the Agreement or any of the other Loan Documents; (iii) has or may be reasonably expected to have any material adverse effect upon the Collateral, the Liens of Lender with respect to the Collateral or the priority of such Liens; or (iv) materially impairs the ability of Parent, Borrower or any of its respective Subsidiaries to perform its obligations under the Agreement, any Guaranty Agreement or any of the other Loan Documents or of Lender to enforce or collect the Obligations or realize upon any of the Collateral in accordance with the Loan Documents and Applicable Law. Maximum Rate - the maximum non-usurious rate of interest permitted by Applicable Law that at any time, or from time to time, may be contracted for, taken, reserved, charged or received on the Indebtedness in question or, to the extent permitted by Applicable Law, under such Applicable Law that may hereafter be in effect and which allow a higher maximum non-usurious interest rate than Applicable Law now allows. Notwithstanding any other provision hereof, the Maximum Rate shall be calculated on a daily basis (computed on the actual number of days elapsed over a year of 365 or 366 days, as the case may be). A- 19 Money Borrowed - for any Person (i) Indebtedness arising from the lending of money by any other Person to such Person; (ii) Indebtedness, whether or not in any such case arising from the lending by any other Person of money to such Person, (a) which is represented by notes payable or drafts accepted that evidence extensions of credit, (b) which constitutes obligations evidenced by bonds, debentures, notes or similar instruments, or (c) upon which interest charges are customarily paid (other than accounts payable) or that was issued or assumed as full or partial payment for Property; (iii) Indebtedness that constitutes a Capitalized Lease Obligation; (iv) reimbursement obligations with respect to letters of credit or guaranties of letters of credit and (v) Indebtedness of such Person under any guaranty of obligations that would constitute Indebtedness for Money Borrowed under clauses (i) through (iii) hereof, if owed directly by such Person. Mortgages - the mortgages and deeds of trust to be executed by Borrower on or about the Closing Date in favor of Lender and by which Borrower shall grant and convey to Lender, as security for the Obligations, a Lien upon the real Property of Borrower located at 3437 East Main Street, Claremont, Hickory, North Carolina and 9990 Princeton Road, Cincinnati, Ohio. Multiemployer Plan - has the meaning set forth in Section 4001(a)(3) of ERISA. Net Proceeds - the gross proceeds (including cash receivable (when received) by way of deferred payment) received by Parent, Borrower or any of its respective Subsidiaries from (a) the sale, lease, transfer or other disposition of any Collateral, including, without limitation, insurance proceeds and awards of compensation received with respect to the destruction or condemnation of all or part of such Collateral, net of: (i) the reasonable costs of such sale, lease, transfer or other disposition; (ii) any tax liability arising from such transaction; and (iii) amounts applied to repayment of Indebtedness (other than the Obligations) secured by a Permitted Lien on the Collateral disposed of that is senior to Lender's Liens, and (b) the incurrence after the Closing Date with the consent of Lender of any Indebtedness for Money Borrowed, except for Indebtedness for Money Borrowed permitted to be incurred under the Agreement, net of (i) reasonable and customary fees and expenses with respect to legal, investment banking, brokerage and accounting and other professional fees incurred by Parent and its Subsidiaries in connection therewith. Notice of Borrowing - as defined in Section 3.1.1(i) of the Agreement. Notice of Conversion/Continuation - as defined in Section 2.1.3(ii) of the Agreement. Obligations - all Loans and all other advances, debts, liabilities, obligations, covenants and duties, together with all interest, fees and other charges thereon, owing, arising, due or payable from Parent, Borrower or any of its respective Subsidiaries to Lender, or any Affiliate of Lender, of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising under the A- 20 Agreement or any of the other Loan Documents or otherwise, whether direct or indirect (including those acquired by assignment), absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired. Office Lease - the lease dated September 1, 1998 between Columbia Hill Land, the lessor, and Borrower, as the lessee, for the headquarters and office building located in Hickory, North Carolina, as in effect on the Closing Date. Original Term - as defined in Section 5.1 of the Agreement. Other Agreements - any and all agreements, instruments and documents (other than the Agreement and the Security Documents), heretofore, now or hereafter executed by Parent, Borrower or any of its respective Subsidiaries or any other third party and delivered to Lender in respect of the transactions contemplated by the Agreement. Overadvance - a Revolver Loan made by Lender when an Overadvance Condition exists or would result from the making of such Revolver Loan. Overadvance Condition - at any date, a condition such that the principal amount of the Revolver Loans outstanding to Borrower on such date exceeds the Borrowing Base on such date. PF Distribution - PF Distribution, LLC, a North Carolina limited liability company, and wholly owned Subsidiary of Parent. PF Distribution Agreement - the Logistics Agreement, dated March 3, 2002, as amended March 2, 2003, between PF Distribution and Borrower, pursuant to which PF Distribution has agreed to render certain distribution and logistical services for Borrower, as in effect on the Closing Date. PF Purchasing - PF Purchasing, LLC, a North Carolina limited liability company, and wholly owned Subsidiary of Parent. PF Purchasing Agreement - the Purchasing Agency Agreement, dated September 3, 2001, between PF Purchasing and Borrower, pursuant to which PF Purchasing has agreed to render certain purchasing services for Borrower, as in effect on the Closing Date. Parent - PF Management, Inc., a North Carolina corporation. Parent Indebtedness for Money Borrowed - the Indebtedness for Money Borrowed owing by Parent which is described in SCHEDULE 9.2.5 attached hereto (which specifically does not include any Parent Subordinated Debt) and which, pursuant to the Senior Notes Restructuring, is to be assumed by Borrower. A- 21 Parent Subordinated Debt - the two promissory notes, each dated July 26, 2002, owing by Parent to Clark and Richardson which, in the case of the promissory note owing to Clark, is in the original principal amount of $2,100,000, and, in the case of the promissory note owing to Richardson, is in the original principal amount of $2,300,000. Payment Account - an account maintained at Bank by Lender to which all monies from time to time deposited to a Dominion Account shall be transferred and all other payments shall be sent in immediately available federal funds. Payment Intangibles - shall have the meaning ascribed to the term "payment intangibles" under the Code. Payment Item - all checks, drafts or other items of payment payable to Borrower, including proceeds of any of the Collateral. Permitted Liens - any Lien of a kind specified in Section 9.2.4 of the Agreement. Permitted Purchase Money Indebtedness - Purchase Money Indebtedness of Borrower and its Subsidiaries (which, for the purposes hereof, is specifically meant to exclude Parent and any of its Subsidiaries other than Borrower and any of Borrower's Subsidiaries) in existence on the Closing Date or thereafter incurred which is secured by a Purchase Money Lien and which, when aggregated with the principal amount of all other Purchase Money Indebtedness and Capitalized Lease Obligations of Parent, Borrower and its respective Subsidiaries (including specifically the Columbia Hill Aviation Purchase Money Indebtedness), does not exceed $12,000,000 in the aggregate. For the purposes of this definition, the principal amount of any Purchase Money Indebtedness consisting of capitalized leases shall be computed as a Capitalized Lease Obligation. Person - an individual, partnership, corporation, limited liability company, joint stock company, land trust, business trust, unincorporated organization, or a government or agency or political subdivision thereof. Plan - an employee benefit plan now or hereafter maintained for employees of Borrower that is covered by Title IV of ERISA. Proceeds - shall have the meaning ascribed to the term "proceeds" under the Code. Projections - Parent's and Borrower's forecasted Consolidated and consolidating (i) balance sheets, (ii) profit and loss statements, (iii) cash flow statements, and (iv) capitalization statements, all prepared on a consistent basis with Parent's and Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. A- 22 Properly Contested - in the case of any Indebtedness of Parent, Borrower or any of its respective Subsidiaries (including, but not limited to, any Taxes) that is not paid as and when due or payable by reason of Parent's, Borrower's or any of its Subsidiary's bona fide dispute concerning its liability to pay same or concerning the amount thereof, that (i) such Indebtedness is being properly contested in good faith by appropriate proceedings promptly instituted and diligently conducted, (ii) Parent, Borrower or such Subsidiary has established appropriate reserves as shall be required in conformity with GAAP, (iii) the non-payment of such Indebtedness will not have a Material Adverse Effect; (iv) no Lien is imposed upon Parent's, Borrower's or any such Subsidiary's Property with respect to such Indebtedness unless such Lien is at all times junior and subordinate in priority to the Liens in favor of Lender (except only with respect to Taxes that have priority as a matter of any state's Applicable Laws) and enforcement of such Lien is stayed during the period prior to the final resolution or disposition of such dispute; (iv) if the Indebtedness results in the entry, rendition or issuance against Parent, Borrower or any of its Subsidiaries or any of their respective assets of a judgment, writ, order or decree, such judgment, writ, order or decree is stayed or bonded pending a timely appeal or other judicial review; and (v) if such contest is abandoned, settled or determined adversely to Parent, Borrower or any of its respective Subsidiaries, Parent, Borrower or such Subsidiary forthwith pays such Indebtedness and all penalties and interest in connection therewith. Property - any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. Purchase Money Indebtedness - means and includes (i) Indebtedness (other than the Obligations) for the payment of all or any part of the purchase price of any fixed assets, (ii) any Indebtedness (other than the Obligations) incurred at the time of or within 10 days prior to or after the acquisition of any fixed assets for the purpose of financing all or any part of the purchase price thereof, and (iii) any renewals, extensions or refinancings thereof, but not any increases in the principal amounts thereof outstanding at the time. Purchase Money Lien - a Lien upon fixed assets which secures Purchase Money Indebtedness, but only if such Lien shall at all times be confined solely to the fixed assets the purchase price of which was financed through the incurrence of the Purchase Money Indebtedness secured by such Lien. Real Estate Term Loan - the Loan described in Section 1.2.1 of the Agreement. Real Estate Term Note - the Real Estate Term Note to be executed by Borrower on or about the Closing Date in favor of Lender to evidence the Real Estate Term Loan, which shall be in the form of EXHIBIT F to the Agreement. Recall Insurance Policy Assignment - the Collateral Assignment of Insurance Proceeds to be executed by Borrower on or about the Closing Date by which Borrower shall assign to Lender, and grant to Lender a security interest in, as security for the A- 23 Obligations, all of Borrower's right, title and interest in its recall policy of insurance and all proceeds payable thereunder. Refinancing Indebtedness for Money Borrowed - with respect to any Indebtedness for Money Borrowed, Indebtedness for Money Borrowed issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness for Money Borrowed of Parent, Borrower or any of its Subsidiaries, provided that each of the conditions are first satisfied: (i) the principal amount of such Refinancing Indebtedness for Money Borrowed does not exceed the principal amount of the Indebtedness for Money Borrowed so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith), (ii) the terms and conditions of the Refinancing Indebtedness for Money Borrowed, including the required principal payments or prepayments and interest rate, are at least as favorable as, and no more restrictive than, the terms and conditions of the Indebtedness for Money Borrowed so extended, refinanced, renewed, replaced, defeased or refunded, (iii) if the Indebtedness for Money Borrowed being extended, refinanced, renewed, replaced, defeased or refunded is Subordinated Debt, such Refinancing Indebtedness for Money Borrowed is subordinated in right of payment to the Obligations on terms as least as favorable to Lender as those contained in the documentation governing the Subordinated Debt being extended, refinanced, renewed, replaced, defeased or refunded, and (iv) after the Senior Notes Restructuring Closing Date, such Refinancing Indebtedness, regardless of who is the obligor thereof, is incurred solely by Borrower. Regulation D - Regulation D of the Board of Governors. Rent Reserve - for each location at which Eligible Inventory is stored with, or located on premises owned by, a landlord, warehouseman or other Person from whom Borrower has procured for Lender's benefit a written agreement of such Person, an amount equal to the average storage or warehouse costs (excluding handling costs), as determined by Lender from time to time, for the number of months of the accrual of such costs the warehouser or landlord of such premises shall have agreed, in its written agreement with Lender entered into to satisfy the eligibility condition set forth in clause (viii) of the definition of Eligible Inventory, to limit its possessory Lien in such Inventory. On the Closing Date, the amount of the Rent Reserve shall be $1,084,000. Reportable Event - any of the events set forth in Section 4043(b) of ERISA. Restricted Investment - any acquisition of Property by Parent, Borrower or any of its respective Subsidiaries in exchange for cash or other Property, whether in the form of an acquisition of Securities or other Indebtedness or obligations, or the purchase or acquisition by Parent, Borrower or any of its respective Subsidiaries of any other Property, or a loan, advance, capital contribution or subscription, except acquisitions of the following: A- 24 (i) investments in one or more Subsidiaries of Parent or of Borrower to the extent existing on the Closing Date; (ii) Fixed assets to be used in the business of Parent, Borrower and its respective Subsidiaries so long as the acquisition costs thereunder constitute Capital Expenditures permitted hereunder; (iii) Goods held for sale or lease or to be used in the manufacture of goods or the rendition of services by Parent, Borrower or any of its respective Subsidiaries in the ordinary course of business; and (iv) Cash Equivalents. Revolver Facility Amount - $30,000,000, as such amount may be reduced from time to time pursuant to Section 1.1.2 of the Agreement. Revolver Loan - a Loan made by Lender as provided in Section 1.1.1 of the Agreement. Richardson - James C. Richardson, a resident of the State of North Carolina. Richardson Note - that certain $5,000,000 promissory note dated January 31, 2002 executed by Richardson to the order of Borrower evidencing a loan made by Borrower to Richardson, as such note is amended, modified, renewed or restated from time to time. Richardson Note Assignment - the Assignment and Security Agreement to be executed by Borrower on or about the Closing Date by which Borrower shall assign to Lender, and grant to Lender a security interest in, as security for the Obligations, all of Borrower's right, title and interest in the Richardson Note and all amounts owing thereon, and Richardson shall consent to such assignment and agree to make all payments thereon to Lender for the account of Borrower. Schedule of Accounts - as defined in Section 7.2.1 of the Agreement. Security - shall have the meaning ascribed to the term "security" under the Code. Security Documents - each Guaranty Agreement, the Mortgages, the Business Interruption Insurance Policy Assignment, the Recall Insurance Policy Assignment, the Control Agreements, the Richardson Note Assignment, the Intellectual Property Security Agreements, and all other instruments and agreements now or at any time hereafter securing the whole or any part of the Obligations. Security Entitlement - shall have the meaning ascribed to the term "security entitlement" under the Code. A- 25 Senior Notes - the $115,000,000 in aggregate of 10-3/4% Senior Notes due 2006 issued by Borrower pursuant to the Indenture as in effect on the date of this Agreement which are outstanding on the Closing Date. Senior Notes Cash Sweep Prepayment - a mandatory prepayment to be made by Borrower on the Senior Notes, within thirty (30) days following the delivery by Borrower to the Indenture Trustee and Lender of the audited financial statements of Borrower and its Subsidiaries for a Fiscal Year ending after the Senior Notes Restructuring Closing, but in no event later than one hundred twenty (120) days following the end of each such Fiscal Year, in an amount equal to 50% of Borrower's Consolidated Excess Cash for such Fiscal Year, if, but only if, each of the Senior Notes Cash Sweep Prepayment Conditions are first satisfied. Senior Notes Cash Sweep Prepayment Conditions - the following conditions, the satisfaction of each of which shall be a condition to Borrower's requirement to make a Senior Notes Cash Sweep Prepayment in respect of a Fiscal Year ending after the Senior Notes Restructuring Closing Date: (i) the payment is made after Lender's receipt of the audited financial statements of Borrower and its Subsidiaries required by section 9.1.3(i) of the Agreement; and (ii) Availability on the date of such payment and for each day during the 90-day period immediately preceding the date of such payment equals or exceeds $5.0 million, in each case determined on a pro forma basis after giving effect to such payment. Senior Notes Restructuring - the restructuring of the Senior Notes by Borrower, the holders of the Senior Notes, and the Indenture Trustee, upon terms satisfactory to Lender in its sole and unfettered discretion, which shall include the following: (i) the waiver by the holders of the Senior Notes and the Indenture Trustee of all alleged defaults by Borrower under the Indenture and the other documents executed in connection therewith, (ii) the increase of the interest rate payable by Borrower on the Senior Notes to 12.25% until March 31, 2005 and 13.25% thereafter, (iii) the payment by Borrower of a restructuring fee equal to 3% of the face amount of the outstanding Senior Notes, (iv) the granting by Borrower to the holders of the Senior Notes of a put which allows them to require Borrower to give notice to repurchase the Senior Notes at par plus accrued interest on March 31, 2005, (v) the granting by Borrower to the Indenture Trustee, for the ratable benefit of the holders of the Senior Notes, of Liens in substantially all of the assets of Borrower which are junior and subordinate to the Liens of Lender therein, (vi) the subordination of the payment of the Senior Notes to the prior payment in full of the Obligations owing to Lender, (vii) the making by Borrower of a Senior Notes Cash Sweep Prepayment, (viii) the assignment to, and assumption by, Borrower of the Parent Indebtedness for Money Borrowed and the Columbia Hill Aviation Purchase Money Indebtedness (together with the assignment and transfer of the aircraft that is the subject of the Purchase Money Lien securing the same), (ix) the subordination of the payment of the Parent Indebtedness for Money Borrowed assumed by Borrower to the prior payment in full of the Obligations owing to Lender and the Senior Notes, (x) the termination of the Affiliate Agreements and all other related party and affiliated transactions between Parent, Borrower and all of its respective Affiliates except for the Office Lease, the Richardson Note, and the Subordinated Debt owing by Parent to Clark and Richardson, A- 26 and (xi) the modification of the Indenture Trust to provide for annual limits on the amount of executive compensation and perquisites payable by Borrower, directly or indirectly, to Clark and Richardson. Senior Notes Restructuring Closing Date - the date on which all of the Senior Notes Restructuring Conditions shall have been satisfied and Borrower, Parent, the holders of the Senior Notes and the Indenture Trustee close the transactions contemplated by the Senior Notes Restructuring. Senior Notes Restructuring Conditions - the following conditions, the satisfaction of each and every one of which shall be a condition precedent to Borrower's and Parent's closing of the Senior Notes Restructuring: (i) Lender shall have approved, in the exercise of its sole discretion, each and every term and condition of the Senior Notes Restructuring; (ii) Lender shall have received and approved, in the exercise of its sole discretion, each of the documents to be executed and delivered by Parent, Borrower and each of their respective Subsidiaries in connection with the Senior Notes Restructuring; (iii) Lender and the Indenture Trustee shall have executed and delivered a subordination agreement, in form and substance satisfactory to Lender in its sole discretion which shall contain provisions, among other things, that (a) payment of the Senior Notes shall be subordinated to the prior payment in full of the Obligations, (b) all Liens securing the Senior Notes in any assets of Parent or any of its Subsidiaries are subordinated to the Liens of Lender therein, (c) no payments of any kind may be made by Borrower on the Senior Notes, or received by the holders of the Senior Notes, at any time during the pendency of any insolvency proceeding involving Borrower or at any time after Lender gives notice to the Indenture Trustee that a Default or Event of Default exists, and (d) the holders of the Senior Notes shall have no right to enforce the Senior Notes or the Liens securing the Senior Notes until the Obligations are paid in full; (iv) Lender and each holder of the Parent Indebtedness for Money Borrowed shall have executed and delivered a subordination agreement, in form and substance satisfactory to Lender in its sole discretion which shall contain provisions, among other things, that (a) payment of such Parent Indebtedness for Money Borrowed shall be subordinated to the prior payment in full of the Obligations, (b) no payments of any kind may be made by Borrower on such Parent Indebtedness for Money Borrowed, or received by the holder of such Parent Indebtedness for Money Borrowed, at any time during the pendency of any insolvency proceeding involving Borrower or at any time after Lender gives notice to the holder of such Parent Indebtedness for Money Borrowed that a Default or Event of Default exists, (c) all Liens securing the Senior Notes in any assets of Parent or any of its Subsidiaries are subordinated to the Liens of Lender A- 27 therein, and (d) the holder of such Parent Indebtedness for Money Borrowed shall have no right to enforce such Parent Indebtedness for Money Borrowed or the Liens securing such Parent Indebtedness for Money Borrowed until the Obligations are paid in full; (v) both immediately before and after giving pro forma effect to the closing of the Senior Notes Restructuring, including the payment of all restructuring fees and other transaction fees and expenses payable in connection therewith, no Default or Event of Default shall exist; (vi) any mandatory cash sweep prepayment payable on the Senior Notes shall be (a) in an amount no greater than the Senior Notes Cash Sweep Prepayment and (b) payable for any Fiscal Year ending after the Senior Notes Restructuring Closing only if each of the Senior Notes Cash Sweep Prepayment Conditions shall have first been satisfied; (vii) all cash or Cash Equivalents then owned by PF Distribution, PF Purchasing, Columbia Hill Aviation and Parent is transferred to Borrower; and (viii) each of the Affiliate Agreements is terminated and no further transactions of any nature thereunder shall thereafter occur. Senior Notes Stated Maturity Date - June 1, 2006. Software - shall have the meaning ascribed to the term "software" under the Code. Solvent - as to any Person, such Person (i) owns Property whose fair saleable value is greater than the amount required to pay all of such Person's Indebtedness (including contingent debts), (ii) is able to pay all of its Indebtedness as such Indebtedness matures and (iii) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage. Statutory Reserves - on any date, the percentage (expressed as a decimal) established by the Board of Governors which is the then stated maximum rate for all reserves (including, but not limited to, any emergency, supplemental or other marginal reserve requirements) applicable to any member bank of the Federal Reserve System in respect to Eurocurrency Liabilities (or any successor category of liabilities under Regulation D). Such reserve percentage shall include, without limitation, those imposed pursuant to said Regulation D. The Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in such percentage. Subordinated Debt - with respect to any Person, any Indebtedness of such Person that is subordinated to the Obligations in a manner and upon terms satisfactory to Lender. A- 28 Subsidiary - any corporation or limited liability company of which a Person owns, directly or indirectly through one or more intermediaries, more than 50% of the Voting Stock at the time of determination. Supporting Obligations - shall have the meaning ascribed to the term "supporting obligations" under the Code. Taxes - any present or future taxes, levies, imposts, duties, fees, assessments, deductions, withholdings or other charges of whatever nature, including income, receipts, excise, property, sales, use, transfer, license, payroll, withholding, social security and franchise taxes now or hereafter imposed or levied by the United States, or any state, local or foreign government or by any department, agency or other political subdivision or taxing authority thereof or therein and all interest, penalties, additions to tax and similar liabilities with respect thereto, but excluding, in the case of Lender, taxes imposed on or measured by the net income or overall gross receipts of Lender. Templeton - James M. Templeton, a resident of the State of North Carolina. Term Loans - the Real Estate Term Loan and the Equipment Term Loan and the term "Term Loan" shall mean one of them. Term Notes - the Real Estate Term Note and the Equipment Term Note and the term "Term Note" shall mean one of them. Total Credit Facility - $40,000,000. Type - the type of Revolver Loan, which shall either be a LIBOR Rate Loan or an Alternate Base Rate Loan. Uncertificated Security - shall have the meaning ascribed to the term "uncertificated security" under the Code. Validity Guarantors - Clark and Richardson. Voting Stock - Securities of any class or classes of a corporation or limited liability company the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the directors or managers (or Persons performing similar functions). ACCOUNTING TERMS - Unless otherwise specified herein, all terms of an accounting character used in the Agreement shall be interpreted, all accounting determinations in the Agreement shall be made, and all financial statements required to be delivered under the Agreement shall be prepared in accordance with GAAP, applied on a basis consistent with the most recent audited Consolidated financial statements of Parent, Borrower and its respective Subsidiaries heretofore delivered to Lender and using the same method for inventory valuation as used in such audited financial statements, except for any change in which Parent's and A- 29 Borrower's independent public accountant's concur or as required by GAAP unless (i) Parent and Borrower shall have objected to determining such compliance on such basis at the time of delivery of such financial statements or (ii) Lender shall so object in writing within thirty (30) days after the delivery of such financial statements, in either of which events such calculation shall be made on a basis consistent with those used in the preparation of the latest financial statement as to which such objection shall not have been made. In the event of any change in GAAP that occurs after the date of the Agreement and that is material to Parent, Borrower and its respective Subsidiaries, Lender shall have the right to require either that conforming adjustments be made to any financial covenants set forth in the Agreement, or the components thereof, that are affected by such change or that Parent and Borrower report its financial condition based on GAAP as in effect immediately prior to the occurrence of such change. For the purposes of the Agreement and any financial statements of Borrower, whether audited or interim, Columbia Hill Aviation shall be deemed a special purpose entity of Borrower and the operations of Columbia Hill Aviation shall be included in the calculation of the balance sheet and related income, cash flow and other financial statements of Borrower and its Subsidiaries. OTHER TERMS. All other terms contained in the Agreement shall have, when the context so indicates, the meanings provided for by the Code to the extent the same are used or defined therein. CERTAIN MATTERS OF CONSTRUCTION. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to the Agreement as a whole and not to any particular section, paragraph or subdivision. Whenever in the Agreement the word "including" is used, it is understood to mean "including, without limitation". Any pronoun used shall be deemed to cover all genders. The section titles, table of contents and list of exhibits appear as a matter of convenience only and shall not affect the interpretation of the Agreement. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references to any of the Loan Documents shall include any and all modifications thereto and any and all extensions or renewals thereof. All references to any Person shall mean and include successors and permitted assigns of such Person. All references to "including" and "include" shall be understood to mean "including, without limitation". [Signatures Begin on the Next Page] A- 30 IN WITNESS WHEREOF, the parties have caused this Appendix to be duly executed by their duly authorized officers on this 13th day of August, 2003. PIERRE FOODS, INC. ("BORROWER") By: /s/ David R. Clark ------------------------------------- Title: Vice Chairman PF MANAGEMENT, INC. ("PARENT") By: /s/ David R. Clark ------------------------------------- Title: President FLEET CAPITAL CORPORATION ("LENDER") By: /s/ Rodney J. McSwain ------------------------------------- Title: Senior Vice President A- 31 LIST OF EXHIBITS AND SCHEDULES Exhibit A Form of Notice of Conversion/Continuation Exhibit B Form of Notice of Borrowing Exhibit C Form of Borrowing Base Certificate Exhibit D Form of Compliance Certificate Exhibit E Form of Equipment Term Note Exhibit F Form of Real Estate Term Note Schedule 7.1.1 Business Locations of Parent, Borrower and each of its respective Subsidiaries Schedule 8.1.1 Jurisdictions in which Parent, Borrower and each of its respective Subsidiaries is Authorized to do Business Schedule 8.1.4 Capital Structure of Parent, Borrower and each of its respective Subsidiaries Schedule 8.1.5 Corporate Names of Parent, Borrower and each of its respective Subsidiaries Schedule 8.1.13 Tax Identification Numbers of Parent, Borrower and each of its respective Subsidiaries Schedule 8.1.15 Patents, Trademarks, Copyrights and Licenses of Parent, Borrower and each of its respective Subsidiaries Schedule 8.1.18 Contracts Restricting Right of Parent, Borrower and each of its respective Subsidiaries to Incur Debts Schedule 8.1.19 Litigation involving Parent, Borrower and each of its respective Subsidiaries Schedule 8.1.21 Capitalized and Operating Leases of Parent, Borrower and each of its respective Subsidiaries Schedule 8.1.22 Pension Plans of Parent, Borrower and each of its respective Subsidiaries Schedule 8.1.24 Labor Contracts of Parent, Borrower and each of its respective Subsidiaries Schedule 9.2.2 Loans Schedule 9.2.3 Affiliate Transactions Schedule 9.2.3 (ii)(c) Payment of Amounts owing on Affiliate Agreements on Closing Date Schedule 9.2.4 Permitted Liens Schedule 9.2.5 Parent Indebtedness for Money Borrowed Schedule 9.3.4 Executive Perquisites A- 32 EXHIBIT A FORM OF NOTICE OF CONVERSION/CONTINUATION Date ________________, 20__ Fleet Capital Corporation 6100 Fairview Road, Suite 200 Charlotte, North Carolina 28210 Attention: Southeast Loan Administration Re: Loan and Security Agreement dated August 13, 2003, by and between Pierre Foods, Inc. ("Borrower"), Pierre Management, Inc. ("Parent") and Fleet Capital Corporation (as at any time amended, the "Loan Agreement") Ladies and Gentlemen: This Notice of Conversion/Continuation is delivered to you pursuant to Section 2.1.4(ii) of the Loan Agreement. Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned thereto in the Loan Agreement. Borrower hereby gives notice of its request as follows: Check as applicable: [ ] A conversion of Loans from one Type to another, as follows: (i) The requested date of the proposed conversion is _______________, 20___ (the "Conversion Date"); (ii) The Type of Loans to be converted pursuant hereto are presently ____________ _____________________ [select either LIBOR Rate Loans or Alternate Base Rate Loans] in the principal amount of $_________________ outstanding as of the Conversion Date; (iii) The portion of the aforesaid Loans to be converted on the Conversion Date is $________________ (the "Conversion Amount"); (iv) The Conversion Amount is to be converted into a __________________ [select either a LIBOR Rate Loan or an Alternate Base Rate Loan] (the "Converted Loan") on the Conversion Date. (v) [In the event Borrower selects a LIBOR Rate Loan:] Borrower hereby requests that the Interest Period for such Converted Loan be for a duration of ________ [insert length of Interest Period]. Exhibit A-1 [ ] A continuation of LIBOR Rate Loans for a new Interest Period, as follows: (i) The requested date of the proposed continuation is _______________, 20___; (ii) The aggregate amount of the LIBOR Rate Loans subject to such continuation is $_____________________; (iii) The duration of the selected Interest Period for the LIBOR Rate Loans which are the subject of such continuation is ________________ [select duration of applicable Interest Period]. Borrower hereby ratifies and reaffirms all of its liabilities and obligations under the Loan Documents and certifies that no Default or Event of Default exists on the date hereof. Borrower has caused this Notice of Conversion/Continuation to be executed and delivered by its duly authorized officer, this ____ day of _______________, 20___. PIERRE FOODS, INC. ("BORROWER") By: ___________________________________ Title: ______________________________ Exhibit A-2 EXHIBIT B FORM OF NOTICE OF BORROWING Date ________________, 20__ Fleet Capital Corporation 6100 Fairview Road, Suite 200 Charlotte, North Carolina 28210 Attention: Southeast Loan Administration Re: Loan and Security Agreement dated August 13, 2003, by and between Pierre Foods, Inc. ("Borrower"), Pierre Management, Inc. ("Parent") and Fleet Capital Corporation (as at any time amended, the "Loan Agreement") Ladies and Gentlemen: This Notice of Borrowing is delivered to you pursuant to Section 3.1.1(i) of the Loan Agreement. Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned thereto in the Loan Agreement. Borrower hereby requests a ____________ Loan [insert name of Loan] in the aggregate principal amount of $______________ to be made on ________________, ____, and to consist of: Check as applicable: [ ] Alternate Base Rate Loans in the aggregate principal amount of $__________________. [ ] LIBOR Rate Loans in the aggregate principal amount of $______________, with Interest Periods as follows: (i) As to $_____________, an Interest Period of _______________ month(s); (ii) As to $_____________, an Interest Period of _______________ month(s); (iii) As to $_____________, an Interest Period of _______________ month(s). Borrower hereby ratifies and reaffirms all of its liabilities and obligations under the Loan Documents and Borrower hereby certifies that no Default or Event of Default exists on the date hereof. Borrower has caused this Notice of Borrowing to be executed and delivered by its duly authorized officer, this ____ day of ________________, 20_____. Exhibit B-1 PIERRE FOODS, INC. ("BORROWER") By: ____________________________________ Title:_________________________________ Exhibit B-2 EXHIBIT C FORM OF BORROWING BASE CERTIFICATE Borrowing Base Certificate Attached Exhibit C-1 EXHIBIT D COMPLIANCE CERTIFICATE [Letterhead of Parent and Borrower] Date ________________, 20__ Fleet Capital Corporation 6100 Fairview Road, Suite 200 Charlotte, North Carolina 28210 Attention: Southeast Loan Administration Ladies and Gentlemen: The undersigned, the chief financial officers of Pierre Management, Inc., a North Carolina corporation ("Parent") and Pierre Foods, Inc., a North Carolina corporation ("Borrower"), gives this certificate to Fleet Capital Corporation ("Lender") in accordance with the requirements of Section 9.1.3 of that certain Loan and Security Agreement dated August 13, 2003, among Parent, Borrower and Lender ("Loan Agreement"). Capitalized terms used in this Certificate, unless otherwise defined herein, shall have the meanings ascribed to them in the Loan Agreement. 1. Based upon my review of the Consolidated balance sheets and statements of income of Parent and its Subsidiaries and of Borrower and its Subsidiaries for the [Fiscal Year] [Fiscal Quarter] [monthly period] ending __________________, 20___, copies of which are attached hereto, the undersigned in their respective official capacities, hereby certify that: (a) Consolidated Net Worth of Parent and its Subsidiaries at the end of such period is $_______________; (b) Consolidated Fixed Charge Coverage Ratio/Covenant of Borrower and its Subsidiaries for the period was ___________________; (c) Consolidated Fixed Charge Coverage Ratio/Covenant of Parent and its Subsidiaries for the period was ___________________; (d) Consolidated EBITDA of Parent and its Subsidiaries for the period was $_______________; Exhibit D-1 (e) Consolidated EBITDA of Borrower and its Subsidiaries for the period was $_______________; (f) Capital Expenditures of Parent and its Subsidiaries during the period and for the Fiscal Year to date total $__________ and $__________, respectively. 2. No Default exists on the date hereof, other than: __________________________________________________________________ [if none, so state]; and 3. No Event of Default exists on the date hereof, other than ____________________________________________________________ [if none, so state]. Very truly yours, PF MANAGEMENT, INC. By: _______________________________ Chief Financial Officer PIERRE FOODS, INC. By: _______________________________ Chief Financial Officer Exhibit D-2 EXHIBIT E EQUIPMENT TERM NOTE $5,000,000 August 13, 2003 Charlotte, North Carolina FOR VALUE RECEIVED, the undersigned PIERRE FOODS, INC., a North Carolina corporation (hereinafter "Borrower"), hereby promises to pay to the order of FLEET CAPITAL CORPORATION, a Rhode Island corporation (hereinafter "Lender"), in such coin or currency of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, the principal sum of Five Million Dollars ($5,000,000) together with interest from and after the date hereof on the unpaid principal balance outstanding at the rates of interest in effect from time to time pursuant to Section 2.1 of the Loan Agreement (as such term is defined below). This Secured Promissory Note (the "Note") is the Equipment Term Note referred to in, and is issued pursuant to, that certain Loan and Security Agreement among Pierre Management, Inc., a North Carolina corporation, Borrower and Lender dated the date hereof (hereinafter, as amended from time to time, the "Loan Agreement"), and is entitled to all of the benefits and security of the Loan Agreement. All of the terms, covenants and conditions of the Loan Agreement and the Security Documents are hereby made a part of this Note and are deemed incorporated herein in full. All capitalized terms used herein, unless otherwise specifically defined in this Note, shall have the meanings ascribed to them in the Loan Agreement. For so long as no Event of Default shall have occurred, the principal amount and accrued interest of this Note shall be due and payable on the dates and in the manner hereinafter set forth: (a) Interest shall be due and payable monthly, in arrears, on the first day of each month, commencing on the first day following the date hereof, and continuing until such time as the full principal balance, together with all other amounts owing hereunder, shall have been paid in full; (b) Principal shall be due and payable monthly commencing on September 1, 2003, and continuing on the first day of each month thereafter to and including the first day of August 1, 2006, in installments of $59,523 each; and (c) The entire remaining principal amount then outstanding, together with any and all other amounts due hereunder, shall be due and payable on August 1, 2006. If, prior to the date on which this Note is required to be paid in full in accordance with the foregoing provisions, the Loan Agreement is terminated pursuant to Sections 5.2.1 or 5.2.2 thereof, then the entire unpaid principal balance and accrued interest on this Note shall be immediately due and payable in full and shall be paid on the effective date of such termination. Exhibit E-1 Borrower shall prepay this Note as provided in Section 4.5.1 of the Loan Agreement and may prepay this Note in whole at any time or in part from time to time as provided in Section 4.5.2 of the Loan Agreement. All partial prepayments, whether mandatory or voluntary, shall be applied to installments of principal in the inverse order of their maturities. Upon the occurrence of an Event of Default, Lender shall have all of the rights and remedies set forth in Section 11 of the Loan Agreement. Borrower shall pay a late payment fee equal to four percent (4%) of the amount of any installment of principal or interest, or both, required hereunder which is received by Lender more than fifteen (15) days after the due date thereof. Time is of the essence of this Note. To the fullest extent permitted by applicable law, Borrower, for itself and its legal representatives, successors and assigns, expressly waives presentment, demand, protest, notice of dishonor, notice of non-payment, notice of maturity, notice of protest, presentment for the purpose of accelerating maturity, diligence in collection, and the benefit of any exemption or insolvency laws. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Lender in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Lender of any right or remedy preclude any other right or remedy. Lender, at its option, may enforce its rights against any collateral securing this Note without enforcing its rights against Borrower, any guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to Borrower. Borrower agrees that, without releasing or impairing Borrower's liability hereunder, Lender may at any time release, surrender, substitute or exchange any collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of North Carolina and is intended to take effect as an instrument under seal. Exhibit E-2 IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed and delivered in Charlotte, North Carolina, on the date first above written. PIERRE FOODS, INC. ("BORROWER") By: ______________________________________ Title: Vice Chairman Exhibit E-3 EXHIBIT F REAL ESTATE TERM NOTE $5,000,000 August 13, 2003 Charlotte, North Carolina FOR VALUE RECEIVED, the undersigned PIERRE FOODS, INC., a North Carolina corporation (hereinafter "Borrower"), hereby promises to pay to the order of FLEET CAPITAL CORPORATION, a Rhode Island corporation (hereinafter "Lender"), in such coin or currency of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, the principal sum of Five Million Dollars ($5,000,000) together with interest from and after the date hereof on the unpaid principal balance outstanding at the rates of interest in effect from time to time pursuant to Section 2.1 of the Loan Agreement (as such term is defined below). This Secured Promissory Note (the "Note") is the Real Estate Term Note referred to in, and is issued pursuant to, that certain Loan and Security Agreement among Pierre Management, Inc., a North Carolina corporation, Borrower and Lender dated the date hereof (hereinafter, as amended from time to time, the "Loan Agreement"), and is entitled to all of the benefits and security of the Loan Agreement. All of the terms, covenants and conditions of the Loan Agreement and the Security Documents are hereby made a part of this Note and are deemed incorporated herein in full. All capitalized terms used herein, unless otherwise specifically defined in this Note, shall have the meanings ascribed to them in the Loan Agreement. For so long as no Event of Default shall have occurred, the principal amount and accrued interest of this Note shall be due and payable on the dates and in the manner hereinafter set forth: (a) Interest shall be due and payable monthly, in arrears, on the first day of each month, commencing on the first day following the date hereof, and continuing until such time as the full principal balance, together with all other amounts owing hereunder, shall have been paid in full; (b) Principal shall be due and payable monthly commencing on September 1, 2003, and continuing on the first day of each month thereafter to and including the first day of August 1, 2006, in installments of $41,667 each; and (c) The entire remaining principal amount then outstanding, together with any and all other amounts due hereunder, shall be due and payable on August 1, 2006. If, prior to the date on which this Note is required to be paid in full in accordance with the foregoing provisions, the Loan Agreement is terminated pursuant to Sections 5.2.1 or 5.2.2 thereof, then the entire unpaid principal balance and accrued interest on this Note shall be immediately due and payable in full and shall be paid on the effective date of such termination. Exhibit F-1 Borrower shall prepay this Note as provided in Section 4.5.1 of the Loan Agreement and may prepay this Note in whole at any time or in part from time to time as provided in Section 4.5.2 of the Loan Agreement. All partial prepayments, whether mandatory or voluntary, shall be applied to installments of principal in the inverse order of their maturities. Upon the occurrence of an Event of Default, Lender shall have all of the rights and remedies set forth in Section 11 of the Loan Agreement. Borrower shall pay a late payment fee equal to four percent (4%) of the amount of any installment of principal or interest, or both, required hereunder which is received by Lender more than fifteen (15) days after the due date thereof. Time is of the essence of this Note. To the fullest extent permitted by applicable law, Borrower, for itself and its legal representatives, successors and assigns, expressly waives presentment, demand, protest, notice of dishonor, notice of non-payment, notice of maturity, notice of protest, presentment for the purpose of accelerating maturity, diligence in collection, and the benefit of any exemption or insolvency laws. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Lender in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Lender of any right or remedy preclude any other right or remedy. Lender, at its option, may enforce its rights against any collateral securing this Note without enforcing its rights against Borrower, any guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to Borrower. Borrower agrees that, without releasing or impairing Borrower's liability hereunder, Lender may at any time release, surrender, substitute or exchange any collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of North Carolina and is intended to take effect as an instrument under seal. Exhibit F-2 IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed and delivered in Charlotte, North Carolina, on the date first above written. PIERRE FOODS, INC. ("BORROWER") By: _______________________________________ Title: Vice Chairman Exhibit F-3 EX-10.11 4 g89090exv10w11.txt EX-10.11 Exhibit 10.11 AMENDMENT NO. 1 TO, AND CONSENT UNDER, LOAN AND SECURITY AGREEMENT THIS AMENDMENT NO. 1 TO, AND CONSENT UNDER, LOAN AND SECURITY AGREEMENT (this "Amendment"), dated this 8th day of March, 2004, is made by and among PIERRE FOODS, INC., a North Carolina corporation (the "Borrower"); PF MANAGEMENT, INC. , a North Carolina corporation (the "Parent"); FLEET CAPITAL CORPORATION, a Rhode Island corporation (the "Lender"); PF DISTRIBUTION, LLC, PF PURCHASING, LLC, FRESH FOODS PROPERTIES, LLC, COLUMBIA HILL AVIATION, LLC, and COMPASS OUTFITTERS, LLC, each a North Carolina limited liability company (each, a "Company Guarantor" and, collectively, the "Company Guarantors"); and DAVID R. CLARK and JAMES C. RICHARDSON, each a resident of the State of North Carolina (the "Validity Guarantors" and, together with the Company Guarantors, the "Guarantors" and, each, a "Guarantor"). RECITALS A. Pursuant to the Loan and Security Agreement, dated August 13, 2003 (as amended, modified, restated or supplemented from time to time, the "Loan Agreement"), among the Borrower, the Parent and the Lender, the Lender has agreed to make loans and extend credit to the Borrower secured by the Collateral. All capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Loan Agreement. B. All of the Obligations owing from time to time to the Lender under the Loan Agreement or otherwise are unconditionally, jointly and severally guaranteed by the Parent and each of the Company Guarantors pursuant to the Guaranty Agreement, dated August 13, 2003, executed by the Parent in favor of the Lender, and the Guaranty and Security Agreements, dated August 13, 2003, executed by each Company Guarantor in favor of the Lender. C. The validity of all Collateral is guaranteed by the Validity Guarantors pursuant to the Guaranties of Validity, dated August 13, 2003, executed by each Validity Guarantor in favor of the Lender. D. Concurrently with the execution and delivery of this Amendment, the Borrower and certain of the Company Guarantors propose to enter into with the Indenture Trustee a Fourth Supplemental Indenture (the "Fourth Supplemental Indenture") to the Indenture and close the Senior Notes Restructuring. Section 9.2.14 of the Loan Agreement prohibits the Borrower, without the prior written consent of the Lender, from amending or modifying in any way the terms or provisions 1 of the Indenture or the Senior Notes from those in effect on the Closing Date, except for the amendments and modifications contemplated by the Senior Notes Restructuring if the Senior Notes Restructuring Conditions are first satisfied. E. Not all of the Senior Notes Restructuring Conditions have been satisfied. Specifically, the Indenture Trustee and the holders of the Senior Notes have refused to subordinate the payment of the Senior Notes to the prior payment in full of the Obligations as required by section (iii) of the definition of the Senior Notes Restructuring Conditions, but they have agreed to subordinate the Liens securing the Senior Notes being granted in connection with the Senior Notes Restructuring and limit the enforcement of such Liens, all upon the terms and subject to the provisions of a Lien Subordination Agreement (the "Lien Subordination Agreement"), dated of even date herewith, between the Indenture Trustee and the Lender, and acknowledged and agreed to by the Borrower, the Parent and the Company Guarantors, a copy of which is attached to the Fourth Supplemental Indenture as EXHIBIT D thereto. F. The Borrower, the Parent and the Guarantors have each requested that, notwithstanding the failure of the Borrower and the Parent to satisfy all of the Senior Notes Restructuring Conditions, the Lender nevertheless grant its consent to the Senior Notes Restructuring. G. The Lender has agreed to such request, provided that the Loan Agreement is modified as set forth herein, and the Guarantors each grant their respective consent to such amendments to the Loan Agreement and the Lender's granting of its consent to the Senior Notes Restructuring, and ratify their respective obligations under their respective Guaranty Agreements and the Loan Documents to which each of them is a party or by which each of them may be bound. H. To accomplish the foregoing, the Borrower, the Parent, the Lender and the Guarantors have agreed to enter this into Amendment. STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are expressly acknowledged, the Borrower, the Parent, the Lender and the Guarantors hereby agree as follows: ARTICLE I AMENDMENTS TO LOAN AGREEMENT Subject to the satisfaction of the conditions precedent set forth in Article III below, the Loan Agreement is hereby amended as follows: 1.1 Definitions. APPENDIX A to the Loan Agreement is amended as follows: 2 (a) New definitions are added in proper alphabetical order as follows: "Fourth Supplemental Indenture - the Fourth Supplemental Indenture, dated as of the Senior Notes Restructuring Closing Date, among the Indenture Trustee, the Borrower and the Subsidiaries of the Borrower that are parties thereto, which supplements and amends the Indenture. Senior Notes 2005 Offer Purchase Date" - March 31, 2005." (b) The definition of "Credit Facility Termination Date" is amended in its entirety to read as follows: "Credit Facility Termination Date - the earliest to occur of any of the following: (i) August 13, 2006, (ii) ninety (90) days before the Senior Notes 2005 Offer Purchase Date, or (iii) ninety (90) days before the Senior Notes Stated Maturity Date. (c) The definition of "Fiscal Year" is amended in its entirety to read as follows: "Fiscal Year - the fiscal year of Parent, Borrower and each of its respective Subsidiaries which means twelve (12) periods consisting of four (4) or (5) weeks each determined based on a 52-53 week accounting period, the last week of which ends on the last day of February if it falls on a Saturday, and, if not, on the first Saturday in March of each year. When a year is used in connection with a Fiscal Year, such as Fiscal Year 2004, such reference shall mean the Fiscal Year ending in that year." 1.2. Parent Indebtedness for Money Borrowed. SCHEDULE 9.2.5 to the Loan Agreement is amended as follows: (a) the second to the last loan listed on page 1 as "Jim Templeton (Peoples)" is amended to refer to "S&D Land Company (Peoples Bank)"; and (b) the last loan listed on page 2 in the amount of $625,000 owing to First Century Bank is deleted. 1.3 Tax Consolidation. Section 9.2.11 is amended in its entirety to read as follows: 9.2.11 Tax Consolidation. File or consent to the filing of any consolidated income tax return with any Person other than Parent or any Subsidiary of Parent. 1.4 Capital Expenditures. Section 9.3.3 is amended in its entirety to read as follows: 9.3.3 Capital Expenditures. Parent, Borrower and their respective Subsidiaries shall not make Capital Expenditures (including, without limitation, by way of capitalized leases) during any period which, in the aggregate, exceed the amount shown below corresponding to such period: 3
PERIOD MAXIMUM CAPITAL EXPENDITURES - ------ ---------------------------- 3rd Fiscal Quarter of Fiscal Year Ending 2004 $2,000,000 3rd and 4th Fiscal Quarters of Fiscal Year Ending 2004 $3,000,000 3rd and 4th Fiscal Quarters of Fiscal Year Ending 2004 and 1st Fiscal Quarter of Fiscal Year Ending 2005 $6,200,000 3rd and 4th Fiscal Quarters of Fiscal Year Ending 2004 and 1st and 2nd Fiscal Quarters of Fiscal Year Ending 2005 $7,700,000 4th Fiscal Quarter of Fiscal Year Ending 2004 and 1st, 2nd and 3rd Fiscal Quarters of Fiscal Year Ending 2005 $7,700,000 1st, 2nd, 3rd and 4th Fiscal Quarters of Fiscal Year Ending 2005 $6,500,000 2nd, 3rd and 4th Fiscal Quarters of Fiscal Year Ending 2005 and 1st Fiscal Quarter of Fiscal Year Ending 2006 $6,000,000 Each period of four (4) consecutive Fiscal Quarters thereafter $6,000,000
ARTICLE II MODIFICATION OF LOAN DOCUMENTS; CONSENTS OF THE LENDER, THE PARENT AND THE GUARANTORS 2.1. Loan Documents. The Loan Agreement and each of the other Loan Documents are amended to provide that any reference therein to the Loan Agreement or any of the other Loan Documents shall mean, unless otherwise specifically provided, the Loan Agreement as amended hereby, and as further amended, restated, supplemented or modified from time to time. 2.2. Consent by the Lender. Subject to the satisfaction of the conditions precedent set forth in Article III below, the Lender consents to the Senior Notes Restructuring upon the terms set forth in the Fourth Supplemental Indenture. 4 2.3. Consent by the Parent and the Guarantors; Ratification of Guaranty Agreements. The Parent and the Guarantors each hereby consents to, and agrees to be bound by, (i) each of the amendments to the Loan Agreement as set forth in Article I of this Amendment and (ii) the consent by the Lender to the Senior Notes Restructuring as set forth in Section 2.2 of this Amendment. The Parent and each Guarantor hereby ratify its or his obligations under its or his respective Guaranty Agreement and the other Loan Documents to which each of them is a party or by which each of them may be bound, each of whom remains in full force and effect, enforceable in accordance with its terms. ARTICLE III REPRESENTATIONS AND WARRANTIES The Borrower, the Parent and the Guarantors each hereby represents and warrants to the Lender that: 3.1. Compliance with the Loan Agreement. As of the execution of this Amendment, the Borrower, the Parent and the Guarantors are each in compliance with all of the terms and provisions set forth in the Loan Agreement and the other Loan Documents to be observed or performed by the Borrower, the Parent and the Guarantors except where non-compliance has been waived in writing by the Lender. 3.2. Representations in Other Loan Documents. The representations and warranties of the Borrower, the Parent and the Guarantors set forth in the Loan Agreement and the other Loan Documents are true and correct in all material respects except to the extent that such representations and warranties relate solely to or are specifically expressed as of a particular date or period which is past or expired as of the date hereof. 3.3. No Event of Default. No Default or Event of Default exists. ARTICLE IV CONDITIONS PRECEDENT The effectiveness of the amendments to the Loan Agreement as set forth in Article I of this Amendment and the consent of the Lender as set forth in Section 2.2 of this Amendment, are each conditioned upon the satisfaction of each of the following conditions precedent: 4.1. Amendment. The Lender shall have received this Amendment duly executed by the Borrower, the Parent and the Guarantors. 5 4.2. Lien Subordination Agreement. The Lender shall have received the Lien Subordination Agreement duly executed by the Indenture Trustee and acknowledged and agreed to by the Borrower, the Parent and the Guarantors that are parties thereto. 4.3. Conditions Precedent to Fourth Supplemental Indenture. Each of the conditions precedent to the effectiveness of the Fourth Supplemental Indenture as set forth in Article III thereof shall have been satisfied. 4.4. Consents to Assignment and Subordination Agreements. The Lender shall have received a Consent to Assignment and Subordination Agreement duly executed by each party to whom Parent Indebtedness for Money Borrowed is owed, each such consent to be in substantially the form agreed to by the Borrower and Anderson Kill & Olick, P.C. on January 30, 2004, with such changes thereto that are approved by the Lender in its sole discretion. 4.5. Representations and Warranties. The representations and warranties of the Borrower, the Parent and the Guarantors as set forth in Article III of this Amendment shall be true and correct in all material respects. 4.6. No Default or Event of Default. No Default or Event of Default shall exist. 4.7. Cash or Cash Equivalents. All cash or Cash Equivalents owned by PF Distribution, PF Purchasing, Columbia Hill Aviation and the Parent on the Senior Notes Restructuring Closing Date are transferred to the Borrower. 4.8. Affiliate Agreements. Each of the Affiliate Agreements are terminated and the Lender shall have received termination agreements duly executed by the parties thereto. 4.9 Certificate. The Parent and the Borrower shall have delivered to the Lender a certificate in form and substance satisfactory to the Lender confirming that each of the conditions set forth in this Article IV has been satisfied. ARTICLE V GENERAL 5.1. Full Force and Effect. As expressly amended hereby, the Loan Agreement and the other Loan Documents shall continue in full force and effect in accordance with the provisions thereof. As used in the Loan Agreement and the other Loan Documents, "hereinafter", "hereto", "hereof", or words of similar import, shall, unless the context otherwise requires, mean the Loan Agreement or the other Loan Documents, as the case may be, as amended by this Amendment. 5.2. Applicable Law. This Amendment shall be governed by and construed in accordance with the internal laws and judicial decisions of the State of North Carolina. 6 5.3. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one and the same instrument. 5.4. Further Assurances. The Borrower and the Guarantors shall each execute and deliver to the Lender such additional documents and certificates as the Lender may reasonably request to effect the amendments contemplated by this Amendment. 5.5. Headings. The headings in this Amendment are for the purpose of reference only and shall not affect the construction of this Amendment. 5.6. Expenses. The Borrower shall reimburse the Lender for all fees and expenses (legal or otherwise) incurred by the Lender in connection with the preparation, execution and delivery of this Amendment and the other Loan Documents required or contemplated hereby, the Fourth Supplemental Indenture and the closing of the Senior Notes Restructuring. 5.7. Waiver of Jury Trial. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE BORROWER, THE LENDER, THE PARENT AND THE GUARANTORS EACH WAIVES ANY RIGHT TO TRIAL BY JURY THE BORROWER, THE LENDER, THE PARENT OR THE GUARANTORS MAY HAVE IN ANY ACTION OR PROCEEDING IN CONNECTION WITH THIS AMENDMENT, THE LOAN AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO. [Rest of page intentionally left blank] 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered as of the date first above written. PIERRE FOODS, INC. ("BORROWER") By: /s/ Pamela M. Witters ----------------------------------- Title: CFO PF MANAGEMENT, INC. ("PARENT") By: /s/ David R. Clark ----------------------------------- Title: President FLEET CAPITAL CORPORATION ("LENDER") By: /s/ Rodney J. McSwain ----------------------------------- Title: Sr. Vice President COMPANY GUARANTORS: PF DISTRIBUTION, LLC By: /s/ Brian D. Davis ----------------------------------- Brian D. Davis, Manager PF PURCHASING, LLC By: /s/ Brian D. Davis ----------------------------------- Brian D. Davis, Manager [Signatures Continue on the Next Page] 8 FRESH FOODS PROPERTIES, LLC By: /s/ Pamela M. Witters ----------------------------------- Pamela M. Witters, Manager COLUMBIA HILL AVIATION, LLC By: /s/ Brian D. Davis ----------------------------------- Brian D. Davis, Manager COMPASS OUTFITTERS, LLC By: /s/ Pamela M. Witters ----------------------------------- Pamela M. Witters, Manager VALIDITY GUARANTORS: /s/ David R. Clark (SEAL) --------------------------------- DAVID R. CLARK /s/ James C. Richardson, Jr. (SEAL) --------------------------------- JAMES C. RICHARDSON 9 EX-10.12 5 g89090exv10w12.txt EX-10.12 Exhibit 10.12 STOCK PURCHASE AGREEMENT AMONG PF MANAGEMENT, INC., THE PF MANAGEMENT, INC. SHAREHOLDERS, DAVID R. CLARK (AS SHAREHOLDERS' AGENT) AND PIERRE HOLDING CORP. (BUYER) MAY 11, 2004 STOCK PURCHASE AGREEMENT TABLE OF CONTENTS 1. PURCHASE AND SALE OF SHARES........................................... 1 2. PURCHASE PRICE - PAYMENT.............................................. 1 2.1 Purchase Price.................................................. 1 2.2 Preliminary Purchase Price...................................... 2 2.3 Certain Closing Deliveries...................................... 2 2.4 Payment of Purchase Price Adjustment............................ 2 2.5 Determination of Final Purchase Price........................... 3 3. JOINT AND SEVERAL REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS.......................................................... 5 3.1 Shareholder Authority, Validity, Ownership...................... 5 3.2 PFMI Organization, Ownership, Liabilities....................... 6 3.3 Company Organization, Qualification, Subsidiaries, Investments, Etc................................................ 7 3.4 Capital Stock................................................... 8 3.5 Non-Contravention............................................... 9 3.6 Reports and Financial Statements; No Undisclosed Liabilities..................................................... 9 3.7 Absence of Material Differences................................. 11 3.8 Employees....................................................... 12 3.9 Employee Benefit Plans.......................................... 13 3.10 Assets and Facilities........................................... 15 3.11 Licenses and Permits............................................ 15 3.12 Litigation...................................................... 15 3.13 Compliance with Laws............................................ 16 3.14 Environmental................................................... 16 3.15 Intellectual Property........................................... 17 3.16 Title to Real and Personal Property; Leasehold Interests........ 18 3.17 Material Contracts.............................................. 19 3.18 Insurance....................................................... 20 3.19 Product Liability............................................... 21 3.20 Affiliate Transactions.......................................... 21 3.21 Customers....................................................... 21 3.22 Suppliers....................................................... 22 3.23 Bank Accounts................................................... 22 3.24 Brokerage....................................................... 22 3.25 Limitation of Representations and Warranties.................... 22 4. REPRESENTATIONS AND WARRANTIES OF BUYER............................... 22 4.1 Organization and Power.......................................... 22 4.2 Authority....................................................... 23 4.3 No Brokers or Finders........................................... 23 4.4 Compliance...................................................... 23

-i- 4.5 Litigation...................................................... 23 4.6 Approvals....................................................... 23 4.7 Financing....................................................... 24 4.8 Investment Intent............................................... 24 4.9 No Knowledge of Breach.......................................... 24 4.10 No Reliance..................................................... 24 4.11 Access to Information........................................... 25 5. COVENANTS............................................................. 25 5.1 HSR Act Filings................................................. 25 5.2 Access to Information and Records............................... 25 5.3 Conduct of Business Pending the Closing......................... 25 5.4 Negative Covenants.............................................. 27 5.5 Consents........................................................ 28 5.6 Satisfaction of Conditions Precedent............................ 28 5.7 Employees....................................................... 29 5.8 Books, Records and Information.................................. 29 5.9 Obligation to Update............................................ 30 5.10 Indemnification and Insurance................................... 31 5.11 Other Agreement................................................. 31 5.12 Tax Matters..................................................... 31 5.13 Exclusivity..................................................... 31 5.14 Non-Competition................................................. 32 5.15 Non-Solicitation................................................ 33 5.16 Confidentiality................................................. 33 5.17 Offering Materials.............................................. 34 6. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS........................... 34 6.1 Representations and Warranties True on the Closing Date......... 34 6.2 Compliance With Agreement....................................... 35 6.3 No Litigation................................................... 35 6.4 Third Party Consents and Approvals.............................. 35 6.5 Governmental Approvals.......................................... 35 6.6 Material Adverse Effect......................................... 35 6.7 Certain Payoffs................................................. 36 6.8 Opinion of Counsel.............................................. 36 6.9 Affiliated Transactions; Shareholders Agreement................. 36 6.10 FIRPTA.......................................................... 36 6.11 Financing....................................................... 36 6.12 Audited Financial Statements.................................... 36 6.13 280G Payments................................................... 37 6.14 Tender Offer. .................................................. 37 6.15 Closing Deliveries.............................................. 37 7. CONDITIONS PRECEDENT TO THE SHAREHOLDERS' OBLIGATIONS................. 37 7.1 Representations and Warranties True on the Closing Date......... 37 7.2 Compliance With Agreement....................................... 38

-ii- 7.3 No Litigation................................................... 38 7.4 Governmental Consents........................................... 38 7.5 Closing Deliveries.............................................. 38 8. INDEMNIFICATION....................................................... 38 8.1 By Shareholders................................................. 38 8.2 By Buyer........................................................ 39 8.3 Manner of Payment............................................... 40 8.4 Indemnification of Third-Party Claims........................... 40 8.5 Tax Effect...................................................... 41 8.6 Insurance Effect................................................ 42 8.7 Limitations on Indemnification.................................. 42 8.8 Exclusive Remedy................................................ 44 8.9 Limitations on Claims by Shareholders........................... 44 9. CLOSING............................................................... 45 9.1 Documents to be Delivered by Company and Shareholder............ 45 9.2 Documents to be Delivered by Buyer.............................. 46 10. TERMINATION........................................................... 46 10.1 Termination Without Breach...................................... 46 10.2 Termination for Breach.......................................... 47 10.3 Effect of Termination........................................... 47 11. MISCELLANEOUS......................................................... 48 11.1 Further Assurance............................................... 48 11.2 Disclosures and Announcements................................... 48 11.3 Assignment; Parties in Interest................................. 48 11.4 Law Governing Agreement; Forum.................................. 48 11.5 WAIVER OF JURY TRIAL............................................ 49 11.6 Amendment and Modification...................................... 49 11.7 Notice.......................................................... 49 11.8 Shareholders' Agent............................................. 50 11.9 Expenses........................................................ 51 11.10 Specific Performance............................................ 52 11.11 Entire Agreement................................................ 52 11.12 Counterparts.................................................... 52 11.13 Headings........................................................ 52 11.14 Glossary of Terms............................................... 52

-iii- EXHIBITS EXHIBIT A Voting Trust Agreement EXHIBIT B Escrow Agreement EXHIBIT C Earn-Out Warrant EXHIBIT D Debt Financing Commitment Letter EXHIBIT E [Intentionally Omitted] EXHIBIT F Equity Commitment Letter EXHIBIT G Opinion of Foley & Lardner LLP EXHIBIT H Tax Sharing Agreement EXHIBIT I Confidentiality Agreement EXHIBIT J Shareholders Agent Agreement EXHIBIT K Asset Distribution Letter Agreement SCHEDULES Schedule 2.1 Average Working Capital Schedule 3.1(c) Ownership Schedule 3.1(e) Brokerage Schedule 3.3(e) Subsidiaries Schedule 3.5 Non-Contravention Schedule 3.6(e) Company Liabilities Schedule 3.6(f) Liabilities Schedule 3.7 Absence of Material Differences Schedule 3.8 Employees Schedule 3.9 Employee Benefit Plans Schedule 3.9(g) ERISA Non-Contravention Schedule 3.11(a) Licenses and Permits - No Defaults Schedule 3.11(b) Licenses and Permits Schedule 3.12 Litigation Schedule 3.13(a) Compliance with Laws - Exceptions Schedule 3.13(b) Compliance with Laws - Exceptions Schedule 3.14(a) Environmental Schedule 3.14(b) Environmental Schedule 3.14(c) Environmental Schedule 3.14(d) Environmental Schedule 3.14(e) Environmental Schedule 3.14(f) Environmental Schedule 3.15 Intellectual Property Schedule 3.16(a) Owned Real Property Schedule 3.16(b) Leased Real Property Schedule 3.17 Material Contracts Schedule 3.18 Insurance Schedule 3.19 Product Liability Schedule 3.20 Affiliate Transactions Schedule 3.21 Customers -iv- Schedule 3.22 Suppliers Schedule 3.23 Bank Accounts Schedule 3.24 Brokerage Schedule 5.4(j) Distribution Transactions Schedule 6.4 Third Party Approvals Schedule 9.1(e) Resignations -v- STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (this "Agreement") dated May 11, 2004 among Pierre Holding Corp., a Delaware corporation ("Buyer"), James C. Richardson, Jr., David R. Clark, James M. Templeton and Brian D. Davis, as Trustee under that certain Voting Trust Agreement for the shareholder participants thereof identified on Exhibit A hereto (each a "Shareholder" and collectively the "Shareholders"), PF Management, Inc., a North Carolina Corporation ("PFMI"), and David R. Clark, as designated agent on behalf of the Shareholders (the "Shareholders' Agent"). RECITALS A. The Shareholders collectively own all of the issued and outstanding shares of capital stock (the "Shares") of PFMI. B. PFMI owns all of the issued and outstanding capital stock of Pierre Foods, Inc., a North Carolina corporation (the "Company"). C. Buyer desires to purchase the Shares from the Shareholders, and the Shareholders desire to sell the Shares to Buyer, upon the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants, agreements and conditions hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows. 1. PURCHASE AND SALE OF SHARES Subject to the terms and conditions of this Agreement, on the Closing Date (an index of the defined terms used herein being set forth in Section 11.14), the Shareholders shall sell to Buyer, and Buyer shall purchase from the Shareholders, all of the Shares, free and clear of all Liens. 2. PURCHASE PRICE - PAYMENT 2.1 Purchase Price. The purchase price for the Shares (the "Purchase Price") shall be an amount equal to (i) Four Hundred Two Million Dollars ($402,000,000) (the "Cash Portion"); plus (ii) the amount, if any, by which the Closing Working Capital as shown on the Closing Balance Sheet is greater than the Average Working Capital Amount; minus (iii) the Closing Indebtedness Amount; minus (iv) the Executive Bonus Payments; minus (v) the Grigg Fee; minus (vi) Shareholder Transaction Expenses; minus (vii) the Non-Compete Payments; minus (viii) the Crawford Fee; minus (ix) the amount, if any, by which the Closing Working Capital as shown on the Closing Balance Sheet is less than the Average Working Capital Amount; provided that, if at the end of any fiscal quarter during the fiscal year ending March 5, 2005, the EBITDA of the Company for the trailing four fiscal quarters then ended is $56,000,000 or greater, the Cash Portion shall be increased by $13,000,000 (the "Cash Increase"), to $415,000,000, and Buyer shall promptly pay such amount by wire transfer of immediately available funds to an account designated in writing to Buyer by Shareholders' Agent. The Cash Increase shall be allocated 10% as an increase in the Executive Bonus Payments (subject to required withholding taxes) and 90% as an increase in the Purchase Price. For purposes of the proviso to this Section 2.1, if the Company or any Subsidiary acquires any Person after the Closing Date, such other Person and the results of its operations shall be disregarded and not combined with the results of operations of the Company and any Subsidiary in calculating EBITDA hereunder. 2.2 Preliminary Purchase Price. For purposes of this Agreement, the "Preliminary Purchase Price" shall be equal to the Purchase Price as calculated in accordance with Section 2.1 above and as estimated by the Shareholders' Agent on the basis of a projected consolidated balance sheet for the Company and its Subsidiaries as of the close of business on the Closing Date (the "Estimated Closing Balance Sheet"), prepared in good faith by the Shareholders' Agent and delivered to Buyer not less than five (5) days prior to the Closing, which Estimated Closing Balance Sheet shall be reasonably acceptable to Buyer. The Preliminary Purchase Price shall not include any amount which may become payable by Buyer pursuant to the proviso in Section 2.1 above (unless such amount is achieved during the first quarter of the fiscal year ending March 5, 2005). 2.3 Certain Closing Deliveries. Subject to the conditions set forth in this Agreement, at the Closing, Buyer shall make the following payments: 2.3.(a) on behalf of the Shareholders and Executives, Buyer shall deposit 5% of the sum of the Preliminary Purchase Price and the amount set forth in item (iv) in Section 2.1 as estimated under Section 2.2 (the "Escrowed Amount") with the Escrow Agent to be held in an escrow account (the "Escrow Account") and released by the Escrow Agent in accordance with the terms and conditions of this Agreement and of the Escrow Agreement substantially in the form attached hereto as Exhibit B (the "Escrow Agreement") (subject to such administrative changes as may be required to be made by the Escrow Agent); 2.3.(b) on behalf of PFMI and the Company, Buyer shall pay the amounts owed by PFMI, the Company and its Subsidiaries pursuant to the Payoff Letters delivered to Buyer pursuant to Section 6.7 as set forth in such Payoff Letters, which amounts shall represent the Closing Indebtedness Amount and the Shareholder Transaction Expenses; 2.3.(c) on behalf of the Company, Buyer shall pay the Grigg Fee; 2.3.(d) on behalf of the Company, Buyer shall pay the Non-Compete Payments; 2.3.(e) on behalf of the Company, Buyer shall pay to Shareholders' Agent on behalf of each Executive such Executive's Executive Bonus Payment, less (i) the amount of any required withholding taxes subject to such payments, (ii) such Executive's Rollover Amount (if any), and (iii) such Executive's pro rata share of 10% of the -2- Escrowed Amount, to not more than four accounts which have been designated by the Shareholders' Agent not less than (2) business days prior to the Closing Date; and 2.3.(f) Buyer shall pay an amount equal to the Preliminary Purchase Price less 90% of the Escrowed Amount to an account which has been designated by the Shareholders' Agent not less than (2) business days prior to the Closing Date. 2.4 Payment of Purchase Price Adjustment. On or before the fifth business day following the final determination of the Purchase Price in accordance with Section 2.5 below, either (i) the Shareholders shall pay to Buyer the amount, if any, by which the Preliminary Purchase Price exceeds the Purchase Price, together with simple interest on the amount being paid from the Closing Date to the date of the payment at a rate per annum equal to 5.0%; or (ii) Buyer shall pay to Shareholders' Agent the amount, if any, by which the Purchase Price exceeds the Preliminary Purchase Price, together with simple interest on the amount being paid from the Closing Date to the date of payment at a rate per annum equal to 5.0% (either of which being a "Purchase Price Adjustment"). In addition, if the Preliminary Purchase Price is greater than the Purchase Price, Buyer shall have the right, but shall not be obligated, to obtain payment of the difference out of the Escrow Account pursuant to the terms and conditions of this Agreement and the Escrow Agreement. 2.4.(a) Method of Payment. All payments under Section 2.3 and this Section 2.4 shall be made in U.S. Dollars by wire transfer of immediately available funds to an account designated by the recipient not less than 48 hours prior to the time for payment specified herein. 2.4.(b) Shareholder Indemnification. The Shareholders jointly and severally agree to indemnify, defend and hold harmless the Buyer Indemnified Parties from any Losses (as defined in Section 8.1) arising in connection with any claims by any Shareholder or Executive that such Person did not receive such Person's Executive Bonus Payment or such Person's allocable portion of the Purchase Price to which such Person was entitled pursuant to this Agreement and the Escrow Agreement; provided that Buyer has made the payments required under Section 2.3 and the required payment of the Cash Increase, if any. 2.5 Determination of Final Purchase Price. 2.5.(a) Closing Working Capital. The "Closing Working Capital" shall mean (i) the sum of all assets of the Company and its Subsidiaries on a consolidated basis which would, in accordance with GAAP, be classified on a consolidated balance sheet of the Company and its Subsidiaries as current assets (excluding Cash), minus (ii) the sum of all liabilities of the Company and its Subsidiaries on a consolidated basis which would, in accordance with GAAP, be classified on a consolidated balance sheet of the Company and its Subsidiaries as current liabilities (excluding accrued Income Taxes, Income Tax refunds and any other Income Tax assets and the Closing Indebtedness Amount), in each case determined as of the close of business on the Closing Date. The Closing Working Capital shall be determined in accordance with GAAP from the books and records of the -3- Company and its Subsidiaries using the same accounting principles, policies, practices and procedures theretofore followed by the Company in the preparation of the Audited Financial Statements and in the calculation of the Average Working Capital Amount as reflected on Schedule 2.1. 2.5.(b) Purchase Price Adjustment. (i) Not later than 90 days after the Closing Date, Buyer shall deliver to Shareholders' Agent (A) an unaudited consolidated balance sheet of the Company and its Subsidiaries as of the close of business on the Closing Date (the "Closing Balance Sheet"), and (B) a statement setting forth in reasonable detail its calculation of Closing Working Capital, the Closing Indebtedness Amount and the Purchase Price and the other components thereof. The Closing Balance Sheet shall be prepared in accordance with GAAP consistently applied and shall include all accounting entries and adjustments required in a year-end closing of the books as of the close of business on the Closing Date. Buyer's calculation of Closing Working Capital, the Closing Indebtedness Amount and the Purchase Price shall be based on the Closing Balance Sheet. (ii) The Closing Balance Sheet and Buyer's determination of the Purchase Price shall become final and binding upon the parties 30 days after Shareholders' Agent's receipt thereof unless Shareholders' Agent or a firm of independent accountants engaged by Shareholders' Agent (the "Shareholders' Accountants") object prior to such date (an "Objection"). Such an Objection shall be made in writing to Buyer, shall set forth a specific description of the basis of the Objection (including Shareholders' Agent's calculation of the Purchase Price) and the items in dispute and shall only include disagreements based upon mathematical errors or based upon the Purchase Price not being calculated in accordance with Sections 2.1, 2.5.(a) and Schedule 2.1. Shareholders' Agent will be deemed to accept any items not specifically disputed in the Objection. (iii) In the event Buyer and Shareholders' Agent are unable to resolve the Objection within thirty days thereafter, the Objection shall be resolved by Pricewaterhouse Coopers LLP (the "Neutral Accounting Firm"). Buyer shall promptly forward a copy of the Closing Balance Sheet and calculation of the Purchase Price delivered pursuant to Section 2.5.(b)(i), and Shareholders' Agent shall promptly forward a copy of the Objection delivered pursuant to Section 2.5.(b)(ii), to the Neutral Accounting Firm. The Neutral Accounting Firm, acting as experts in accounting and not arbitrators, shall determine on a basis consistent with the requirements of this Section 2.5, and only with respect to the specific accounting related differences properly submitted, the Closing Working Capital, Closing Indebtedness Amount and the Purchase Price. The Neutral Accounting Firm's determination will be conclusive and binding on all parties. Determination by the Neutral Accounting Firm shall be evidenced by a written report delivered to the parties addressing the items in dispute. The Neutral Accounting Firm shall be instructed to use reasonable efforts to perform its services within thirty days of submission of the Objection to it and, in any case, as soon as practicable after -4- such submission. The fees and expenses for the services of the Neutral Accounting Firm shall be paid by Buyer and Shareholders' Agent as follows: Shareholders' Agent shall pay a percentage of such fees and expenses equal to A/(A+B), and Buyer shall pay a percentage of such fees and expenses equal to B/(A+B), where A is equal to the absolute value of the difference (in dollars) between the Purchase Price as finally determined by the Neutral Accounting Firm and the Purchase Price proposed by Shareholders' Agent as reflected in the Objection prepared and delivered by Shareholders' Agent in accordance with Section 2.5(b)(ii), and where B is equal to the absolute value of the difference (in dollars) between the Purchase Price as finally determined by the Neutral Accounting Firm and the Purchase Price as reflected in the report prepared and delivered by Buyer in accordance with Section 2.5(b)(i). (iv) Buyer agrees to permit Shareholders' Agent, the Shareholders' Accountants and their respective representatives, during normal business hours, to have reasonable access to, and to examine and make copies of, all books and records of Company, including but not limited to the books, records, schedules, work papers and audit programs of Buyer and Buyer's independent accountants ("Buyer's Accountants"), related to the preparation of the Closing Balance Sheet and Buyer's determination of the Purchase Price and components thereof; provided that such information shall remain subject to the confidentiality obligations set forth in Section 5.16 herein. 3. JOINT AND SEVERAL REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS As a material inducement to Buyer to enter into this Agreement, each of the Shareholders, jointly and severally, makes the following representations and warranties to Buyer. "Knowledge", as used herein with respect to the Shareholders means the actual knowledge or awareness of any of the Shareholders or the actual knowledge or awareness after reasonable inquiry of any Executive where "reasonable inquiry" means that such Executive has made inquiries regarding the substance of the representations to Gary Sluss, Sam Patton, Joe Meyers, Jeff Harris and Ted Karre. 3.1 Shareholder Authority, Validity, Ownership. 3.1.(a) Each Shareholder has full power, legal capacity, right and authority to enter into, execute and deliver this Agreement, and the Escrow Agreement, the Shareholders Agent Agreement, the Tax Sharing and Indemnification Agreement and all other agreements identified herein and delivered in connection herewith (collectively, the "Ancillary Agreements") to which such Shareholder is a party, and to carry out the transactions contemplated hereby and thereby and to perform his obligations hereunder and thereunder. 3.1.(b) This Agreement and the Ancillary Agreements have been duly and validly executed and delivered by the Shareholders and the Shareholders' Agent and are legal, -5- valid and binding obligations of each Shareholder and the Shareholders' Agent, enforceable against each of them in accordance with their respective terms, except as such may be limited by bankruptcy, insolvency, reorganization, or other similar Laws affecting creditors' rights generally, and by general equitable principles. 3.1.(c) Each Shareholder holds of record and owns beneficially the Shares set forth opposite his name on Schedule 3.1(c) attached hereto. The delivery to Buyer of such Shares at Closing pursuant to this Agreement will transfer to Buyer good and valid title to such Shares, free and clear of all liens, restrictions on transfer (other than any restrictions under the Securities Act of 1933, as amended, and applicable state securities laws), mortgages, security interests, pledges, charges, claims, equities, reservations, options, warrants, rights, calls, commitments, adverse claims or other encumbrances of any kind (collectively, "Liens"). No Shareholder is a party to any option, warrant, right, contract, call, put or other agreement or commitment providing for the disposition or acquisition of any capital stock of PFMI (other than this Agreement). Except for the Voting Trust Agreement, no Shareholder is a party to any voting trust, proxy or other agreement or understanding with respect to the voting of any capital stock of PFMI. 3.1.(d) Neither the execution and the delivery of this Agreement, the Ancillary Agreements and the other documents contemplated hereby and thereby to which the Shareholders and the Shareholders' Agent are a party, nor the consummation of the transactions contemplated hereby and thereby, shall (a) conflict with, result in a breach of any of the provisions of, (b) constitute a default under, (c) result in the violation of, (d) give any third party the right to terminate or to accelerate any obligation under, (e) result in the creation of any Lien upon the Shares owned by such Shareholder, or (f) require any authorization, consent, approval, execution or other action by or notice to any court or other governmental body, under the provisions of any indenture, mortgage, lease, loan agreement or other contract, agreement or instrument to which any Shareholder or the Shareholders' Agent is bound or affected, or any statute, regulation, rule, Order or other restriction of any government, governmental or administrative agency or court to which any Shareholder or the Shareholders' Agent is subject. No notice to, filing with or authorization, consent or approval of any government or governmental or administrative agency by the Shareholders or the Shareholders' Agent is necessary for the consummation of the transactions contemplated by this Agreement, the Ancillary Agreements and the other documents contemplated hereby to which the Shareholders and the Shareholders' Agent are a party, except such filings and notices as may be required under the HSR Act. 3.1.(e) Except as set forth on Schedule 3.1(e), there are no claims for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of any Shareholder. 3.1.(f) There are no actions, suits, proceedings or orders pending or, to Shareholders' Knowledge, threatened against or affecting Shareholders at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which would -6- adversely affect Shareholders' performance under this Agreement and the Ancillary Agreements or the consummation of the transactions contemplated hereby or thereby. 3.1.(g) Each Shareholder understands the term "accredited investor" as used in Regulation D promulgated under the Securities Act of 1933 and represents and warrants to Buyer that he or it is an "accredited investor" as defined therein. 3.2 PFMI Organization, Ownership, Liabilities. 3.2.(a) PFMI is a corporation duly organized, validly existing and in good standing under the Laws of the State of North Carolina and has the requisite corporate power and authority to conduct its business as conducted on the date hereof and as of the Closing Date. PFMI is duly qualified to do business, and is in good standing, in each jurisdiction where the character of the properties owned or leased by it, or the nature of its activities, is such that qualification to do business in that jurisdiction is required by law, except for jurisdictions in which the failure to be so qualified has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect. 3.2.(b) The authorized capital stock of PFMI consists of 100,000 shares of common stock, no par value (the "PFMI Common Stock"). Each share of PFMI Common Stock is validly issued and outstanding. All such outstanding shares of PFMI Common Stock are fully paid and nonassessable, are not subject to, nor were they issued in violation of, any preemptive rights or rights of first refusal, and are owned of record and beneficially by the respective Shareholders as set forth on Schedule 3.1(c), free and clear of all Liens. The respective Shareholders have owned all issued and outstanding shares of PFMI Common Stock since the dates set forth on Schedule 3.1(c). No shares of PFMI Common Stock are reserved for issuance, nor are there outstanding any options, warrants, puts, calls, rights to subscribe, convertible securities or other rights (including, without limitation, preemptive rights or stock appreciation rights), agreements or commitments to issue, dispose of or acquire shares of PFMI Common Stock (other than this Agreement). There are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to PFMI. Except for the Voting Trust Agreement and the Shareholders Agreement, there are no voting trusts, proxies or any other agreements or understandings with respect to the voting of the capital stock of PFMI. PFMI is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock. PFMI has not violated any applicable federal or state securities laws in connection with the offer, sale or issuance of any of its capital stock; provided that the foregoing representation shall not apply with respect to the offer and sale of the Shares contemplated by this Agreement. 3.2.(c) PFMI owns all of the issued and outstanding capital stock of the Company. PFMI has no assets other than the outstanding capital stock of the Company. 3.3 Company Organization, Qualification, Subsidiaries, Investments, Etc. 3.3.(a) Each of the Company and its Subsidiaries is duly organized or formed, validly existing and in good standing under the Laws of the State of North Carolina and -7- has the requisite corporate or limited liability company power and authority to carry on its respective businesses as now being conducted. 3.3.(b) Each of the Company and the Subsidiaries is duly qualified to do business, and is in good standing, in each jurisdiction where the character of the properties owned or leased by it, or the nature of its activities, is such that qualification to do business in that jurisdiction is required by law, except for jurisdictions in which the failure to be so qualified has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect. 3.3.(c) The Company has made available to Buyer true and accurate copies of the charter and bylaws of the Company and PFMI and the organizational documents of all of the Subsidiaries reflecting all amendments made thereto at any time prior to the date of this Agreement. 3.3.(d) None of PFMI, the Company or any of the Subsidiaries is in violation of any of the provisions of its charter, bylaws or other organizational documents. 3.3.(e) Schedule 3.3(e) sets forth the identity, jurisdiction of organization, foreign qualifications and outstanding equity capitalization of each of the Subsidiaries. 3.3.(f) Except for the entities set forth on Schedule 3.3(e) (the "Subsidiaries"), none of PFMI, the Company or any Subsidiary owns (of record or beneficially) or holds any shares of stock or any other security or interest in any other Person or any rights to acquire any such stock or other security or interest. Each of the Company and PFMI owns (of record and beneficially) and has valid title to all of the outstanding capital stock of its respective Subsidiaries, free and clear of all Liens. 3.3.(g) No limited liability company interests or other equity interest in any Subsidiary, any securities convertible into limited liability company interests or other equity interests of any Subsidiary, or any other rights to acquire limited liability company interests or other equity interests of any Subsidiary is or may become required to be issued, sold or transferred by reason of any option, warrant, put, call, subscription or other agreement or right relating to the equity of the Subsidiary. There is no contract, arrangement or understanding by which any Subsidiary is bound to issue any of its limited liability company interests or any other equity interest or any option, warrant or other right relating thereto or by which the Company is or may be bound to sell or transfer any part of the equity interest in any Subsidiary. There is no contract, arrangement or understanding relating to the right of the Company to vote, transfer or otherwise dispose of any of the equity interest in any Subsidiary. All of the outstanding limited liability company interests of each Subsidiary are duly authorized and validly issued, were not issued in violation of any law or any charter or other provision regarding pre-emptive, anti-dilution or similar rights of member and is owned free and clear of all Liens. No Subsidiary is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire any of its limited liability company interests or any of its equity interests. -8- 3.3.(h) The board of directors of PFMI has unanimously, on the terms and conditions set forth herein, approved this Agreement and the transactions contemplated hereby. 3.4 Capital Stock. The authorized capital stock of the Company consists of 100,000 shares of common stock, no par value (the "Company Common Stock"). Each share of the Company Common Stock is validly issued and outstanding. All such outstanding shares of Company Common Stock are validly owned (beneficially and of record) by PFMI, fully paid and nonassessable, free and clear of all Liens (other than Liens securing Indebtedness, which Liens shall be discharged at or prior to Closing) and are not subject to, nor were they issued in violation of, any preemptive rights or rights of first refusal or similar rights. No shares of the Company Common Stock are reserved for issuance, nor are there outstanding any options, warrants, calls, puts, rights to subscribe, convertible securities or other rights (including, without limitation, preemptive rights or stock appreciation rights), agreements or commitments to issue, dispose of or acquire shares of the Company Common Stock. There are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to the Company. Except for the Shareholders Agreement, there are no voting trusts, proxies or any other agreements or understandings with respect to the voting of the capital stock of the Company. The Company is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock. The Company has not violated any applicable federal or state securities laws in connection with the offer, sale or issuance of any of its capital stock. 3.5 Non-Contravention. Except as disclosed in Schedule 3.5, the execution, delivery and performance of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby by PFMI, the Company, the Subsidiaries and the Shareholders do not and will not: (a) result in a breach of any provision of the charter, bylaws or other organizational documents of the Company, any of the Subsidiaries or PFMI; (b) violate any Order of any court or other authority having jurisdiction over the Company, any of the Subsidiaries or PFMI, or any of their properties, or cause the suspension or revocation of any authorization, consent, approval or license presently in effect that affects or binds the Company, any of the Subsidiaries or PFMI or any of their material properties; (c) result in a breach of or default, or give a third party the right to accelerate, terminate or suspend any obligations, under any agreement or instrument to which PFMI, the Company or any of the Subsidiaries is a party or by which any of them or any of their material properties is bound or affected; (d) require the authorization, consent, approval, permit or license of any Person, any notice to be given to, filing to be made with or other action to be taken with or by any Person (other than filings and actions to be made and taken under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (such act, together with the rules and regulations promulgated thereunder, being the "HSR Act")); (e) result in the creation of any Lien upon the Shares or the material assets of PFMI, the Company or any Subsidiary; or (f) constitute grounds for the loss or suspension of any material permit, license or other authorization used by PFMI, the Company or any of the Subsidiaries. -9- 3.6 Reports and Financial Statements; No Undisclosed Liabilities. 3.6.(a) PFMI has made available to Buyer each of the following: (i) the Company's Annual Report on Form 10-K filed with the SEC on March 9, 2004 for its fiscal year ended March 1, 2003 (the "Annual Report"); (ii) the Company's Quarterly Reports on Form 10-Q, each filed with the SEC on March 9, 2004, for its fiscal quarters ended May 31, 2003, August 30, 2003 and November 29, 2003 (the "Quarterly Reports"); (iii) the Company's consolidated audited financial statements for its fiscal year ended March 1, 2003, included in the Annual Report, together with its audited financial statements for its fiscal year ended March 2, 2002 (collectively, the "Audited Financial Statements"); (iv) PFMI's unaudited consolidated financial statements for its fiscal years ended March 2, 2002, March 1, 2003 and March 6, 2004 (the "PFMI Unaudited Financial Statements"); and (v) the Company's unaudited consolidated financial statements for its fiscal year ended March 6, 2004 (the "Company Unaudited Financial Statements", and together with the PFMI Unaudited Financial Statements, the "Unaudited Financial Statements"). 3.6.(b) To the Knowledge of the Shareholders, each of the Annual Report and Quarterly Reports did not, at the time it was filed with the SEC, and all such documents taken together do not, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made or are made, respectively, not misleading. The financial statements contained in the Annual Report and in the Quarterly Reports were prepared in accordance with GAAP from the books and records of the Company and its consolidated Subsidiaries, except in the case of the unaudited interim financial statements contained in the Quarterly Reports, the absence of footnotes and subject to customary year end adjustments for recurring accruals. 3.6.(c) The Audited Financial Statements were prepared in accordance with GAAP and fairly and accurately reflect the financial condition and results of operations of the Company and its consolidated Subsidiaries at the dates and for the periods indicated. 3.6.(d) The Unaudited Financial Statements were prepared from the books and records of PFMI and its consolidated Subsidiaries and the Company and its consolidated Subsidiaries, as applicable, and fairly and accurately reflect in all material respects the financial condition and results of the operations of PFMI and its consolidated Subsidiaries and the Company and its consolidated Subsidiaries, as applicable, at the dates and for the periods indicated. -10- 3.6.(e) When delivered pursuant to Section 6.12, the Recent Audited Financial Statements will have been prepared in accordance with GAAP and will fairly and accurately reflect in all material respects the financial condition and results of operations of the Company and its consolidated Subsidiaries and PFMI and its consolidated subsidiaries, as applicable, at the dates and for the periods indicated. 3.6.(f) None of PFMI, the Company or any Subsidiary has any material liability or obligation (whether absolute, accrued, contingent, unliquidated or otherwise, whether or not known to Shareholders, whether due or to become due and regardless of when or by whom asserted) other than those liabilities or obligations (i) reflected in the Company's audited financial statements for the fiscal year ended March 1, 2003 included in the Annual Report (including the footnotes thereto), (ii) arising under contracts or commitments described on Schedule 3.17 or under contracts and commitments entered into in the ordinary course of business which are not required to be disclosed thereon due to specified dollar thresholds (but not liabilities for breaches thereof occurring on or prior to the Closing Date), (iii) arising out of the matters reflected on Schedule 3.12, (iv) reflected in the PFMI Unaudited Financial Statements for its fiscal year ended March 6, 2004 or the Company Unaudited Financial Statements for its fiscal year ended March 6, 2004, (v) incurred after March 6, 2004 in the ordinary course of business consistent with past practices of the Company and its Subsidiaries (none of which is a liability for breach of contract, tort, infringement, claim, lawsuit or breach of warranty), or (vi) set forth in Schedule 3.6(f). 3.6.(g) The Company has made all required filings with the SEC and the form and content of all such filings complied in all material respects with the rules and regulations of the SEC. 3.7 Absence of Material Differences. Since November 29, 2003, there has been no Material Adverse Change. Without limiting the generality of the foregoing, except as disclosed in Schedule 3.7, since November 29, 2003, PFMI, the Company and the Subsidiaries have conducted their respective businesses in the ordinary course consistent with past practices, and without limiting the generality of the foregoing since that date there has been no: 3.7.(a) (i) disposition of any material items of real or personal property (other than sales of inventory in the ordinary course of business) by PFMI, the Company or any Subsidiary; or (ii) capital investment in, any loan to, or any acquisition of the securities or assets of, any other Person (or series of related capital investments, loans, or acquisitions); 3.7.(b) change in the accounting methods or practices (including assumptions underlying estimates of reserves for inventory and accounts receivable and accruals for liabilities) of PFMI (provided, that PFMI is currently in the process of adopting GAAP standards for the preparation of its financial statements), the Company or any of the Subsidiaries which has had a material effect on the financial results reported by PFMI, the Company or the Subsidiaries; -11- 3.7.(c) satisfaction or discharge of any material claim, Lien or liability (whether accrued, contingent or otherwise and whether due or to become due) of PFMI, the Company or any of the Subsidiaries outside the ordinary course of business and consistent with past practice; 3.7.(d) sale, lease, mortgage, encumbrance or other disposal of or grant of any interest in, or attachment of any Lien upon, any of the material assets or properties of PFMI, the Company or any of the Subsidiaries, except for (i) sales, leases, encumbrances and other dispositions and grants in the ordinary course of business and consistent with past practice and (ii) Liens for taxes not yet due (provided, however, that adequate accruals, consistent with GAAP, are maintained for all such Liens for taxes not yet due) and Liens not material in amount or effect that do not impair the use of the asset or property subject to such Lien; 3.7.(e) declaration or set asides for dividends, distributions or redemptions of securities of PFMI, the Company or any of the Subsidiaries; any split, combination or reclassification of any of the equity interests or other securities thereof or agreement or commitment to make any exchange for or redemption of any such equity interests or other securities (whether payable in cash, stock or property); 3.7.(f) material damage, destruction, or loss (whether or not covered by insurance) to the tangible assets of PFMI, the Company or any Subsidiary; 3.7.(g) (i) adoption of, entry into or amendment of any Benefit Plan, including any bonus, profit sharing, compensation, stock option, warrant, pension, retirement, deferred compensation, employment, severance, termination, change in control or other employee benefit plan, agreement, trust fund or arrangement for the benefit or welfare of any officer, director, employee or consultant, (ii) agreement to any increase in the compensation payable or to become payable to, or any increase in the contractual term of employment of, any officer, director or consultant or salaried employee (other than in the ordinary course of business and consistent with past practice) or (iii) payment of any benefit not required by any Benefit Plan or other plan or agreement; 3.7.(h) incurrence, assumption or guarantee of any indebtedness for borrowed money; 3.7.(i) issuance of, or agreement to issue, any equity interests in PFMI, the Company or in any of the Subsidiaries, or options, warrants or other rights of any kind to acquire any such equity interests, whether by purchase or conversion or exchange of other equity interests or other securities; 3.7.(j) amendment to or restatement of any of the organizational documents of PFMI, the Company or any of the Subsidiaries; 3.7.(k) delay or postponement of the payment of accounts payable and other liabilities of PFMI, the Company or any Subsidiary outside the ordinary course of business; or -12- 3.7.(l) agreement, commitment or understanding, whether in writing or otherwise, with respect to any of the matters referred to in subsections (a) through (n) of this Section 3.7. 3.8 Employees. Except as disclosed in Schedule 3.8, none of PFMI, the Company or any of the Subsidiaries is bound by any express or implied contract or agreement to employ, directly or as a consultant or otherwise, any individual for any specified period of time or until any specific age. No employee of PFMI, the Company or any Subsidiary is represented by any labor organization. To the Knowledge of the Shareholders, there are no proposals by employees of PFMI, the Company or any Subsidiary for organizing activities or collective bargaining arrangements or any organized labor slowdown, work interruption or work stoppage by employees. To Shareholders' Knowledge, except for Pamela Witters and the North Carolina Employees, no key employee and no group of employees has any plans to terminate his or her employment with such entity (including upon consummation of the transactions contemplated hereby). Except as set forth on Schedule 3.13(a), PFMI, the Company and its Subsidiaries have complied in all material respects with all applicable laws relating to the employment of labor, including, without limitation, provisions thereof relating to wages, hours, equal opportunity, collective bargaining and the payment of social security and other taxes. Except as set forth on Schedule 3.8, there are no material claims, actions, proceedings or investigations pending or, to Shareholders' Knowledge, threatened against PFMI, the Company or any Subsidiary with respect to or by any employee or former employee of PFMI, the Company or any Subsidiary. None of PFMI, the Company or any Subsidiary has experienced any strikes, collective bargaining disputes, material labor grievances or material unfair labor practices claims within the last three (3) years prior to the date hereof. 3.9 Employee Benefit Plans. 3.9.(a) The Company has made available to Buyer, except for the items described in the side letter agreement, dated the date hereof by and between Buyer and Shareholders' Agent on behalf of the Shareholders (the "Benefits Side Letter Agreement"), true and accurate copies of all pension, retirement, profit-sharing, deferred compensation, retention, change-in-control, severance pay, vacation, bonus and other incentive plans, all other written employee programs, arrangements and agreements, all medical, vision, dental and other health plans, all life insurance plans and all other employee benefit plans and fringe benefit plans, including, without limitation, "employee benefit plans" as that term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (such act, together with the rules and regulations thereunder, being "ERISA"), currently or previously adopted, maintained by, sponsored in whole or in part by or contributed to by PFMI, the Company or any Subsidiary for the benefit of employees, retirees, dependents, spouses, directors, independent contractors and other beneficiaries of PFMI, the Company and the Subsidiaries (as used in this Section 3.9, collectively, "employees") and under which employees are or were eligible to participate (collectively, "Benefit Plans"); provided that the Company has not made available to Buyer those insurance policies set forth on Part A of Schedule 3.9 maintained by PFMI and covering the Shareholders, all of which are to be retained by the -13- Shareholders pursuant to the Asset Distribution Letter Agreement (the "Shareholder Insurance Policies"). All of the Benefit Plans (other than the items described in the Benefits Side Letter Agreement) are listed on Part B of Schedule 3.9. Each Benefit Plan may be amended or terminated at any time after the Closing Date. 3.9.(b) None of PFMI, the Company or any Subsidiary maintains or is required to contribute to or has any liability with respect to any plan, fund (including, without limitation, any superannuation fund) or other similar program established or maintained outside the United States of America, which fund or similar program provides or results in retirement income, a deferral of income in contemplation of retirement, payments to be made upon termination of employment, and which plan is not subject to ERISA or the Internal Revenue Code of 1986 (the "Code"). 3.9.(c) No Benefit Plans (other than qualified retirement plans and the items described in the Benefits Side Letter Agreement) provide any benefits or coverage to any employee following retirement or termination of service, except as required under Section 4980B of the Code. 3.9.(d) Each Benefit Plan and any related trust, insurance contract or fund has been maintained, funded and administered in compliance with its respective terms and with ERISA, the Code and all other state, federal and local Laws applicable thereto in all material respects, and no action, suit, proceeding, hearing, investigation with respect to the administration or investment of assets of any Benefit Plan (other than routine claims for benefits) is pending or, to the Knowledge of the Shareholders, threatened. 3.9.(e) None of the Benefit Plans is or was a multiemployer plan (within the meaning of Section 3(37)(A) of ERISA) or an "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA) that is subject to Section 302 of ERISA, Title IV of ERISA or Section 412 of the Code. No asset of PFMI, the Company or any Subsidiary is subject to any Lien under ERISA or the Code, and none of PFMI, the Company or any Subsidiary has incurred any liability under Title IV of ERISA or to the Pension Benefit Guaranty Corporation. 3.9.(f) Each Benefit Plan that is intended to be qualified within the meaning of Section 401(a) of the Code has received a GUST determination from the Internal Revenue Service (the "IRS") that such Benefit Plan is qualified under Section 401(a) of the Code, and nothing has occurred since the date of such determination that could adversely affect the qualification of such Benefit Plan. 3.9.(g) Except as disclosed in Schedule 3.9(g), neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (A) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute or otherwise) becoming due to any employee from PFMI, the Company or any of the Subsidiaries (otherwise than pursuant to the health coverage continuation requirements of Code Section 4980B or Part 6 of Title I of ERISA, (B) increase any benefits otherwise payable under any Benefit Plan or (C) result in any acceleration in the time of payment or vesting of any such benefit. -14- 3.9.(h) Neither the Company, PFMI nor any other "disqualified person" (within the meaning of Section 4975 of the Code) or "party in interest" (within the meaning of Section 3(14) of ERISA) has taken any action with respect to any of the Benefit Plans which could subject any such Benefit Plan (or its related trust) or PFMI or the Company or any Subsidiary, or any officer, director or employee of any of the foregoing, to any penalty or tax under Section 502(i) of ERISA or Section 4975 of the Code. 3.9.(i) None of PFMI, the Company or the Subsidiaries has any liability (potential or otherwise) with respect to any "employee benefit plan" (as defined in Section 3(3) of ERISA) solely by reason of being treated as a single employer under Section 414 of the Code with any other entity. 3.9.(j) With respect to each Benefit Plan, the Company has made available to Buyer true, complete and correct copies of (to the extent applicable) (i) all documents pursuant to which the Benefit Plan is maintained, funded and administered, (ii) the most recent annual report (Form 5500 series) filed with the IRS (with applicable attachments), (iii) the most recent financial statements, (iv) the most recent summary plan description provided to participants, and (v) the most recent determination letter received from the IRS. 3.9.(k) With respect to each Benefit Plan (other than with respect to the items described in the Benefits Side Letter Agreement), all required or recommended (in accordance with historical practices) payments, premiums, contributions, reimbursements or accruals for all periods (or partial periods) ending prior to or as of the Closing Date shall have been made or properly accrued on the Audited Financial Statements. None of the Benefit Plans has any unfunded liabilities which are not reflected on the Audited Financial Statements. 3.10 Assets and Facilities. The food processing facilities, fixtures, improvements, equipment and other tangible property owned or leased by PFMI, the Company and the Subsidiaries or otherwise used by them in connection with the operation of their respective businesses (the "Facilities and Equipment") are in operating condition and repair (reasonable wear and tear excepted) adequate for the uses to which they are being put. To Shareholders' Knowledge, there are no material structural deficiencies affecting any of the Facilities and Equipment and there are no facts or conditions affecting any of the Facilities and Equipment which would, individually or in the aggregate, interfere in any material respect with the use or occupancy of the Facilities and Equipment or any portion thereof in the operation of the business of PFMI, the Company or the Subsidiaries. Except as described in Schedule 3.10, PFMI, the Company or Subsidiary (as the case may be) has good and marketable title to the Facilities and Equipment, free and clear of all Liens, except Permitted Liens. The assets and properties (whether real or personal, tangible or intangible) owned or leased by PFMI, the Company or any Subsidiary constitute all of the assets and properties necessary to operate the business of PFMI, the Company and the Subsidiaries as currently conducted. -15- 3.11 Licenses and Permits. The Company and the Subsidiaries hold all of the material licenses, permits, certificates, accreditations, grants of inspection, registrations and other franchises and authorizations of foreign, federal, state and local governmental agencies, including without limitation the United States Food and Drug Administration (the "FDA"), the United States Department of Agriculture (the "USDA") and similar state agencies, required for the conduct of their businesses and are not in default under any such license, permit or franchise, except as set forth in Schedule 3.11(a). Schedule 3.11(b) sets forth a list of all USDA grants of inspection and FDA registrations of PFMI, the Company and the Subsidiaries. 3.12 Litigation. Except as described in Schedule 3.12: (i) there is no action, suit, claim, proceeding or investigation pending against PFMI, the Company or any of the Subsidiaries or affecting the Shares; (ii) to the Knowledge of the Shareholders, no action, suit, claim, proceeding or investigation against PFMI, the Company or any of the Subsidiaries or affecting the Shares is threatened; (iii) there have been no such actions, suits, proceedings, claims or investigations pending or, to Shareholders' Knowledge, threatened within the last three years against PFMI, the Company or any Subsidiary or affecting the Shares where the costs associated with any such action, suit, proceeding, claim, order or investigation (including settlement payments, judgment awards and legal fees and expenses) exceeded $250,000; and (iv) none of PFMI, the Company or any Subsidiary has any material actions, suits or claims pending against any other Person, in the case of clauses (i), (ii), (iii) and (iv), at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. None of PFMI, the Company, any Subsidiary or the Shares is subject to any outstanding Order directed at PFMI, the Company, any Subsidiary or the Shares (as distinguished from Orders of general applicability). 3.13 Compliance with Laws. 3.13.(a) Except as described in Schedule 3.13(a), each of PFMI, the Company and the Subsidiaries comply, and have complied during the three years prior to the date hereof, in all material respects with all Laws, and no written notices have been received by, and no written claims have been filed against, PFMI, the Company or any Subsidiary alleging a violation of any such Laws. Except for orders of the SEC regarding the effectiveness of registration statements for the Company Notes, none of PFMI, the Company and the Subsidiaries, or any of their respective material properties, are subject to any judgment, order, decree, writ, ruling, charge or injunction (collectively, "Orders") issued by any court or governmental or administrative body or agency, including without limitation the FDA, USDA and the United States Federal Trade Commission (the "FTC"), and directed at PFMI, the Company or a Subsidiary (as distinguished from Orders of general applicability). 3.13.(b) Except as described in Schedule 3.13(b), PFMI, the Company and the Subsidiaries, and their manufacturing facilities and processes and all Foods, packaging, and food contact substances used in or with all Foods, comply, and have complied during -16- the three years prior to the date hereof, in all material respects with all applicable USDA, FDA, FTC, other federal agency and any relevant state agency regulations related to the regulation of Foods, packaging, and food contact substances. Except as described in Schedule 3.13(b), during the three years prior to the date hereof and as of the date hereof, PFMI, the Company and the Subsidiaries have secured a written guarantee from their material third party ingredient and raw material suppliers adequate to assure that the ingredients and/or raw materials purchased from these suppliers complies in all material respects with all applicable USDA, FDA, FTC, other federal agency and any relevant state agency regulations. Except as described in Schedule 3.13(b), during the three years prior to the date hereof and as of the date hereof, PFMI, the Company and the Subsidiaries have conducted investigations, audits, and/or on-going monitoring of third party co-packers, labelers, or distributors of the Food and, based on such activities, PFMI, the Company and the Subsidiaries are not aware of any information to indicate that such third party co-packers, labelers, or distributors have not materially complied with and are not in material compliance with all applicable USDA, FDA, FTC, other federal agency and any relevant state agency regulations that pertain to the Food co-packed, labeled, or distributed by those entities including but not limited to FDA's current Good Manufacturing Practices regulations. 3.13.(c) PFMI has furnished to Buyer (i) all written USDA Noncompliance Records and inspectional observations, FDA inspectional observations and warning letters, and written notices from the FTC, received by Shareholders, PFMI, the Company or any Subsidiary during the last three (3) years from the USDA, FDA, FTC, or other similar federal agencies or state authorities relating to legal or regulatory non-compliance, (ii) PFMI's and/or the Company's or any Subsidiary's written response to such items identified in clause (i) which have been submitted to such regulatory agency or authority (except for such responses which are immaterial), and (iii) any further written correspondence from such regulatory agency or authority related to the items identified in clause (i). 3.14 Environmental. 3.14.(a) Except as set forth on Schedule 3.14(a), no amounts of Hazardous Materials have been spilled, discharged, released, pumped, disposed of or allowed to escape or migrate into (each, a "Release") the environment or on or to any real property (including the soil and subsurface thereof) owned or leased by PFMI, the Company or any of the Subsidiaries in such a manner as to give rise to any material liability under any Environmental Law. 3.14.(b) Except as set forth on Schedule 3.14(b) PFMI, the Company and the Subsidiaries have obtained and complied, and are in compliance, in all material respects with, all material permits or authorizations required under Environmental Laws to operate their facilities, assets and business; and PFMI, the Company and the Subsidiaries (and their respective predecessors) comply, and have complied in all material respects with all Environmental Laws. -17- 3.14.(c) Except as set forth on Schedule 3.14(c), no claim or legal or administrative proceeding is pending or, to Shareholders' Knowledge, threatened and, to the Knowledge of the Shareholders, there is no investigation pending or threatened, with respect to (A) the presence or alleged presence of any Release or threatened Release of Hazardous Materials or (B) any material violation or alleged violation of, or any material liability or alleged liability under, any Environmental Laws, in either case relating to (a) any real property currently or formerly owned or leased by PFMI, the Company or any of the Subsidiaries (or any of their respective predecessors) or (b) any of their operations thereon. 3.14.(d) Except as set forth on Schedule 3.14(d), none of the following exists at any property or facility currently owned or operated by PFMI, the Company or any of the Subsidiaries: (1) underground storage tanks; (2) asbestos-containing material in any form or condition; (3) materials or equipment containing polychlorinated biphenyls or ozone-depleting substances; or (4) landfills, surface impoundments, or disposal areas. 3.14.(e) Except as set forth on Schedule 3.14(e), none of PFMI, the Company or any of the Subsidiaries, or any of their respective predecessors have treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled, manufactured, marketed, exposed any persons to or released any Hazardous Materials, or owned or operated any property or facility so as to give rise to any material liabilities under any Environmental Laws for fines or penalties, for personal injury, nuisance, property damage or damage to natural resources, or for related costs of environmental investigation or cleanup. 3.14.(f) Except as set forth on Schedule 3.14(f), none of PFMI, the Company or any of the Subsidiaries have, either expressly or by operation of law, assumed or undertaken any liability of any other Person relating to Environmental Laws, including without limitation any obligation for corrective or remedial action. 3.14.(g) All written environmental audits, reports and other material environmental documents relating to the past or current properties, facilities or operations of PFMI, the Company, any of the Subsidiaries, or their respective predecessors, which are in their possession or under their reasonable control, have been made available to Buyer. 3.15 Intellectual Property. PFMI, the Company and the Subsidiaries own and possess all right, title and interest in and to all of the Intellectual Property set forth on Schedule 3.15 and own and possess all right, title and interest in and to, or have a license to use pursuant to a written license agreement listed on Schedule 3.17, all other Intellectual Property that is used in the conduct of the businesses of PFMI, the Company and the Subsidiaries as currently conducted (collectively, "Company Intellectual Property"). Schedule 3.15 lists all of the following that are owned by PFMI, the Company or one of the Subsidiaries: (a) patented or registered Intellectual Property -18- and pending patent applications or applications for registrations of other Intellectual Property; and (b) material unregistered trademarks, material unregistered service marks, trade names, corporate names and Internet domain names. Except as described in Schedule 3.15, the Company Intellectual Property is not subject to any Liens, except Permitted Liens. Except as described in Schedule 3.15, (x) the operation of PFMI's, the Company's and the Subsidiaries' businesses have not, do not and will not, as currently conducted, infringe or misappropriate any Intellectual Property of any other Person, (y) there are no facts that indicate a likelihood of the foregoing, and (z) none of PFMI, the Company or any of the Subsidiaries have received any written notice regarding any of the foregoing (including, without limitation, any offers to license any Intellectual Property from another Person) during the three year period prior to the date hereof. To the Knowledge of the Shareholders, no Person is infringing upon or misappropriating any Company Intellectual Property, except as stated in Schedule 3.15. Except as set forth in Schedule 3.15, PFMI, the Company and the Subsidiaries have taken commercially reasonable action to maintain and protect all material Company Intellectual Property. Immediately subsequent to the Closing, the Company Intellectual Property will be owned by or available for use by PFMI, the Company and the Subsidiaries on terms and conditions identical to those under which PFMI, the Company and the Subsidiaries owned or used the Company Intellectual Property immediately prior to the Closing. To the Knowledge of the Shareholders, all of the registered or issued Company Intellectual Property and all material unregistered trademarks, material unregistered service marks, trade names, corporate names and Internet domain names listed on Schedule 3.15 is valid and enforceable, and none of the Company Intellectual Property has been misused. Except as stated in Schedule 3.15, no claim by any third party contesting the validity, enforceability, use or ownership of any Company Intellectual Property is pending nor, to the Knowledge of the Shareholders, are there grounds for same. 3.16 Title to Real and Personal Property; Leasehold Interests. 3.16.(a) Owned Real Property. Schedule 3.16(a) sets forth the address and description of each Owned Real Property. With respect to each Owned Real Property: (i) except as set forth in Schedule 3.16(a), PFMI, the Company or Subsidiary (as the case may be) has good and marketable indefeasible fee simple title to such Owned Real Property, free and clear of all Liens, except Permitted Liens, (ii) except as set forth in Schedule 3.16(a), PFMI, the Company or Subsidiary has not leased or otherwise granted to any Person the right to use or occupy such Owned Real Property or any portion thereof; (iii) other than the right of Buyer pursuant to this Agreement, there are no outstanding options, rights of first offer or rights of first refusal to purchase such Owned Real Property or any portion thereof or interest therein. None of PFMI, the Company or any Subsidiary is a party to any agreement or option to purchase any real property or interest therein. 3.16.(b) Leased Real Property. Schedule 3.16(b) sets forth the address of each Leased Real Property, and a true and complete list of all Leases for each such Leased Real Property. The Company has made available to Buyer a true and complete copy of each such Lease document. Except as set forth in Schedule 3.16(b), with respect to each of the Leases: (i) such Lease is legal, valid, binding, enforceable and in full force and effect; (ii) the sale of the Shares to Buyer pursuant to this Agreement does not require the consent of any other party to such Lease, will not result in a breach of or default -19- under such Lease, or otherwise cause such Lease to cease to be legal, valid, binding, enforceable and in full force and effect on identical terms following the Closing; (iii) PFMI's, the Company's or Subsidiary's possession and quiet enjoyment of the Leased Real Property under such Lease has not been disturbed, and to the Shareholders' Knowledge, there are no disputes with respect to such Lease; (iv) none of PFMI, the Company or Subsidiary nor any other party to the Lease is in breach or default under such Lease in any material respect, and no event has occurred or circumstance exists which, with the delivery of notice, the passage of time or both, would constitute such a breach or default, or permit the termination, modification or acceleration of rent under such Lease; (v) the other party to such Lease is not an affiliate of, and otherwise does not have any economic interest in, PFMI, the Company or any Subsidiary; (viii) none of PFMI, the Company or Subsidiary has subleased, licensed or otherwise granted any Person the right to use or occupy such Leased Real Property or any portion thereof; and (ix) none of PFMI, the Company or Subsidiary has collaterally assigned or granted any other security interest in such Lease or any interest therein. 3.16.(c) Availability of Utility Services. All water, oil, gas, electrical, steam, compressed air, telecommunications, sewer, storm and waste water systems and other utility services or systems for the Real Property have been installed and are operational and sufficient for the operation of PFMI's, the Company's or Subsidiary's business thereon, as applicable, and all hook-up fees or other similar fees or charges have been paid in full. 3.16.(d) Condemnation and Litigation. None of PFMI, the Company or any Subsidiary has received written notice of any pending condemnation, expropriation or other proceeding in eminent domain affecting any Real Property or any portion thereof or interest therein. There are no outstanding Orders and none of PFMI, the Company or any Subsidiary has received written notice of any pending claims, litigation, administrative actions or similar proceedings, in either instance relating to the ownership, lease, use or occupancy of the Real Property or any portion thereof. 3.17 Material Contracts. Except as listed in Schedule 3.17, none of PFMI, the Company or any of its Subsidiaries is a party to, or bound by, any written or legally binding oral: (i) contract, agreement or commitment that (A) has a duration of twelve months or more or (B) requires either party thereto to pay, to the other, $250,000 or more annually; (ii) distribution, marketing, dealer, representative or sales agency agreement, contract or commitment; (iii) lease under which PFMI, the Company or any of the Subsidiaries is the lessor or permits any third party to hold or operate any property, real or personal, owned or controlled by PFMI, the Company or any Subsidiary; (iv) note, debenture, bond, equipment trust agreement, letter of credit agreement, loan agreement or other contract or commitment for the borrowing or lending of money or agreement or arrangement for a line of credit or guarantee, pledge or undertaking of the indebtedness of any other Person or other Indebtedness (except for certain immaterial items which in the aggregate do not exceed One Hundred Thousand Dollars ($100,000)); (v) agreement relating to the ownership of or investments in any Person (including investments in joint ventures and minority equity investments); (vi) agreement under which PFMI, the Company or any Subsidiary is a -20- lessee of or holds or operates any personal property owned by any other Person for which the annual rental exceeds $100,000; (vii) agreement relating to the licensing of Intellectual Property by PFMI, the Company or any Subsidiary to another Person or by any Person to PFMI, the Company or any Subsidiary or any other agreement affecting PFMI's, the Company's or any Subsidiary's ability to use or disclose any Company Intellectual Property (other than licenses of off-the-shelf software for an aggregate purchase price of less than $10,000), and all other agreements affecting PFMI's, the Company's or any Subsidiary's ability to use or disclose any Intellectual Property; (viii) nondisclosure or confidentiality agreement, except for agreements entered into during the past ninety (90) days with other potential bidders in connection with the possible sale of the Shares and other agreements entered into in the ordinary course of business; (ix) contracts with any labor union or any bonus, pension, profit sharing, retirement or any other form of deferred compensation plan or any stock purchase, stock option or similar plan or practice, whether formal or informal, or any severance agreement or arrangement; (x) agreements for the employment of any individual on a full time, part-time, consulting, or other basis providing annual compensation in excess of $100,000; (xi) agreement, contract or commitment whereby it has agreed to indemnify any other Person, except for contracts with its customers entered into in the ordinary course of business; or (xii) agreement, contract or commitment limiting or restraining PFMI, the Company, a Subsidiary, an Affiliate of any of them or an employee (other than noncompetition agreements between an employee and the Company) of any of them or any of their businesses or successors from engaging or competing in any manner or in any business. With respect to each agreement required to be listed in Schedule 3.17, (a) none of PFMI, the Company or the Subsidiaries are in breach or default in any material respect (nor, to the Knowledge of the Shareholders, is any counterparty thereto in material breach or default of such agreement or has any event occurred which, with notice or lapse of time, would constitute a material breach or default, or permit termination, modification, or acceleration under the agreement) under any such agreement; (b) PFMI, the Company and the Subsidiaries have performed in all material respects all of their respective obligations required to be performed by them to date under all such agreements, (c) the agreement is legal, valid, binding, enforceable, and in full force and effect, except as such may be limited by bankruptcy, insolvency, reorganization, or other similar Laws affecting creditors' rights generally, and by general equitable principles; (d) the agreement will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms immediately following the consummation of the transactions contemplated by this Agreement, provided that any consents necessary to undertake such transactions are obtained prior thereto, except as such may be limited by bankruptcy, insolvency, reorganization, or other similar Laws affecting creditors' rights generally, and by general equitable principles; and (e) to Shareholders' Knowledge, no other party has repudiated any provision of the agreement. 3.18 Insurance. Copies of all insurance policies covering PFMI, the Company and the Subsidiaries and their owned and leased properties and employees have been made available to Buyer. Schedule 3.18 identifies each such insurance policy. All premiums due prior to the date hereof under such policies have been paid, there are no retroactive premiums with respect to such policies and no written notice of cancellation or termination has been received by PFMI, the Company or its Subsidiaries with respect to such insurance policies. PFMI, the Company and the Subsidiaries have complied in all material respects with the provisions of such policies, the -21- policies are in full force and effect and shall be in full force and effect as of the Closing and none of PFMI, the Company or any of the Subsidiaries has received any written notice of cancellation or non-renewal thereof. Except as set forth on Schedule 3.18, none of PFMI, the Company or any of its Subsidiaries have any self-insurance or co-insurance programs, and the reserves set forth on the consolidated balance sheet of the Company and its Subsidiaries as of November 29, 2003 are adequate (and the reserves to be set forth on the Closing Balance Sheet will be adequate) to cover all anticipated liabilities with respect to any such self-insurance or co-insurance programs. None of the rights under PFMI's, the Company's and its Subsidiaries' insurance policies for pre-Closing occurrences will be affected by the transactions contemplated by this Agreement. 3.19 Product Liability. Except as described in Schedule 3.19, no claims related to the manufacture, sale or supply of the Company's or any Subsidiary's products (other than workman's compensation or claims by federal or state regulatory agencies arising in connection with environmental matters) are pending or, to the Knowledge of the Shareholders, threatened against the Company or any of the Subsidiaries, and except for claims arising in the ordinary course of business which have not, individually or in the aggregate, resulted in any material liability, there have been no such claims within the past three (3) years. Except as described in Schedule 3.19, there have been no recalls of products manufactured and/or distributed by the Company for any reason within the three (3) years prior to the date hereof. The Company maintains customer complaint files, records of any potential defects in any Food, and records of investigations and other steps taken in response to complaints and/or information relating to potential defects. 3.20 Affiliate Transactions. Except as set forth on Schedule 3.20, no officer, director, shareholder or Affiliate of PFMI, the Company or any of its Subsidiaries or any individual related by blood, marriage or adoption to any such individual or any entity in which any such Person or individual owns any beneficial interest, is currently a party to any contract or agreement with PFMI, the Company or any of its Subsidiaries or has any interest in any property, asset or right used by PFMI, the Company or any of its Subsidiaries or necessary for their respective businesses. Schedule 3.20 describes all intercompany or affiliated services currently provided to or on behalf of PFMI, the Company or any Subsidiary by Shareholders or their Affiliates and to or on behalf of Shareholders and such Affiliates by PFMI, the Company or any Subsidiary and all intercompany transactions or agreements among PFMI, the Company or any Subsidiary and Shareholders or their Affiliates. 3.21 Customers. Schedule 3.21 lists the Company's top twenty (20) customers based on gross sales during the trailing twelve month period ended March 6, 2004. Except as set forth on Schedule 3.21, no customer required to be identified on Schedule 3.21 has notified any Shareholder or, to Shareholders' Knowledge, notified any officer or managerial level employee of PFMI, the Company or any of its Subsidiaries in writing that it intends to reduce its volume of goods or services ordered during the twelve (12) month period ending March 6, 2005 by more than ten percent (10%) from purchases made during the twelve (12) month period ended March 6, 2004. -22- No such customer has terminated, or has notified any Shareholder, PFMI, the Company or any of its Subsidiaries that it intends to terminate its business relationship with the Company or such Subsidiary. 3.22 Suppliers. Schedule 3.22 lists the Company's top twenty (20) suppliers based on gross purchases during the trailing twelve month period ended March 6, 2004. Except as set forth on Schedule 3.22, there are no suppliers of products or services to PFMI, the Company or any Subsidiary that are material to their respective businesses with respect to which practical alternative sources of supply are not generally available on comparable terms and conditions in the marketplace. No supplier listed on Schedule 3.22 has notified any Shareholder or, to Shareholders' Knowledge, notified any officer or managerial level employee of PFMI, the Company or any of its Subsidiaries in writing that it intends to terminate its business relationship with the Company or such Subsidiary and the Shareholders do not have Knowledge of any material dispute with any material supplier of products or services to the Company or its Subsidiaries. 3.23 Bank Accounts. Schedule 3.23 lists all of the bank accounts, safe deposit boxes and lock boxes used by PFMI, the Company and the Subsidiaries (designating each authorized signatory). None of PFMI, the Company or any Subsidiary has granted a power of attorney to any Person which has not been terminated. 3.24 Brokerage. Except as set forth on Schedule 3.24, there are no claims for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of PFMI, the Company or any Subsidiary. 3.25 Limitation of Representations and Warranties. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES EXPRESSLY STATED IN THIS ARTICLE 3, IN THE SCHEDULES AND IN THE CERTIFICATES AND OTHER INSTRUMENTS DELIVERED IN CONNECTION HEREWITH, THE SHAREHOLDERS MAKE NO REPRESENTATIONS OR WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED, TO THE BUYER OR ANY OTHER PERSON CONCERNING PFMI, THE SHAREHOLDERS, THE SHARES OR THE BUSINESS, ASSETS OR LIABILITIES OF THE COMPANY OR THE SUBSIDIARIES. 4. REPRESENTATIONS AND WARRANTIES OF BUYER As a material inducement to Shareholders to enter into this Agreement, Buyer makes the following representations and warranties to the Shareholders. -23- 4.1 Organization and Power. 4.1.(a) Organization. Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware. 4.1.(b) Power. Buyer has all requisite corporate power to enter into this Agreement and the other documents and instruments to be executed and delivered by Buyer and to carry out the transactions contemplated hereby and thereby. 4.2 Authority. The execution and delivery of this Agreement and the other documents and instruments to be executed and delivered by Buyer pursuant hereto and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the board of directors of Buyer. No other action or proceeding on the part of Buyer or its shareholders is necessary to authorize this Agreement or the other documents and instruments to be executed and delivered by Buyer pursuant hereto or the consummation of the transactions contemplated hereby and thereby. This Agreement constitutes and, when executed and delivered, the Ancillary Agreements to be executed and delivered by Buyer pursuant hereto will constitute, valid and binding agreements of Buyer, enforceable in accordance with their respective terms, except as may be limited by Laws affecting creditors' rights generally and by general equitable principles. 4.3 No Brokers or Finders. Neither Buyer nor any of its directors, officers, employees or agents has retained, employed or used any broker or finder in connection with the transactions provided for herein or in connection with the negotiation thereof. 4.4 Compliance. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, upon satisfaction of the conditions set forth in Articles 6 and 7 hereof, will not: (a) result in the breach of any of the terms or conditions of, or constitute a default under or violate, as the case may be, the charter or bylaws of Buyer, or any agreement, lease, mortgage, note, bond, indenture, license or other document or undertaking, oral or written, to which the Buyer or any of its subsidiaries or Affiliates is bound, or by which any of its or their properties or assets may be bound; or (b) violate any rule, regulation, writ, injunction, order or decree of any court, administrative agency or governmental body. 4.5 Litigation. There are no actions, suits, proceedings or investigations pending or threatened against Buyer that question the validity of this Agreement or of any action taken or to be taken in connection herewith by Buyer or the consummation of the transactions contemplated herein by Buyer. -24- 4.6 Approvals. Except for filings and approvals under the HSR Act, all consents, approvals, authorizations and orders (corporate, governmental or otherwise) necessary for the due authorization, execution and delivery by Buyer of this Agreement and the consummation of the transactions contemplated hereby have been obtained or will be obtained prior to the Closing Date. 4.7 Financing. Buyer has received, accepted and agreed to a commitment letter from Bank of America Securities, LLC and Wachovia Securities (the "Debt Financing Commitment Letter"), committing such entities to provide debt financing for the transactions contemplated by this Agreement to Buyer in an aggregate amount of $275,000,000, subject to the terms and conditions set forth therein (such debt financing, the "Debt Financing"). A true and complete copy of the executed Debt Financing Commitment Letter is attached hereto as Exhibit D, and a copy of an executed equity commitment letter from Madison Dearborn Capital Partners IV, L.P. is attached hereto as Exhibit F. If the Debt Financing is obtained on substantially the same terms as described in the term sheets attached to the Debt Financing Commitment Letter, then the Buyer will have, as of the Closing, sufficient funds to consummate the transactions contemplated by this Agreement, including payment of the Purchase Price and the amounts set forth in Section 2.3. As of the date hereof, Buyer does not have knowledge of any conditions set forth in the Debt Financing Commitment Letter or the term sheets attached thereto which will not be able to be satisfied. 4.8 Investment Intent. The Shares are being acquired by Buyer for investment and not with a view to resale. 4.9 No Knowledge of Breach. Buyer has no knowledge of any breach by the Shareholders of any representation, warranty or covenant made in this Agreement based upon information contained in any written report or memorandum prepared by any of Buyer's attorneys, accountants or consultants and delivered to Buyer or in any written report or memorandum prepared internally by Madison Dearborn Capital Partners or any of its principals or associates. In addition, Buyer has no knowledge of a breach of the representation in the first sentence of Section 3.7 based upon the disclosures set forth in Schedule 3.7. 4.10 No Reliance. In connection with its decision to purchase the Shares, Buyer, for itself and on behalf of its Affiliates and related parties, acknowledges, understands and agrees that: (a) Buyer is a sophisticated party with such knowledge and experience in business and financial matters as to be capable of evaluating the merits and risks of purchasing the Shares and consummating the transactions contemplated hereby; (b) Buyer is not relying upon any forward-looking projections, forecasts, budgets, financial data or other forward-looking information (written or oral) with -25- respect to the Shares or the business or prospects of the Company prepared by or furnished to Buyer by or on behalf of any Shareholder, PFMI, the Company or any Subsidiary ("Forward-Looking Data"); (c) Buyer recognizes that significant uncertainties are inherent in Forward-Looking Data and that the Shareholders have not made any representations or warranties, express or implied, relating to any Forward-Looking Data; and (d) Buyer assumes full and exclusive responsibility for evaluating the adequacy and accuracy of any Forward-Looking Data. 4.11 Access to Information. Buyer has had an opportunity to discuss, with the management of PFMI, the Company and the Subsidiaries, the management and financial affairs of PFMI, the Company and the Subsidiaries and to review in detail the records of the business and operations of PFMI, the Company and the Subsidiaries provided to Buyer. Buyer has had an opportunity to ask questions and receive answers from PFMI and the Company regarding the Company, PFMI and the Subsidiaries. 5. COVENANTS 5.1 HSR Act Filings. To the extent such filings have not been completed prior to the execution of this Agreement, each party shall, in cooperation with the other parties, file or cause to be filed any reports or notifications that may be required to be filed by such party under the HSR Act with the Federal Trade Commission and the Antitrust Division of the Department of Justice and shall furnish to the other parties all such information in its possession as may be necessary for the completion of the reports or notifications to be filed by such other parties. Before initiating any communication, written or oral, with the Federal Trade Commission, the Antitrust Division of the Department of Justice or any other governmental agency or authority or members of their respective staffs with respect to this Agreement or the transactions contemplated hereby, each party agrees to consult with the other parties hereto. Buyer shall be responsible for the payment of all filing or other fees applicable to the Notification and Report Form filed pursuant to the HSR Act. 5.2 Access to Information and Records. During the period prior to the Closing, PFMI shall, and shall cause the Company and the Subsidiaries to, give Buyer, its counsel, accountants and other representatives, as well as counsel and representatives of Buyer's lenders, access during regular business hours to business, financial, legal, regulatory, tax, compensation and other data and information concerning PFMI, the Company and its Subsidiaries and to the Company's and its Subsidiaries' directors, officers, employees, agents, representatives, customers and suppliers for the purposes of such meetings and communications as Buyer reasonably desires; provided that such access does not interfere with the conduct of the business of PFMI, the Company and the Subsidiaries and provided further that Buyer coordinates such access with the Company's Chief Financial Officer and that Buyer shall not contact customers or vendors of the Company or any Subsidiary without the prior consent of the Shareholders' Agent, which consent shall not be withheld or delayed without good reason. -26- 5.3 Conduct of Business Pending the Closing. From the date hereof until the Closing, except as otherwise approved in writing by Buyer, PFMI and the Shareholders covenant as follows, and the Shareholders shall cause each of the following to occur: 5.3.(a) Ordinary Course of Business. PFMI, the Company and the Subsidiaries will carry on their business in the ordinary course consistent with past practices and will not make or institute any material changes in their methods of purchase, sale, management, accounting or operation, including (i) collecting accounts receivable, paying accounts payable and managing inventory in the ordinary course of business consistent with past practice, (ii) maintaining its respective books, accounts and records in accordance with past custom and practice as used in the preparation of the Audited Financial Statements; provided, that PFMI is currently in the process of adopting GAAP standards for the preparation of its financial statements, (iii) maintaining in full force and effect the existence of, and use commercially reasonable efforts to protect, all material Intellectual Property of PFMI, the Company and the Subsidiaries, and (iv) complying in all material respects with all requirements of law and all contractual obligations applicable to PFMI, the Company and the Subsidiaries and paying all applicable Taxes as and when such become due and payable. 5.3.(b) Maintain Organization. PFMI, the Company and the Subsidiaries will take such action as may be necessary to maintain, preserve and renew their existence, rights and franchises and will use commercially reasonable efforts to preserve their respective business organizations intact, to keep available their present officers and employees and to preserve their present business relationships with suppliers, customers and others. 5.3.(c) Maintenance of Insurance. PFMI, the Company and the Subsidiaries shall maintain all of the insurance coverage in effect as of the date hereof with respect to the business and properties of PFMI, the Company and the Subsidiaries. 5.3.(d) Maintenance of Property. PFMI, the Company and the Subsidiaries shall use, operate, maintain and repair all of their respective material personal property in sufficient operating condition and repair (ordinary wear and tear excepted), maintain inventory, supplies and spare parts at customary operating levels consistent with past practices, replace in accordance with past practice any inoperable, worn out or obsolete material assets with assets of comparable quality and, in the event of a casualty, loss or damage to any of the material assets of PFMI, the Company or the Subsidiaries prior to the Closing Date, either repair or replace such assets with substantially similar assets. 5.3.(e) Maintenance of Real Property. PFMI, the Company or Subsidiary (as the case may be) shall maintain the Real Property, including all of the Facilities and Equipment, in substantially the same condition as of the date of this Agreement, ordinary wear and tear excepted, and shall not demolish or remove any of the existing Facilities and Equipment, or erect new material improvements on the Real Property or any portion thereof, without the prior written consent of Buyer. -27- 5.3.(f) Taxes. The Acquired Group shall take all actions necessary to comply with all applicable Tax laws, including filing all material Tax Returns on or before the date on which such Returns are due (including permitted extensions), and paying all Taxes due and owing on or before the date on which such Taxes are due to the relevant Taxing Authority. Without the prior written consent of Buyer, the Acquired Group shall not make or change any election, change an annual accounting period, adopt or change any accounting method (other than the adoption of GAAP standards for the preparation of PFMI's financial statements), file any amended Tax Return, enter into any closing agreement, settle any Tax claim or assessment relating to the Acquired Group, surrender any right to claim a refund of Taxes, consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to the Acquired Group, or take any other similar action relating to the filing of any material Tax Return or the payment of any Tax, if such election, adoption, change, amendment, agreement, settlement, surrender, consent or other action would have the effect of increasing the Tax liability of the Acquired Group for any period ending after the Closing Date or decreasing any Tax attribute of the Acquired Group existing on the Closing Date. 5.3.(g) Title Insurance and Surveys. The Company shall use its commercially reasonable efforts to assist Buyer in obtaining title commitments, title policies and surveys in connection with Buyer's financing, including without limitation, executing such affidavits and undertakings as may be necessary to issue the title policies and all endorsements thereto requested by Buyer or its lender (including, extended coverage, creditor's rights endorsement, and a non-imputation endorsement), and removing from title any liens or encumbrances which are not Permitted Liens. 5.4 Negative Covenants. Except as otherwise expressly provided herein or as expressly consented to in writing by Buyer, prior to the Closing Date, none of PFMI, the Company or any Subsidiary shall, and the Shareholders shall not permit PFMI, the Company or any Subsidiary to: 5.4.(a) (1) adopt, enter into or materially amend any Benefit Plan, including any bonus, profit sharing, compensation, stock option, warrant, pension, retirement, deferred compensation, employment, severance, termination, change in control or other employee benefit plan, agreement, trust fund or arrangement for the benefit or welfare of any officer, director, employee or consultant, (2) agree to any increase in the compensation payable or to become payable to, or any increase in the contractual term of employment of, any officer, director or consultant or (other than in the ordinary course of business and consistent with past practice) salaried employee or (3) pay any material benefit not required by any Benefit Plan or other plan or agreement; 5.4.(b) sell, lease, license or otherwise dispose of any interest in any of the material assets of PFMI, the Company or any Subsidiary, other than sales of inventory in the ordinary course of business consistent with past practice or as otherwise expressly permitted pursuant to this Agreement, or permit, allow or suffer any of the material assets of PFMI, the Company or any Subsidiary to be subjected to any Lien, other than any Lien -28- which exists as of the date of this Agreement (all of which shall be released, satisfied or otherwise discharged as of the Closing Date, other than the Permitted Liens); 5.4.(c) except with respect to capital expenditures in connection with the retrofit of Line 7 at the Company's manufacturing facility in Cincinnati, Ohio which capital expenditures shall not exceed $1,700,000, make capital expenditures in excess of $500,000 in the aggregate for any single item or project; 5.4.(d) do or omit to take any action, or permit any omission to act, that would cause a material breach or default under, or the termination, modification or amendment of, any contract or agreement listed on Schedule 3.17 or any government license, permit or other authorization; 5.4.(e) amend their charters or bylaws; 5.4.(f) sell, assign or otherwise transfer or attempt to sell, assign or otherwise transfer any of the Shares or any other capital stock or equity securities, except to Buyer pursuant hereto; and PFMI shall refuse to accept any certificates for Shares to be transferred or otherwise to allow such sale, assignment or transfer to occur upon its books; 5.4.(g) enter into any new, or amend any existing, material contracts, agreements or commitments, including purchases of raw materials or supplies and sale of goods or services (real, personal, or mixed, tangible or intangible), except contracts, commitments, purchases or sales that are in the ordinary course of business and consistent with past practice; 5.4.(h) amend, modify, extend, renew or terminate any Lease, or enter into any new lease, sublease, license or other agreement for the use or occupancy of any real property requiring rental and other payments in excess of $250,000 annually; 5.4.(i) take or omit to take any action which would be reasonably anticipated to have a Material Adverse Effect; 5.4.(j) except as set forth on Schedule 5.4(j), enter into any transaction with or distribute any assets or property to any of its officers, directors, partners, stockholders or Affiliates; or 5.4.(k) authorize or enter into an agreement to take any actions prohibited by this Section 5.4. 5.5 Consents. Each of the Shareholders will use their commercially reasonable efforts prior to Closing to obtain or to cause PFMI, the Company and the Subsidiaries to obtain, all third-party and governmental consents necessary for consummation of the transactions contemplated hereby. -29- 5.6 Satisfaction of Conditions Precedent. 5.6.(a) By All Parties. Each of the Shareholders and Buyer shall use their commercially reasonable efforts to cause the fulfillment at the earliest practicable date of all of the conditions to each other party's obligations to consummate the transactions contemplated by this Agreement. 5.6.(b) By the Shareholders' Agent. The Shareholders' Agent shall (i) use his commercially reasonable efforts to cause all conditions precedent to the Shareholders' obligations hereunder to be satisfied to the extent satisfaction of such conditions is within their control and (ii) not take any action or omit to take any action within his reasonable control to the extent that such action or omission might result in the breach of any term or condition of this Agreement or in any representation or warranty by the Shareholders in this Agreement being incorrect as of the Closing Date. 5.6.(c) By Buyer. Without limiting the generality of Section 5.6(a), in the event Buyer is unable to secure the Debt Financing from the lenders issuing the Debt Financing Commitment Letter, Buyer shall use commercially reasonable efforts to secure alternative sources of financing, provided that such financing is available on substantially similar terms as set forth in the Debt Financing Commitment Letter. 5.6.(d) Antitrust Requirements. The parties shall use their commercially reasonable efforts to resolve such objections, if any, as may be asserted by any antitrust authority with respect to the transactions contemplated hereby; provided, however, that, notwithstanding any other provision of this Agreement, neither the Company nor any of its Affiliates shall be required to divest any of their respective businesses, product lines or assets, or to take or agree to take any other action or agree to any limitation that could reasonably be expected to have a material adverse effect on the business, assets, condition (financial or otherwise), results of operations or prospects of the Company or any such Affiliate or that the Company or such Affiliate considers inconsistent with its business plans. 5.7 Employees. Benefits; Crediting of Service. Buyer shall provide, or cause the Company and the Subsidiaries to provide, for at least twelve months after the Closing Date, to all employees of the Company and the Subsidiaries in connection with their service as employees of Buyer, the Company or a Subsidiary after the Closing, employee benefits that are on the whole substantially similar to those provided to the employees immediately prior to the Closing Date, including, without limitation, group health plan benefits comparable to the group health plan benefits available to the employees immediately prior to the Closing Date. Buyer shall grant and shall continue to credit, or cause the Company and the Subsidiaries to credit, and continue to credit, to all employees under all of its employee benefit plans in which employees are or will be eligible to participate, all service with the Company and the Subsidiaries credited to them and to be credited to them in respect of employee benefits for all purposes under such plans. -30- 5.8 Books, Records and Information. 5.8.(a) Inspection of Documents. The Buyer agrees that all documents delivered to the Buyer by or for the Shareholders' Agent pursuant to this Agreement and all documents of Company and the Subsidiaries shall after the Closing be open for inspection by Shareholders' Agent after prior written notice at any time during regular business hours for reasonable and necessary purposes related to the preparation of tax returns or financial reports until such time as documents are destroyed or possession thereof is given to the other party as provided for in Section 5.8(b) hereof and that the Shareholders' Agent may during such period at its expense make such copies thereof as it reasonably requests; provided that such documents and information shall remain subject to the confidentiality provisions of Section 5.16 hereof. 5.8.(b) Destruction of Documents. Without limiting the generality of Section 5.8(a) hereof, for the period ending beginning on the Closing Date and ending on the sixth anniversary of the Closing Date, neither the Buyer nor the Shareholders' Agent shall destroy or give up possession of any item referred to in Section 5.8(a) hereof without first offering in writing to the other (or, in the case of the Company or a Subsidiary, to the Shareholders' Agent), the opportunity for a period of not less than 15 business days after the date such written offer is delivered, at the other's (or the Shareholders' Agent's) expense (but without any other payment), to obtain any such items. Thereafter, each party shall be free to dispose of any such items as such party deems fit. 5.8.(c) Access to Employees. For a period of three years following the Closing, the Buyer shall use reasonable efforts to afford the Shareholders' Agent access, upon reasonable advance notice and during normal business hours, to employees of the Company as the Shareholders' Agent may reasonably request for proper corporate purposes, including, without limitation, the defense of legal proceedings and the preparation of corporate Tax Returns; provided that such access does not unreasonably interfere with the operation of the business, in which case Buyer and Shareholders' Agent shall agree on an alternative time which does not cause such interference. Such access may include interviews or attendance at depositions or legal proceedings. All out-of-pocket expenses reasonably incurred by the Buyer in connection with this Section 5.8(c) shall be paid or promptly reimbursed by the Shareholders; such reimbursement shall include the cost on a pro rata basis of the salary or wages and benefits of the employee involved to the extent the time involved for any particular employee is in excess of five business days per calendar year. 5.9 Obligation to Update. The Shareholders shall have an obligation to notify Buyer in writing after the date hereof and prior to Closing (the "Update Period") with respect to any matter discovered during the Update Period which would have been required to be set forth or described in the Schedules. The Shareholders' Agent shall have the right to amend the Schedules with respect to any such matter by addition, deletion or revision at any time up to five days prior to the Closing; provided, however, such updates, amendments or modifications shall only modify the Schedules for -31- purposes of determining whether there has been a breach of a representation and warranty contained herein for which Buyer may seek post-Closing indemnification pursuant to Section 8.1 hereof and shall not modify the Schedules to this Agreement for purposes of determining whether Buyer's obligations to consummate the transactions contemplated hereby are satisfied pursuant to Article 6. 5.10 Indemnification and Insurance. 5.10.(a) Buyer agrees that all rights to exculpation and indemnification for acts or omissions occurring prior to the Closing Date now existing in favor of the current or former directors or officers of the Company (the "Directors and Officers") as provided in its charter or bylaws, in each case as in effect at the date hereof, shall survive the Closing and shall continue in full force and effect in accordance with their terms without amendment thereof. For three years after the Closing Date, Buyer shall exculpate and indemnify the Directors and Officers to the same extent as such Indemnified Parties are entitled to exculpation and indemnification pursuant to the immediately preceding sentence. 5.10.(b) For two years after the Closing Date, Buyer shall maintain in full force and effect the Company's current (or, in substitution therefor, reasonably equivalent) directors' and officers' liability insurance (to the extent such insurance is available at premium rates not to exceed 150% of the premium rate which the Company is paying on the date hereof) covering those persons who are covered by the Company's directors' and officers' liability insurance policy at the date hereof; provided that if such insurance is only available at rates which exceed 150% of the rate which the Company is paying on the date hereof, Shareholders may, at their option, agree to pay any additional premium amounts over such amount to cause the Company to maintain such insurance. 5.11 Other Agreement. Immediately prior to Closing, the Company shall make all asset distributions contemplated by that certain letter agreement, dated and executed as of the date hereof, among the Company, PFMI, David R. Clark and James C. Richardson, Jr. (the "Asset Distribution Letter Agreement"), a copy of which is attached hereto as Exhibit K. 5.12 Tax Matters. To the extent any amount due and owing under (i) the Grigg Fee, (ii) the Executive Bonus Payments, (iii) the Asset Distribution Letter Agreement, or (iv) any other payment may be deemed an "excess parachute payment" within the meaning of Code Section 280G (or any corresponding provision of state, local or foreign law), prior to the Closing the Acquired Group shall hold a shareholder vote in compliance with the shareholder approval requirements of Code Section 280G(b)(5)(B) and Treasury Regulation Section 1.280G-1 Q & A 7 with respect to such amount. 5.13 Exclusivity. 5.13.(a) Each of the Shareholders, PFMI, the Company and the Subsidiaries agrees that, commencing on the date of this Agreement and until the earlier -32- of the Closing or the date on which this Agreement has been terminated by its terms (the "Exclusivity Period"), Buyer shall have the exclusive right to consummate the transactions contemplated by this Agreement. 5.13.(b) Without limiting the generality of the foregoing, each of the Shareholders, PFMI, the Company and the Subsidiaries agrees that, unless this Agreement is terminated by its terms, none of PFMI, the Company, any Subsidiary or any Shareholder shall (and none of PFMI, the Company, any Subsidiary or any Shareholder shall cause or permit any Affiliate, agent or representative or any other Person acting on their behalf to), directly or indirectly, through any officer, director, shareholder, partner, Affiliate, employee, agent, investment banker, attorney, accountant or other representative or otherwise, (a) solicit, initiate or encourage the submission of any proposal or offer (an "Acquisition Proposal") from any Person (including any of its officers, directors, partners, shareholders, Affiliates, employees, agents and other representatives) relating to any liquidation, dissolution, recapitalization of, merger or consolidation with or into, or acquisition or purchase of all or any portion of the capital stock of, or any material asset of (other than sales of inventory in the ordinary course of business), or all or substantially all of the assets of, or any capital stock or other equity security of, any of PFMI, the Company or any of its Subsidiaries or any other similar transactions or business combination involving any of PFMI, the Company or any of its Subsidiaries (other than the transactions contemplated by the Asset Distribution Letter Agreement), or (b) participate in any discussions or negotiations regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage any effort or attempt by any other Person to do or seek to do any of the foregoing. 5.13.(c) Each of the Shareholders, PFMI, the Company and the Subsidiaries represents that it has suspended (and has caused its officers, directors, shareholders, partners, Affiliates, employees, agents, investment bankers, attorneys, accountants or other representatives to suspend), and shall cease for the duration of the Exclusivity Period, all contacts, discussions and negotiations with third parties (other than Buyer and its Affiliates, agents and representatives) regarding any Acquisition Proposal. Each of the Shareholders, PFMI, the Company and the Subsidiaries shall promptly notify Buyer if any such Acquisition Proposal, or any inquiry or contact with any Person with respect thereto (including any Person with whom any Shareholder, PFMI or the Company or any Subsidiary has already had such discussions), is made and shall provide reasonable detail regarding the nature of such proposal, inquiry or contact and such Shareholder's, PFMI's or the Company's or any Subsidiaries' response thereto. 5.14 Non-Competition. In consideration of the mutual covenants provided for herein to Shareholders at the Closing, during the period beginning on the Closing Date and ending on the fifth anniversary of the Closing Date (the "Non-Compete Period"), each of the Shareholders shall not, directly or indirectly through such Shareholder's Affiliates or otherwise, engage (whether as an owner, operator, manager, employee, officer, director, consultant, advisor, representative or otherwise) in any business involved in producing and distributing packaged, fully cooked food products to -33- the foodservice, home meal replacement and retail markets (the "Competitive Business") in any geographic area in which PFMI, the Company or such Subsidiary conducts the Competitive Business or has current written plans to conduct the Competitive Business as of the Closing Date; provided that ownership of less than 5% of the outstanding stock of any publicly-traded corporation shall not be deemed to be engaging solely by reason thereof in any of its business; provided further, that neither James C. Richardson, Jr.'s ownership and management of Hoggs, LLC (ham curing) nor James C. Richardson, Jr.'s and James M. Templeton's ownership and management of restaurants shall be deemed a Competitive Business. Each Shareholder expressly acknowledges and agrees that each and every restriction imposed by this Section 5.14 is reasonable with respect to subject matter, time period and geographical area. If, at the time of enforcement of this Section 5.14 or Section 5.15 of this Agreement, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. 5.15 Non-Solicitation. Each Shareholder agrees that, during the period beginning on the Closing Date and ending on the third anniversary of the Closing Date, such Shareholder shall not, directly or indirectly through its Affiliates or otherwise (i) hire or solicit for hire any current employee of PFMI, the Company or its Subsidiaries, or any Person that was an employee of PFMI, the Company or any of its Subsidiaries at any time within six (6) months prior to the Closing Date, (ii) induce or attempt to induce any such employee or former employee to leave the employ of PFMI, the Company or its Subsidiaries or Affiliates, or (iii) in any way interfere with the relationship between PFMI, the Company and any of its subsidiaries or Affiliates and any such employee or former employee; provided that, the provisions of this first sentence shall not apply with respect to the hiring of the North Carolina Employees, or the hiring of Pamela M. Witters ("Witters") upon the expiration of the term of employment under the employment agreement to be entered into by and between the Company and Witters on the Closing Date. Each Shareholder further agrees that, during the Non-Compete Period, such Shareholder shall not, directly or indirectly through its Affiliates or otherwise, in any manner take or cause to be taken any action which is designed or intended, or would be reasonably anticipated to have the effect of discouraging customers, suppliers, referral sources, governmental agencies, insurance companies, lessors, consultants, advisors and other business associates from maintaining the same business relationships with PFMI, the Company and its Subsidiaries after the Closing Date as were maintained with PFMI, the Company and its Subsidiaries prior to the Closing Date (including, without limitation, making any negative or disparaging statements or communications regarding Buyer, PFMI, the Company or any Subsidiary). 5.16 Confidentiality. After the Closing, each Shareholder agrees not to disclose or use at any time any Confidential Information. In the event Shareholders are required by law to disclose any Confidential Information, Shareholders shall promptly notify Buyer in writing, which notification shall include the nature of the legal requirement and the extent of the required -34- disclosure, and Shareholders shall cooperate with Buyer to preserve the confidentiality of such information consistent with applicable law; provided that Buyer shall reimburse Shareholders for any out-of-pocket expenses incurred by Shareholders in cooperating with Buyer hereunder. 5.17 Offering Materials. 5.17.(a) During the period commencing on the date hereof and ending on the Closing Date, the Shareholders' Agent shall provide Buyer and its representatives with monthly financial statements for PFMI, the Company and its Subsidiaries. 5.17.(b) PFMI shall provide, and shall cause the Company and its Subsidiaries to provide, all reasonable cooperation and assistance in connection with the arrangement of the Debt Financing, including facilitating customary due diligence, participation in meetings and providing certificates, documents and financial reports as may be reasonably requested by Buyer. 5.17.(c) PFMI shall, and shall cause the Company and its Subsidiaries to, use commercially reasonable efforts to cooperate with and assist, and shall use commercially reasonable efforts to cause the independent accountants for the Company and its Subsidiaries, to cooperate and assist, Buyer in preparing such information packages and offering materials as the parties to the Debt Financing Commitment Letter may reasonably request (collectively, the "Offering Materials") for use in connection with the offering and/or syndications of debt securities, loan participations and other matters contemplated by the Debt Financing Commitment Letter (the "Offerings"), including, without limitation, (i) making senior management and other representatives of the Company and its Subsidiaries available (at mutually agreeable times) to participate in meetings with prospective investors, participating in "road shows" in connection with any such Offerings and participating in meetings with rating agencies and causing the present and former independent accountants for PFMI, the Company and its Subsidiaries to participate in drafting sessions related to the preparation of the Offering Materials and making work papers available to Buyer, the underwriters and their respective representatives; provided that, Buyer shall reimburse the Company for all out-of-pocket travel expenses of its senior management and the reasonable fees and expenses of attorneys and financial advisors to the Company in connection with participation in such "road shows" and other meetings or otherwise incurred in connection with the Offerings; (ii) delivering "comfort letters" in customary form in connection with any Offering; (iii) delivering consents to the inclusion of financial statements required in connection with any Offering registered under the Securities Act; and (iv) providing such information and assistance as the parties to such Debt Financing Commitment Letter may reasonably request in connection therewith. 5.18 Delivery of Financial Statements by Buyer. In connection with determining the eligibility of the Shareholders for any Earn-Out Warrants, Buyer shall deliver to Shareholders Agent copies of the Company's audited financial statements for the fiscal years ended March 5, 2005 and March 4, 2006, respectively, promptly following receipt thereof from the Company's independent accountants; provided, -35- however, in the event the Company has not (i) entered into a binding agreement with Burger King Corporation and/or one of its authorized purchasing cooperatives with a duration of not less than one (1) year prior to March 5, 2005 or (ii) sold at least ten million pounds of meat product to Burger King Corporation and/or one of its authorized purchasing cooperatives during the period beginning on the Closing Date and ending March 5, 2005, Buyer shall not be required to deliver to Shareholders' Agent copies of the Company's audited financial statements for the fiscal year ended March 4, 2006. In addition, in connection with determining whether the Cash Increase becomes payable, Buyer shall deliver to Shareholders' Agent copies of the Company's unaudited financial statements for each of the fiscal quarters for the fiscal year ended March 5, 2005 promptly following the completion thereof by the Company. In the event that the accounting standards used in the preparation of the annual audited financial statements and the quarterly unaudited financial statements being delivered to Shareholders' Agent pursuant to this Section 5.18 differ from those used in the preparation of the Company's audited financial statements for the fiscal year ended March 6, 2004 being delivered to Buyer under Section 6.12 herein, Buyer shall provide Shareholders' Agent with a supplement identifying any such change in accounting standards. Shareholders' Agent agrees that the financial statements being delivered pursuant to this Section 5.18 shall constitute Confidential Information and shall therefore be subject to the confidentiality provisions of Section 5.16. 6. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS Each and every obligation of Buyer to be performed on the Closing Date shall be subject to the satisfaction as of the Closing of each of the following conditions: 6.1 Representations and Warranties True on the Closing Date. Each of the representations and warranties made by the Shareholders in this Agreement and the Tax Sharing Agreement which are not qualified as to materiality shall be true and correct in all material respects and each of the representations and warranties of the Shareholders which are qualified as to materiality shall be true and correct in all respects, in each case when made and at and as of the Closing Date as though such representations and warranties were made or given on and as of the Closing Date, except for any changes consented to in writing by Buyer. 6.2 Compliance With Agreement. The Shareholders shall have in all material respects performed and complied with all of their covenants, agreements and obligations under this Agreement and the Tax Sharing Agreement that are to be performed or complied with by them prior to or on the Closing Date. 6.3 No Litigation. No suit, action or other proceeding, or other Order (including a temporary restraining order) or final judgment, order or decree relating thereto, of any state or federal court or other governmental agency in which it is sought to obtain damages or other relief (including recission), or which prevents or restrains the consummation of the transactions which are the subject of this Agreement or prohibits Buyer's ownership of the Shares, or that has had, or would reasonably be expected to have, a Material Adverse Effect, shall be pending or threatened; no -36- investigation that would result in any such suit, action or proceeding shall be pending or threatened and no such judgment, order or decree has been entered and not subsequently dismissed with prejudice. 6.4 Third Party Consents and Approvals. All approvals, consents, licenses and waivers from third-parties that are required to effect the transactions contemplated hereby (including any consents required under any Lease), that are required for the transfer of the Shares to Buyer or that are required in order to prevent a breach of or a default under or a termination or modification of or any right of acceleration of any obligations under any contract which is listed on Schedule 6.4 attached hereto and prepared by Buyer shall have been received, all on terms reasonably satisfactory to Buyer and originals or copies of executed counterparts thereof shall have been made available for inspection by Buyer prior to the Closing ("Third Party Approvals"). 6.5 Governmental Approvals. All governmental filings, authorizations and approvals that are required for the transfer of the Shares to Buyer and the consummation of the transactions contemplated hereby shall have been duly made and obtained on terms reasonably satisfactory to Buyer, and all applicable waiting periods (and any extensions thereof) under the HSR Act shall have expired or been terminated. ("Governmental Approvals"). 6.6 Material Adverse Effect. From the date hereof to the Closing Date, there shall have been no change, event or development that has had, or would reasonably be expected to have, a Material Adverse Effect. 6.7 Certain Payoffs. Shareholders shall have delivered to Buyer (i) payoff letters with respect to all Indebtedness covered by clauses (i) and (ii) of the definition of Indebtedness in Section 11.14 hereof which is outstanding as of the Closing, including all indebtedness secured by the Owned Real Property, and releases of any and all Liens securing such Indebtedness and Liens listed on Schedule 6.7 shall have been obtained, all on terms reasonably satisfactory to Buyer and (ii) payoff letters covering all Shareholder Transaction Expenses, in form and substance reasonably satisfactory to Buyer (collectively, "Payoff Letters"). 6.8 Opinion of Counsel. Buyer shall have received an opinion, dated the Closing Date, of Foley & Lardner LLP, counsel to the Company and the Shareholders, in the form of Exhibit G hereto, and on which Buyer's lenders in connection with the financing of the transactions contemplated by this Agreement shall be entitled to rely. -37- 6.9 Affiliated Transactions; Shareholders Agreement. The transactions, agreements and arrangements set forth in Schedule 3.20, the Existing Executive Agreements and the Shareholders Agreement, shall each have been terminated prior to the Closing, on terms and conditions reasonably satisfactory to Buyer. 6.10 FIRPTA. Each Shareholder shall deliver to Buyer a non-foreign affidavit dated as of the Closing Date, sworn under penalty of perjury and in form or substance required under the Treasury Regulations issued pursuant to Code Section 1445 stating that such Person is not a "foreign person" as defined in Code Section 1445 so that Buyer is exempt from withholding any portion of the Purchase Price thereunder (the "FIRPTA Affidavit"). 6.11 Financing. Buyer and its subsidiaries shall have received the necessary financing in order to consummate the transactions contemplated by this Agreement on terms and conditions substantially similar to those set forth in the term sheets attached to the Debt Financing Commitment Letter. 6.12 Audited Financial Statements. Buyer shall have received (i) the audited consolidated financial statements of the Company and its Subsidiaries for the fiscal year ended March 6, 2004 and (ii) the audited consolidated financial statements of PFMI for its fiscal years ended March 2, 2002, March 1, 2003 and March 6, 2004 (collectively, the statements in clauses (i) and (ii) shall be referred to herein as the "Recent Audited Financial Statements"), and shall have been given access to the audit work papers (and the Company's outside accountants) related to the Recent Audited Financial Statements, and such Recent Audited Financial Statements shall be in form and substance reasonably satisfactory to Buyer; provided that this condition shall be deemed satisfied and shall terminate at the close of business on the sixth business day following Buyer's receipt of such audited financial statements and access to work papers and accountants unless Buyer provides written notice to the Shareholders' Agent of the failure of this condition prior to such time; provided further that this condition shall be deemed satisfied if the Recent Audited Financial Statements do not deviate materially from the Company Unaudited Financial Statements in the case of the financial statements delivered pursuant to clause (i) (other than with respect to an increase in income taxes payable in an amount not to exceed $800,000, an increase in the provision for income taxes in an amount not to exceed $800,000 and a decrease in the amount of stockholder's equity in an amount not to exceed $4 million), and do not deviate materially from the PFMI Unaudited Financial Statements in the case of the financial statements delivered pursuant to clause (ii) (other than with respect to deviations arising from the conversion of financial statements prepared on a cash basis to financial statements prepared in accordance with GAAP and adjustments related to the preparation of the consolidated tax provision for the fiscal year ended March 6, 2004). -38- 6.13 280G Payments. There shall have been no payments that PFMI, the Company or any Subsidiary, Buyer or any of their Affiliates has made or is or may be required to make as a result of the transactions contemplated hereby that was, is, or will be an "excess parachute payment" within the meaning of Code Section 280G. 6.14 Tender Offer. Buyer or a wholly-owned subsidiary of Buyer shall have received affirmative tenders and acceptances of payments for not less than a majority of the aggregate principal amount of each issue of the outstanding Company Notes pursuant to its tender offer for the outstanding Company Notes and in connection therewith shall have received all necessary consents from such majority to amend the terms and conditions of each indenture governing the Company Notes to permit the financing contemplated under the Commitment Letters and the sale of the Shares to Buyer. If the foregoing is not achieved, Buyer shall use commercially reasonable efforts to find an alternate means by which to satisfy the obligation of the Company under the Company Notes, including but not limited to obtaining a bridge loan or assuming the Company Notes; provided that such alternative means are available on terms and conditions consistent with the terms set forth in the Debt Financing Commitment Letter. 6.15 Earn-Out Warrants. The Earn-Out Warrants, the form of which is attached hereto as Exhibit C, shall have been executed by the Shareholders and delivered to Buyer at Closing. 6.16 Closing Deliveries. Buyer shall have received from the Shareholders and the Shareholders' Agent all of the instruments, documents and considerations described in Section 9.1; the form and substance of all such deliveries shall be reasonably satisfactory to Buyer; and the Shareholders' Agent and Escrow Agent shall have executed and delivered the Escrow Agreement. 7. CONDITIONS PRECEDENT TO THE SHAREHOLDERS' OBLIGATIONS Each and every obligation of the Shareholders to be performed on the Closing Date shall be subject to the satisfaction prior to or at the Closing of the following conditions: 7.1 Representations and Warranties True on the Closing Date. Each of the representations and warranties made by Buyer in this Agreement shall be true and correct in all material respects when made and shall be true and correct in all material respects at and as of the Closing Date as though such representations and warranties were made or given on and as of the Closing Date. -39- 7.2 Compliance With Agreement. Buyer shall have in all material respects performed and complied with all of Buyer's agreements and obligations under this Agreement which are to be performed or complied with by Buyer prior to or on the Closing Date. 7.3 No Litigation. No suit, action or other proceeding, or preliminary or permanent injunction or other order (including a temporary restraining order) or final judgment, order or decree relating thereto, of any state or federal court or other governmental agency in which it is sought to obtain damages or other relief (including recission), or which prevents or restrains the consummation of the transactions which are the subject of this Agreement or prohibits the Buyer's ownership of the Shares, or that has had, or would reasonably be expected to have, a Material Adverse Effect, shall be pending or threatened; no investigation that would result in any such suit, action or proceeding shall be pending nor threatened and no such judgment, order or decree has been entered and not subsequently dismissed with prejudice. 7.4 Governmental Consents. All governmental filings, authorizations and approvals that are required for the consummation of the transactions contemplated hereby shall have been duly made and obtained on terms reasonably satisfactory to Shareholders, and all applicable waiting periods (and any extensions thereof) under the HSR Act shall have expired or been terminated. 7.5 Earn-Out Warrants. The Earn-Out Warrants, the form of which is attached hereto as Exhibit C, shall have been executed by Buyer and delivered to the Shareholders at Closing. 7.6 Closing Deliveries. The Shareholders shall have received from Buyer all of the instruments, documents and considerations described in Section 9.2, and the form and substance of all such deliveries shall be reasonably satisfactory in all material respects to Shareholders' Agent. 8. INDEMNIFICATION 8.1 By Shareholders. Subject to the terms and conditions of this Article 8, the Shareholders hereby agree to indemnify, defend and hold harmless Buyer and its Affiliates, stockholders, officers, directors, employees, agents, representatives, successors and permitted assigns (collectively, the "Buyer Indemnitees") from and against all Losses asserted against, resulting to, imposed upon, or incurred by any such Buyer Indemnitee, directly or indirectly, by reason of, arising out of or resulting from: -40- 8.1.(a) the inaccuracy or breach of any representation or warranty of Shareholders contained in or made pursuant to this Agreement, any Schedule hereto (after giving effect to updates to the Schedules pursuant to Section 5.9) or any certificate delivered by the Shareholders to Buyer with respect hereto or thereto in connection with the Closing; 8.1.(b) the nonfulfillment or breach of any covenant of Shareholders or PFMI contained in this Agreement or any Schedule hereto, including any payment due by the Shareholders after final determination of a Purchase Price Adjustment pursuant to Article 2; 8.1.(c) any claim for payment of fees and/or expenses as a broker or finder in connection with the origin, negotiation or execution of this Agreement or the consummation of the transactions contemplated hereby based upon any alleged agreement, arrangement or understanding between the claimant and PFMI, the Company, any Subsidiary or any Shareholder or any of their agents or representatives; 8.1.(d) PF Distribution, LLC, a North Carolina limited liability company, PF Purchasing, LLC, a North Carolina limited liability company, Columbia Hill Aviation, or the business, operations or winding up of any of such entities; 8.1.(e) the ownership, operation, use or transfer of any assets, properties or rights to be distributed pursuant to the Asset Distribution Letter Agreement or any obligation or liability related thereto, or arising in connection with the transactions contemplated by the Asset Distribution Letter Agreement; or 8.1.(f) the litigation matters referred to in items 2, 3 and 4 under part (i) of Schedule 3.12; 8.1.(g) any claim made or payment required in respect of the unredeemed stock of PFMI from the management buyout transaction on July 26, 2002; 8.1.(h) the lease guaranty agreements for the Prime Sirloin restaurant leases as referenced in item 9 on Schedule 3.17(iv), or any obligation or liability related thereto or arising thereunder; 8.1.(i) the engagement letter, dated as of December 13, 2001, by and between PFMI and William E. Simon & Sons, LLC, and any obligations or liabilities thereunder including, without limitation, any claim for fees or other compensation thereunder arising out of or related to the transactions contemplated by this Agreement including the tender offer and redemption of the Company Notes; 8.1.(j) the matters described in the Benefits Side Letter Agreement, or any obligation or liability related thereto; 8.1.(k) Claremont Restaurant Group LLC, Fresh Foods Sales, LLC, Mom `N' Pop's Country Ham, LLC and Bennet's Restaurant, or the business, operations, disposition or winding up of any of such entities; or -41- 8.1.(l) the judgment lien in favor of AT&T against WSMP, Inc. As used in this Article 8, the term "Losses" shall include (i) all debts, liabilities and obligations; (ii) all losses, damages, judgments, awards, settlements, costs and expenses (including, without limitation, interest (including prejudgment interest in any litigated matter), penalties, court costs and reasonable legal and expert witness fees and expenses); and (iii) all demands, claims, suits, actions, costs of investigation, causes of action, proceedings and assessments, whether or not ultimately determined to be valid. The Shareholders' indemnification obligations pursuant to this Article 8 shall be joint and several, except with respect to the Shareholders' indemnification obligations under Section 8.1(b) for breaches of the Shareholders' post-Closing covenants in Sections 5.14, 5.15 and 5.16, which indemnification obligations shall be several, and not joint. 8.2 By Buyer. Subject to the terms and conditions of this Article 8, Buyer hereby agrees to indemnify, defend and hold harmless the Shareholders and their respective heirs, beneficiaries and permitted assigns (collectively, the "Shareholder Indemnitees") from and against all Losses asserted against, resulting to, imposed upon or incurred by any of them, directly or indirectly, by reason of or resulting from: 8.2.(a) the inaccuracy or breach of any representation or warranty of Buyer contained in or made pursuant to this Agreement, any Schedule hereto or any certificate delivered by Buyer to the Shareholders with respect hereto or thereto in connection with the Closing; 8.2.(b) the nonfulfillment or breach of any covenant of Buyer contained in this Agreement, including any payment due by Buyer after final determination of a Purchase Price Adjustment pursuant to Article 2; or 8.2.(c) any claim for payment of fees and/or expenses as a broker or finder in connection with the origin, negotiation or execution of this Agreement or the consummation of the transactions contemplated hereby based upon any alleged agreement, arrangement or understanding between the claimant and Buyer or any of its agents or representatives. 8.3 Manner of Payment. Except as otherwise provided herein, any indemnification of the Buyer Indemnitees or Shareholder Indemnitees pursuant to this Article 8 shall be effected by wire transfer of immediately available funds from the Shareholders or Buyer, as the case may be, to an account(s) designated by the applicable Buyer Indemnitee or Shareholder Indemnitee, within ten (10) days after the determination thereof. Any amounts owing from the Shareholders pursuant to this Article 8 for breaches of representations and warranties of the Shareholders shall first be made to the extent possible from the Escrowed Amount and thereafter shall be made directly by the Shareholders in accordance with the terms of this Section 8.3. -42- 8.4 Indemnification of Third-Party Claims. The obligations and liabilities of any party to indemnify any other party under this Article 8 with respect to actions, lawsuits or other claims brought by third-parties shall be subject to the following terms and conditions: 8.4.(a) Notice and Defense. The party or parties entitled to be indemnified under this Article 8 (whether one or more, the "Indemnified Party") will give the party from whom indemnification is sought (the "Indemnifying Party") prompt written notice after receiving written notice of any action, lawsuit, proceeding, investigation or other claim against it (if by a third party) or discovering the liability, obligation or facts giving rise to such claim for indemnification, and the Indemnifying Party shall be entitled to participate in the defense of such action, lawsuit, proceeding, investigation or other claim giving rise to an Indemnified Party's claim for indemnification at such Indemnifying Party's expense, and at its option (subject to the limitations set forth below) shall be entitled to appoint a recognized and reputable counsel reasonably acceptable to the Indemnified Party to be the lead counsel in connection with such defense; provided, that prior to the Indemnifying Party assuming control of such defense, it shall first verify to the Indemnified Party in writing that such Indemnifying Party shall be fully responsible (with no reservation of any rights) for all liabilities and obligations relating to such claim for indemnification and that it shall provide full indemnification (whether or not otherwise required hereunder) to the Indemnified Party with respect to such action, lawsuit, proceeding, investigation or other claim giving rise to such claim for indemnification hereunder; provided further, the Indemnifying Party shall not be entitled to assume control of such defense and shall pay the fees and expenses of counsel retained by the Indemnified Party if (i) the claim for indemnification relates to or arises in connection with any criminal proceeding, action, indictment, allegation or investigation; (ii) the claim seeks an injunction or equitable relief against the Indemnified Party; (iii) there is a reasonably probability that a claim may materially and adversely affect the Indemnified Party other than as a result of money damages or other money payments, or (iv) the claim involves environmental matters in which case the Indemnified Party shall have sole control and management authority over the resolution of such claim (including hiring legal counsel and environmental consultants, conducting environmental investigations and cleanups, negotiating with governmental agencies and third parties and defending or settling claims and actions). Failure to give prompt notice shall not affect the Indemnifying Party's duty or obligations under this Article 8, except to the extent (and only to the extent that) such failure shall have caused the damages for which the Indemnifying Party is obligated to be greater than such damages would have been had the Indemnified Party given the Indemnifying Party prompt notice hereunder. So long as the Indemnifying Party is defending any such action actively and in good faith, the Indemnified Party shall not settle such action. The Indemnified Party shall make available to the Indemnifying Party or its representatives all records and other materials required by them and in the possession or under the control of the Indemnified Party, for the use of the Indemnifying Party and its representatives in defending any such action, and shall in other respects give reasonable cooperation in such defense. -43- 8.4.(b) Failure to Defend. If the Indemnifying Party, promptly after receiving notice of any claim, demand or action brought by a third-party, fails to defend such action actively and in good faith, the Indemnified Party will (upon further written notice) have the right to undertake the defense, compromise or settlement of such action or consent to the entry of a judgment with respect to such action, on behalf of and for the account and risk of the Indemnifying Party, and the Indemnifying Party shall thereafter have no right to challenge the Indemnified Party's defense, compromise, settlement or consent to judgment therein, except on the grounds of gross negligence committed by the Indemnified Party's counsel. 8.4.(c) Indemnified Party's Rights. Anything in this Section 8.4 to the contrary notwithstanding, the Indemnifying Party shall not, without the written consent of the Indemnified Party, settle or compromise any action or consent to the entry of any judgment which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party of a full and unconditional release from all liability and obligation in respect of such action without any payment by the Indemnified Party. 8.5 Tax Effect. Payments made pursuant to the indemnification obligation of an Indemnifying Party shall be paid by the Indemnifying Party without reduction for any Tax benefits available to the Indemnified Party. However, to the extent that the Indemnified Party recognizes Tax benefits as a result of an Indemnified claim, the Indemnified Party shall pay the amount of such Tax benefits (but not in excess of the indemnification payment actually received from the Indemnifying Party with respect to such Indemnified claim) to the Indemnifying Party. For this purpose, the amount of a Tax benefit in a given taxable year with respect to an indemnified claim shall be equal to the excess, if any of (A) the tax liability of the Indemnified Party through the end of such taxable year, calculated by excluding any Tax items attributable to the indemnified claim from all taxable years, over (B) the tax liability of the Indemnified Party through the end of such taxable year, calculated by taking into account any Tax items attributable to the indemnified claim for all taxable years (to the extent permitted by relevant Tax law and treating such Tax items as the last items claimed for any taxable year). All indemnification payments made under this Agreement shall be treated as adjustments to the Purchase Price for federal income tax purposes. If any indemnity payment made hereunder is subject to any Tax, the Indemnifying Party shall indemnify the Indemnified Party for such Tax (including any Tax imposed on payments made pursuant to this sentence). To the extent a Tax benefit repaid to an Indemnifying Party by an Indemnified Party is later denied or reduced by a Taxing Authority, the Indemnifying Party shall restore such Tax benefit amount to the Indemnified Party, and the Indemnifying Party shall indemnify the Indemnified Party for any resulting Tax costs. 8.6 Insurance Effect. To the extent that any Losses that are subject to indemnification pursuant to this Article 8 are covered by insurance paid for by PFMI or the Company prior to the Closing, Buyer shall use commercially reasonable efforts to obtain the maximum recovery under such insurance; provided that Buyer shall nevertheless be entitled to bring a claim for indemnification against -44- Shareholders under this Article 8 in respect of such Losses and the time limitations set forth in Section 8.7 hereof for bringing a claim of indemnification under this Agreement shall be tolled during the pendency of such insurance claim. If the Indemnified Party, within twelve months following the receipt of any indemnity payments pursuant to this Article 8 for any Losses, (i) obtains any insurance recovery from third-party insurance provided for such Losses or (ii) obtains any recovery from any other third party for such Losses, then such Indemnified Party shall promptly pay over to the Indemnifying Party the amount of the net cash proceeds received by such Indemnified Party for such Losses, up to the amount of the indemnity payments made by the Indemnifying Party for such Losses. 8.7 Limitations on Indemnification. 8.7.(a) Time Limitation. The representations and warranties in this Agreement and the Schedules hereto or in any writing delivered by Buyer, on the one hand, or the Shareholders, on the other hand, to the other party in connection with this Agreement (including the certificate required to be delivered by the Shareholders pursuant to Section 9.1(b) and the certificate required to be delivered by Buyer pursuant to Section 9.2(b)) shall survive the Closing until the later of (i) the date which is twelve (12) months following the Closing Date and (ii) the date which is sixty (60) days following the date on which the Company completes its audit for the fiscal year ending March 5, 2005 (the "General Survival Period"). Notwithstanding the foregoing or any other provision of this Agreement: (i) The representations and warranties in Section 3.14 (Environmental), and in the certificate required to be delivered by Shareholders pursuant to Section 9.1(b) with respect to Section 3.14, shall terminate on the third anniversary of the Closing Date; (ii) The representations and warranties in Sections 3.1(a), (b), (c) and (e) (Shareholder Authority, Validity, Ownership), the first sentence of Section 3.2(a), Sections 3.2(b) and (c) (PFMI Organization, Ownership, Liabilities), Sections 3.3(a), (e) (except with respect to foreign qualifications), (f) and (g) (Company Organization, Qualification, Subsidiaries, Investments, etc.), Section 3.4 (Capital Stock), Section 3.24 (Brokerage), Section 4.1 (Organization and Power), Section 4.2 (Authority) and Section 4.3 (No Brokers or Finders), and in the certificate required to be delivered by Shareholders pursuant to Section 9.1(b) with respect to Sections 3.1(a), 3.1(b), 3.1(c), 3.1(e), the first sentence of 3.2(a), 3.2(b), 3.2(c), 3.3(a), 3.3(e) (except with respect to foreign qualifications), 3.3(f), 3.3(g), 3.4, 3.24, and in the certificate required to be delivered by Buyer pursuant to Section 9.2(b) with respect to Sections 4.1, 4.2 and 4.3, shall not terminate (collectively, the "Non-Terminating Representations"). The Shareholders and Buyer each hereby waive all applicable statutory limitation periods with respect to the breach of any Non-Terminating Representations. (iii) The representations and warranties contained in Section 3.9 (Employee Benefit Plans), and in the certificate required to be delivered by Shareholders pursuant to Section 9.1(b) with respect to Section 3.9, shall -45- terminate when the applicable statutes of limitations with respect to the liabilities in question expire, plus sixty (60) days; (iv) Any claim made by a party hereunder by filing a suit or action in a court of competent jurisdiction or a court reasonably believed to be of competent jurisdiction for breach of a representation or warranty prior to the termination of the survival period provided hereunder for such claim shall be preserved despite the subsequent termination of such survival period; and (v) Buyer and Shareholders acknowledge that indemnification hereunder with respect to the breach of any post-Closing covenant or agreement contained in this Agreement, including any breach of any covenant or agreement contained in this Article 8, and any pre-Closing covenant or agreement that is a Fully Indemnified Representation and Covenant, shall not be subject to any time or other limitations. 8.7.(b) Deductible. No amount shall be payable by the Indemnifying Party under Sections 8.1(a), 8.1(b), 8.2(a) or 8.2(b)(other than with respect to the Fully Indemnified Representations and Covenants) unless and until the aggregate amount otherwise payable by such Indemnifying Party exceeds one percent of the sum of the Purchase Price plus the amounts set forth in item (iv) in Section 2.1 (the "Deductible"), in which event such Indemnifying Party shall only be obligated to pay the amount payable by such Indemnifying Party in excess of the amount of the Deductible, and, subject to the limitations set forth in Sections 8.7(c) and 8.7(d), all future amounts that become payable by such Indemnifying Party under Sections 8.1(a), 8.1(b), 8.2(a) or 8.2(b) from time to time thereafter. 8.7.(c) Threshold. No amount shall be payable by the Indemnifying Party under Sections 8.1(a), 8.1(b), 8.2(a) or 8.2(b) (other than with respect to the Fully Indemnified Representations and Covenants) for any individual item or series of related items where the Losses relating to such item or items is less than Twenty-Five Thousand Dollars ($25,000) (the "Threshold"), and such amounts shall not be applied against the Deductible. 8.7.(d) Aggregate Amount Limitation. Except with respect to the Fully Indemnified Representations and Covenants, the Shareholders', on the one hand, and Buyer's, on the other hand, aggregate liability for Losses pursuant to Sections 8.1(a), 8.1(b) (other than the Purchase Price Adjustment) and 8.2(a) shall not exceed ten percent (10%) of the sum of the Purchase Price plus the amounts set forth in item (iv) in Section 2.1 (the "Cap"); provided, that the Cap shall be reduced by 33% (to 66.7% of the Cap) upon the expiration of the General Survival Period, and by an additional 33% (to 33.3% of the Cap) on the second anniversary of the Closing Date, but any such reduction shall not affect any claims made prior to the date of such reduction. 8.7.(e) Mitigation. An Indemnified Party shall take all commercially reasonable steps to mitigate all indemnifiable Losses upon and after becoming aware of any event -46- that could reasonably be expected to give rise to any Loss that is indemnifiable hereunder. 8.7.(f) Materiality. For purposes of determining the amount of any Losses that are the subject matter of a claim for indemnification hereunder, the Threshold and Deductible amounts shall be the materiality standard and, therefore, each representation, warranty and other provision contained in this Agreement and each certificate delivered pursuant hereto (other than the representation and warranty in Section 3.7(a)) shall be read without regard and without giving effect to any materiality or Material Adverse Effect or other qualification contained in such representation or warranty (as if such qualification were deleted from such representation and warranty). 8.8 Exclusive Remedy. Buyer hereby acknowledges and agrees that, from and after the Closing, its sole remedy with respect to any and all claims for money damages arising out of or relating to this Agreement, with the exception of the Purchase Price Adjustment provided in Section 2.4 herein, claims for common law fraud and claims under the Tax Sharing Agreement, shall be pursuant to the indemnification provisions set forth in this Article 8. 8.9 Limitations on Claims by Shareholders. Notwithstanding the terms and provisions of Section 5.10 herein, each of the Shareholders hereby agrees that he will not make any claim for indemnification or reimbursement against PFMI, the Company, its Subsidiaries or the Buyer by reason of the fact that he was a director, officer, employee, or agent of PFMI, the Company or any Subsidiary or was serving at the request of PFMI, the Company or any Subsidiary as a partner, trustee, director, officer, employee, or agent of another entity (whether such claim is for judgments, damages, penalties, fines, costs, amounts paid in settlement, losses, expenses, or otherwise and whether such claim is pursuant to any statute, charter document, bylaw, agreement, or otherwise) with respect to any action, suit, proceeding, complaint, claim, or demand brought by Buyer against such Shareholder pursuant to this Agreement or the Tax Sharing Agreement. 9. CLOSING The closing of this transaction (the "Closing") shall take place at the offices of Kirkland & Ellis LLP, 200 East Randolph Drive, Chicago, Illinois 60601, at 10:00 A.M. local time on June 30, 2004, or at such other time and place as the parties hereto shall agree upon or, if the conditions to Closing set forth in Articles 6 and 7 have not been satisfied (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of those conditions by the party entitled to the benefit thereof) as of such date, on the third business day following satisfaction or waiver of such conditions. Such date is referred to in this Agreement as the "Closing Date." The Closing shall be deemed effective as of 11:59 p.m. on the Closing Date. -47- 9.1 Documents to be Delivered by Company and Shareholder. At the Closing, Shareholders' Agent shall deliver to Buyer the following documents, in each case duly executed or otherwise in proper form: 9.1.(a) Stock Certificates. Stock certificates or certificates representing the Shares, duly endorsed for transfer or with duly executed stock powers attached. 9.1.(b) Compliance Certificate. A certificate, signed by the Shareholders and dated the Closing Date, stating that the conditions specified in Sections 6.1, 6.2, 6.3, 6.6 and 6.13 have been fully satisfied as of the Closing. 9.1.(c) Certified Resolutions. Certified copies of the resolutions of the board of directors of PFMI, authorizing and approving this Agreement, the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby. 9.1.(d) Charter; Bylaws. A copy of the bylaws of Company and its Subsidiaries and of PFMI, certified by Company's and PFMI's secretary, respectively, and a copy of the charter of Company and its Subsidiaries and of PFMI, each charter being certified by the Secretary of State of the State of North Carolina. 9.1.(e) Resignations. The resignations of those officers and directors of PFMI and of the Company and its Subsidiaries specified in Schedule 9.1(e), effective as of the Closing Date and in form reasonably satisfactory to Buyer's counsel. 9.1.(f) Escrow Agreement. The Escrow Agreement, substantially in the form attached hereto as Exhibit B (subject to such administrative changes as may be required to be made by the Escrow Agent). 9.1.(g) Good Standing Certificates. Copies of the certificate of good standing of PFMI, the Company and each of its Subsidiaries issued on or not more than ten (10) days before the Closing Date by the Secretary of State (or comparable officer) of the jurisdiction of each such Person's organization. 9.1.(h) Corporate Records. All minute books, stock ledgers, seals and other corporate records of PFMI, the Company and the Subsidiaries. 9.1.(i) Other Documents. All other documents required to be delivered to Buyer at or prior to the Closing pursuant to this Agreement, including Payoff Letters, the FIRPTA Affidavit, Third-Party Approvals and Governmental Approvals, and such other certificates of authority and documents as Buyer may reasonably request. 9.2 Documents to be Delivered by Buyer. At the Closing, Buyer shall deliver to Shareholders' Agent the following documents, in each case duly executed or otherwise in proper form: -48- 9.2.(a) Purchase Price. Evidence of the wire transfers required by Section 2.3 hereof. 9.2.(b) Compliance Certificate. A certificate, signed by an authorized officer of Buyer and dated the Closing Date, stating that the conditions specified in Sections 7.1, 7.2 and 7.3 have been fully satisfied as of the Closing. 9.2.(c) Certified Resolutions. A certified copy of the resolutions of the board of directors of Buyer authorizing and approving this Agreement and the consummation of the transactions contemplated hereby. 9.2.(d) Incumbency Certificate. Incumbency certificates relating to each person executing any document delivered to Shareholders' Agent by Buyer at or prior to the Closing pursuant to the terms hereof. 9.2.(e) Escrow Agreement. The Escrow Agreement, substantially in the form attached hereto as Exhibit B, subject to such administrative changes as may be required to be made by the Escrow Agent. 9.2.(f) Other Documents. All other documents required to be delivered to Shareholders' Agent at or prior to the Closing pursuant to this Agreement and such other certificates of authority and documents as Shareholders' Agent may reasonably request. 10. TERMINATION 10.1 Termination Without Breach. This Agreement may be terminated at any time prior to the Closing: 10.1.(a) by mutual written agreement of Buyer and the Shareholders, 10.1.(b) by Buyer if the condition set forth in Section 6.12 is not fulfilled to Buyer's satisfaction by the close of business on the sixth business day following Buyer's receipt of the audited financial statements and access to audit work papers as described therein. 10.1.(c) by either Buyer or the Shareholders if the Closing shall not have occurred on or before ninety days after the date of this Agreement (unless such delay is due to requests for information pursuant to the HSR Act, in which case the parties may agree to an extension of this date), provided the terminating party has not, through breach of a representation, warranty or covenant, prevented the Closing from occurring on or before such date. 10.2 Termination for Breach. 10.2.(a) Termination by Buyer. If (i) there has been a material violation or breach by PFMI, the Shareholders or the Shareholders' Agent of any of the representations, warranties, covenants or agreements contained in this Agreement or the -49- Tax Sharing Agreement that has not been waived in writing by Buyer, (ii) there has been a failure of satisfaction of a condition to the obligations of Buyer that has not been waived or (iii) the Shareholders' Agent shall have attempted to terminate this Agreement under this Article 10 or otherwise without grounds to do so, then Buyer may, by written notice to Shareholders' Agent at any time prior to the Closing, terminate this Agreement. 10.2.(b) Termination by the Shareholders. If (i) there has been a material violation or breach by Buyer of any of the representations, warranties, covenants or agreements contained in this Agreement that has not been waived in writing by the Shareholders, (ii) there has been a failure of satisfaction of a condition to the obligations of the Shareholders that has not been waived or (iii) Buyer shall have attempted to terminate this Agreement under this Article 10 or otherwise without grounds to do so, then Shareholders' Agent may, by written notice to Buyer at any time prior to the Closing, terminate this Agreement. 10.3 Effect of Termination. Termination of this Agreement pursuant to this Section 10.2 or Section 10.1 shall terminate all obligations of the parties hereto; provided, however, that such termination shall not in any way terminate, limit or restrict:(i) the Confidentiality and Nondisclosure Agreement between Buyer and Company attached hereto as Exhibit I (the "Confidentiality Agreement"), which shall survive until the parties expressly terminate such Confidentiality Agreement; or (ii) the rights and remedies of any party hereto against any other party that has violated, breached any of the representations, warranties, covenants or agreement of this Agreement or the Tax Sharing Agreement prior to termination hereof. Subject to the foregoing, the parties' obligations under Section 11.9(c), Section 11.2 and Section 5.16 of this Agreement shall survive termination. 11. MISCELLANEOUS 11.1 Further Assurance. Each party agrees that it will execute and deliver, or cause to be executed and delivered, on or after the date of this Agreement, all such other instruments and will take all reasonable actions as may be necessary to transfer and convey the Shares to the Buyer, on the terms herein contained, to consummate the transactions contemplated hereby, and to effectuate the provisions and purposes hereof. 11.2 Disclosures and Announcements. Announcements concerning the transactions provided for in this Agreement by Buyer or the Shareholders or any of their Affiliates shall be subject to the approval of the Buyer and the Shareholders' Agent in all essential respects, except that approval shall not be required as to any statements and other information which any party may be required to make pursuant to any applicable rule or regulation of the SEC or as otherwise required by law. -50- 11.3 Assignment; Parties in Interest. 11.3.(a) Assignment. Except as expressly provided herein, the rights and obligations of a party hereunder may not be assigned, transferred or encumbered without the prior written consent of the other parties. Notwithstanding the foregoing, Buyer may at any time, in its sole discretion, assign, in whole or in part, (a) its rights and obligations pursuant to this Agreement to one or more of its Affiliates; (b) its rights under this Agreement for collateral security purposes to any lender providing financing to Buyer, the Company or any of their Affiliates and any such lender may exercise all of the rights and remedies of the Buyer hereunder; and (c) its rights under this Agreement, in whole or in part, to any subsequent purchaser of PFMI, the Company or any of its respective subsidiaries or any material portion of its respective assets (whether such sale is structured as a sale of stock, sale of assets, merger, recapitalization or otherwise); provided, however, that Buyer shall nevertheless remain liable for all obligations imposed upon it under, or to which it is subject pursuant to, the provisions of this Agreement. 11.3.(b) Parties in Interest. This Agreement shall be binding upon, inure to the benefit of and be enforceable by the respective successors and permitted assigns of the parties hereto. Nothing contained herein shall be deemed to confer upon any other person any right or remedy under or by reason of this Agreement. 11.4 Law Governing Agreement; Forum. This Agreement may not be modified or terminated orally, and shall be construed and interpreted according to the internal Laws of North Carolina, excluding any choice of law rules that may direct the application of the Laws of another jurisdiction. The parties hereto agree that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby may only be brought in the United States District Court for the Southern District of Ohio, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate court therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding that may be brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. 11.5 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO EXPRESSLY WAIVES ITS RIGHTS TO A TRIAL BY JURY IN ANY LAWSUIT OR PROCEEDING RELATING TO OR ARISING IN ANY WAY FROM THIS AGREEMENT OR THE MATTERS CONTEMPLATED HEREBY. EACH OF THE PARTIES ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO THIS AGREEMENT, THAT EACH HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT, AND THAT EACH WILL CONTINUE TO RELY ON THIS WAIVER IN FUTURE DEALINGS. -51- EACH OF THE PARTIES FURTHER WARRANTS AND REPRESENTS THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 11.6 Amendment and Modification. The parties to this Agreement may amend, modify or supplement this Agreement in such manner as may be agreed upon in writing by Buyer and the Shareholders' Agent. 11.7 Notice. All notices, requests, demands and other communications hereunder shall be given in writing and shall be: (a) personally delivered; or (b) sent to the parties at their respective addresses indicated herein by registered or certified U.S. mail, return receipt requested and postage prepaid, or by private overnight mail courier service providing for a receipted delivery. The respective addresses to be used for all such notices, demands or requests are as follows: (a) If to Buyer, to: Pierre Holding Corp. c/o Madison Dearborn Partners Three First National Plaza Suite 3800 Chicago, IL 60602 Telephone: 312-895-1000 Attention: Robin P. Selati (with copies to) Kirkland & Ellis LLP 200 E. Randolph Drive Chicago, IL 60601 Telephone: 312-861-2000 Attention: Edward T. Swan, P.C. (b) If to Shareholders or Shareholders' Agent, to: Mr. David R. Clark 361 Second Street NW Hickory, North Carolina 28601 Telephone: (828) 304-2307 (with a copy to) -52- Patrick Daugherty, Esq. Foley & Lardner LLP 150 West Jefferson, Suite 1000 Detroit, Michigan 48226 Telephone: (313) 963-6200 (and to) T. Stewart Gibson, Esq. The Power Plant, Suite 302-B 1701 Sunset Avenue Rocky Mount, North Carolina 27804 Telephone: (252) 977-0700 If personally delivered, such communication shall be deemed delivered upon actual receipt; if sent by overnight courier pursuant to this paragraph, such communication shall be deemed delivered upon receipt; and if sent by U.S. mail pursuant to this paragraph, such communication shall be deemed delivered as of the date of delivery indicated on the receipt issued by the relevant postal service, or, if the addressee fails or refuses to accept delivery, as of the date of such failure or refusal. Any party to this Agreement may change its address for the purposes of this Agreement by giving notice thereof in accordance with this Section 11.7. 11.8 Shareholders' Agent David R. Clark, as Shareholders' Agent pursuant to the Shareholders Agent Agreement attached as Exhibit J (the "Shareholders Agent Agreement"), shall be the designated agent of the Shareholders with exclusive authority to make all decisions and determinations and to take all actions (including giving consents and waivers to this Agreement) required or permitted hereunder on behalf of the Shareholders, and any such action, decision or determination so made or taken shall be deemed the action, decision or determination of the Shareholders, and any notice, document, certificate or information required to be given to any Shareholder shall be deemed so given if given to Shareholders' Agent. The appointment of the Shareholders' Agent shall be deemed coupled with an interest and shall be irrevocable, and Buyer and any other Person may conclusively and absolutely rely, without inquiry, upon any action of the Shareholders' Agent on behalf of the Shareholders in all matters in which it has been granted authority pursuant to this Section 11.8 and pursuant to the Shareholders Agent Agreement. All actions, decisions and instructions of the Shareholders' Agent taken, made or given pursuant to the authority granted to the Shareholders' Agent pursuant to this Section 11.8 and pursuant to the Shareholders Agent Agreement shall be final, conclusive and binding upon all Shareholders. The Shareholders' Agent and the Shareholders covenant and agree not to change any of the terms of the Shareholders Agent Agreement without the prior written consent of Buyer. 11.9 Expenses. Regardless of whether or not the transactions contemplated hereby are consummated: -53- 11.9.(a) Other Professionals. John Grigg, who is a director of the Company, shall be compensated by the Company at Closing for professional services performed on behalf of the Company and PFMI in connection with the this Agreement and the transactions contemplated hereby. Each of the Shareholders and Buyer represent and warrant to all other parties to this Agreement that, with respect to himself or itself, there is no broker, agent or other intermediary involved or in any way connected with the transactions contemplated hereby on his or its behalf, respectively, the Shareholders represent and warrant that there is no such Person involved on behalf of PFMI, and each agrees to hold the others harmless from and against all claims for brokerage commissions or finder's fees arising in connection with the execution of this Agreement or the consummation of the transactions provided for herein. 11.9.(b) Transfer Taxes. Any sales, use, excise, transfer or other similar tax imposed with respect to the transactions provided for in this Agreement and the Asset Distribution Letter Agreement, and any interest or penalties related thereto, shall be paid by Shareholders, whether such tax is imposed prior to or after Closing. 11.9.(c) Other. Except as may otherwise be provided herein, each of the parties shall bear its own fees and expenses (including the fees and expenses of its own lawyers, accountants, appraisers and other advisers) in connection with this Agreement and the transactions contemplated hereby; provided, however, that the Company shall bear all such fees and expenses incurred by or on behalf of PFMI, the Company and the Subsidiaries prior to Closing and such fees and expenses shall be deemed Shareholder Transaction Expenses in the computation of the Purchase Price pursuant to Section 2.1; provided further, in the event of a breach by any Shareholder, PFMI, the Company or any Subsidiary of Section 5.13 of this Agreement and the termination of this Agreement by Buyer, the Shareholders shall pay all of Buyer's costs and expenses (including attorneys', accountants' and consultants' fees and other out-of-pocket expenses) in connection with the negotiation and execution of this Agreement and the performance of Buyer's obligations hereunder, including Buyer's and its representatives' due diligence. Shareholders shall bear all fees and expenses arising in connection with or related to the Asset Distribution Letter Agreement, whether such fees and expenses arise prior to or after the Closing. 11.10 Specific Performance. Each Shareholder acknowledges that the Company's business is unique and recognizes and affirms that in the event of a breach of this Agreement by such Shareholder, money damages may be inadequate and Buyer may have no adequate remedy at law. Accordingly, each Shareholder agrees that Buyer shall have the right, in addition to any other rights and remedies existing in its favor, to enforce its rights and such Shareholder's obligations hereunder not only by an action or actions for damages but also by an action or actions for specific performance, injunctive and/or other equitable relief. -54- 11.11 Entire Agreement. This Agreement (including the Exhibits, the Schedules and the Ancillary Agreements) and the Benefits Side Letter Agreement sets forth the entire agreement between the parties hereto with respect to the transactions contemplated herein and supersedes and replaces any prior understanding, agreement or statement of intent with respect to the transactions contemplated herein, and there have been and are no agreements, representations or warranties between the parties other than those set forth or provided for herein. Buyer acknowledges that it has conducted its own independent review and analysis of the business of PFMI, Company and of the Shares and that it has been provided access to the records, properties and personnel of Company and, where appropriate, PFMI and the Shareholders for this purpose. The mere listing (or inclusion of a copy) of a document or other item shall not be adequate to disclose an exception to a representation or warranty made in the Agreement, unless the representation or warranty has to do with the existence of the document or other item itself. No exceptions to any representations or warranties disclosed on one Schedule shall constitute an exception to any other representations or warranties unless the exception is disclosed on each such other applicable Schedule or cross-referenced in such other applicable section or unless the applicability of such exception to another Schedule is reasonably apparent on its face. 11.12 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11.13 Headings. The headings in this Agreement are inserted for convenience only and shall not constitute a part hereof. 11.14 Glossary of Terms. The following sets forth the location of definitions of capitalized terms defined in the body of this Agreement: "Acquired Group" shall have the meaning set forth in the Tax Sharing Agreement. "Acquisition Proposal" shall have the meaning specified in Section 5.13(b). "Affiliate" of a Person means a Person who, directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, such Person. For purposes of this definition, "control", when used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have correlative meanings. "Agreement" shall have the meaning specified in the preamble to this Agreement. "Ancillary Agreements" shall have the meaning specified in Section 3.1(a). -55- "Annual Report" shall have the meaning specified in Section 3.6(a)(i). "Asset Distribution Letter Agreement" shall have the meaning specified in Section 5.11. "Audited Financial Statements" shall have the meaning specified in Section 3.6(a)(iii). "Average Working Capital Amount" shall mean the 12-month average of the Company's and its consolidated Subsidiaries' working capital during the 12-month period as of the end of third monthly period in the Company's fiscal year ended March 5, 2005, calculated in accordance with Schedule 2.1. "Benefit Plans" shall have the meaning specified in Section 3.9(a). "Buyer Indemnitees" shall have the meaning specified in Section 8.1. "Buyer's Accountants" shall have the meaning specified in Section 2.5(b)(iv). "Buyer" shall have the meaning specified in the preamble to this Agreement. "Cap" shall have the meaning specified in Section 8.7(d). "Cash" shall mean all cash, cash equivalents, certificates of deposit and bankers' acceptances of the Company and its Subsidiaries. "Closing Balance Sheet" shall have the meaning specified in Section 2.5(b)(i). "Closing Date" shall have the meaning specified in the preamble to Article 9. "Closing Indebtedness Amount" means the amount of Closing Indebtedness including, without limitation, all amounts listed under the heading "PFMI Debt" on Schedule 3.6(f). "Closing Indebtedness" means the outstanding balance of Indebtedness of PFMI, the Company and its Subsidiaries as of the close of business on the Closing Date; provided that, for purposes of such calculation, all interest, prepayment penalties, premiums, fees and expenses (if any) which would be payable if such Indebtedness was paid in full at the Closing shall be treated as Indebtedness. "Closing Working Capital" shall have the meaning specified in Section 2.5(a). "Closing" shall have the meaning specified in the preamble to Article 9. "Code" shall have the meaning specified in Section 3.9(b). "Columbia Hill Aviation" shall mean Columbia Hill Aviation, LLC, a North Carolina limited liability company. "Company Common Stock" shall have the meaning specified in Section 3.4. "Company Intellectual Property" shall have the meaning specified in Section 3.15. -56- "Company Notes" shall have the meaning specified in the definition of "Indebtedness" in this Section 11.14. "Company" shall have the meaning specified in the recitals to this Agreement. "Confidential Information" means all information of a confidential or proprietary nature (whether or not specifically labeled or identified as "confidential"), in any form or medium, that relates to the business, products, financial condition, services or research or development of the PFMI, the Company, the Subsidiaries or their respective suppliers, distributors, customers, independent contractors or other business relations, as such is related to the businesses of PFMI, the Company and the Subsidiaries. Confidential Information includes, but is not limited to, the following: (i) internal business and financial information (including information relating to strategic and staffing plans and practices, business, finances, training, marketing, promotional and sales plans and practices, cost, rate and pricing structures and accounting and business methods); (ii) identities of, individual requirements of, specific contractual arrangements with, and information about, PFMI's, the Company's and the Subsidiaries' suppliers, distributors, customers, independent contractors or other business relations and their confidential information, as such is related to the business; (iii) trade secrets, ideas, know-how, compilations of data and analyses, techniques, systems, recipes, formulae, compositions, research and development information, records, reports, manuals, drawings, specifications, designs, plans, proposals, technical data, documentation, models, data and databases relating thereto, manufacturing processes and techniques, financial and marketing plans and customer and supplier lists and information; (iv) inventions, innovations, improvements, developments and methods (whether or not patentable); and (v) all other Company Intellectual Property of a confidential nature. Notwithstanding the foregoing, "Confidential Information" shall not include information, data, knowledge or know-how that (i) enters the public domain through no violation of this Agreement by any Shareholder or any of its representatives or agents, (ii) is received from a third party not under obligation of confidentiality to Buyer, PFMI, the Company or its Subsidiaries or (iii) is independently developed without reliance on any Confidential Information. "Confidentiality Agreement" shall have the meaning specified in Section 10.3. "Crawford Fee" shall mean all outstanding amounts owed to Crawford Race Cars, LLC under that certain Endorsement Agreement, dated as of June 22, 2001, by and between the Company and Crawford Race Cars, LLC. "Debt Financing Commitment Letter" shall have the meaning specified in Section 4.7. "Debt Financing" shall have the meaning specified in Section 4.7. "Deductible" shall have the meaning specified in Section 8.7(b). "Directors and Officers" shall have the meaning specified in Section 5.10(a). "EBITDA" shall mean the Company's consolidated net income plus, to the extent (but only to the extent) deducted in determining such net income (A) interest expense for indebtedness for borrowed money, (B) federal, state, local and foreign income tax expense, (C) depreciation expense, (D) amortization expense, (E) management, administrative or similar fees -57- and expenses paid to Madison Dearborn Capital Partners IV, L.P. or any of its Affiliates, (F) to the extent not accounted for in clauses (A) through (E) above or (G) below, those items listed on Schedule 1 to the Debt Financing Commitment Letter which relate to non-recurring expenses incurred by the Company prior to the date hereof, and (G) transaction expenses incurred in connection with the transactions contemplated by this Agreement, including lender fees, attorney fees, accountant fees and investment banker or financial advisor fees, write-offs of capitalized loan costs and capitalized Indenture restructuring fees, payment of 1% call premium on Indenture and loan prepayment penalty costs, payments of the (i) Executive Bonus Payments, (ii) Non-Compete Payments, (iii) Grigg Fee, (iv) Crawford Fee, and (v) Shareholder Transaction Expenses, and compensatory transfers of retained assets to senior management of the Acquired Group pursuant to the Asset Distribution Letter Agreement. To avoid confusion, the Company's unaudited EBITDA calculated in the foregoing manner was $52.5 million for the fiscal year ended March 6, 2004. Furthermore, EBITDA shall be calculated in accordance with GAAP applied on a basis consistent with the preparation of the Company's audited financial statements for its fiscal year ended March 6, 2004. "Environmental Laws" means all federal, state and local Laws, including common law, and Orders purporting to regulate the use, misuse, pollution or preservation of land, air or water resources, or the exposure of persons or property to pollutants, contaminants, hazardous substances, noise, odor or radiation, including without limitation the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq., as amended, the Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq., as amended, the Clean Air Act, 42 U.S.C. 7401 et seq., as amended, the Clean Water Act, 33 U.S.C. 1251 et seq., as amended, the Occupational Safety and Health Act, 29 U.S.C. 655 et seq., as amended. "ERISA" shall have the meaning specified in Section 3.9. "Escrow Account" shall have the meaning specified in Section 2.3(a). "Escrow Agent" shall mean Bank of America Private Bank. "Escrow Agreement" shall have the meaning specified in Section 2.3(a). "Escrowed Amount" shall have the meaning specified in Section 2.3(a). "Estimated Closing Balance Sheet" shall have the meaning specified in Section 2.2. "Exclusivity Period" shall have the meaning specified in Section 5.13(a). "Executive Bonus Payments" shall mean all amounts due and owing under the Existing Executive Agreements between the Company and each of Norbert E. Woodhams, Sr., Pamela M. Witters and Robert C. Naylor, less applicable amounts, in each case, that the Company as their employer is required by law to withhold for payment of taxes. "Executive Rollover Amount" shall mean for each of Norbert E. Woodhams and Robert C. Naylor, $3,100,000 and $2,300,000, respectively. -58- "Executives" shall mean each of Norbert E. Woodhams, Sr., Pamela M. Witters and Robert C. Naylor. "Existing Executive Agreements" shall mean (i) the Employment Agreement, dated as of December 31, 2001, by and between the Company and Pamela M. Witters, (ii) the Employment Agreement, dated as of December 31, 2001, by and between the Company and Robert C. Naylor, and (iii) the Incentive Agreement, dated as of August 18, 1999, by and between the Company and Norbert E. Woodhams, Sr. (as amended), in each case as amended through the date hereof. "Facilities and Equipment" shall have the meaning specified in Section 3.10. "FDA" shall have the meaning specified in Section 3.11. "Federal Tax" shall have the meaning specified in the Tax Sharing Agreement attached hereto as Exhibit H. "FIRPTA Affidavit" shall have the meaning specified in Section 6.10. "Food or Foods" shall mean all products (whether finished food or food ingredients) that PFMI, the Company and the Subsidiaries manufacture as of the Closing Date, and all products (whether finished food or food ingredients) that PFMI, the Company and the Subsidiaries have manufactured during the three year period prior to the Closing Date. "Forward-Looking Data" shall have the meaning specified in Section 4.10. "Fully Indemnified Representations and Covenants" shall mean the representations and warranties in Sections 3.1(a), (b), (c) and (e) (Shareholder Authority, Validity, Ownership), the first sentence of Section 3.2(a), Sections 3.2(b) and (c) (PFMI Organization, Ownership, Liabilities), Sections 3.3(a), (e) (except with respect to foreign qualifications), (f) and (g) (Company Organization, Qualification, Subsidiaries, Investments, etc.), Section 3.4 (Capital Stock), Section 3.20 (Affiliate Transactions), Section 3.24 (Brokerage), Section 4.1 (Organization and Power), Section 4.2 (Authority), Section 4.3 (No Brokers or Finders), Section 5.3(f) (Taxes) and Section 5.4(f) (Sale of Shares), and in the certificate required to be delivered by Shareholders pursuant to Section 9.1(b) with respect to Sections 3.1(a), 3.1(b), 3.1(c), 3.1(e), 3.2(a), 3.2(b), 3.2(c), 3.3(a), 3.3(e), 3.3(f), 3.3(g), 3.4, 3.20, 3.24, 5.3(f) and 5.4(f), and in the certificate required to be delivered by Buyer pursuant to Section 9.2(b) with respect to Sections 4.1, 4.2 and 4.3. "GAAP" shall mean United States generally accepted accounting principles consistently applied during the periods involved. "General Survival Period" shall have the meaning specified in Section 8.7(a). "Governmental Approvals" shall have the meaning specified in Section 6.5. "Grigg Fee" shall mean all amounts owing to John Grigg, including without limitation advisory fees and expenses, pursuant to his letter agreement with the Company dated as of January 29, 2004. -59- "Hazardous Materials" means (a) any element, compound or chemical that is defined, listed or otherwise classified as a contaminant, pollutant, toxic pollutant, toxic or hazardous substance, extremely hazardous substance or chemical, hazardous waste, medical waste, biohazardous or infectious waste, special waste, solid waste or words of similar meaning or effect under Environmental Laws; (b) petroleum, petroleum-based or petroleum-derived products; (c) polychlorinated biphenyls; (d) any substance exhibiting a hazardous waste characteristic, including but not limited to corrosivity, ignitibility, toxicity or reactivity as well as any radioactive or explosive materials; and (e) asbestos or asbestos-containing materials. "HSR Act" shall have the meaning specified in Section 3.5. "Income Tax" or "Income Taxes" shall have the meaning specified in the Tax Sharing Agreement. "Indebtedness" means with respect to any Person to the extent required to be reflected as a liability on a balance sheet for such Person prepared in accordance with GAAP, (i) any indebtedness for borrowed money or issued in substitution for or exchange of indebtedness for borrowed money, (ii) any indebtedness evidenced by any note, bond, debenture or other debt security, (iii) any indebtedness for the deferred purchase price of property or services with respect to which a Person is liable, contingently or otherwise, as obligor or otherwise (other than trade payables and other current liabilities incurred in the ordinary course of business), (iv) any obligations under capitalized leases with respect to which a Person is liable as obligor, (v) any indebtedness secured by a Lien on a Person's assets, (vi) any distributions payable or loans/advances payable to any Affiliates, shareholders or partners as of the Closing, which are not paid at Closing, (vii) any obligation or liability on the Closing Balance Sheet or the balance sheet of PFMI or the Hickory Cost Center (other than any obligation or liability associated with the unredeemed stock of PFMI from the management buyout transaction on July 26, 2002 ) as of the close of business on the Closing Date which does not relate to the ongoing business of the Company in the ordinary course, (viii) any other liabilities recorded in accordance with GAAP on the balance sheet of such Person which are not due within one year of the Closing, and (ix) any accrued interest, prepayment penalties and premiums on any of the foregoing; provided that with respect to the Company's 10-3/4% Senior Notes Due 2006 issued subject to the Indenture (the "Company Notes"), the amount of premium which shall constitute "Indebtedness" hereunder shall not exceed one percent (1%) of the face amount of the Company Notes. "Indemnified Party" shall have the meaning specified in Section 8.4(a). "Indemnifying Party" shall have the meaning specified in Section 8.4(a). "Indenture" shall mean the indenture dated as of June 9, 1998 among the Company, each of several subsidiaries of the Company as guarantors and State Street Bank and Trust Company as trustee, as supplemented by a First Supplemental Indenture dated as of September 5, 1998, a Second Supplemental Indenture dated as of February 26, 1999, a Third Supplemental Indenture dated as of October 8, 1999, and a Fourth Supplemental Indenture dated as of March 8, 2004, providing for the issuance of the Company's Notes. -60- "Intellectual Property" shall mean all of the following in any jurisdiction throughout the world: (i) patents, patent applications and invention disclosures; (ii) trademarks, service marks, trade dress, trade names, corporate names, logos and slogans (and all translations, adaptations, derivations and combinations of the foregoing) and Internet domain names, together with all goodwill associated with each of the foregoing; (iii) copyrights and copyrightable works; (iv) registrations and applications for registration for any of the foregoing; (v) trade secrets, confidential information, know-how, recipes, formulae and inventions; and (vi) computer software (including but not limited to source code, executable code, data, databases and documentation). "IRS" shall have the meaning specified in Section 3.9(f). "Knowledge" shall have the meaning specified in Section 3. "Laws" shall mean all foreign, federal, state and local laws, statutes, codes, regulations, orders, notices, rules or ordinances, including without limitation rules and regulations of the FDA, USDA and FTC, and any requirements, restrictions, limitations, conditions or obligations contained therein. "Leased Real Property" means all leasehold or subleasehold estates and other rights to use or occupy any land, buildings, structures, improvements, fixtures or other interest in real property held by the Company or any Subsidiary. "Leases" means all leases, subleases, licenses, concessions and other agreements (written or oral) pursuant to which the Company or any Subsidiary holds any Leased Real Property, including the right to all security deposits and other amounts and instruments deposited by or on behalf of the Company or any Subsidiary thereunder. "Liens" shall have the meaning specified in Section 3.1(c). "Losses" shall have the meaning specified in Section 8.1. "Material Adverse Effect" or "Material Adverse Change" shall mean any change, development or effect, either individually or in the aggregate, that has been, or would reasonably be expected to be, materially adverse to the assets, liabilities, business, operations, results of operations or condition (financial or otherwise) of PFMI, the Company and the Subsidiaries, considered as one enterprise, or the ability of Shareholders, Shareholders' Agent or Buyer to consummate timely the transactions contemplated hereby, excluding, in any case, any change, effect or circumstance that results from or relates to: (i) changes in (A) United States or global economic conditions that do not disproportionately affect the Company or the Subsidiaries, or (B) increases in the cost of raw materials used in the industry in which the Company and the Subsidiaries operate that do not disproportionately impact the Company or the Subsidiaries, or (C) Laws or accounting standards, principles or interpretations of general application that do not disproportionately impact the Company or the Subsidiaries; (ii) the announcement by Buyer of its plans or intentions with respect to the conduct of the Company's business; or (iii) any natural disaster or any acts of terrorism, sabotage, military action or war (whether or not declared) or any escalation or worsening thereof that do not disproportionately affect the Company and the Subsidiaries, considered as one enterprise. -61- "Neutral Accounting Firm" shall have the meaning specified in Section 2.5(b)(iii). "Non-Compete Payments" shall mean all outstanding amounts owed to L. Dent Miller and Charles F. Connor, Jr., pursuant to the Non-Competition Agreements. "Non-Compete Period" shall have the meaning specified in Section 5.14. "Non-Competition Agreements" shall mean (i) the Consulting and Noncompete Agreement dated as of January 6, 2000 between the Company and L. Dent Miller and (ii) the Consulting and Non-Competition Agreement, dated as of January 29, 1998, between the Company and Charles F. Connor, Jr. "Non-Terminating Representations" shall have the meaning specified in Section 8.7(a)(ii). "North Carolina Employees" shall mean, collectively, Bart Blocker, Pearle Brown, Dave Cape, Michelle Cooke, Kerri Gilliam, Jason Harris, Tony Hazel, Rita Isenhour, Winston Jackson, Derrick Killian, Dave Mauldwin, Shawn McInerny, Jerri McNiel, Norma Meese, Robyn Queen, Dean Richardson, Harold Snipes, Rodney Jordan and Alex Stilwell. "Objection" shall have the meaning specified in Section 2.5(b)(ii). "Offering Materials" shall have the meaning specified in Section 5.17(c). "Offerings" shall have the meaning specified in Section 5.17(c). "Orders" shall have the meaning specified in Section 3.13(a). "Owned Real Property" means all land, together with all buildings, structures, improvements and fixtures located thereon, and all easements and other rights and interests appurtenant thereto, owned by the Company or any Subsidiary. "Payoff Letters" shall have the meaning specified in Section 6.7. "Permitted Liens" shall mean (i) Liens for current state and local property taxes or assessments not yet due or delinquent or which are being contested in good faith and with respect to which adequate reserves have been made in accordance with GAAP; (ii) Liens arising by operation of Law and with respect to which adequate reserves have been made in accordance with GAAP; (iii) mechanics', carriers', workers', repairers' and other similar liens arising or incurred in the ordinary course of business and with respect to which adequate reserves have been made in accordance with GAAP; (iv) exceptions shown on the surveys or other matters of record made available to Buyer which do not materially affect the current use of the Company's real property; and (vii) any land use ordinances and zoning ordinances (but not violations thereof). "Person" shall mean any individual, partnership, firm, corporation, joint venture, association, trust, unincorporated organization, limited liability company, limited liability partnership or other legal entity. -62- "PFMI Common Stock" shall have the meaning specified in Section 3.2(b). "PFMI" shall have the meaning specified in the recitals to this Agreement. "Preliminary Purchase Price" shall have the meaning specified in Section 2.2. "Purchase Price Adjustment" shall have the meaning specified in Section 2.4. "Purchase Price" shall have the meaning specified in Section 2.1. "Quarterly Reports" shall have the meaning specified in Section 3.6(a)(ii). "Recent Audited Financial Statements" shall have the meaning specified in Section 6.12. "Release" shall have the meaning specified in Section 3.14(a). "Schedules" shall mean the disclosure schedules attached to this Agreement. "Shareholder's Accountants" shall have the meaning specified in Section 2.5(b)(ii). "Shareholders Agent Agreement" shall have the meaning specified in Section 11.8. "Shareholders' Agent" shall have the meaning specified in the preamble to this Agreement. "Shareholder Transaction Expenses" shall mean all fees and expenses of PFMI, the Company, the Subsidiaries and the Shareholders (including, without limitation, fees and expenses of legal counsel, accountants, investment bankers, brokers, finders or other representatives and consultants retained by any of them and any change of control or retention payments or fees or transaction related bonuses paid or payable to any Person (other than the Executive Bonus Payments, the Grigg Fee, the Non-Compete Payments and the Crawford Fee)) with respect to this Agreement, each of the agreements contemplated hereby and the transactions contemplated hereby and thereby, if paid at or subsequent to the Closing. "Shareholders" shall have the meaning specified in the preamble to this Agreement. "Shareholders Agreement" shall mean that certain Shareholders Agreement, dated as of April 17, 2001, by and among David R. Clark, James M. Templeton and James C. Richardson, Jr. "Shares" shall have the meaning specified in the recitals to this Agreement. "Subsidiaries" shall have the meaning specified in Section 3.3(f). "Tax Return" or "Return" shall have the meaning specified in the Tax Sharing Agreement attached hereto as Exhibit H. "Tax Sharing Agreement" shall mean that certain Tax Sharing and Indemnification Agreement attached hereto as Exhibit H. -63- "Tax" or "Taxes" shall have the meaning specified in the Tax Sharing Agreement attached hereto as Exhibit H. "Taxing Authority" shall have the meaning specified in the Tax Sharing Agreement attached hereto as Exhibit H. "Third Party Approvals" shall have the meaning specified in Section 6.4. "Threshold" shall have the meaning specified in Section 8.7(c). "Unaudited Financial Statements" shall have the meaning specified in Section 3.6(a)(v). "Update Period" shall have the meaning specified in Section 5.9. Where any group or category of items or matters is defined collectively in the plural number, any item or matter within such definition may be referred to using such defined term in the singular number. [Signatures on following page] -64- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. SHAREHOLDERS: BUYER: PIERRE HOLDING CORP. /s/ James C. Richardson, Jr. By: /s/ Robin P. Selati - -------------------------------- ------------------------------------ James C. Richardson, Jr. Name: Robin P. Selati Its: President /s/ David R. Clark - -------------------------------- David R. Clark /s/ James M. Templeton - -------------------------------- James M. Templeton SHAREHOLDERS' AGENT: /s/ David R. Clark By: /s/ Brian D. Davis - -------------------------------- ------------------------------------ David R. Clark Brian D. Davis, as Trustee of the Voting Trust Agreement, dated February 1, 2004, among James Cole Richardson, Thomas Jason Richardson, Parker Heyward Richardson, Sherry Dean Templeton Miller, Donna Marie Templeton Sharman, S&D Land Company, LLC, Sherry Dean Templeton Miller and Douglas Lester Miller, as Co-Trustees of the Charles Douglas Miller Grandchild Trust, Sherry Dean Templeton Miller and Douglas Lester Miller, as Co-Trustees of the Philip Altman Miller Grandchild Trust, T. Stewart Gibson, as Trustee of the Will S. Clark Irrevocable Trust and as Trustee of the Lauren A. Clark Irrevocable Trust -65- EX-10.13 6 g89090exv10w13.txt EX-10.13 EXHIBIT 10.13 THIRD AMENDMENT TO INCENTIVE AGREEMENT THIS THIRD AMENDMENT TO INCENTIVE AGREEMENT (the "Third Amendment") is made and entered into as of the 11th day of May, 2004 ("Execution Date"), by and between Pierre Foods, Inc., a North Carolina corporation (the "Company"), and Norbert E. Woodhams, a resident of the State of Ohio ("Executive"). WITNESSETH: WHEREAS, Executive serves the Company in the capacity of President pursuant to a certain Incentive Agreement dated August 18, 1999 (the "Original Agreement") as amended by a certain First Amendment to Incentive Agreement dated January 1, 2000 (the "First Amendment"), and a certain Second Amendment to Incentive Agreement dated December 31, 2001 (the "Second Amendment", the Original Agreement as amended by the aforesaid First Amendment and Second Amendment herein the "Incentive Agreement"); and WHEREAS, the Company considers it essential to the best interest of its sole shareholder, PF Management, Inc. ("PFMI") to foster the continued employment of key management personnel in a period of uncertainty recognizing that the possibility of a change in control exists and that such possibility, and the uncertainty and questions which it necessarily raises among management, may result in the departure or distraction of key management personnel to the detriment of the Company and PFMI in this period when their undivided attention and commitment to the best interests of the Company and PFMI are particularly important; and WHEREAS, the Company wishes to assure itself of the services of the Executive without distraction from any circumstances arising from the possibility of a change in control of the Company and to incentivize the Executive to remain with the Company during any such process to assist in obtaining an execution of any such corporate transaction (the "Transaction"), and the Executive wishes to continue to serve in the employ of the Company in the current capacity and upon the terms and conditions set forth in the Incentive Agreement, as modified and amended hereby for the compensatory arrangement in the event of a Transaction; and WHEREAS, the parties desire to make and memorialize certain amendments to the Original Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties agree as follows: 1. Definitions. For purposes hereof: 1 (a) "Code" shall mean the United States Internal Revenue Code of 1986, as amended. (b) "Change of Control Date" shall mean the date on which a Change of Control shall be deemed to have occurred. (c) "Shareholders Agent" shall mean David R. Clark, or such other person appointed as the agent and representative of the shareholders of PFMI with respect to the Transaction under a Shareholders Agent Agreement. (d) "Parachute Payment" shall mean any payment in the nature of compensation payable to the Executive if such payment is contingent on a change in the ownership or effective control of the Company or PFMI. (e) "Acquirer" means the person or entity acquiring the shares of PFMI by reason of a Change of Control. (f) "Shareholders Agent Agreement" shall mean an agreement binding on the shareholders of PFMI and executives of the Company participating in bonuses as a result of a Transaction, said agreement specifying the rights and obligations of the parties. (g) "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 M. 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 M. 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. (h) "Transaction" means the event causing or resulting in the Change of Control. (i) "PFMI" means PF Management, Inc. 2 2. Change of Control Amendment. Subject to the Effective Conditions (as herein defined) and provided the Executive is in the employment of the Company as of the Change of Control Date, the parties hereby agree to amend the Incentive Agreement as follows: (a) Section 2 of the Incentive Agreement is amended to read as follows: 3. Change of Control. If a Change of Control shall occur before the termination of this Agreement, then the Company shall pay to Executive, in lump sum by bank check or other good funds, simultaneously with the Change of Control on the Change of Control Date, a bonus ("Bonus") equal to 4% of the net proceeds realized by PFMI's shareholders and Executive and the other officers of the Company receiving payments similar to the Bonus hereunder from the Transaction, after all purchase price adjustments and reductions for the retirement of debt and other obligations of the Company (excluding the Bonus hereunder and other bonuses payable to other officers of the Company), and escrow and indemnity deposits and other adjustments (including costs and fees) as may be necessary or required as a condition of the closing of the Transaction, and as reduced by $2,870,370 to be payable pursuant to a deferred compensation plan to be adopted by the Company on or prior to the Change of Control Date. It is expressly agreed and understood and the Executive hereby acknowledges that the intent of the Bonus is to place the Executive in the same economic position with respect to the Transaction, with the same risk of indemnity and obligation for sharing transaction costs, as a hypothetical shareholder owning 4% of the outstanding capital shares of PFMI; provided, it is expressly understood that Executive will have no right to participate in or receive any warrants issued to the shareholders in the Transaction. In furtherance of this understanding, Executive as a condition of receiving said Bonus shall agree, and upon instructions from the Shareholders Agent, shall deliver his proportionate share of said Bonus for deposit in any escrow or other indemnity account as may be required pursuant to any purchase agreement and other ancillary agreements (including a Shareholders Agent Agreement) related to the Transaction. As a further condition of the payment of the Bonus, Executive agrees to enter into, execute and deliver such ancillary agreements along with shareholders of PFMI and other key executives participating in any similar bonus on the same Change of Control as may be required pursuant to the closing of the Transaction, or otherwise agreed upon by such parties, as necessary to carry out the obligations of the Executive for his several responsibilities (as among the PFMI shareholders and participating key executives receiving distributions of the aforesaid net purchase price proceeds), to indemnify and hold harmless the Acquirer in the Transaction from working capital or other purchase price adjustments, claims under indemnity obligations, tax sharing agreements or otherwise, and all costs, fees, interest, and expenses associated therewith and under the purchase agreement or any ancillary agreement or in the administration thereof. Executive as a further condition of payment of said Bonus does hereby agree that duly appointed Shareholders Agent (representing the PFMI shareholders and Executive and other key executives participating in the aforesaid net proceeds) shall be duly 3 authorized to direct the Company, Acquirer, any escrow agent or any other party distributing or paying such Bonus or any other proceeds from the Transaction, including from an escrow or indemnity account, for the benefit of Executive to distribute all or part thereof to the Shareholders Agent for deposit and distribution under the terms of a Shareholders Agent Agreement, or require the Executive to likewise contribute all or part thereof to the Shareholders Agent, subject to the Shareholders Agent's obligation to make payments thereof to the Executive, and further subject to Shareholders Agent's reasonable discretion to establish a reserve for future indemnity, costs, expenses or claims arising from or related to the Transaction as the Agent deems necessary. The Bonus herein shall be subject to normal and appropriate employment tax, withholding, and other similar deductions. (b) Sections 2, 3, 5 and 8 of the Incentive Agreement as originally written are hereby deleted, and Schedule A attached to the Original Agreement is deleted and of no further force or effect. 3. Effective Conditions. The effectiveness of the amendments in Section 2 herein and the payment of the Bonus contemplated thereunder is subject to the satisfaction of all of the following conditions (the "Effective Conditions"): (a) On or before the Effective Date, the delivery by the Executive of a waiver (in the form attached as Exhibit A) of all Parachute Payments due to or receivable by the Executive under any other plan, arrangement or agreement between the Executive and the Company, other than as provided under the Incentive Agreement, as hereby amended. (b) Approval (in accordance with Section 280G(b)(5)(B) of the Code) by the shareholders of the Company and PFMI of the amendments in Section 2 hereof and the payment of the Bonus thereunder (said approval date being the "Effective Date") before the closing of the Transaction. (c) The Change of Control occurs within six months of the Effective Date. 4. Effectiveness. The amendments in Section 2 shall not become operative until the satisfaction of conditions (a) and (b) of Section 3 hereinabove. Further provided that notwithstanding the operative effect of the amendments in Section 2, if a Change of Control does not occur within six months of the Effective Date, the amendments in Section 2 shall thereafter become null and void, and the Original Agreement, only as amended by the First and Second Amendments, shall be binding on the parties as originally written. 5. No Change. Except as amended by this Third Amendment, the Incentive Agreement shall remain in full force and effect. 4 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. EXECUTIVE: COMPANY: Pierre Foods, Inc. /s/ Norbert E. Woodhams By: /s/ David R. Clark -------------------------------- ------------------------------ Norbert E. Woodhams David R. Clark, Vice Chairman 5 EXHIBIT A WAIVER OF PAYMENT MAY 11, 2004 A. Pierre Foods, Inc. (the "Company") and Norbert E. Woodhams, an executive of the Company (the "Executive") entered into an Incentive Agreement, dated August 18, 1999 (the "Original Agreement"), as amended by a First Amendment to an Incentive Agreement dated January 1, 2000 (the "First Amendment") and a Second Amendment to an Incentive Agreement (the "Second Amendment", the Original Agreement as amended by the First Amendment and Second Amendment being the "Incentive Agreement"). B. Pursuant to the Incentive Agreement, the Company committed to pay Executive certain payments under Sections 2, 3, 5, and 8 upon a Disposition (as defined in the Original Agreement). C. The shareholders of PF Management, Inc. ("PFMI") are in negotiations with an undisclosed buyer ("Buyer") pursuant to which the shareholders of PFMI may sell all of the capital shares of PFMI to said Buyer. D. The Company and Executive desire to amend the Incentive Agreement (the "Third Amendment") to provide for the payment of a different amount in the event of a Change of Control (as defined in the Third Amendment) or Disposition (the "New Bonus"). The undersigned Executive, recognizing that PFMI, the Company and Buyer will rely on this Waiver, agrees as follows: The Executive understands that it is the intent of the Board of Directors of the Company to submit the proposed Third Amendment to the Original Agreement providing for the New Bonus to a vote of PFMI and its shareholders for approval of said Third Amendment and the payment of said New Bonus in accordance with the shareholder approval procedures in Section 280G(b)(5)(B) of the Internal Revenue Code of 1986, as amended, ("Code") and the regulations thereunder. In consideration thereof, the Executive does hereby waive all rights to any other payments in the nature of compensation payable to the Executive under any other plan, arrangement or agreement if such payment is contingent on a Change of Control. The Executive understands that there are no guarantees or commitments that the shareholders will actually approve such Third Amendment and New Bonus. 6 All other provisions of the Incentive Agreement shall remain in full force and effect, except as modified or amended by the Third Amendment or affected by this Waiver. This Waiver shall be construed in accordance with the laws of the State of North Carolina, excluding conflicts of laws and principles, with the understanding that it is intended to exempt the payment of the New Bonus from the application of excise taxes under Section 4999 of the Code. The undersigned Executive has executed this Waiver as of May 11, 2004. Acknowledged, Accepted and Received this 11th day of May, 2004 __________________________________ Norbert E. Woodhams Pierre Foods, Inc. By: _____________________________ David R. Clark, Vice Chairman 7 EX-10.14 7 g89090exv10w14.txt EX-10.14 EXHIBIT 10.14 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT (the "Amendment") is made and entered into as of the 11th day of May, 2004 ("Execution Date"), 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, Executive serves the Company in the capacity of Senior Vice President and Chief Financial Officer of the Company pursuant to a certain Employment Agreement dated December 31, 2001 (the "Original Agreement"); and WHEREAS, the Company considers it essential to the best interest of its sole shareholder, PF Management, Inc. ("PFMI") to foster the continued employment of key management personnel in a period of uncertainty recognizing that the possibility of a change in control exists and that such possibility, and the uncertainty and questions which it necessarily raises among management, may result in the departure or distraction of key management personnel to the detriment of the Company and PFMI in this period when their undivided attention and commitment to the best interests of the Company and PFMI are particularly important; and WHEREAS, the Company wishes to assure itself of the services of the Executive without distraction from any circumstances arising from the possibility of a change in control of the Company and to incentivize the Executive to remain with the Company during any such process to assist in obtaining an execution of any such corporate transaction (the "Transaction"), and the Executive wishes to continue to serve in the employ of the Company in the current capacity and upon the terms and conditions set forth in the Original Agreement, as modified and amended hereby for the compensatory arrangement in the event of a Transaction; and WHEREAS, the parties desire to make and memorialize certain amendments to the Original Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties agree as follows: 1. Definitions. Except as otherwise defined in the Original Agreement, all capitalized terms herein not otherwise defined shall have the same meaning as in the Original Agreement. For purposes hereof: (a) "Code" shall mean the United States Internal Revenue Code of 1986, as amended. 1 (b) "Change of Control Date" shall mean the date on which a Change of Control shall be deemed to have occurred. (c) "Shareholders Agent" shall mean David R. Clark, or such other person appointed as the agent and representative of the shareholders of PFMI with respect to the Transaction under a Shareholders Agent Agreement. (d) "Parachute Payment" shall mean any payment in the nature of compensation payable to the Executive if such payment is contingent on a change in the ownership or effective control of the Company or PFMI. (e) "Acquirer" means the person or entity acquiring the shares of PFMI by reason of a Change of Control. (f) "Shareholders Agent Agreement" shall mean an agreement binding on the shareholders of PFMI and executives of the Company participating in bonuses as a result of a Transaction, said agreement specifying the rights and obligations of the parties. 2. Change of Control Amendment. Subject to the Effective Conditions (as herein defined) and provided the Executive is in the employment of the Company as of the Change of Control Date, the parties hereby agree to amend subsection f. of Section 2.3 of the Original Agreement to read as follows: f. Change of Control. If a Change of Control shall occur before the termination of this Agreement, then the Company shall pay to Executive, in lump sum by bank check or other good funds, simultaneously with the Change of Control on the Change of Control Date, a bonus ("Bonus") equal to 3% of the net proceeds realized by PFMI's shareholders and Executive and the other officers of the Company receiving payments similar to the Bonus hereunder from the Transaction, after all purchase price adjustments and reductions for the retirement of debt and other obligations of the Company (excluding the Bonus hereunder and other similar bonuses payable to other officers of the Company), and escrow and indemnity deposits and other adjustments (including costs and fees) as may be necessary or required as a condition of the closing of the Transaction. It is expressly agreed and understood and the Executive hereby acknowledges that the intent of the Bonus is to place the Executive in the same economic position with respect to the Transaction, with the same risk of indemnity and obligation for sharing transaction costs, as a hypothetical shareholder owning 3% of the outstanding capital shares of PFMI; provided, it is expressly understood that Executive will have no right to participate in or receive any warrants issued to the shareholders in the Transaction. In furtherance of this understanding, Executive as a condition of receiving said Bonus shall agree, and upon instructions from the Shareholders Agent, shall deliver her proportionate share of said Bonus for deposit in any escrow or other indemnity account as may be required pursuant to any purchase agreement and other ancillary agreements (including a Shareholders Agent Agreement) related to the Transaction. As a further condition of the 2 payment of the Bonus, Executive agrees to enter into, execute and deliver such ancillary agreements along with shareholders of PFMI and other key executives participating in any similar bonus on the same Change of Control as may be required pursuant to the closing of the Transaction, or otherwise agreed upon by such parties, as necessary to carry out the obligations of the Executive for her several responsibilities (as among the PFMI shareholders and participating key executives receiving distributions of the aforesaid net purchase price proceeds), to indemnify and hold harmless the Acquirer in the Transaction from working capital or other purchase price adjustments, claims under indemnity obligations, tax sharing agreements or otherwise, and all costs, fees, interest, and expenses associated therewith and under the purchase agreement or any ancillary agreement or in the administration thereof. Executive as a further condition of payment of said Bonus does hereby agree that duly appointed Shareholders Agent (representing the PFMI shareholders and Executive and other key executives participating in the aforesaid net proceeds) shall be duly authorized to direct the Company, Acquirer, any escrow agent or any other party distributing or paying such Bonus or any other proceeds from the Transaction, including from an escrow or indemnity account, for the benefit of Executive to distribute all or part thereof to the Shareholders Agent for deposit and distribution under the terms of a Shareholders Agent Agreement, or require the Executive to likewise contribute all or part thereof to the Shareholders Agent, subject to the Shareholders Agent's obligation to make payments thereof to the Executive, and further subject to Shareholders Agent's reasonable discretion to establish a reserve for future indemnity, costs, expenses or claims arising from or related to the Transaction as the Agent deems necessary. The Bonus herein shall be subject to normal and appropriate employment tax, withholding, and other similar deductions. 3. Effective Conditions. The effectiveness of the amendment in Section 2 above and the payment of the Bonus contemplated thereunder is subject to the satisfaction of all of the following conditions (the "Effective Conditions"): (a) On or before the Effective Date, the delivery by the Executive of a waiver (in the form attached as Exhibit A) of all Parachute Payments due to or receivable by the Executive under any other plan, arrangement or agreement between the Executive and the Company, other than as provided under the Original Agreement, as hereby amended. (b) Approval (in accordance with Section 280G(b)(5)(B) of the Code) by the shareholders of the Company and PFMI of the amendment in Section 2 hereof and the payment of the Bonus thereunder (said approval date being the "Effective Date") before the closing of the Transaction. (c) The Change of Control occurs within six months of the Effective Date. 3 4. Effectiveness. The amendment in Section 2 shall not become operative until the satisfaction of conditions (a) and (b) of Section 3 hereinabove. Further provided that notwithstanding the operative effect of the amendment in Section 2, if a Change of Control does not occur within six months of the Effective Date, the amendment in Section 2 shall thereafter become null and void, and the Original Agreement, only as amended hereunder in Section 5, shall be binding on the parties as originally written. 5. Other Amendment. (a) Section 3.1(a) of the Original Agreement is amended by deleting therefrom the following sentence: "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 Executive hereby waives any and all rights to any CPI increases referenced above not otherwise awarded or implemented prior to the date hereof. (b) The second sentence of Section 5.3 is amended to read as follows: "Such indemnification shall continue as to Executive for a period of two (2) years after she has ceased to be an employee, officer, or director of the Company and shall inure to the benefit of her heirs and estate". 6. No Change. Except as amended by this Amendment, the Original Agreement shall remain in full force and effect. 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 4 EXHIBIT A WAIVER OF PAYMENT MAY 11, 2004 A. Pierre Foods, Inc. (the "Company") and Pamela M. Witters, an executive of the Company (the "Executive") entered into an employment agreement, dated December 31, 2001 (the "Original Agreement"). B. Pursuant to the Original Agreement, the Company committed to pay Executive certain payments under Section 2.3 f. upon a Change of Control (as defined in the Original Agreement). C. The shareholders of PF Management, Inc. ("PFMI") are in negotiations with an undisclosed buyer ("Buyer") pursuant to which the shareholders of PFMI may sell all of the capital shares of PFMI to said Buyer. D. The Company and Executive desire to amend Section 2.3 f. of the Original Agreement (the "Amendment") to provide for the payment of a different amount in the event of a Change of Control (the "New Bonus"). The undersigned Executive, recognizing that PFMI, the Company and Buyer will rely on this Waiver, agrees as follows: The Executive understands that it is the intent of the Board of Directors of the Company to submit the proposed Amendment to the Original Agreement providing for the New Bonus to a vote of PFMI and its shareholders for approval of said Amendment and the payment of said New Bonus in accordance with the shareholder approval procedures in Section 280G(b)(5)(B) of the Internal Revenue Code of 1986, as amended, ("Code") and the regulations thereunder. In consideration thereof, the Executive does hereby waive all rights to any other payments in the nature of compensation payable to the Executive under any other plan, arrangement or agreement if such payment is contingent on a Change of Control. The Executive understands that there are no guarantees or commitments that the shareholders will actually approve such Amendment and New Bonus. 5 All other provisions of the Original Agreement shall remain in full force and effect, except as modified or amended by the Amendment or affected by this Waiver. This Waiver shall be construed in accordance with the laws of the State of North Carolina, excluding conflicts of laws and principles, with the understanding that it is intended to exempt the payment of the New Bonus from the application of excise taxes under Section 4999 of the Code. The undersigned Executive has executed this Waiver as of May 11, 2004. Acknowledged, Accepted and Received this 11th day of May, 2004 ______________________________ Pamela M. Witters Pierre Foods, Inc. By: _____________________________ David R. Clark, Vice Chairman 6 EX-10.15 8 g89090exv10w15.txt EX-10.15 EXHIBIT 10.15 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT (the "Amendment") is made and entered into as of the 11th day of May, 2004 ("Execution Date"), 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, Executive serves the Company in the capacity of Senior Vice President of Sales and Marketing of the Company pursuant to a certain Employment Agreement dated December 31, 2001 (the "Original Agreement"); and WHEREAS, the Company considers it essential to the best interest of its sole shareholder, PF Management, Inc. ("PFMI") to foster the continued employment of key management personnel in a period of uncertainty recognizing that the possibility of a change in control exists and that such possibility, and the uncertainty and questions which it necessarily raises among management, may result in the departure or distraction of key management personnel to the detriment of the Company and PFMI in this period when their undivided attention and commitment to the best interests of the Company and PFMI are particularly important; and WHEREAS, the Company wishes to assure itself of the services of the Executive without distraction from any circumstances arising from the possibility of a change in control of the Company and to incentivize the Executive to remain with the Company during any such process to assist in obtaining an execution of any such corporate transaction (the "Transaction"), and the Executive wishes to continue to serve in the employ of the Company in the current capacity and upon the terms and conditions set forth in the Original Agreement, as modified and amended hereby for the compensatory arrangement in the event of a Transaction; and WHEREAS, the parties desire to make and memorialize certain amendments to the Original Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties agree as follows: 1. Definitions. Except as otherwise defined in the Original Agreement, all capitalized terms herein not otherwise defined shall have the same meaning as in the Original Agreement. For purposes hereof: (a) "Code" shall mean the United States Internal Revenue Code of 1986, as amended. 1 (b) "Change of Control Date" shall mean the date on which a Change of Control shall be deemed to have occurred. (c) "Shareholders Agent" shall mean David R. Clark, or such other person appointed as the agent and representative of the shareholders of PFMI with respect to the Transaction under a Shareholders Agent Agreement. (d) "Parachute Payment" shall mean any payment in the nature of compensation payable to the Executive if such payment is contingent on a change in the ownership or effective control of the Company or PFMI. (e) "Acquirer" means the person or entity acquiring the shares of PFMI by reason of a Change of Control. (f) "Shareholders Agent Agreement" shall mean an agreement binding on the shareholders of PFMI and executives of the Company participating in bonuses as a result of a Transaction, said agreement specifying the rights and obligations of the parties. 2. Change of Control Amendment. Subject to the Effective Conditions (as herein defined) and provided the Executive is in the employment of the Company as of the Change of Control Date, the parties hereby agree to amend subsection f. of Section 2.3 of the Original Agreement to read as follows: f. Change of Control. If a Change of Control shall occur before the termination of this Agreement, then the Company shall pay to Executive, in lump sum by bank check or other good funds, simultaneously with the Change of Control on the Change of Control Date, a bonus ("Bonus") equal to 3% of the net proceeds realized by PFMI's shareholders and Executive and the other officers of the Company receiving payments similar to the Bonus hereunder from the Transaction, after all purchase price adjustments and reductions for the retirement of debt and other obligations of the Company (excluding the Bonus hereunder and other bonuses payable to other officers of the Company), and escrow and indemnity deposits and other adjustments (including costs and fees) as may be necessary or required as a condition of the closing of the Transaction, and as reduced by $2,129,630 to be payable pursuant to a deferred compensation plan to be adopted by the Company on or prior to the Change of Control Date. It is expressly agreed and understood and the Executive hereby acknowledges that the intent of the Bonus is to place the Executive in the same economic position with respect to the Transaction, with the same risk of indemnity and obligation for sharing transaction costs, as a hypothetical shareholder owning 3% of the outstanding capital shares of PFMI; provided, it is expressly understood that Executive will have no right to participate in or receive any warrants issued to the shareholders in the Transaction. In furtherance of this understanding, Executive as a condition of receiving said Bonus shall agree, and upon instructions from the Shareholders Agent, shall deliver his proportionate share of said Bonus for deposit in any escrow or other indemnity account as may be 2 required pursuant to any purchase agreement and other ancillary agreements (including a Shareholders Agent Agreement) related to the Transaction. As a further condition of the payment of the Bonus, Executive agrees to enter into, execute and deliver such ancillary agreements along with shareholders of PFMI and other key executives participating in any similar bonus on the same Change of Control as may be required pursuant to the closing of the Transaction, or otherwise agreed upon by such parties, as necessary to carry out the obligations of the Executive for his several responsibilities (as among the PFMI shareholders and participating key executives receiving distributions of the aforesaid net purchase price proceeds), to indemnify and hold harmless the Acquirer in the Transaction from working capital or other purchase price adjustments, claims under indemnity obligations, tax sharing agreements or otherwise, and all costs, fees, interest, and expenses associated therewith and under the purchase agreement or any ancillary agreement or in the administration thereof. Executive as a further condition of payment of said Bonus does hereby agree that duly appointed Shareholders Agent (representing the PFMI shareholders and Executive and other key executives participating in the aforesaid net proceeds) shall be duly authorized to direct the Company, Acquirer, any escrow agent or any other party distributing or paying such Bonus or any other proceeds from the Transaction, including from an escrow or indemnity account, for the benefit of Executive to distribute all or part thereof to the Shareholders Agent for deposit and distribution under the terms of a Shareholders Agent Agreement, or require the Executive to likewise contribute all or part thereof to the Shareholders Agent, subject to the Shareholders Agent's obligation to make payments thereof to the Executive, and further subject to Shareholders Agent's reasonable discretion to establish a reserve for future indemnity, costs, expenses or claims arising from or related to the Transaction as the Agent deems necessary. The Bonus herein shall be subject to normal and appropriate employment tax, withholding, and other similar deductions. 3. Effective Conditions. The effectiveness of the amendment in Section 2 herein and the payment of the Bonus contemplated thereunder is subject to the satisfaction of all of the following conditions (the "Effective Conditions"): (a) On or before the Effective Date, the delivery by the Executive of a waiver (in the form attached as Exhibit A) of all Parachute Payments due to or receivable by the Executive under any other plan, arrangement or agreement between the Executive and the Company, other than as provided under the Original Agreement, as hereby amended. (b) Approval (in accordance with Section 280G(b)(5)(B) of the Code ) by the shareholders of the Company and PFMI of the amendment in Section 2 hereof and the payment of the Bonus thereunder (said approval date being the "Effective Date") before the closing of the Transaction. (c) The Change of Control occurs within six months of the Effective Date. 3 4. Effectiveness. The amendment in Section 2 shall not become operative until the satisfaction of conditions (a) and (b) of Section 3 hereinabove. Further provided that notwithstanding the operative effect of the amendment in Section 2, if a Change of Control does not occur within six months of the Effective Date, the amendment in Section 2 shall thereafter become null and void, and the Original Agreement, only as amended hereunder in Section 5, shall be binding on the parties as originally written. 5. Other Amendment. (a) Section 3.1(a) of the Original Agreement is amended by deleting therefrom the following sentence: "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 Executive hereby waives any and all rights to any CPI increases referenced above not otherwise awarded or implemented prior to the date hereof. (b) The second sentence of Section 5.3 is amended to read as follows: "Such indemnification shall continue as to Executive for a period of two (2) years after he has ceased to be an employee, officer, or director of the Company and shall inure to the benefit of his heirs and estate". 6. No Change. Except as amended by this Amendment, the Original Agreement shall remain in full force and effect. 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 4 EXHIBIT A WAIVER OF PAYMENT MAY 11, 2004 A. Pierre Foods, Inc. (the "Company") and Robert C. Naylor, an executive of the Company (the "Executive") entered into an employment agreement, dated December 31, 2001 (the "Original Agreement"). B. Pursuant to the Original Agreement, the Company committed to pay Executive certain payments under Section 2.3 f. upon a Change of Control (as defined in the Original Agreement). C. The shareholders of PF Management, Inc. ("PFMI") are in negotiations with an undisclosed buyer ("Buyer") pursuant to which the shareholders of PFMI may sell all of the capital shares of PFMI to said Buyer. D. The Company and Executive desire to amend Section 2.3 f. of the Original Agreement (the "Amendment") to provide for the payment of a different amount in the event of a Change of Control (the "New Bonus"). The undersigned Executive, recognizing that PFMI, the Company and Buyer will rely on this Waiver, agrees as follows: The Executive understands that it is the intent of the Board of Directors of the Company to submit the proposed Amendment to the Original Agreement providing for the New Bonus to a vote of PFMI and its shareholders for approval of said Amendment and the payment of said New Bonus in accordance with the shareholder approval procedures in Section 280G(b)(5)(B) of the Internal Revenue Code of 1986, as amended, ("Code") and the regulations thereunder. In consideration thereof, the Executive does hereby waive all rights to any other payments in the nature of compensation payable to the Executive under any other plan, arrangement or agreement if such payment is contingent on a Change of Control. The Executive understands that there are no guarantees or commitments that the shareholders will actually approve such Amendment and New Bonus. 5 All other provisions of the Original Agreement shall remain in full force and effect, except as modified or amended by the Amendment or affected by this Waiver. This Waiver shall be construed in accordance with the laws of the State of North Carolina, excluding conflicts of laws and principles, with the understanding that it is intended to exempt the payment of the New Bonus from the application of excise taxes under Section 4999 of the Code. The undersigned Executive has executed this Waiver as of May 11, 2004. Acknowledged, Accepted and Received this 11th day of May, 2004 ________________________________ Robert C. Naylor Pierre Foods, Inc. By: _____________________________ David R. Clark, Vice Chairman 6 EX-12 9 g89090exv12.txt EX-12 . . . Exhibit 12 CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS OF DOLLARS, EXCEPT FOR RATIOS)
FISCAL YEARS ENDED --------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Income/(loss) from continuing operations before income tax provision (benefit) and acumulative effect of accounting change $ 2,737 $ 2,900 $ 734 $ (4,979) $ (19,060) Add Fixed Charges: Interest expense 16,209 13,482 12,679 12,763 14,086 Interest expense on operating leases 485 391 450 394 353 Amortization of financing costs 770 746 528 571 900 ---------- ---------- ---------- ---------- ---------- Total income (loss) as defined $ 20,201 $ 17,519 $ 14,391 $ 8,749 $ (3,721) ========== ========== ========== ========== ========== Fixed Charges: Interest expense $ 16,209 $ 13,482 $ 12,679 $ 12,763 $ 14,086 Interest expense on operating leases $ 485 $ 391 $ 450 $ 394 $ 353 Capitalized interest 230 - - - - Amortization of financing costs 770 746 528 571 900 ---------- ---------- ---------- ---------- ---------- Total fixed charges $ 17,694 $ 14,619 $ 13,657 $ 13,728 $ 15,339 ========== ========== ========== ========== ========== Ratio of earnings to fixed charges 1.14 1.20 1.05 Additional income required to meet a 1.0 ratio: n/a n/a n/a $ 4,979 $ 19,060
EX-21 10 g89090exv21.txt EX-21 Exhibit 21 SUBSIDIARIES OF PIERRE FOODS, INC. Fresh Foods Properties, LLC Compass Outfitters, LLC EX-31.1 11 g89090exv31w1.txt EX-31.1 Exhibit 31.1 CERTIFICATIONS I, Norbert E. Woodhams, certify that: 1. I have reviewed this annual report on Form 10-K of Pierre Foods, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 17, 2004 /S/ NORBERT E. WOODHAMS -------------------------------------- Norbert E. Woodhams President and Chief Executive Officer (Principal Executive Officer) EX-31.2 12 g89090exv31w2.txt EX-31.2 Exhibit 31.2 CERTIFICATIONS I, Pamela M. Witters, certify that: 1. I have reviewed this annual report on Form 10-K of Pierre Foods, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; d. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and e. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 17, 2004 /S/ PAMELA M. WITTERS --------------------------------- Pamela M. Witters Chief Financial Officer (Principal Financial Officer) EX-32 13 g89090exv32.txt EX-32 ================================================================================ Exhibit 32 CERTIFICATIONS REQUIRED PURSUANT TO 18 U.S.C. . " 1350 Solely for the purposes of complying with 18 U.S.C. "1350, I, the undersigned President and Chief Executive Officer of Pierre Foods, Inc. (the "Company"), hereby certify, based on my knowledge, that the Annual Report on Form 10-K of the Company for the year ended March 6, 2004 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ NORBERT E. WOODHAMS - ----------------------- Norbert E. Woodhams May 17, 2004 Solely for the purposes of complying with 18 U.S.C. "1350, I, the undersigned Chief Financial Officer of Pierre Foods, Inc. (the "Company"), hereby certify, based on my knowledge, that the Annual Report on Form 10-K of the Company for the year ended March 6, 2004 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ PAMELA M. WITTERS - --------------------- Pamela M. Witters May 17, 2004 -----END PRIVACY-ENHANCED MESSAGE-----


	Quarters Ended
	5/31/2003		8/30/2003			11/29/2003		3/6/2004
Operating revenues, net	$	81,479,869	$	81,248,052		$	93,824,930	$	101,996,465
Gross profit	$	25,259,954	$	23,038,885		$	27,322,811	$	28,692,650
Net income (loss)	$	376,235	$	(1,934,115	)	$	1,768,328	$	1,223,347
Net income/(loss) per common share — basic and diluted	$	3.76	$	(19.34	)	$	17.68	$	12.24


	6/1/2002			8/31/2002			11/30/2002		3/1/2003
Operating revenues, net	$	61,878,429		$	61,843,102		$	79,032,831	$	73,584,461
Gross profit	$	21,625,594		$	20,864,004		$	26,377,329	$	23,380,324
Income before cumulative effect of accounting change	$	(113,602	)	$	(671,138	)	$	2,160,880	$	401,843
Net income (loss)	$	(18,718,136	)	$	(671,138	)	$	2,160,880	$	401,843
Net income/(loss) per common share — basic and diluted before cumulative effect of accounting change	$	(1.14	)	$	(6.71	)	$	21.61	$	4.02
Net income/(loss) per common share — basic and diluted	$	(187.18	)	$	(6.71	)	$	21.61	$	4.02


Item Number		Page
	PART I
Item 1.	Description of Business		1
	General Development of Business		1
	Narrative Description of Business		1
Item 2.	Properties		3
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 Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		5
Item 6.	Selected Financial Data		6
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		11
	Commercial Commitments, Contingencies and Contractual Obligations		14
	Inflation		15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		16
Item 8.	Financial Statements and Supplementary Data		18
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		18
Item 9A.	Controls and Procedures		18
	PART III
Item 10.	Directors and Executive Officers of the Registrant		19
Item 11.	Executive Compensation		20
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		22
Item 13.	Certain Relationships and Related Transactions		23
Item 14.	Principal Accountant Fees and Services		24
	PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		25
	OTHER INFORMATION
	Signatures		26
	Index to Exhibits		27

	(1)		Reflects income from discontinued operations in the amount of $2,828 in fiscal 2000. In addition, reflects gain from disposal of discontinued operations of $6,802 in fiscal 2000.

	(2)		Reflects an extraordinary loss from early extinguishment of debt in the amount of $455 in fiscal 2001 and $52 in fiscal 2000.

	(3)		Reflects a loss due to a cumulative effect of accounting change in the amount of $18,605 in fiscal 2003. See Note 2– Summary of Significant Accounting Policies— to the consolidated financial statements.


	Page
PIERRE FOODS, INC.
INDEPENDENT AUDITORS’ REPORT		F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 6, 2004 and March 1, 2003		F-3
Consolidated Statements of Operations for the Years Ended March 6, 2004, March 1, 2003 and March 2, 2002		F-4
Consolidated Statements of Shareholders’ Equity for the Years Ended March 6, 2004, March 1, 2003 and March 2, 2002		F-5
Consolidated Statements of Cash Flows for the Years Ended March 6, 2004, March 1, 2003 and March 2, 2002		F-6
Notes to Consolidated Financial Statements		F-7


Long-Term Debt Maturities, Including Capital Leases (Note 9)
2005		2006		2007		2008		Total
$	1,314,933	$	116,303,479	$	20,188,912	$	280,027	$	138,087,351


Obligation of Special Purpose Entity
								2009 and
2005		2006		2007		2008		Thereafter		Total
$	313,344	$	331,029	$	349,712	$	369,450	$	4,243,151	$	5,606,686


/S/ NORBERT E. WOODHAMS		/S/ PAMELA M. WITTERS

Norbert E. Woodhams		Pamela M. Witters
President and Chief Executive Officer		Chief Financial Officer and Treasurer