-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GQfEWhT1gOX4aPyCt1/w/Bwtqpir/qAZ/GZ1E27uXpcKmWGYNQJz2bdjnxpj/ctv xKamK4QH8cj0P1LzOhSLkw== 0000760775-97-000134.txt : 19970929 0000760775-97-000134.hdr.sgml : 19970929 ACCESSION NUMBER: 0000760775-97-000134 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19970628 FILED AS OF DATE: 19970926 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WLR FOODS INC CENTRAL INDEX KEY: 0000760775 STANDARD INDUSTRIAL CLASSIFICATION: POULTRY SLAUGHTERING AND PROCESSING [2015] IRS NUMBER: 541295923 STATE OF INCORPORATION: VA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-17060 FILM NUMBER: 97686016 BUSINESS ADDRESS: STREET 1: P O BOX 7000 CITY: BROADWAY STATE: VA ZIP: 22815 BUSINESS PHONE: 7038674001 MAIL ADDRESS: STREET 1: 800 CO OP DRIVE CITY: TIMBERVILLE STATE: VA ZIP: 22853 FORMER COMPANY: FORMER CONFORMED NAME: WAMPLER LONGACRE ROCKINGHAM INC DATE OF NAME CHANGE: 19881114 FORMER COMPANY: FORMER CONFORMED NAME: WAMPLER LONGACRE INC DATE OF NAME CHANGE: 19880209 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 28, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ Commission File Number 0-17060 WLR FOODS, INC. (Exact name of registrant as specified in its charter) Virginia 54-1295923 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) P.O. Box 7000, Broadway, Virginia 22815 (Address of principal executive offices) Registrant's telephone number, including area code 540-896-7001 Securities registered pursuant Name of exchange on which to Section 12(b) of the Act: registered N/A N/A Securitis registered pursuant to Section 12(g) of the Act: Common Stock - no par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (X) Yes _____ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ________ The aggregate value of the voting stock held by non-affiliates of the registrant as of September 22, 1997 was approximately $126,486,468. As of that date 16,282,050 shares of the registrant's common stock were issued and outstanding. PART I Item 1. BUSINESS. General WLR Foods, Inc. (with its subsidiaries, "WLR" or the "Company") was incorporated in the Commonwealth of Virginia in 1984. WLR is a leading producer, processor and marketer of poultry-based products, including fresh, frozen and further processed chicken and turkey. The Company markets products under its Wampler Foods brand trademark and under various private labels to customers in the retail, foodservice and institutional markets, as well as to export customers in more than 64 countries. In 1997, WLR was ranked the second largest turkey producer by Turkey World magazine, the eighth largest further processor of poultry by Meat & Poultry magazine and the fourteenth largest chicken producer by Broiler Industry. Company sales for fiscal 1997 were $1.014 billion, including approximately $400 million of chicken products and $490 million of turkey products, and representing approximately 565 million pounds of chicken and 530 million pounds of turkey. Remaining sales were comprised of feed, ice, nonpoultry distribution and by-product sales. The Company markets a full line of chicken and turkey products, including individually packaged fresh and frozen whole birds, fresh and frozen bulk parts, fresh and frozen tray packs of individual parts and a large assortment of further processed products. By offering a broad array of products, the Company is able to shift production among whole birds, parts and further processed products in response to changes in customer demands and product prices. WLR is also actively expanding its offering of further processed products, which offer consumers added convenience and taste while generating higher margins for WLR, and for which grain costs represent a smaller percentage of overall production cost. Further processed products include a variety of salads, sliced luncheon meats, turkey burgers and sausage, ground turkey and chicken and various fully cooked breast products. WLR markets branded, as well as, private label poultry products to retailers, fast food operators, foodservice and institutional customers primarily in the eastern United States, as well as to customers in the upper Midwest and California. The Company is positioning itself as a full-service supplier to these customers for poultry-based products, offering a broad assortment of branded and private label products across multiple price points. In addition, WLR continues to expand its export sales, which have grown from 4% of total Company sales in 1990 to 10% of sales in 1997. The Company is vertically integrated and controls the growing of its poultry, and the processing, preparation, packaging and marketing of its products. Such integration enables WLR to ensure a consistently high degree of product quality, and to adjust its product mix to changes in the prices of products, changes in customer requirements and to geographic imbalances in supply. As an integrated producer, the Company also has opportunities to reduce operating costs, improve operating efficiency and deliver a higher yield of harvestable birds to its processing plants through improvements in processing facilities, automation and the active monitoring and management of its breeder stock, hatching and growing conditions and feed components. In addition to its poultry operations, the Company operates a cold storage and ice manufacturing and distribution business through its Cassco Ice & Cold Storage, Inc. ("Cassco") operating subsidiary. Cassco is a leading ice producer and distributor in the mid-Atlantic region of the United States. In 1997, Cassco generated sales of $19.2 million. On July 25, 1997, the Company sold its 65% interest in May Supply Company, Inc., a wholesale distributor of plumbing supplies and equipment. Poultry Production WLR Foods' primary operations include the breeding, hatching, grow-out and processing of turkeys and chickens. For fiscal 1997, WLR Foods produced approximately 561 million pounds of dressed turkey and 622 million pounds of dressed chicken. WLR Foods purchases breeder stock turkey eggs which it hatches and places with growers who supply labor and housing to produce breeder flocks. These breeder flocks produce eggs that are taken to the company-owned turkey hatchery for incubation and hatching into poults, providing approximately 53% of the Company's poult supply. The balance of the Company's poults are purchased from Cuddy Farms, Inc. (not affiliated with WLR Foods). In its chicken operations, WLR Foods purchases breeder flock chicks and places them with growers who supply labor and housing to raise the birds. The birds are then moved to breeder farms where they begin providing eggs, which are in turn transported to company-owned hatcheries. Once hatched, day-old poults and chicks are inspected and vaccinated against common poultry diseases. In total, WLR Foods contracts with 200 breeder growers who grow approximately one-half of WLR Foods' turkey, and all of WLR Foods' chicken, breeder flocks. In February, 1997, the Board of Directors approved the investment of $8 million for the construction of a new hatchery at the Goldsboro, North Carolina facility and the implementation of a second shift. The Company is in the process of completing the hatchery and anticipates that it will be fully operational before the end of the calendar year. A second shift at the adjacent processing facility will permit the Company to leverage its fixed plant expenses by spreading such expenses over a greater volume of product, thereby minimizing per unit cost. The expansion has been anticipated by the Company since it acquired the facility in September 1995. After hatching and vaccination, poults and chicks are transported to one of WLR Foods' approximately 886 contract growers located in Virginia, West Virginia, Pennsylvania, Maryland, North Carolina and South Carolina who supply labor and housing to raise the turkeys and chickens to maturity. WLR Foods supplies feed primarily from company- owned feedmills and provides grower support through WLR Foods' technicians and veterinarians. Grow-out and breeder farms provide WLR Foods with more than 57 million square feet of growing facilities. These farms typically are grower-owned and operate under contract with WLR Foods, providing facilities, utilities and labor. Contract growers are compensated on a cost-based formula and several incentive-based formulas. Approximately 99% of WLR Foods' turkeys and 100% of its chickens are raised by contract growers, with the balance grown by independent growers and company-owned farms. WLR Foods strives to maintain good contract grower relationships and believes the availability of contract growers is sufficient for anticipated needs. An important factor in the grow-out of poultry is the rate at which poultry converts feed into body weight. The Company purchases it primary feed ingredients on the open market. These ingredients consist primarily of corn and soybean meal. Because the quality and composition of feed is critical to the feed conversion rate, WLR Foods formulates and manufactures a majority of its feed at one of its five feedmills. WLR Foods has an annual feed manufacturing capacity of approximately 2 million tons and anticipates no difficulty in meeting the Company's feed requirements in the future. Once the turkeys and chickens reach marketable weight, they are transported in WLR Foods' trucks to one of its eight poultry processing plants. These plants utilize modern, highly automated equipment to process and package the turkeys and chickens for sale or preparation for further processing. Some further processing, such as deboning and skinning, is also conducted in a number of these processing plants. Additional further processing, including slicing, grinding, marinating, spicing and cooking to produce delicatessen products, frankfurters, meat salads, ground turkey and chicken, and food service products is conducted at the Company's two further processing plants. Distribution, Public Refrigerated Warehousing, Ice and Other WLR Foods' distribution business includes fresh poultry, beef, and other meat products purchased from third parties for resale, along with certain products produced by the Company. These operations are conducted within a radius of approximately 75 miles of WLR Foods' further processing facility in Franconia, Pennsylvania. Cassco manufactures and distributes ice in the mid-Atlantic region and operates five public refrigerated warehouses in Virginia, West 2 Virginia and North Carolina. WLR Foods' protein conversion plants convert the nonedible by-products of its poultry processing plants into feed ingredients, with the balance sold to pet food manufacturers. The following table approximates sales revenues from WLR Foods' products for the last three fiscal years. Fiscal 1997 Fiscal 1996 Fiscal 1995 ----------- ----------- ----------- (Dollars in Millions) Chicken, fresh and frozen $400 $380 $310 Turkey, fresh and frozen 490 485 480 Ice/Warehousing 19 19 18 Distribution, Feed and Other 105 114 101 ---- ---- ---- Total Net Sales $1,014 $998 $909 ====== ==== ==== Competition The poultry industry is highly competitive. WLR Foods markets its products in competition with larger and smaller poultry companies on the basis of price, quality and service, with WLR Foods' greatest competition coming from four or five of the country's larger poultry producers and processors. The pricing of poultry products is so competitive that any company with a cost advantage is in a favorable competitive position. Seasonal increases in production and customer buying patterns contribute to fluctuations in prices which are controlled more by supply and demand than by cost of production. WLR Foods primarily markets its chicken products in the highly competitive eastern sections of the United States. Seasonality In general, the Company's sales are relatively stable throughout the year. However demand for chicken and further processed products is typically strongest in May through August while demand for turkey products is typically strongest in September through December. Management responds to this seasonality by attempting to manage operating volumes and inventory levels, and the associated working capital requirements, to meet expected demand. As a consequence, the Company's short-term borrowings typically peak in the third and fourth quarters of each fiscal year, reflecting the buildup of turkey product inventories. Trademarks and Patents As of August 1996, the Company's Wampler Foods subsidiary began marketing products under the trademarks WAMPLER FOODS and WAMPLER FOODS and design, which have applications for registration pending at the U.S. Patent and Trademark Office. Wampler Foods continues to market its products under the trademarks WAMPLER-LONGACRE and design, TRIM FREE, COLONY FARMS, DINOSAUR WINGS, POULTRY PARTNERS, POULTRY PARTNERSHIP, KAFETERIA KIT and THE DELI ROAST COLLECTION and design, all of which are federally registered trademarks. Products are also sold under the LEAN LITE DELI, ROUND HILL, FARMER'S CHOICE and VALLEY PRIDE marks. Following the acquisition of Cuddy Foods, Wampler Foods obtained the right to market products under various marks using the CUDDY name. Wampler Foods ceased packing products under the CUDDY marks as of July 1, 1997. Wampler Foods continues to market its export and foreign military sales under the COLONEL ROCKINGHAM design and ROCKINGHAM trademarks, as well as the WAMPLER FOODS trademark. Cassco distributes its products under the federally registered trademark CASSCO. Wampler Foods holds a patent for pasteurized salads and a patent for processing turkey. Government Contracts WLR Foods' government contracts are a small segment of its total sales, consisting of bids on particular products for delivery at specified locations. Contracts are generally bid, and the product is delivered, within a one- to two-month period. These contracts include both chicken and turkey products and can involve further processed products. WLR Foods had less than $0.5 million of governmental contracts outstanding as of June 28, 1997, compared to approximately $0.1 million as of June 29, 1996. 3 Foreign Sales WLR Foods' export sales constituted approximately 10% of its total annual sales in each of fiscal 1997 and 1996, compared to 8% for fiscal year 1995. Wampler Foods has a full-time staffed export sales office which coordinates export sales efforts on behalf of WLR Foods. Export sales originate from that office and use independent brokers as needed. Sales are made to customers in over 64 countries. Transportation Transportation logistics, including the availability of transportation equipment and the efficiency of transportation systems, are key elements in the raising of poultry, transporting feed to the contract growers and outside purchasers, transporting poultry to the processing plants, and transporting products to customers. WLR Foods has contracts with two railroad companies for the delivery of feed ingredients to WLR Foods' feedmills. Delivery of the Company's products are generally made by truck. WLR Foods maintains a fleet of refrigerated trucks and uses them, along with refrigerated common carrier and customer-owned vehicles, to deliver its products. Export products are loaded in refrigerated containers and shipped overseas. Raw Materials WLR Foods' largest cost is for basic feed ingredients, namely corn and soybean meal. Feed grains are commodities and, as such, are subject to volatile price changes caused by weather, size of harvest, changes in demand, transportation and storage cost and the agricultural policies of the United States and foreign governments. Although WLR Foods can, and sometimes does, purchase grain in the forward markets, it cannot completely eliminate the potential adverse effect of grain price increases. The Company uses futures contracts and forward purchases to hedge the risk of fluctuating grain prices. The results of closed hedging transactions become part of the cost of the related inventory items, and gains and losses in the market value of open hedging contracts are reported as an adjustment to the carrying amount of the hedged item. Environmental and Other Regulatory Compliance WLR Foods' facilities and operations are subject to the regulatory jurisdiction of various federal agencies, including the Food and Drug Administration, Department of Agriculture, Environmental Protection Agency, Occupational Safety and Health Administration, and of corresponding state agencies in Virginia, West Virginia, North Carolina and Pennsylvania. All environmental permits, such as air, water and solid waste disposal permits, are issued by appropriate state agencies. A total of seven environmental permits are held by Wampler Foods's Virginia facilities, all of which were issued by the Virginia Department of Environmental Quality. The Hinton turkey processing facility holds an air permit which regulates certain combustion equipment and a water permit which regulates the treatment of process wastewater. The Harrisonburg turkey processing facility holds a water permit requiring pretreatment of its process wastewater to meet certain effluent standards before discharging into the regional sewer system. Wampler Foods' Timberville chicken processing and protein conversion facility holds a water permit which regulates the discharge of process wastewater and an air permit which regulates the operation of its protein conversion facility, as well as certain combustion equipment. The chicken processing facility in Alma/Stanley holds one water permit which regulates the discharge of process wastewater. Finally, the Broadway feedmill holds an air permit which was issued primarily for the control and abatement of dust. In addition to the seven environmental permits held by Wampler Foods, WLR Foods holds a Virginia Pollution Abatement permit which allows Wampler Foods' Virginia facilities to apply to land in Virginia certain wastewater biosolids generated by the facilities' wastewater treatment systems. In West Virginia, Wampler Foods' Moorefield facilities hold four environmental permits, all of which were issued by the West Virginia Department of Commerce, Labor & Environmental Resources. The chicken processing and protein conversion facility holds a water permit which regulates the discharge of process wastewater, an air permit which regulates the operation of the Company's protein conversion facility, and a sludge management permit regulating the land application in West Virginia of certain wastewater biosolids generated at the Moorefield 4 facilities wastewater treatment works. The Moorefield feedmill holds one air permit which was issued primarily for the control and abatement of dust. Wampler Foods' North Carolina facilities hold a total of thirteen environmental permits, all of which were issued by the North Carolina Department of Environment, Health & Natural Resources. The Monroe turkey processing plant holds three permits: an industrial wastewater discharge permit which requires process wastewater to be pretreated prior to discharge to a regional sewer system, a stormwater permit which regulates stormwater discharges, and an air permit which regulates boiler emissions. The Marshville turkey processing plant holds an industrial wastewater discharge permit and stormwater permit which are similar to the counterpart permits held by the Monroe facility. In addition, the Marshville facility holds a stormwater permit which regulates cooling water and boiler blowdown discharges. The Wingate feedmill holds a stormwater permit which regulates stormwater discharges and an air permit which regulates emissions from boilers, bagfilters, and related equipment. The Goldsboro feedmill and Jones County grain elevator each hold an air permit issued for the control and abatement of dust. Finally, the Goldsboro chicken processing facility holds three environmental permits, a general stormwater permit, an industrial user pretreatment permit providing for the pretreatment of certain wastewater before discharge to the City of Goldsboro Control Authority, and an air permit regulating certain combustion equipment. Pennsylvania facilities owned by Wampler Foods hold a total of six environmental permits. The Franconia turkey processing plant holds five permits: two water permits for the treatment of process wastewater, two air permits to regulate operation of certain combustion and incineration equipment, and one municipal solid waste disposal permit for the disposal of incinerator ash. The New Oxford turkey processing facility holds one air permit which regulates combustion equipment. All of the Pennsylvania permits were issued by the Pennsylvania Department of Environmental Resources. In addition to the foregoing environmental permits, and where not otherwise addressed above, all facilities have taken steps to ensure compliance with stormwater regulations. Where applicable, facilities have applied for the necessary group, individual or general storm water permit in accordance with state and federal guidelines. Further, each facility has registered aboveground and underground storage tanks in accordance with relevant state and federal regulations. Management believes that all facilities and operations are currently in compliance with environmental and regulatory standards. Compliance has not had a materially adverse effect upon WLR Foods' earnings or competitive position in the past, and it is not anticipated to have a materially adverse effect in the future. Employees WLR Foods employed over 8,500 persons as of June 28, 1997, none of whom were covered by a collective bargaining agreement. Item 2. PROPERTIES. WLR Foods' eight poultry processing facilities and two further processing plants are located in Virginia, West Virginia, Pennsylvania and North Carolina, and have a total slaughter capacity of approximately 650,000 turkeys per week (single shift) and 3.3 million chickens per week (double shift, except in the Goldsboro plant, which currently operates a single shift). During the coming winter the Goldsboro plant will move to a double shift, which will add 0.3 million chickens per week to the Company's capacity. WLR Foods owns and operates five feedmills with a production capacity of approximately 2 million tons of finished feed per year; a turkey hatchery with a production capacity of approximately 360,000 poults per week and three chicken hatcheries with a production capacity of approximately 3.5 million chicks per week; freezer and cold storage for finished products with approximately 5.2 million cubic feet of capacity; and two protein conversion plants with a total production capacity of 4,500 tons of raw product weekly. The diversity, number and geographic proximity of its processing and support facilities provide WLR Foods with operating flexibility and enable it to alter the size and mix of poultry processed among the various facilities, as market conditions change. The Company's assets are depreciated on a straight-line basis, based on the following asset lives: 5 Land Improvements 10-20 years Buildings & Improvements 5-20 years Machinery & Equipment 3-17 years Transportation Equipment 3-6 years Cassco operates public refrigerated facilities at five locations with approximately 9.2 million cubic feet. These facilities are located close to major food processors in Virginia, West Virginia and North Carolina. Cassco also operates seven ice manufacturing facilities in Virginia, West Virginia and Washington, D.C. with a capacity of approximately 1,200 tons per day. Item 3. LEGAL PROCEEDINGS. On March 8, 1996, suit was filed against WLR Foods and its wholly owned subsidiary, WLR Poultry Products, Inc., New Hope Feeds, Inc. and Equipment Truck Leasing, Inc. (collectively, "New Hope") and the principal shareholders of New Hope, by Case Foods, Inc. and its wholly owned subsidiary, Case Farms of North Carolina, Inc. (collectively, "Case"). The suit, filed in the Burke County, North Carolina, General Court of Justice, Superior Court Division, arises from the September 29, 1995 acquisition by the Company of the chicken processing plant, live production assets, and inventory of New Hope (the "Acquisition"). The complaint maintains that the Acquisition was in violation of a right of first refusal previously granted by New Hope to Case. The suit also maintains that the Acquisition was in violation of a letter of intent between New Hope and Case, and in contravention of certain oral promises and representations claimed to have been made by New Hope. In addition to breach of contract and other claims against New Hope, the claims against WLR Foods and its subsidiary include tortious interference with contract, tortious interference with prospective advantage, and unfair and deceptive trade practices under North Carolina law. The Complaint seeks monetary damages of an unspecified amount from WLR Foods and New Hope, some of which are requested to be trebled pursuant to North Carolina law. The Company intends to defend vigorously against the claims made by Case, and does not expect the litigation to have a material effect on the Company or its financial statements. Moreover, in connection with the Acquisition, the Company entered into an Indemnification Agreement with New Hope, secured by a Stock Escrow Agreement, pursuant to which New Hope is obligated to defend WLR Foods, and to indemnify WLR Foods for certain liabilities arising from the Acquisition, specifically including liabilities arising from this litigation. The escrow account currently holds 318,332 shares of WLR Foods Common Stock. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to the shareholders of the Company during the fourth quarter of the fiscal year ended June 28, 1997. Executive Officers of the Registrant The following information is given regarding WLR Foods' executive officers. ______________________________________________________________________________
Name and Position Principal Occupation with the Company Age During the Last Five Years ______________________________________________________________________________ James L. Keeler 62 Chief Executive Officer since February President 1988 Chief Executive Officer James L. Mason 47 President of Wampler Foods since January Executive Vice President 1994; previously, General Manager and President President of Wampler-Longacre Turkey, Inc. Wampler Foods, Inc. since April 1990 6 Robert T. Ritter 46 Chief Financial Officer since June 1996; Chief Financial previously, Private Investor and Financial Officer Consultant; Controller and Treasurer of Treasurer and Secretary American Cyanamid Co. John J. Broaddus 47 Executive Vice President since June 1996; Executive Vice President previously, Vice President of Wampler Wampler Foods, Inc. Longacre, Inc. since 1994 and President of Cassco since 1990 Jane T. Brookshire 51 Vice President of Human Resources since Vice President of October 1993; previously, Director of Human Resources Human Resources for WLR Foods Ruth J. Mack 42 Executive Vice President of Sales and Executive Vice President Marketing since May 1997; previously, of Sales and Marketing Executive Vice President for Marketing and Wampler Foods, Inc. Sales for Just Born, Inc., Bethlehem, Pennsylvania from 1994 to 1997, and Director of Marketing for Pepsi Cola Company from 1989 to 1994 Robert W. Lauffenberger 61 Special Assistant to the President and Chief Special Assistant to the Executive Officer since May 1997; previously, President and Chief President of Con Agra Turkey Company from 1994 Executive Officer to 1995, and President of Rocco Turkeys, Inc. from 1988 to 1993 _______________ James L. Mason is the son of Herman D. Mason, who is Vice Chairman of the Company's Board.
PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. Public trading of shares of WLR Foods' common stock commenced on May 10, 1988. The stock was included in NASDAQ as of September 12, 1988, and was included in NASDAQ/National Market System as of March 7, 1989. The range of high and low bid information for the stock, as well as information regarding dividends declared by WLR Foods, for each full quarterly period within the two most recent fiscal years is incorporated by reference to Note 12 to the Registrant's Consolidated Financial Statements in the Annual Report, attached hereto as Exhibit 13.3. As of September 22, 1997, the approximate number of shareholders of record was 4,000. Item 6. SELECTED FINANCIAL DATA. Selected financial data for each of the fiscal years in the ten- year period ended June 28, 1997 is incorporated by reference to the table entitled "Financial Highlights" in the Annual Report, attached hereto as Exhibit 13.1. A summary of significant accounting policies and business acquisitions and dispositions is incorporated by reference to Notes 1 and 2 to the Registrant's Consolidated Financial Statements in the Annual Report, attached hereto as Exhibit 13.3. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management's discussion and analysis of financial condition and results of operations is incorporated by reference to that section in the Annual Report, attached hereto as Exhibit 13.2. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this Item, except for the required financial statement schedule, is incorporated by reference to the Consolidated Financial Statements and Notes thereto in the Annual Report, attached hereto as Exhibit 13.3. The required financial statement schedule is included on page 13 of this report. 7 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There were no changes in or disagreements with accountants on accounting and financial disclosure during WLR Foods' two most recent fiscal years or any subsequent interim period. PART III Items 10 - 13 inclusive. These items have been omitted in accordance with instructions to Form 10-K Annual Report. The Registrant will file with the Commission in September 1997, pursuant to Regulation 14A, a definitive proxy statement that will involve the election of directors. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under Section 16 of the Securities Exchange Act of 1934, the Company's directors, executive officers and beneficial owners of more than 10% of the outstanding common stock are required to file reports with the Securities and Exchange Commission concerning their ownership of and transactions in common stock. Based on copies of those reports and related information furnished to the Company, the Company believes that all such filing requirements were complied with in a timely manner for the fiscal year ended June 28, 1997, except that a Form 3 was not filed for Robert W. Lauffenburger on a timely basis upon his becoming an executive officer of the Company. A Form 3 was filed promptly upon discovery of the error. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Financial Statements, Financial Statement Schedules and Exhibits Financial Statements Consolidated Statements of Operations - Fiscal years ended June 28, 1997, June 29, 1996 and July 1, 1995 Consolidated Balance Sheets - June 28, 1997 and June 29, 1996 Consolidated Statements of Shareholders' Equity - Fiscal years ended June 28, 1997, June 29, 1996 and July 1, 1995 Consolidated Statements of Cash Flows - Fiscal years ended June 28, 1997, June 29, 1996 and July 1, 1995 Notes to Consolidated Financial Statements - Fiscal years ended June 28, 1997, June 29, 1996 and July 1, 1995 Financial Statement Schedules Independent Auditors' Report on Schedules Schedule II - Valuation and Qualifying Accounts Schedules not included in this Item have been omitted because they are either not applicable or the information is included in the Consolidated Financial Statements or notes thereto. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 28, 1997. 8 (c) Exhibits See Exhibit Index. [The remainder of this page is intentionally left blank.] 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WLR Foods, Inc. By:______/S/ James L. Keeler________________ Its President & Chief Executive Officer Date: September 26, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. ______/s/ James L. Keeler_____________ President & Chief Executive Officer Date: September 26, 1997 ______/s/ Robert T. Ritter____________ Chief Financial Officer Date: September 26, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on September 26, 1997. Signature Title ____________________________________ Director George E. Bryan* ____________________________________ Director Charles L. Campbell* ____________________________________ Director Stephen W. Custer* ____________________________________ Director Calvin G. Germroth* ____________________________________ Director William H. Groseclose* ____________________________________ Director J. Craig Hott* ____/s/ James L. Keeler_____________ Director James L. Keeler ____________________________________ Director Herman D. Mason* 10 ____________________________________ Director Charles W. Wampler, Jr.* ____________________________________ Director William D. Wampler* *By ______/s/ Robert T. Ritter_______ Robert T. Ritter, attorney-in-fact 11 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE The Board of Directors and Shareholders WLR Foods, Inc.: Under date of August 20, 1997, we reported on the consolidated balance sheets of WLR Foods, Inc. and subsidiaries as of June 28, 1997 and June 29, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the fiscal years in the three-year period ended June 28, 1997, as contained in the June 28, 1997 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the June 28, 1997 annual report on Form 10-K of WLR Foods, Inc. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed in item 14(a) of this Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Richmond, Virginia August 20, 1997 12 WLR FOODS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR FISCAL YEARS ENDED JUNE 28, 1997, JUNE 29, 1996 and JULY 1, 1995 (in thousands)
Description Balance at Charged to Charged to Balance beginning cost and other at end of of period expenses accounts period Fiscal year ended June 28, 1997 Allowance for Doubtful Accounts $708 $946 $104 $1,550 ---- ---- ---- ------ Total $708 $946 $104 $1,550 ==== ==== ==== ====== Fiscal year ended June 29, 1996 Allowance for Doubtful Accounts $613 $297 $202 $708 ---- ---- ---- ---- Total $613 $297 $202 $708 ==== ==== ==== ==== Fiscal year ended July 1, 1995 Allowance for Doubtful Accounts $360 $686 $433 $613 ---- ---- ---- ---- Total $360 $686 $433 $613 ==== ==== ==== ====
13 EXHIBIT INDEX 3.1 Articles of Incorporation of the Registrant, restated effective May 30, 1995, incorporated by reference to Exhibit 3.1 of Form 10-K filed with the Securities and Exchange Commission on October 2, 1995. 3.2 Bylaws of the Registrant, as amended on November 2, 1994, incorporated by reference to Exhibit 3.2 of Form 10-K filed with the Securities and Exchange Commission on October 2, 1995. 4.1 Specimen Stock Certificate incorporated by reference to Exhibit 4 of Form 10-K filed with the Securities and Exchange Commission on September 27, 1990. 4.2 Note Agreement, dated May 1, 1991 with Minnesota Mutual Life Insurance Company, Inc. and others, incorporated by reference to Exhibit 4.4 of Form 10-K filed with the Securities and Exchange Commission on September 27, 1991. 4.3 First Amendment, dated October 16, 1992, to the Note Agreement, dated May 1, 1991 with Minnesota Mutual Life Insurance Company, Inc., incorporated by reference to Exhibit 4.3 of Form 10-K filed with the Securities and Exchange Commission on October 2, 1995. 4.4 Agreement of the Company, dated September 27, 1995, to furnish a copy of the Second Amendment, dated June 1, 1995, to the Note Agreement, dated May 1, 1991 with Minnesota Mutual Life Insurance Company, Inc. to the Securities and Exchange Commission upon its request, incorporated by reference to Exhibit 4.4 of Form 10-K filed with the Securities and Exchange Commission on October 2, 1995. 4.5 Shareholder Protection Rights Agreement, dated as of February 4, 1994, which includes as Exhibit A the forms of Rights Certificate and Election to Exercise and as Exhibit B the Form of Certificate of Designation and Terms of the Participating Preferred Stock incorporated by reference to Exhibit 1 of Form 8-A filed with the Securities and Exchange Commission on September 30, 1993. 4.6 Agreement of the Company, dated September 27, 1995, to furnish a copy of the Note Agreement, dated June 1, 1995 with respect to the issuance of certain long-term debt to the Securities and Exchange Commission upon its request, incorporated by reference to Exhibit 4.9 of Form 10-K filed with the Securities and Exchange Commission on October 2, 1995. 4.7 Credit Agreement, dated as of January 1, 1997, with First Union National Bank of Virginia and others, incorporated by reference to Exhibit 4.1 of Form 10-Q filed with the Securities Exchange Commission on May 13, 1997. 4.8 Loan Agreement, dated as of January 1, 1997, with First Union National Bank of Virginia, incorporated by reference to Exhibit 4.2 of Form 10-Q filed with the Securities Exchange Commission on May 13, 1997. 4.9 Agreement of the Company, dated May 6, 1997, to furnish a copy of the Third Amendment, dated as of March 1, 1997, to the Note Agreement dated May 1, 1991, with the Minnesota Mutual Life Insurance Company and others, incorporated by reference to Exhibit 4.3 of Form 10-Q filed with the Securities Exchange Commission on May 13, 1997. 4.10 Agreement of the Company, dated May 6, 1997, to furnish a copy of the First Amendment, dated as of March 1, 1997, to the Note Agreement dated June 1, 1995, with respect to the issuance of certain long-term debt, incorporated by reference to Exhibit 4.4 of Form 10-Q filed with the Securities Exchange Commission on May 13, 1997. 9.1 Voting Trust Agreement, dated September 29, 1995, incorporated by reference to Exhibit 9.2 of Form 10-K filed with the Securities and Exchange Commission on September 29, 1996. 10.1 Employment Agreement, dated July 4, 1993 between the Registrant and James L. Keeler (Deferred Compensation Agreement attached thereto as Exhibit A), incorporated by reference to Exhibit 10.6 of Form 10-K filed with the Securities and Exchange Commission on September 30, 1993. 14 10.2 Amendment to Employment Agreement, dated February 4, 1994, between the Registrant and James L. Keeler, incorporated by reference to Exhibit 10.2 of Form 10-Q filed with the Securities and Exchange Commission on February 15, 1994. 10.3 Amendment to Deferred Compensation Agreement, dated February 4, 1994, between the Registrant and James L. Keeler, incorporated by reference to Exhibit 10.3 of Form 10-Q filed with the Securities and Exchange Commission on February 15, 1994. 10.4 Amendment, dated June 27, 1995, to Employment Agreement dated July 4, 1993, between the Registrant and James L. Keeler, incorporated by reference to Exhibit 10.4 of Form 10-K filed with the Securities and Exchange Commission on September 29, 1996. 10.5 Executive Cash Bonus Program, incorporated by reference to Exhibit 10.7 of Form 10-K filed with the Securities and Exchange Commission on September 30, 1993. 10.6 Long-Term Incentive Plan, as amended, incorporated by reference to Exhibit 28 to Post-Effective Amendment Number One to Form S-8 (No. 33-27037), filed with the Securities and Exchange Commission on November 18, 1992. 10.7 Severance Agreement, dated February 4, 1994 between the Registrant and James L. Keeler, incorporated by reference to Exhibit 10.4 of Form 10-Q filed with the Securities and Exchange Commission on February 15, 1994. 10.8 Severance Agreement, dated February 4, 1994, between the Registrant and James L. Mason, incorporated by reference to Form 10-Q/A filed with the Securities and Exchange Commission on February 23, 1994. 10.9 Severance Agreement, dated June 20, 1996 between the Registrant and John J. Broaddus, incorporated by reference to Exhibit 10.9 of Form 10-K filed with the SEC on September 29, 1996. 10.10 Deferred Compensation Agreement, dated February 4, 1994 between the Registrant and Charles W. Wampler, Jr. incorporated by reference to Exhibit 10.9 of Form 10-Q filed with the Securities and Exchange Commission on February 15, 1994. 10.11 Deferred Compensation Agreement, dated February 4, 1994 between the Registrant and Herman D. Mason incorporated by reference to Exhibit 10.10 of Form 10-Q filed with the Securities and Exchange Commission on February 15, 1994. 10.12 Amendment to Deferred Compensation Agreement, dated July 25, 1996 between the Registrant and Herman D. Mason, incorporated by reference to Exhibit 10.13 of Form 10-K filed with the Securities and Exchange Commission on September 29, 1996. 10.13 Deferred Compensation Agreement, dated February 4, 1994, between the Registrant and George E. Bryan, incorporated by reference to Exhibit 10.11 to Form 10-Q filed with the Securities and Exchange Commission on February 15, 1994. 10.14 Deferred Compensation Agreement, dated February 4, 1994, between the Registrant and William D. Wampler, incorporated by reference to Exhibit 10.12 of Form 10-Q filed with the Securities and Exchange Commission on February 15, 1994. 10.15 1995 Nonqualified Deferred Compensation Plan, incorporated by reference to Exhibit 10.16 of Form 10-K filed with the SEC on September 29, 1996. 10.16 Amendment No. One to 1995 Deferred Compensation Plan, incorporated by reference to Exhibit 10.17 of Form 10-K filed with the SEC on September 29, 1996. 10.17 Severance Agreement, dated June 20, 1996 between the Registrant and Robert T. Ritter. 10.18 Severance Agreement, dated May 13, 1997 between the Registrant and Jane T. Brookshire. 10.19 Severance Agreement, dated February 4, 1994 between the Registrant and Henry L. Holler. 10.20 Trust Under WLR Foods, Inc. Nonqualified Deferred Compensation Plan, incorporated by reference to Exhibit 10.18 of Form 10-K filed with the SEC on September 29, 1996. 15 10.21 Description of Plan to Issue Stock for Director Compensation, incorporated by reference to Exhibit 10.19 of Form 10-K filed with the SEC on September 29, 1996. 13.1 Financial highlights, from the Registrant's Annual Report to Shareholders for the fiscal year ended June 28, 1997. 13.2 Management's Discussion and Analysis, from the Registrant's Annual Report to Shareholders for the fiscal year ended June 28, 1997. 13.3 Consolidated Financial Statements and Notes to Consolidated Financial Statements, from the Registrant's Annual Report to Shareholders for the fiscal year ended June 28, 1997. 13.4 Independent Auditor Report on Consolidated Financial Statements, from the Registrant's Annual Report to Shareholders for the fiscal year ended June 28, 1997. 21 List of Subsidiaries of the Registrant. 23 Consent of Independent Certified Public Accountants. 24 Power of Attorney. 27 Financial Data Schedule. 16 EX-10.17 2 SEVERANCE AGREEMENT ROBERT T. RITTER Exhibit 10.17 June 20, 1996 Mr. Robert T. Ritter Chief Financial Officer of WLR Foods, Inc. WLR Foods, Inc. Post Office Box 7000 Broadway, Virginia 22815 Dear Mr. Ritter: WLR Foods, Inc., a Virginia corporation (the "Company"), considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined herein) may arise and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders. Accordingly, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in circumstances arising from the possibility of a Change in Control of the Company. In particular, the Board believes it important, should the Company or its shareholders receive a proposal for transfer of control of the Company, that you be able to assess and advise the Board whether such proposal would be in the best interests of the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. In order to induce you to remain in the employ of the Company, this letter agreement ("Agreement"), which has been approved by the Board, sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a Change in Control of the Company under the circumstances described below. 1. Agreement to Provide Services; Right to Terminate. (i) Except as otherwise provided in paragraph (ii) below, the Company or you may terminate your employment at any time following a Change in Control as defined herein, subject to the Company's providing the benefits hereinafter specified in accordance with the terms hereof. (ii) In the event a Person (as hereinafter defined) makes an offer which, if accepted by the Company and subsequently consummated, would constitute a Change in Control, you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement, as such terms are hereinafter defined) and will render the services contemplated in the recitals to this Agreement until such Change in Control offer has been abandoned or terminated or a Change in Control has occurred. For the purposes of this Agreement, Retirement shall mean a termination of your employment by you on or after you have reached age sixty-five (65) and have completed at least five (5) years of service for the Company (including any service for a predecessor of the Company where such prior service is recognized by the Company for the purpose of awarding other benefits). For purposes Mr. Robert T. Ritter June 20, 1996 Page 2 of this Section 1, "years of service" shall be defined as in the WLR Profit Sharing and Salary Savings Plan. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until December 31, 1996; provided, however, that commencing on January 1, 1997 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one (1) additional year unless at least ninety (90) days prior to such January 1st date, the Company or you shall have given notice that this Agreement shall not be extended; and provided, further, that, notwithstanding the delivery of any such notice, this Agreement shall continue in effect for a period of thirty-six (36) months after a Change in Control, if such Change in Control shall have occurred while this Agreement is in effect. Notwithstanding anything in this Section 2 to the contrary, this Agreement shall terminate if you or the Company terminate your employment prior to a Change in Control of the Company. 3. Change in Control. For the purpose of this Agreement, a "Change in Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13 (d) (3) or 14 (d) (2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of either the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that in no event may the following acquisitions constitute a Change in Control: (a) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (b) any acquisition by the Company, (c) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (d) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (a), (b) and (c) of paragraph (iii) of this Section 3 are satisfied, or (e) any sale or other disposition of all or substantially all of the assets of the Company, if , following such sale or other disposition, the conditions described in (1), (2) and (3) of paragraph (iv) of this Section 3 are satisfied; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least seventy-five percent (75%) of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation, unless, in each case following such reorganization, merger or consolidation, (a) more than sixty percent (60%) of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote Mr. Robert T. Ritter June 20, 1996 Page 3 generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (b) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or a corporation resulting from such reorganization, merger or consolidation) beneficially owns, directly or indirectly, thirty-nine percent (39%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (c) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (iv) Approval by the shareholders of the Company of (a) a complete liquidation or dissolution of the Company or (b) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which following such sale or other disposition, (1) more than sixty percent (60%) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation) beneficially owns, directly or indirectly, thirty-nine percent (39%) or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (3) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. (v) Notwithstanding anything in the paragraphs (i) - (iv) of this Section 3 to the contrary, no Change in Control shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in you, or a group of Persons which includes you, acquiring, directly or indirectly, twenty percent (20%) or more of the combined voting power of the Company's Voting Securities. 4. Termination Following Change in Control. If any of the events described in Section 3 hereof constituting a Change in Control of the Company shall have occurred, you shall be entitled to the benefits provided in Section 5 hereof upon the termination of your employment with the Company within thirty-six (36) months after such Change in Control, unless such termination is (a) because of your death, (b) by the Company for Cause or Disability or (c) by you other than for Good Reason (as all such capitalized terms are hereinafter defined). Mr. Robert T. Ritter June 20, 1996 Page 4 (i) Disability. Termination by the Company of your employment based on "Disability" shall mean termination because of your absence from your duties with the Company on a full time basis for one hundred eighty (180) consecutive days as a result of your incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given to you following such absence, you shall have returned to the full time performance of your duties. (ii) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon (a) the willful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to you by the Chairman of the Board or President of the Company which specifically identifies the manner(s) in which such executive believes that you have not substantially performed your duties, or (b) the willful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For purposes of this paragraph (ii), no act, or failure to act, on your part shall be considered "willful" unless done, or failed to be done, by you in bad faith and without reasonable belief that your action or omission was in, or not opposed to, the best interests of the Company. Any act or failure to act based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company. It is also expressly understood that your attention to matters not directly related to the business of the Company shall not provide a basis for termination for Cause so long as the Board has approved your engagement in such activities. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in clauses (a) or (b) of this paragraph (ii) and specifying the particulars thereof in detail. (iii) Good Reason. Termination by you of your employment for "Good Reason" shall mean termination based on: (A) a determination by you, in your reasonable judgment, that there has been an adverse change in your status or position(s) as an executive officer of the Company as in effect immediately prior to the Change in Control, including, without limitation, any adverse change in your status or position as a result of a diminution in your duties or responsibilities (other than, if applicable, any such change directly attributable to the fact that the Company is no longer publicly owned) or the assignment to you of any duties or responsibilities which are inconsistent with such status or position(s), or any removal of you from, or any failure to reappoint or reelect you to, such positions(s) (except in connection with the termination of your employment for Cause or Disability or as a result of your death or by you other than for Good Reason); (B) a reduction by the Company in your base salary as in effect immediately prior to the Change in Control; (C) the failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the Change in Control of the Company (or Plans providing you with at least substantially similar benefits) other than as a Mr. Robert T. Ritter June 20, 1996 Page 5 result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the Change in Control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the Change in Control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the Change in Control; (D) the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Company's normal vacation policy as in effect immediately prior to the Change in Control; (E) the Company's requiring you to be based at any office that is greater than thirty (30) miles from where your office is located immediately prior to the Change in Control except for required travel on the Company's business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the Change in Control; (F) the failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 6 hereof; (G) any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (iv) below (and, if applicable, paragraph (ii) above); and for purposes of this Agreement, no such purported termination shall be effective; or (H) any refusal by the Company to continue to allow you to attend to matters or engage in activities not directly related to the business of the Company which, prior to the Change in Control, you were permitted by the Board to attend to or engage in. For purposes of this Agreement, "Plan" shall mean any compensation plan such as the Company Incentive Bonus Plan or any employee benefit plan such as a thrift, pension, profit sharing, medical, disability, accident, life insurance plan or a relocation plan or policy or any other plan, program or policy of the Company intended to benefit employees, except for the Company Restated Long- Term Incentive Plan. (iv) Notice of Termination. Any purported termination by the Company or by you following a Change in Control shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon. (v) Date of Termination. "Date of Termination" following a Change in Control shall mean (a) if your employment is to be terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (b) if your employment is to be terminated by the Company for Cause or by you pursuant to Sections 4(iii)(F) or 6 hereof or for any other Good Reason, the date specified in the Notice of Termination, (c) if your employment is to be terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which in no event shall be a date earlier than ninety (90) days after the date on which a Notice of Termination is given, Mr. Robert T. Ritter June 20, 1996 Page 6 unless an earlier date has been expressly agreed to by you in writing either in advance of, or after, receiving such Notice of Termination, or (d) if your employment is terminated on account of your death, the day after your death. In the case of termination of your employment by the Company for Cause, if you have not previously expressly agreed in writing to the termination, then within thirty (30) days after receipt by you of the Notice of Termination with respect thereto, you may notify the Company that a dispute exists concerning the termination, in which event the Date of Termination shall be the date set either by mutual written agreement of the parties or by such court having the matter before it. During the pendency of any such dispute, the Company will continue to pay you your full compensation in effect just prior to the time the Notice of Termination is given and until the dispute is resolved. However, if such court issues a final and non-appealable order finding that the Company had Cause to terminate you then you must return all compensation paid to you after the Date of Termination specified in the Notice of Termination previously received by you. 5. Compensation Upon Termination or During Disability; Other Agreements. (i) During any period following a Change in Control of the Company that you fail to perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your base salary at the rate then in effect and any benefits or awards under any Plans shall continue to accrue during such period, to the extent not inconsistent with such Plans, until your employment is terminated pursuant to and in accordance with paragraphs 4(iv) - 4(v) hereof. Thereafter, your benefits shall be determined in accordance with the Plans then in effect. (ii) If your employment is terminated for Cause following a Change in Control of the Company, the Company shall pay to you your base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you. Thereupon the Company shall have no further obligations to you under this Agreement. (iii) Subject to Section 8 hereof, if, within thirty-six (36) months after a Change in Control of the Company has occurred, your employment by the Company is terminated other than on account of your death and is terminated (a) by the Company other than for Cause or Disability or (b) by you for Good Reason, then the Company shall pay to you, no later than the fifth (5th) day following the Date of Termination, without regard to any contrary provisions of any Plan, the following: (A) your base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you (including amounts which previously had been deferred at your request); (B) an amount in cash equal to three times the sum of (i) the higher of (a) your annual base salary on the Date of Termination or (b) your annual base salary in effect immediately prior to the Change in Control plus (ii) an amount equal to the average of the bonuses awarded to you in each of the three previous years. For the purposes of this Agreement, the term "base salary" shall include any amounts deducted by the Company with respect to you Mr. Robert T. Ritter June 20, 1996 Page 7 or for your account pursuant to Sections 125 and 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). (iv) If, within thirty-six (36) months after a Change in Control of the Company has occurred, your employment by the Company is terminated for any reason other than retirement, the Company shall pay to you, on the date specified below, an amount ("Spread") in cash equal to the Termination Fair Market Value (as hereinafter defined) less the exercise price of all options which were granted to you pursuant to the Company's Restated Long-Term Incentive Plan or any Plan succeeding thereto, and which shall not become exercisable prior to (a) the end of the one (1) year period immediately following the Date of Termination if your employment is terminated on account of your death, or (b) the end of the third (3rd) month following the Date of Termination if your employment is terminated for any reason other than death. The Company shall make such payment upon the fifth (5th) day following such Date of Termination. For the purposes of this Agreement, the "Termination Fair Market Value" shall be the higher of (a) the highest price of the Company's stock as quoted on the NASDAQ, or any other exchange complying with the requirements of the Securities and Exchange Act of 1934, as amended, within the period beginning ninety (90) days prior to the Date of Termination and ending upon such Date of Termination, and (b) the highest price of the Company's stock as quoted on the NASDAQ, or any other exchange complying with the requirements of the Securities and Exchange Act of 1934, as amended, within the period beginning ninety (90) days prior to a Change of Control and ending upon the date of a Change of Control. (v) If, within thirty-six (36) months after a Change in Control of the Company has occurred, your employment by the Company is terminated (a) by the Company other than for Cause or Disability, or (b) by you for Good Reason, then the Company shall maintain in full force and effect, for the continued benefit of you and your dependents for a period terminating on the earliest of (a) three (3) years after the Date of Termination or (b) the commencement date of equivalent benefits from a new employer, insured and self-insured employee welfare benefit Plans in which you were entitled to participate immediately prior to the Date of Termination, provided that your continued participation is possible under the general terms and provisions of such Plans (and any applicable funding media) and you continue to pay an amount equal to your regular contribution under such Plans for such participation. If three (3) years after the Date of Termination you have not previously received, nor are then receiving, equivalent benefits from a new employer, the Company shall offer you continuation coverage under COBRA as prescribed under Section 4980B of the Code. At the expiration of such continuation coverage (or, if COBRA continuation coverage is not applicable to the Plan, then upon the expiration of the three (3) year period beginning on the Termination Date), the Company shall arrange, at its sole cost and expense, to enable you to convert you and your dependents' coverage under such plans to individual policies and programs upon the same terms as employees of the Company may apply for such conversions. In the event that your participation in any such Plan is barred, the Company, at its sole cost and expense, shall arrange to have issued for the benefit of you and your dependents individual policies of insurance providing benefits substantially similar (on an after-tax basis) to those which you otherwise would have been entitled to receive under such Plans pursuant to this paragraph (v) or, if such insurance is not available at a reasonable cost to the Company, the Company shall otherwise provide you and your dependents with equivalent benefits (on an after-tax basis). You shall not be required to pay any premiums or other charges in an amount greater than that which you would have paid in order to participate in such Plans. Mr. Robert T. Ritter June 20, 1996 Page 8 (vi) Except as specifically provided in paragraph (v) above, the amount of any payment provided for in this Section 5 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination, or otherwise. (vii) In the event that you become entitled to the payments provided by paragraphs (iii) and (iv) of Section 5(iii) hereof (the "Agreement Payments"), if any of the Agreement Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (or any similar tax that may hereafter be imposed), the Company shall pay to you at the time specified in paragraph (viii) below an additional amount (the "Gross-up Payment") such that the net amount retained by you, after deduction of any Excise Tax on the Total Payments (as hereinafter defined) and any federal, state and local income tax and Excise Tax upon the Gross-up Payment provided for by this paragraph (vii), but before deduction for any federal, state or local income tax on the Agreement Payments, shall be equal to the sum of (a) the Total Payments and (b) an amount equal to the product of any deductions disallowed because of the inclusion of the Gross-up Payment in your adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made. For purposes of determining whether any of the Agreement Payments will be subject to the Excise Tax and the amount of such Excise Tax, (a) any other payments or benefits received or to be received by you in connection with a Change in Control of the Company or your termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control of the Company or any person affiliated with the Company or such person) (which, together with the Agreement Payments, shall constitute the "Total Payments") shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax; (b) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Total Payments or (2) the amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (a), above); and (c) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-up Payment, you shall be deemed to (a) pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made, (b) pay the applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes (determined without regard to limitations on deductions based upon the amount of your adjusted gross income), and (c) have otherwise allowable deductions for federal income tax purposes at least equal to those disallowed because of the inclusion of the Gross-up Payment in your adjusted gross income. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account Mr. Robert T. Ritter June 20, 1996 Page 9 hereunder at the time the Gross-up Payment is made, you shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal state and local income tax imposed on the portion of the Gross-up Payment being repaid by you if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest payable with respect to such excess at the rate provided in Section 1274(b)(2)(B) of the Code) at the time that the amount of such excess is finally determined. (viii) The Gross-up Payment or portion thereof provided for in paragraph (vii) above shall be paid not later than the thirtieth (30th) day following payment of any amounts under paragraphs (iii) and (iv) of Section 5; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than the forty-fifth (45th) day after payment of any amounts under paragraphs (iii) and (iv) of Section 5. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you, payable on the fifth (5th) day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 6. Successors; Binding Agreement. (i) The Company will seek, by written request at least five (5) business days prior to the time a Person becomes a Successor (as hereinafter defined), to have such Person, by agreement in form and substance satisfactory to you, assent to the fulfillment of the Company's obligations under this Agreement. Failure of such Person to furnish such assent by the later of (a) three (3) business days prior to the time such Person becomes a Successor or (b) two (2) business days after such Person receives a written request to so assent shall constitute Good Reason for termination by you of your employment if a Change in Control of the Company occurs or has occurred. For purposes of this Agreement, "Successor" shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase of the Company's Voting Securities or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if no such designee exists, to your estate. (iii) For purposes of this Agreement, the "Company" shall include any subsidiaries of the Company and any corporation or other entity which is the surviving or continuing entity in respect of any merger, consolidation or form of business combination in which the Mr. Robert T. Ritter June 20, 1996 Page 10 Company ceases to exist; provided, however, for purposes of determining whether a Change in Control has occurred herein, the term "Company" shall refer to WLR Foods, , Inc. or its successor(s). 7. Fees and Expenses; Mitigation. (i) The Company shall reimburse you, on a current basis, for all reasonable legal fees and related expenses incurred by you in connection with the Agreement following a Change in Control of the Company, including without limitation, (a) all such fees and expenses, if any, incurred in contesting or disputing any termination of your employment or incurred by you in seeking advice with respect to the matters set forth in Section 8 hereof or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement, in each case, regardless of whether or not your claim is upheld by a court of competent jurisdiction; provided, however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non-appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. (ii) You shall not be required to mitigate the amount of any payment the Company becomes obligated to make to you in connection with this Agreement, by seeking other employment or otherwise. 8. Taxes. Subject to the provisions of Section 5(vii), all payments to be made to you under this Agreement will be subject to required withholding of federal, state and local income and employment taxes. 9. Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 12 and 14 of this Agreement shall survive termination of this Agreement. 10. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employee, to the address set forth below his signature, provided that all notices to the Company shall be directed to the attention of the Chairman of the Board or President of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the Chairman of the Board or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 12. Governing Law and Venue. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Virginia. Venue for any proceeding related to the performance or interpretation of this Agreement, or in any way arising out of this Agreement, shall be either the Circuit Mr. Robert T. Ritter June 20, 1996 Page 11 Court of Rockingham County, Virginia, or the United States District Court for the Western District of Virginia, Harrisonburg Division. 13. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Employee's Commitment. You agree that subsequent to your period of employment with the Company, you will not at any time communicate or disclose to any unauthorized person, without the written consent of the Company, any proprietary processes of the Company or other confidential information concerning its business, affairs, products, suppliers or customers which, if disclosed, would have a material adverse effect upon the business or operations of the Company, taken as a whole; it being understood, however, that the obligations under this Section 14 shall not apply to the extent that the aforesaid matters (a) are disclosed in circumstances where you are legally required to do so or (b) become generally known to, and available for use by, the public otherwise than by your wrongful act or omission. 15. Related Agreements. To the extent that any provision of any other agreement between the Company and you shall limit, qualify or be inconsistent with any provision of this Agreement, then for purposes of this Agreement, while the same shall remain in force, the provision of such other agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose. Notwithstanding the effect of the preceding sentence, the conditional Employment Agreement, renewed on June 26, 1992 between the Company and you is hereby cancelled and shall be of no force or effect. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, WLR Foods, Inc. By____/s/ Herman D. Mason______________ Herman D. Mason, Chair Executive Compensation Committee WLR Foods, Inc. Agreed to this _28_ day of June, 1996. ___/s/ Robert T. Ritter_______________ Robert T. Ritter ______________________________________ ______________________________________ EX-10.18 3 SEVERANCE AGREEMENT JANE T. BROOKSHIRE Exhibit 10.18 May 13, 1997 Mrs. Jane T. Brookshire Vice President of Human Resources WLR Foods, Inc. Post Office Box 7000 Broadway, Virginia 22815-7000 Dear Mrs. Brookshire: WLR Foods, Inc., a Virginia corporation (the "Company"), considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined herein) may arise and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders. Accordingly, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in circumstances arising from the possibility of a Change in Control of the Company. In particular, the Board believes it important, should the Company or its shareholders receive a proposal for transfer of control of the Company, that you be able to assess and advise the Board whether such proposal would be in the best interests of the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. In order to induce you to remain in the employ of the Company, this letter agreement ("Agreement"), which has been approved by the Board, sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a Change in Control of the Company under the circumstances described below. 1. Agreement to Provide Services; Right to Terminate. (i) Except as otherwise provided in paragraph (ii) below, the Company or you may terminate your employment at any time following a Change in Control as defined herein, subject to the Company's providing the benefits hereinafter specified in accordance with the terms hereof. (ii) In the event a Person (as hereinafter defined) makes an offer which, if accepted by the Company and subsequently consummated, would constitute a Change in Control, you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement, as such terms are hereinafter defined) and will render the services contemplated in the recitals to this Agreement until such Change in Control offer has been abandoned or terminated or a Change in Control has occurred. For the purposes of this Agreement, Retirement shall mean a termination of your employment by you on or after you have reached age sixty-five (65) and have completed at least five (5) years of service for the Company (including any service for a predecessor of the Company where such prior service is recognized by the Company for the purpose of awarding other benefits). For purposes of this Section 1, "years of service" shall be defined as in the WLR Profit Sharing and Salary Savings Plan. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until December 31, 1997; provided, however, that commencing on January 1, 1998 and each January 1 thereafter, the term of this Agreement shall automatically be Mrs. Jane T. Brookshire May 13, 1997 Page 2 extended for one (1) additional year unless at least ninety (90) days prior to such January 1st date, the Company or you shall have given notice that this Agreement shall not be extended; and provided, further, that, notwithstanding the delivery of any such notice, this Agreement shall continue in effect for a period of thirty-six (36) months after a Change in Control, if such Change in Control shall have occurred while this Agreement is in effect. Notwithstanding anything in this Section 2 to the contrary, this Agreement shall terminate if you or the Company terminate your employment prior to a Change in Control of the Company. 3. Change in Control. For the purpose of this Agreement, a "Change in Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13 (d) (3) or 14 (d) (2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of either the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that in no event may the following acquisitions constitute a Change in Control: (a) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (b) any acquisition by the Company, (c) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (d) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (a), (b) and (c) of paragraph (iii) of this Section 3 are satisfied, or (e) any sale or other disposition of all or substantially all of the assets of the Company, if , following such sale or other disposition, the conditions described in (1), (2) and (3) of paragraph (iv) of this Section 3 are satisfied; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least seventy-five percent (75%) of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation, unless, in each case following such reorganization, merger or consolidation, (a) more than sixty percent (60%) of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (b) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or a corporation resulting from such reorganization, merger or consolidation) beneficially owns, directly or indirectly, thirty-nine percent (39%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (c) at least a majority of Mrs. Jane T. Brookshire May 13, 1997 Page 3 the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (iv) Approval by the shareholders of the Company of (a) a complete liquidation or dissolution of the Company or (b) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which following such sale or other disposition, (1) more than sixty percent (60%) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation) beneficially owns, directly or indirectly, thirty-nine percent (39%) or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (3) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. (v) Notwithstanding anything in the paragraphs (i) - (iv) of this Section 3 to the contrary, no Change in Control shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in you, or a group of Persons which includes you, acquiring, directly or indirectly, twenty percent (20%) or more of the combined voting power of the Company's Voting Securities. 4. Termination Following Change in Control. If any of the events described in Section 3 hereof constituting a Change in Control of the Company shall have occurred, you shall be entitled to the benefits provided in Section 5 hereof upon the termination of your employment with the Company within thirty-six (36) months after such Change in Control, unless such termination is (a) because of your death, (b) by the Company for Cause or Disability or (c) by you other than for Good Reason (as all such capitalized terms are hereinafter defined). (i) Disability. Termination by the Company of your employment based on "Disability" shall mean termination because of your absence from your duties with the Company on a full time basis for one hundred eighty (180) consecutive days as a result of your incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given to you following such absence, you shall have returned to the full time performance of your duties. (ii) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon (a) the willful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to you by the Chairman of the Board or President of the Company which specifically identifies the manner(s) in which such executive believes that you have not substantially performed your duties, or (b) the willful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For purposes of this paragraph (ii), no act, or failure to act, on your part shall be considered "willful" unless done, or failed to be done, by you in bad faith and without reasonable belief that your Mrs. Jane T. Brookshire May 13, 1997 Page 4 action or omission was in, or not opposed to, the best interests of the Company. Any act or failure to act based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company. It is also expressly understood that your attention to matters not directly related to the business of the Company shall not provide a basis for termination for Cause so long as the Board has approved your engagement in such activities. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in clauses (a) or (b) of this paragraph (ii) and specifying the particulars thereof in detail. (iii) Good Reason. Termination by you of your employment for "Good Reason" shall mean termination based on: (A) a determination by you, in your reasonable judgment, that there has been an adverse change in your status or position(s) as an executive officer of the Company as in effect immediately prior to the Change in Control, including, without limitation, any adverse change in your status or position as a result of a diminution in your duties or responsibilities (other than, if applicable, any such change directly attributable to the fact that the Company is no longer publicly owned) or the assignment to you of any duties or responsibilities which are inconsistent with such status or position(s), or any removal of you from, or any failure to reappoint or reelect you to, such positions(s) (except in connection with the termination of your employment for Cause or Disability or as a result of your death or by you other than for Good Reason); (B) a reduction by the Company in your base salary as in effect immediately prior to the Change in Control; (C) the failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the Change in Control of the Company (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the Change in Control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the Change in Control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the Change in Control; (D) the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Company's normal vacation policy as in effect immediately prior to the Change in Control; (E) the Company's requiring you to be based at any office that is greater than thirty (30) miles from where your office is located immediately prior to the Change in Control except for required travel on the Company's business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the Change in Control; (F) the failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 6 hereof; (G) any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination Mrs. Jane T. Brookshire May 13, 1997 Page 5 satisfying the requirements of paragraph (iv) below (and, if applicable, paragraph (ii) above); and for purposes of this Agreement, no such purported termination shall be effective; or (H) any refusal by the Company to continue to allow you to attend to matters or engage in activities not directly related to the business of the Company which, prior to the Change in Control, you were permitted by the Board to attend to or engage in. For purposes of this Agreement, "Plan" shall mean any compensation plan such as the Company Incentive Bonus Plan or any employee benefit plan such as a thrift, pension, profit sharing, medical, disability, accident, life insurance plan or a relocation plan or policy or any other plan, program or policy of the Company intended to benefit employees, except for the Company Restated Long- Term Incentive Plan. (iv) Notice of Termination. Any purported termination by the Company or by you following a Change in Control shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon. (v) Date of Termination. "Date of Termination" following a Change in Control shall mean (a) if your employment is to be terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (b) if your employment is to be terminated by the Company for Cause or by you pursuant to Sections 4(iii)(F) or 6 hereof or for any other Good Reason, the date specified in the Notice of Termination, (c) if your employment is to be terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which in no event shall be a date earlier than ninety (90) days after the date on which a Notice of Termination is given, unless an earlier date has been expressly agreed to by you in writing either in advance of, or after, receiving such Notice of Termination, or (d) if your employment is terminated on account of your death, the day after your death. In the case of termination of your employment by the Company for Cause, if you have not previously expressly agreed in writing to the termination, then within thirty (30) days after receipt by you of the Notice of Termination with respect thereto, you may notify the Company that a dispute exists concerning the termination, in which event the Date of Termination shall be the date set either by mutual written agreement of the parties or by such court having the matter before it. During the pendency of any such dispute, the Company will continue to pay you your full compensation in effect just prior to the time the Notice of Termination is given and until the dispute is resolved. However, if such court issues a final and non-appealable order finding that the Company had Cause to terminate you then you must return all compensation paid to you after the Date of Termination specified in the Notice of Termination previously received by you. 5. Compensation Upon Termination or During Disability; Other Agreements. (i) During any period following a Change in Control of the Company that you fail to perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your base salary at the rate then in effect and any benefits or awards under any Plans shall continue to accrue during such period, to the extent not inconsistent with such Plans, until your employment is terminated pursuant to and in accordance with paragraphs 4(iv) - 4(v) hereof. Thereafter, your benefits shall be determined in accordance with the Plans then in effect. (ii) If your employment is terminated for Cause following a Change in Control of the Company, the Company shall pay to you your base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, Mrs. Jane T. Brookshire May 13, 1997 Page 6 but which have not yet been paid to you. Thereupon the Company shall have no further obligations to you under this Agreement. (iii) Subject to Section 8 hereof, if, within thirty-six (36) months after a Change in Control of the Company has occurred, your employment by the Company is terminated other than on account of your death and is terminated (a) by the Company other than for Cause or Disability or (b) by you for Good Reason, then the Company shall pay to you, no later than the fifth (5th) day following the Date of Termination, without regard to any contrary provisions of any Plan, the following: (A) your base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you (including amounts which previously had been deferred at your request); (B) an amount in cash equal to three times the sum of (i) the higher of (a) your annual base salary on the Date of Termination or (b) your annual base salary in effect immediately prior to the Change in Control plus (ii) an amount equal to the average of the bonuses awarded to you in each of the three previous years. For the purposes of this Agreement, the term "base salary" shall include any amounts deducted by the Company with respect to you or for your account pursuant to Sections 125 and 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). (iv) If, within thirty-six (36) months after a Change in Control of the Company has occurred, your employment by the Company is terminated for any reason other than retirement, the Company shall pay to you, on the date specified below, an amount ("Spread") in cash equal to the Termination Fair Market Value (as hereinafter defined) less the exercise price of all options which were granted to you pursuant to the Company's Restated Long-Term Incentive Plan or any Plan succeeding thereto, and which shall not become exercisable prior to (a) the end of the one (1) year period immediately following the Date of Termination if your employment is terminated on account of your death, or (b) the end of the third (3rd) month following the Date of Termination if your employment is terminated for any reason other than death. The Company shall make such payment upon the fifth (5th) day following such Date of Termination. For the purposes of this Agreement, the "Termination Fair Market Value" shall be the higher of (a) the highest price of the Company's stock as quoted on the NASDAQ, or any other exchange complying with the requirements of the Securities and Exchange Act of 1934, as amended, within the period beginning ninety (90) days prior to the Date of Termination and ending upon such Date of Termination, and (b) the highest price of the Company's stock as quoted on the NASDAQ, or any other exchange complying with the requirements of the Securities and Exchange Act of 1934, as amended, within the period beginning ninety (90) days prior to a Change of Control and ending upon the date of a Change of Control. (v) If, within thirty-six (36) months after a Change in Control of the Company has occurred, your employment by the Company is terminated (a) by the Company other than for Cause or Disability, or (b) by you for Good Reason, then the Company shall maintain in full force and effect, for the continued benefit of you and your dependents for a period terminating on the earliest of (a) three (3) years after the Date of Termination or (b) the commencement date of equivalent benefits from a new employer, insured and self-insured employee welfare benefit Plans in which you were entitled to participate immediately prior to the Date of Termination, provided that your continued participation is possible under the general terms and provisions of such Plans (and any applicable funding media) and you continue to pay an amount equal to your regular contribution under such Plans for such participation. If three (3) years after the Date of Termination you have not previously received, nor are then Mrs. Jane T. Brookshire May 13, 1997 Page 7 receiving, equivalent benefits from a new employer, the Company shall offer you continuation coverage under COBRA as prescribed under Section 4980B of the Code. At the expiration of such continuation coverage (or, if COBRA continuation coverage is not applicable to the Plan, then upon the expiration of the three (3) year period beginning on the Termination Date), the Company shall arrange, at its sole cost and expense, to enable you to convert you and your dependents' coverage under such plans to individual policies and programs upon the same terms as employees of the Company may apply for such conversions. In the event that your participation in any such Plan is barred, the Company, at its sole cost and expense, shall arrange to have issued for the benefit of you and your dependents individual policies of insurance providing benefits substantially similar (on an after-tax basis) to those which you otherwise would have been entitled to receive under such Plans pursuant to this paragraph (v) or, if such insurance is not available at a reasonable cost to the Company, the Company shall otherwise provide you and your dependents with equivalent benefits (on an after-tax basis). You shall not be required to pay any premiums or other charges in an amount greater than that which you would have paid in order to participate in such Plans. (vi) Except as specifically provided in paragraph (v) above, the amount of any payment provided for in this Section 5 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination, or otherwise. (vii) In the event that you become entitled to the payments provided by paragraphs (iii) and (iv) of Section 5(iii) hereof (the "Agreement Payments"), if any of the Agreement Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (or any similar tax that may hereafter be imposed), the Company shall pay to you at the time specified in paragraph (viii) below an additional amount (the "Gross-up Payment") such that the net amount retained by you, after deduction of any Excise Tax on the Total Payments (as hereinafter defined) and any federal, state and local income tax and Excise Tax upon the Gross-up Payment provided for by this paragraph (vii), but before deduction for any federal, state or local income tax on the Agreement Payments, shall be equal to the sum of (a) the Total Payments and (b) an amount equal to the product of any deductions disallowed because of the inclusion of the Gross-up Payment in your adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made. For purposes of determining whether any of the Agreement Payments will be subject to the Excise Tax and the amount of such Excise Tax, (a) any other payments or benefits received or to be received by you in connection with a Change in Control of the Company or your termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control of the Company or any person affiliated with the Company or such person) (which, together with the Agreement Payments, shall constitute the "Total Payments") shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax; (b) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Total Payments or (2) the amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (a), above); and (c) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. Mrs. Jane T. Brookshire May 13, 1997 Page 8 For purposes of determining the amount of the Gross-up Payment, you shall be deemed to (a) pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made, (b) pay the applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes (determined without regard to limitations on deductions based upon the amount of your adjusted gross income), and (c) have otherwise allowable deductions for federal income tax purposes at least equal to those disallowed because of the inclusion of the Gross-up Payment in your adjusted gross income. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, you shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal state and local income tax imposed on the portion of the Gross-up Payment being repaid by you if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest payable with respect to such excess at the rate provided in Section 1274(b)(2)(B) of the Code) at the time that the amount of such excess is finally determined. (viii) The Gross-up Payment or portion thereof provided for in paragraph (vii) above shall be paid not later than the thirtieth (30th) day following payment of any amounts under paragraphs (iii) and (iv) of Section 5; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than the forty-fifth (45th) day after payment of any amounts under paragraphs (iii) and (iv) of Section 5. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you, payable on the fifth (5th) day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 6. Successors; Binding Agreement. (i) The Company will seek, by written request at least five (5) business days prior to the time a Person becomes a Successor (as hereinafter defined), to have such Person, by agreement in form and substance satisfactory to you, assent to the fulfillment of the Company's obligations under this Agreement. Failure of such Person to furnish such assent by the later of (a) three (3) business days prior to the time such Person becomes a Successor or (b) two (2) business days after such Person receives a written request to so assent shall constitute Good Reason for termination by you of your employment if a Change in Control of the Company occurs or has occurred. For purposes of this Agreement, "Successor" shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase of the Company's Voting Securities or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the Mrs. Jane T. Brookshire May 13, 1997 Page 9 terms of this Agreement to your devisee, legatee or other designee or, if no such designee exists, to your estate. (iii) For purposes of this Agreement, the "Company" shall include any subsidiaries of the Company and any corporation or other entity which is the surviving or continuing entity in respect of any merger, consolidation or form of business combination in which the Company ceases to exist; provided, however, for purposes of determining whether a Change in Control has occurred herein, the term "Company" shall refer to WLR Foods, , Inc. or its successor(s). 7. Fees and Expenses; Mitigation. (i) The Company shall reimburse you, on a current basis, for all reasonable legal fees and related expenses incurred by you in connection with the Agreement following a Change in Control of the Company, including without limitation, (a) all such fees and expenses, if any, incurred in contesting or disputing any termination of your employment or incurred by you in seeking advice with respect to the matters set forth in Section 8 hereof or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement, in each case, regardless of whether or not your claim is upheld by a court of competent jurisdiction; provided, however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non-appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. (ii) You shall not be required to mitigate the amount of any payment the Company becomes obligated to make to you in connection with this Agreement, by seeking other employment or otherwise. 8. Taxes. Subject to the provisions of Section 5(vii), all payments to be made to you under this Agreement will be subject to required withholding of federal, state and local income and employment taxes. 9. Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 12 and 14 of this Agreement shall survive termination of this Agreement. 10. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employee, to the address set forth below his signature, provided that all notices to the Company shall be directed to the attention of the Chairman of the Board or President of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the Chairman of the Board or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 12. Governing Law and Venue. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Virginia. Venue for any proceeding related to the performance or interpretation of this Agreement, or in any way arising out of this Agreement, shall be either the Circuit Court of Rockingham County, Virginia, or the United States District Court for the Western District of Virginia, Harrisonburg Division. Mrs. Jane T. Brookshire May 13, 1997 Page 10 13. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Employee's Commitment. You agree that subsequent to your period of employment with the Company, you will not at any time communicate or disclose to any unauthorized person, without the written consent of the Company, any proprietary processes of the Company or other confidential information concerning its business, affairs, products, suppliers or customers which, if disclosed, would have a material adverse effect upon the business or operations of the Company, taken as a whole; it being understood, however, that the obligations under this Section 14 shall not apply to the extent that the aforesaid matters (a) are disclosed in circumstances where you are legally required to do so or (b) become generally known to, and available for use by, the public otherwise than by your wrongful act or omission. 15. Related Agreements. To the extent that any provision of any other agreement between the Company and you shall limit, qualify or be inconsistent with any provision of this Agreement, then for purposes of this Agreement, while the same shall remain in force, the provision of such other agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose. Notwithstanding the effect of the preceding sentence, the conditional Employment Agreement, renewed on June 26, 1992 between the Company and you is hereby cancelled and shall be of no force or effect. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, WLR Foods, Inc. By___/s/ Herman D. Mason ____________ Herman D. Mason, Chair Executive Compensation Committee WLR Foods, Inc. Agreed to this _30_ day of __May____, 1997 __/s/ Jane T. Brookshire______________ Jane T. Brookshire ______________________________________ ______________________________________ EX-10.19 4 SEVERANCE AGREEMENT HENRY L. HOLLER Exhibit 10.19 February 4, 1994 Henry L. Holler Vice President of Sales and Marketing Wampler Foods, Inc. P.O. Box 7275 Broadway, Virginia 22815 Dear Mr. Holler: WLR Foods, Inc., a Virginia corporation (the "Company"), considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined herein) may arise and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders. Accordingly, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in circumstances arising from the possibility of a Change in Control of the Company. In particular, the Board believes it important, should the Company or its shareholders receive a proposal for transfer of control of the Company, that you be able to assess and advise the Board whether such proposal would be in the best interests of the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. In order to induce you to remain in the employ of the Company, this letter agreement ("Agreement"), which has been approved by the Board, sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a Change in Control of the Company under the circumstances described below. 1. Agreement to Provide Services; Right to Terminate. (i) Except as otherwise provided in paragraph (ii) below, the Company or you may terminate your employment at any time following a "Change in Control" as defined herein, subject to the Company's providing the benefits hereinafter specified in accordance with the terms hereof. (ii) In the event a Person (as hereinafter defined) makes an offer which, if accepted by the Company and subsequently consummated, would constitute a Change in Control, you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement, as such terms are hereinafter defined) and will render the services contemplated in the recitals to this Agreement until such Change in Control offer has been abandoned or terminated or a Change in Control has occurred. For the purposes of this Agreement, Retirement shall mean a termination of your employment by you on or after you have reached age sixty-five (65) and have completed at least five (5) years of service for the Company (including any service for a predecessor of the Company where such prior service is recognized by the Company for the purpose of awarding other benefits). For purposes of this Section 1, "years of service" shall be defined as in the WLR Profit Sharing and Salary Savings Plan. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until December 31, 1994; provided, however, that commencing on January 1, 1995 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one (1) additional year unless at least ninety (90) days prior to such January 1st date, the Company or you shall have given notice that this Agreement shall not be extended; and provided, further, that, notwithstanding the delivery of any such notice, this Agreement shall continue in effect for a period of twenty-four (24) months after a Change in Control, if such Change in Control shall have occurred while this Agreement is in effect. Notwithstanding anything in this Section 2 to the contrary, this Agreement shall terminate if you or the Company terminate your employment prior to a Change in Control of the Company. 3. Change in Control. For the purpose of this Agreement, a "Change in Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13 (d) (3) or 14 (d) (2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of either the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that in no event may the following acquisitions constitute a Change in Control: (a) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (b) any acquisition by the Company, (c) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (d) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (a), (b) and (c) of paragraph (iii) of this Section 3 are satisfied, or (e) any sale or other disposition of all or substantially all of the assets of the Company, if , following such sale or other disposition, the conditions described in (1), (2) and (3) of paragraph (iv) of this Section 3 are satisfied; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least seventy-five percent (75%) of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation, unless, in each case following such reorganization, merger or consolidation, (a) more than sixty percent (60%) of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals 2 and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (b) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or a corporation resulting from such reorganization, merger or consolidation) beneficially owns, directly or indirectly, thirty-nine percent (39%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (c) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (iv) Approval by the shareholders of the Company of (a) a complete liquidation or dissolution of the Company or (b) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which following such sale or other disposition, (1) more than sixty percent (60%) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation) beneficially owns, directly or indirectly, thirty-nine percent (39%) or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (3) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. (v) Notwithstanding anything in the paragraphs (i) - (iv) of this Section 3 to the contrary, no Change in Control shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in you, or a group of Persons which includes you, acquiring, directly or indirectly, twenty percent (20%) or more of the combined voting power of the Company's Voting Securities. 4. Termination Following Change in Control. If any of the events described in Section 3 hereof constituting a Change in Control of the Company shall have occurred, you shall be entitled to the benefits provided in Section 5 hereof upon the termination of your employment with the Company within twenty-four (24) months after such Change in Control, unless such termination is (a) because of your death, (b) by the Company for Cause or Disability or (c) by you other than for Good Reason (as all such capitalized terms are hereinafter defined). (i) Disability. Termination by the Company of your employment based on "Disability" shall mean termination because of your absence from your duties with the Company on a full time basis for one hundred eighty (180) consecutive days as a result of your incapacity due to physical or mental illness, unless within thirty 3 (30) days after Notice of Termination (as hereinafter defined) is given to you following such absence, you shall have returned to the full time performance of your duties. (ii) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon (a) the willful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to you by the Chairman of the Board or President of the Company which specifically identifies the manner(s) in which such executive believes that you have not substantially performed your duties, or (b) the willful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For purposes of this paragraph (ii), no act, or failure to act, on your part shall be considered "willful" unless done, or failed to be done, by you in bad faith and without reasonable belief that your action or omission was in, or not opposed to, the best interests of the Company. Any act or failure to act based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company. It is also expressly understood that your attention to matters not directly related to the business of the Company shall not provide a basis for termination for Cause so long as the Board has approved your engagement in such activities. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in clauses (a) or (b) of this paragraph (ii) and specifying the particulars thereof in detail. (iii) Good Reason. Termination by you of your employment for "Good Reason" shall mean termination based on: (A) a determination by you, in your reasonable judgment, that there has been an adverse change in your status or position(s) as an executive officer of the Company as in effect immediately prior to the Change in Control, including, without limitation, any adverse change in your status or position as a result of a diminution in your duties or responsibilities (other than, if applicable, any such change directly attributable to the fact that the Company is no longer publicly owned) or the assignment to you of any duties or responsibilities which are inconsistent with such status or position(s), or any removal of you from, or any failure to reappoint or reelect you to, such positions(s) (except in connection with the termination of your employment for Cause or Disability or as a result of your death or by you other than for Good Reason); (B) a reduction by the Company in your base salary as in effect immediately prior to the Change in Control; (C) the failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the Change in Control of the Company (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the Change in Control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the Change in Control or which would materially reduce your 4 benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the Change in Control; (D) the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Company's normal vacation policy as in effect immediately prior to the Change in Control; (E) the Company's requiring you to be based at any office that is greater than thirty (30) miles from where your office is located immediately prior to the Change in Control except for required travel on the Company's business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the Change in Control; (F) the failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 6 hereof; (G) any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (iv) below (and, if applicable, paragraph (ii) above); and for purposes of this Agreement, no such purported termination shall be effective; or (H) any refusal by the Company to continue to allow you to attend to matters or engage in activities not directly related to the business of the Company which, prior to the Change in Control, you were permitted by the Board to attend to or engage in. For purposes of this Agreement, "Plan" shall mean any compensation plan such as the Company Incentive Bonus Plan or any employee benefit plan such as a thrift, pension, profit sharing, medical, disability, accident, life insurance plan or a relocation plan or policy or any other plan, program or policy of the Company intended to benefit employees, except for the Company Restated Long- Term Incentive Plan. (iv) Notice of Termination. Any purported termination by the Company or by you following a Change in Control shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon. (v) Date of Termination. "Date of Termination" following a Change in Control shall mean (a) if your employment is to be terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (b) if your employment is to be terminated by the Company for Cause or by you pursuant to Sections 4(iii)(F) or 6 hereof or for any other Good Reason, the date specified in the Notice of Termination, (c) if your employment is to be terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which in no event shall be a date earlier than ninety (90) days after the date on which a Notice of Termination is given, unless an earlier date has been expressly agreed to by you in writing either in advance of, or after, receiving such Notice of Termination, or (d) if your employment is terminated on account of your death, the day after your death.. In the case of termination of your employment by the Company for Cause, if you have not previously expressly agreed in writing to the termination, then within thirty (30) days after receipt by you of the Notice of Termination with respect thereto, you may notify the Company that a dispute exists concerning the termination, in which event the Date of Termination shall be the date set either by mutual written agreement of the parties or by such court having the matter before it. During the pendency of any such dispute, 5 the Company will continue to pay you your full compensation in effect just prior to the time the Notice of Termination is given and until the dispute is resolved. However, if such court issues a final and non-appealable order finding that the Company had Cause to terminate you then you must return all compensation paid to you after the Date of Termination specified in the Notice of Termination previously received by you. 5. Compensation Upon Termination or During Disability; Other Agreements. (i) During any period following a Change in Control of the Company that you fail to perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your base salary at the rate then in effect and any benefits or awards under any Plans shall continue to accrue during such period, to the extent not inconsistent with such Plans, until your employment is terminated pursuant to and in accordance with paragraphs 4(iv) - 4(v) hereof. Thereafter, your benefits shall be determined in accordance with the Plans then in effect. (ii) If your employment is terminated for Cause following a Change in Control of the Company, the Company shall pay to you your base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you. Thereupon the Company shall have no further obligations to you under this Agreement. (iii) Subject to Section 8 hereof, if, within twenty- four (24) months after a Change in Control of the Company has occurred, your employment by the Company is terminated other than on account of your death and is terminated (a) by the Company other than for Cause or Disability or (b) by you for Good Reason, then the Company shall pay to you, no later than the fifth (5th) day following the Date of Termination, without regard to any contrary provisions of any Plan, the following: (A) your base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you (including amounts which previously had been deferred at your request); (B) an amount in cash equal to one and one-half (1.5) times the sum of (i) the higher of (a) your annual base salary on the Date of Termination or (b) your annual base salary in effect immediately prior to the Change in Control plus (ii) an amount equal to the average of the bonuses awarded to you in each of the three previous years. For the purposes of this Agreement, the term "base salary" shall include any amounts deducted by the Company with respect to you or for your account pursuant to Sections 125 and 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). (iv) If, within twenty-four (24) months after a Change in Control of the Company has occurred, your employment by the Company is terminated for any reason other than retirement, the Company shall pay to you, on the date specified below, an amount ("Spread") in cash equal to the Termination Fair Market Value (as hereinafter defined) less the exercise price of all options which were granted to you pursuant to the Company's Restated Long-Term Incentive Plan or any Plan succeeding thereto, and which shall not become exercisable prior to (a) the end of the one (1) year period immediately following the Date of Termination if your employment is terminated on account of your death, or (b) the end of the third (3rd) month following the Date 6 of Termination if your employment is terminated for any reason other than death. The Company shall make such payment upon the fifth (5th) day following such Date of Termination. For the purposes of this Agreement, the "Termination Fair Market Value" shall be the higher of (a) the highest price of the Company's stock as quoted on the NASDAQ, or any other exchange complying with the requirements of the Securities and Exchange Act of 1934, as amended, within the period beginning ninety (90) days prior to the Date of Termination and ending upon such Date of Termination, and (b) the highest price of the Company's stock as quoted on the NASDAQ, or any other exchange complying with the requirements of the Securities and Exchange Act of 1934, as amended, within the period beginning ninety (90) days prior to a Change of Control and ending upon the date of a Change of Control. (v) If, within twenty-four (24) months after a Change in Control of the Company has occurred, your employment by the Company is terminated (a) by the Company other than for Cause or Disability, or (b) by you for Good Reason, then the Company shall maintain in full force and effect, for the continued benefit of you and your dependents for a period terminating on the earliest of (a) one and one-half (1.5) years after the Date of Termination or (b) the commencement date of equivalent benefits from a new employer, insured and self-insured employee welfare benefit Plans in which you were entitled to participate immediately prior to the Date of Termination, provided that your continued participation is possible under the general terms and provisions of such Plans (and any applicable funding media) and you continue to pay an amount equal to your regular contribution under such Plans for such participation. If one and one-half (1.5) years after the Termination Date, you have not previously received, nor are then receiving, equivalent benefits from a new employer, the Company shall offer you continuation coverage under COBRA as prescribed under Section 4980B of the Code. At the expiration of such continuation coverage (or, if COBRA continuation coverage is not applicable to the Plan, then upon the expiration of the one and one-half (1.5) year period beginning on the Termination Date) the Company shall arrange, at its sole cost and expense, to enable you to convert you and your dependents' coverage under such plans to individual policies and programs upon the same terms as employees of the Company may apply for such conversions. In the event that your participation in any such Plan is barred, the Company, at its sole cost and expense, shall arrange to have issued for the benefit of you and your dependents individual policies of insurance providing benefits substantially similar (on an after-tax basis) to those which you otherwise would have been entitled to receive under such Plans pursuant to this paragraph (v) or, if such insurance is not available at a reasonable cost to the Company, the Company shall otherwise provide you and your dependents with equivalent benefits (on an after-tax basis). You shall not be required to pay any premiums or other charges in an amount greater than that which you would have paid in order to participate in such Plans. (vi) Except as specifically provided in paragraph (v) above, the amount of any payment provided for in this Section 5 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination, or otherwise. (vii) In the event that you become entitled to the payments provided by paragraphs (iii) and (iv) of Section 5 hereof (the "Agreement Payments"), if any of the Agreement Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (or any similar tax that may hereafter be imposed), the Company shall pay to you at the time specified in paragraph (viii) below an additional amount (the "Gross-up Payment") such that the net amount retained by you, after deduction of any Excise Tax on the Total Payments (as hereinafter defined) and any federal, state and local income tax and Excise Tax upon the Gross-up Payment provided for by this paragraph (vii), but before deduction for any federal, state or 7 local income tax on the Agreement Payments, shall be equal to the sum of (a) the Total Payments and (b) an amount equal to the product of any deductions disallowed because of the inclusion of the Gross-up Payment in your adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made. For purposes of determining whether any of the Agreement Payments will be subject to the Excise Tax and the amount of such Excise Tax, (a) any other payments or benefits received or to be received by you in connection with a Change in Control of the Company or your termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control of the Company or any person affiliated with the Company or such person) (which, together with the Agreement Payments, shall constitute the "Total Payments") shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax; (b) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Total Payments or (2) the amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (a), above); and (c) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-up Payment, you shall be deemed to (a) pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made, (b) pay the applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes (determined without regard to limitations on deductions based upon the amount of your adjusted gross income), and (c) have otherwise allowable deductions for federal income tax purposes at least equal to those disallowed because of the inclusion of the Gross-up Payment in your adjusted gross income. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, you shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal state and local income tax imposed on the portion of the Gross-up Payment being repaid by you if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest payable with respect to such excess at the rate provided in Section 1274(b)(2)(B) of the Code) at the time that the amount of such excess is finally determined. (viii) The Gross-up Payment or portion thereof provided for in paragraph (vii) above shall be paid not later than the 8 thirtieth (30th) day following payment of any amounts under paragraphs (iii) and (iv) of Section 5; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than the forty-fifth (45th) day after payment of any amounts under paragraphs (iii) and (iv) of Section 5. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you, payable on the fifth (5th) day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 6. Successors; Binding Agreement. (i) The Company will seek, by written request at least five (5) business days prior to the time a Person becomes a Successor (as hereinafter defined), to have such Person, by agreement in form and substance satisfactory to you, assent to the fulfillment of the Company's obligations under this Agreement. Failure of such Person to furnish such assent by the later of (a) three (3) business days prior to the time such Person becomes a Successor or (b) two (2) business days after such Person receives a written request to so assent shall constitute Good Reason for termination by you of your employment if a Change in Control of the Company occurs or has occurred. For purposes of this Agreement, "Successor" shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase of the Company's Voting Securities or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if no such designee exists, to your estate. (iii) For purposes of this Agreement, the "Company" shall include any subsidiary of the Company and any corporation or other entity which is the surviving or continuing entity in respect of any merger, consolidation or form of business combination in which the Company ceases to exist; provided, however, for purposes of determing whether a Change in Control has occured herei;n, the term "Company" shall refer to WLR Foods, , Inc. or its successor(s). 7. Fees and Expenses; Mitigation. (i) The Company shall reimburse you, on a current basis, for all reasonable legal fees and related expenses incurred by you in connection with the Agreement following a Change in Control of the Company, including without limitation, (a) all such fees and expenses, if any, incurred in contesting or disputing any termination of your employment or incurred by you in seeking advice with respect to the matters set forth in Section 8 hereof or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement, in each case, regardless of whether or not your claim is upheld by a court of competent jurisdiction; provided, however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non-appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. 9 (ii) You shall not be required to mitigate the amount of any payment the Company becomes obligated to make to you in connection with this Agreement, by seeking other employment or otherwise. 8. Taxes. Subject to the provisions of Section 5(vii), all payments to be made to you under this Agreement will be subject to required withholding of federal, state and local income and employment taxes. 9. Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 12 and 14 of this Agreement shall survive termination of this Agreement. 10. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employee, to the address set forth below his signature, provided that all notices to the Company shall be directed to the attention of the Chairman of the Board or President of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the Chairman of the Board or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 12. Governing Law and Venue. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Virginia. Venue for any proceeding related to the performance or interpretation of this Agreement, or in any way arising out of this Agreement, shall be either the Circuit Court of Rockingham County, Virginia, or the United States District Court for the Western District of Virginia, Harrisonburg Division. 13. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Employee's Commitment. You agree that subsequent to your period of employment with the Company, you will not at any time communicate or disclose to any unauthorized person, without the written consent of the Company, any proprietary processes of the Company or other confidential information concerning its business, affairs, products, suppliers or customers which, if disclosed, would have a material adverse effect upon the business or operations of the Company, taken as a whole; it being understood, however, that the obligations under this Section 14 shall not apply to the extent that the aforesaid matters (a) are disclosed in circumstances where you are legally required to do so or (b) become generally known to, and available for use by, the public otherwise than by your wrongful act or omission. 15. Related Agreements. To the extent that any provision of any other agreement between the Company and you shall limit, qualify or be 10 inconsistent with any provision of this Agreement, then for purposes of this Agreement, while the same shall remain in force, the provision of such other agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, WLR Foods, Inc. By___/s/ Herman D. Mason_____________ Herman D. Mason, Chair Executive Compensation Committee WLR Foods, Inc. Agreed to this __4__ day of _February______, 1994. _____/s/ Henry L. Holler__________ Henry L. Holler ______________________________________ ______________________________________ 11 EX-13.1 5 FINANCIAL HIGHLIGHTS Exhibit 13.1 Financial Highlights from Registrant's Annual Report to Shareholders
WLR FOODS, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS Dollars in thousands, except per share data June 28, June 29, July 1, July 2, July 3, Fiscal year ended: 1997 1996 1995 1994 1993 --------- -------- -------- -------- -------- OPERATIONS Net sales $1,013,777 $997,632 $908,776 $727,270 $616,702 Cost of sales 956,948 897,892 785,085 632,620 535,014 ---------- -------- -------- -------- -------- Gross profit 56,829 99,740 123,691 94,650 81,688 Selling, general and administrative expenses 95,728 97,324 91,420 63,606 55,732 ---------- -------- -------- -------- -------- Operating income (Loss) (38,899) 2,416 32,271 31,044 25,956 Interest expense 13,143 9,359 6,666 4,989 3,816 Other (income) expense, net (1,646) 321 (332) (431) (567) ---------- -------- -------- -------- -------- Total other expense, net 11,497 9,680 6,334 4,558 3,249 Earnings (loss) before income taxes and minority interest (50,396) (7,264) 25,937 26,486 22,707 Income tax expense (benefit) (18,260) (2,610) 9,749 9,897 8,057 Minority interest 47 32 55 38 43 ---------- -------- -------- -------- -------- Net earnings (loss) before cumulative effect of change in accounting (32,183) (4,686) 16,133 16,551 14,607 Cumulative effect on prior years of change in accounting - - - - - ---------- -------- -------- ------ -------- -- Net earnings (loss) (32,183) (4,686) 16,133 16,551 14,607 Less preferred stock dividends - - - - 1,389 ---------- -------- -------- -------- -------- Net earnings (loss) available to common shareholders $(32,183) $(4,686) $16,133 $16,551 $13,218 ========== ======== ======== ======== ======== PER COMMON SHARE Net earnings (loss) before cumulative effect of change in accounting $(1.86) $(0.27) $0.90 $1.01 $0.95 Cumulative effect on prior years of change in accounting - - - - - ---------- -------- -------- -------- -------- Net earnings (loss) per share (primary) $(1.86) $(0.27) $0.90 $1.01 $0.95 Net earnings (loss) per share (fully diluted) $(1.86) (0.27) 0.90 1.01 0.93 Cash dividends declared (excluding Cassco pooling) 0.12 0.24 0.22 0.21 0.21 Book value 7.89 10.00 10.47 9.45 8.66 Year-end stock price 8.50 14.00 14.38 17.00 11.33 Common shares outstanding (in thousands): Average for the year 17,276 17,528 17,859 16,451 15,667 At year end 16,597 17,682 17,298 16,514 16,427 ========== ======= ======= ======== ======= 1
WLR FOODS, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS-Continued Dollars in thousands, except per share data
June 28, June 29, July 1, July 2, July 3, Fiscal year ended: 1997 1996 1995 1994 1993 --------- --------- --------- -------- --------- FINANCIAL POSITION AT END OF YEAR Working capital (Deficit) $(31,397) $144,621 $120,562 $69,989 $57,509 Property, plant and equipment, net 159,426 176,691 174,163 139,854 140,540 Total assets 416,728 451,121 372,525 283,051 265,626 Long-term debt 5,040 138,510 106,481 46,368 52,253 Common stock subject to repurchase 4,438 17,750 17,750 - - Preferred shareholders' equity - - - - - Common shareholders' equity $126,558 $159,010 $163,344 $156,157 $142,255 ======== ======== ======== ======== ======== ANALYTICAL & OTHER INFORMATION Current ratio (compared to 1) 0.89 2.18 2.67 2.02 1.92 Total debt/total capitalization 61.2% 55.1% 44.7% 28.4% 33.5% Return on beginning total equity NMF NMF 10.3% 11.6% 13.1% Capital expenditures $11,245 $18,771 $17,251 $19,186 $31,766 Depreciation expense 28,088 28,243 24,817 21,333 18,115 Amortization expense 500 742 598 520 445 Interest expense 13,143 9,359 6,666 4,989 3,816 Cash dividends declared: Common stock 2,078 4,233 4,073 3,513 3,124 Preferred stock - - - - 1,389 Market capitalization of common stock at year end $141,075 $247,547 $248,654 $280,738 $186,168 ======== ======== ======== ======== ======== All information reflects the three-for-two stock split in the form of a 50% stock dividend declared on February 28, 1995. Fully diluted shares. In March 1993, the Company repurchased all the preferred stock issued in January 1992. Common stock subject to repurchase classified as debt. WLR Foods, Inc. common stock was first publicly traded in 1988. 2
WLR FOODS, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS-Continued Dollars in thousands, except per share data
June 27, June 29, June 30, July 1, July 2, Fiscal year ended: 1992 1991 1990 1989 1988 -------- -------- -------- -------- -------- OPERATIONS Net sales $514,465 $502,238 $494,156 $465,951 $381,363 Cost of sales 454,331 434,509 415,803 391,640 335,855 -------- -------- -------- -------- -------- Gross profit 60,134 67,729 78,353 74,311 45,508 Selling, general and administrative expenses 48,191 50,019 49,595 44,566 37,420 -------- -------- -------- -------- -------- Operating income 11,943 17,710 28,758 29,745 8,088 Interest expense 2,755 928 925 2,037 1,536 Other (income) expense, net (251) (453) (491) 166 (184) -------- -------- -------- -------- -------- Total other expense, net 2,504 475 434 2,203 1,352 Earnings before income taxes and minority interest 9,439 17,235 28,324 27,542 6,736 Income tax expense 3,518 6,521 10,895 10,520 2,952 Minority interest 25 33 34 (206) 60 -------- -------- -------- -------- -------- Net earnings before cumulative effect of change in accounting 5,896 10,681 17,395 17,228 3,724 Cumulative effect on prior years of change in accounting - - - - 1,112 -------- -------- -------- -------- -------- Net earnings 5,896 10,681 17,395 17,228 4,836 Less preferred stock dividends 982 - - - - -------- -------- -------- -------- -------- Net earnings available to common shareholders $4,914 $10,681 $17,395 $17,228 $4,836 ======= ======== ======== ======== ======== PER COMMON SHARE Net earnings before cumulative effect of change in accounting $0.35 $0.68 $1.11 $1.11 $0.24 Cumulative effect on prior years of change in accounting - - - - 0.07 -------- -------- -------- -------- -------- Net earnings per share (primary) $0.35 $0.68 $1.11 $1.11 $0.31 Net earnings per share (fully diluted) 0.35 0.68 1.11 1.11 0.31 Cash dividends declared (excluding Cassco pooling) 0.21 0.21 0.19 0.18 0.21 Book value 6.44 7.33 6.86 5.86 4.95 Year-end stock price 9.67 12.00 12.33 11.87 5.63 Common shares outstanding (in thousands): Average for the year 14,277 15,782 15,645 15,600 15,600 At year end 12,719 15,782 15,782 15,600 15,600 3
WLR FOODS, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS-Continued Dollars in thousands, except per share data
June 27, June 29, June 30, July 1, July 2, Fiscal year ended: 1992 1991 1990 1989 1988 --------- -------- --------- -------- -------- FINANCIAL POSITION AT END OF YEAR Working capital $ 40,337 $ 49,532 $ 46,039 $42,914 $35,169 Property, plant and equipment, net 113,017 88,807 71,414 59,687 53,524 Total assets 207,736 175,329 157,763 142,832 124,810 Long-term debt 38,148 18,678 6,402 7,858 8,995 Common stock subject to repurchase - - - - - Preferred shareholders' equity 29,507 - - - - Common shareholders' equity $ 81,881 $115,625 $108,258 $91,455 $77,181 ======= ======== ======== ======= ======= ANALYTICAL & OTHER INFORMATION Current ratio (compared to 1) 1.80 2.42 2.20 2.12 2.03 Total debt/total capitalization 32.0% 16.1% 8.5% 13.9% 16.0% Return on beginning total equity 5.1% 9.9% 19.0% 22.3% 6.6% Capital expenditures $36,107 $29,471 $20,360 $16,001 $8,163 Depreciation expense 14,041 11,544 9,932 8,595 7,057 Amortization expense 168 - - - - Interest expense 2,755 928 925 2,037 1,536 Cash dividends declared: Common stock 2,854 3,314 2,948 2,643 2,503 Preferred stock 982 - - - - Market capitalization of common stock at year end $122,942 $189,378 $194,638 $185,432 $87,880 ======== ======== ======== ======== ======= All information reflects the three-for-two stock split in the form of a 50% stock dividend declared on February 28, 1995. Fully diluted shares. In March 1993, the Company repurchased all the preferred stock issued in January 1992. Common Stock subject to repurchase classified as debt. WLR Foods, Inc. common stock was first publicly traded in 1988. 4
EX-13.2 6 MD&A Exhibit 13.2 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General In fiscal 1996, results of operations for WLR Foods, Inc. (WLR Foods or the Company) were adversely impacted by significantly higher grain costs in both its chicken and turkey operations and excess supplies of poultry and meats which prevented the Company from raising prices enough to recover these increases. The occurrence of disease in the turkey operations also raised operating costs. The average delivered costs paid for corn and soybean meal were approximately 46% and 23% higher, respectively, than in fiscal 1995. The effects of disease, and, in particular, Poult Enteritis Mortality Syndrome (PEMS), include significantly higher than normal mortality rates, poor feed conversion, irregular growth rates and processing inefficiencies. In combination, these factors can substantially increase the cost of producing turkey products. In fiscal 1997, results of operations were again adversely impacted by significantly higher delivered costs of soybean meal, which increased a further 26% over fiscal 1996 levels, and by corn costs which, although reduced by 6% from fiscal 1996 levels, remained substantially above historical averages. In addition, overproduction within the turkey industry led to lower sale prices. Operating results were further impacted by the recurrence of disease within the turkey operations, particularly in North Carolina. While the current costs for corn and soymeal remain substantially above their historic ranges, the United States Department of Agriculture forecasts higher inventory levels over the next year. If realized, higher inventory levels should lead to further reductions in the prices of these grains. Furthermore, industry-wide turkey production, as reflected by the number of eggs set in hatcheries and the number of poults placed in growout facilities, appears to be declining. Restoring a better balance of supply to demand should help improve commodity prices for turkey products. In addition, WLR Foods has implemented even more stringent biosecurity and flock management practices to minimize the occurrence of disease. The Company has not experienced any further outbreaks of PEMS year-to-date in fiscal 1998. If these trends continue, management believes that the Company will be able to generate substantial improvements in operating margins and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) in fiscal 1998, as compared to fiscal 1997. Results of Operations 1997 Versus 1996 Net sales for fiscal 1997 were $1.014 billion, an increase of $16.2 million, or 1.6%, as compared to net sales for fiscal 1996 of $997.6 million. This increase was attributable to a $17 million increase in chicken sales to $400 million. The increase in chicken sales was due to a 3% increase in pounds sold (the Goldsboro facility was in operation for a full year in 1997) and a 1% increase in prices. Turkey sales increased $5 million to approximately $490 million as a 2% increase in pounds sold offset a 1% decrease in prices. Cost of sales for fiscal 1997 were $956.9 million, an increase of $59.0 million, or 6.6%, as compared to $897.9 million for fiscal 1996. This increase was primarily attributable to the increase in total pounds sold; a $37 million increase in the cost of corn and soybean meal consumed by birds processed at the Company s facilities; and higher growout costs due to the substitution of wheat for corn in feed early in fiscal 1997. Gross profit for fiscal 1997 was $56.8 million, a decrease of $42.9 million, or 43.0%, as compared to $99.7 million for fiscal 1996. Gross profit as a percentage of sales was 5.6% for fiscal 1997, as compared to 10.0% for fiscal 1996. The decrease in gross profit was primarily the result of higher grain costs and operating inefficiencies attributable to the effects of disease and a change in feed rations necessitated by the scarcity of corn in the fall of 1996. These factors were partially offset by higher realized prices on chicken and turkey products and approximately $15 million annual cost savings from the Charlotte, North Carolina plant closing, the move to a single operating shift in the North Carolina turkey processing operation, 1 staff reductions and savings from centralized purchasing. Selling, general and administrative expenses for fiscal 1997 were $95.7 million, a decrease of $1.6 million, or 1.6%, as compared to $97.3 million for fiscal 1996. This was the result of a $1.5 million reduction in general and administrative expense initiated near the end of fiscal 1996. Interest expense for fiscal 1997 was $13.1 million, an increase of $3.8 million over $9.4 million for fiscal 1996. This increase was attributable primarily to higher borrowing levels and slightly higher interest rates. The effective tax benefit rate in 1997 was 36.2% versus 35.9% in 1996. The net loss for fiscal 1997 was $32.2 million (or $1.86 per share), an increase of $27.5 million as compared to a net loss of $4.7 ($0.27 per share) for fiscal 1996. Fiscal 1996 Compared to Fiscal 1995 Net sales for fiscal 1996 were $997.6 million, an increase of $88.9 million, or 9.8%. This increase was primarily attributable to a $70 million increase in chicken sales to approximately $380 million due largely to the acquisition of the Goldsboro, North Carolina complex in September 1995, and a 4% increase in the average price per pound sold. The $5 million decrease in turkey sales to approximately $485 million, was due to a 2% decrease in pounds sold, partially offset by a 1% increase in the average price. Cost of sales for fiscal 1996 were $897.9 million, an increase of $112.8 million, or 14.4%, as compared to $785.1 million for fiscal 1995. This increase was primarily attributable to the increase in total sales pounds and a $58 million increase in corn and soymeal costs in birds processed during the year. Gross profit for fiscal 1996 was $99.7 million, a decrease of $24.0 million, or 19.4%, as compared to $123.7 million for fiscal 1995. Gross profit as a percentage of sales was 10.0% for fiscal 1996, as compared to 13.6% for fiscal 1995. The decrease in gross profit was primarily the result of higher grain costs, only a portion of which were recovered through higher turkey and chicken prices, and costs associated with PEMS in the turkey operations. These were partially offset by cost savings realized through the move to a single operating shift in the North Carolina turkey processing operations and staff reductions in fiscal 1996. Selling, general and administrative expenses for fiscal 1996 were $97.3 million, an increase of $5.9 million, or 6.5%, as compared to $91.4 million for fiscal 1995. This increase was the result of a full year of operations at the North Carolina turkey processing facilities versus 44 weeks in fiscal 1995, combined with a $3.4 million increase in freight costs and a $3.9 million increase in sales expense, both due to higher sales volumes. These higher expenses were partially offset by operational efficiencies, a decrease in costs from the centralization of administrative functions, and the elimination of bonuses. Interest expense for fiscal 1996 was $9.4 million, an increase of $2.7 million, as compared to $6.7 million for fiscal 1995. This increase was attributable to increased borrowings to cover higher inventory levels and other operating needs. The effective tax benefit rate was 35.9% due to limitations on the use of operating losses in certain states. The net loss for fiscal 1996 was $4.7 million, or $0.27 per share, a decrease of $20.8 million as compared to net earnings of $16.1 million (a profit of $0.90 per share) for fiscal 1995. Liquidity and Capital Resources The Company s historical capital resources have included funds from operations, the public offering of common stock, bank lines of credit and other borrowings. The primary uses of cash have been to provide funds for operations, make expenditures for capital improvements, equipment and facilities, repay indebtedness, pay cash dividends to shareholders, repurchase shares of common stock and make acquisitions. On June 28, 1997, the Company had a net working capital deficit of $31.4 million, compared to net working capital of $144.6 million on June 29, 1996. This decrease resulted primarily from the reclassification of $182 million of long-term debt obligations. As of June 28, 1997, the Company was not in compliance with the minimum tangible net worth and the current ratio provisions set forth in its credit agreements. The Company has secured waivers from its lenders covering both provisions only as of June 28, 1997. 2 The Company is exploring alternative sources of financing to replace a portion of its existing debt and for general corporate purposes. In addition, the Company is negotiating amendments to the revolving credit facility. On June 28, 1997, inventories were $165.6 million, a decrease of $6.4 million, or 3.7%, as compared to $171.9 million on June 29, 1996. This decrease resulted primarily from lower levels of turkey finished goods inventories. Operating activities generated cash of $10.9 million in fiscal 1997, used $40.3 million in fiscal 1996 and generated $32.7 million in fiscal 1995. The increase in cash generated in fiscal 1997, as compared to fiscal 1996, resulted primarily from the reduction of its accounts receivable, inventories and other assets partially offset by the operating loss. The decrease in cash generated in fiscal 1996, as compared to fiscal 1995, resulted primarily from the decrease in net earnings and increases in accounts receivable, inventories and other current assets, partially offset by an increase in accounts payable. Capital expenditures were $11.2 million in fiscal 1997. The Company also leased equipment totaling $3.0 million using operating leases. Capital expenditures in fiscal 1996 totaled $18.8 million. In addition, the Company spent $16.6 million to acquire the Goldsboro, North Carolina chicken complex. Capital expenditures in fiscal years 1997 and 1996 were generally for normal replacements and upgrades of existing assets and were somewhat constrained by the operating results. The Company expects capital expenditures in fiscal 1998 to range from $20 million to $25 million to cover normal replacement and upgrades of existing facilities, of which approximately $8.0 million will be used to fund construction of a new hatchery and implement a second shift at the Goldsboro, North Carolina chicken facility. Management believes that expanding production will enable the Company to leverage its fixed plant expenses at Goldsboro over a significantly larger volume of product, thereby minimizing per unit product costs. In fiscal 1997, the Company repurchased $13.3 million of common stock in a private transaction. Under the terms of the private transaction, the final repurchase of common stock for $4.4 million was completed shortly after the close of the fiscal 1997 year. This eliminated the Company s obligation to repurchase common stock. Including the common stock subject to repurchase as debt, total debt to total capital was 61.2% at June 28, 1997, an increase from 55.1% at June 29, 1996. The Company targets a total debt to total capital ratio of 40% to 45%. Accounting Matters In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share" and SFAS No. 129, Disclosure of Information about Capital Structure." SFAS No. 128 establishes new standards for computing and presenting earnings per share. SFAS No. 129 establishes standards for disclosing information about an entity s capital structure. Both SFAS Nos. 128 and 129 are effective for financial statements issued for periods ending after December 15, 1997. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general- purpose financial statements. SFAS 131 requires that companies report certain information about operating segments in complete sets of financial statements and in condensed financial statements of interim periods issued to shareholders. Both SFAS Nos. 130 and 131 are effective for fiscal years beginning after December 15, 1997. The Company does not believe the adoption of these Statements of Financial Accounting Standards will have a significant impact on the Company s financial condition or results of operations. This report contains certain forward-looking statements which are based on management's current views and assumptions, and involve risks and uncertainties that could significantly affect expected results. WLR Foods' actual results may differ materially from those in the forward-looking statements. For example, operating results may be affected by external factors such as: actions of competitors, changes in laws and regulations, including changes in governmental interpretations of regulations and changes in accounting standards, customer demand and fluctuations in the cost and availability of feed ingredients. Stockholders may review reports filed with the Securities and Exchange Commission for a more detailed description of 3 the uncertainties and other factors that could cause actual results to differ materially from such forward-looking statements. 4 EX-13.3 7 CONSOLIDATED FINANCIAL STATEMENTS Exhibit 13.3 Consolidated Financial Statements and Notes to Consolidated financial Statements WLR Foods, Inc. and Subsidiaries Consolidated Statements of Operations
Dollars in thousands, except per share data Fiscal years ended June 28, 1997, June 29, 1996 and July 1, 1995 1997 1996 1995 - ----------------------------------------------- ------- ------- ------- Net sales (Note 11) $1,013,777 $997,632 $908,776 Cost of sales (Note 11) 956,948 897,892 785,085 ---------- -------- -------- Gross profit 56,829 99,740 123,691 Selling, general and administrative expenses 95,728 97,324 91,420 ---------- -------- -------- Operating income (loss) (38,899) 2,416 32,271 Other expense: Interest expense (Note 4) 13,143 9,359 6,666 Other expense (income), net (1,646) 321 (332) ---------- -------- -------- Other expense, net 11,497 9,680 6,334 Earnings (loss) before income taxes and minority interest (50,396) (7,264) 25,937 Income tax expense (benefit)(Note 7) (18,260) (2,610) 9,749 Minority interest in net earnings of consolidated subsidiary 47 32 55 ---------- -------- -------- Net Earnings (loss) $ (32,183) $ (4,686) $ 16,133 ---------- -------- -------- Net Earnings (loss) per common share $ (1.86) $ (0.27) $ 0.90 ========== ======== ======== See accompanying Notes to Consolidated Financial Statements.
1 WLR Foods, Inc. and Subsidiaries Consolidated Balance Sheets
Dollars in thousands, June 28, 1997 and June 29, 1996 1997 1996 - ------------------------------- ------ ------ Assets Current Assets Cash and cash equivalents $ 283 $ 724 Accounts receivable, less allowance for doubtful accounts of $1,550 and $708 72,462 79,932 Inventories (Note 3) 165,551 171,946 Income taxes receivable 4,567 10,802 Other current assets 2,301 4,275 -------- -------- Total current assets 245,164 267,679 Property, plant and equipment, net (Note 4) 159,426 176,691 Deferred income taxes (Note 7) 4,996 - Other assets 7,142 6,751 -------- -------- Total Assets $416,728 $451,121 ======== ======== Liabilities and Shareholders' Equity Current Liabilities Notes payable to banks (Note 5) $ 4,031 $ 30,776 Current maturities of long-term debt (Note 5) 186,391 7,983 Excess checks over bank balances 12,118 14,788 Trade accounts payable 35,005 31,989 Accrued expenses 26,657 23,887 Deferred income taxes (Note 7) 12,359 12,574 Other current liabilities - 1,061 -------- -------- Total current liabilities 276,561 123,058 Long-term debt, excluding current maturities (Note 5) 5,040 138,510 Deferred income taxes (Note 7) - 8,849 Minority interest in consolidated subsidiary 592 552 Other liabilities and deferred credits 3,539 3,392 Commitments and other matters (Notes 6, 8, 10, and 11) Common stock subject to repurchase (Note 8) 4,438 17,750 Shareholders' equity (Notes 8 and 9) Common stock, no par value 64,206 61,407 Additional paid-in capital 2,974 2,974 Retained earnings 59,378 94,629 -------- -------- Total shareholders' equity 126,558 159,010 -------- -------- Total Liabilities and Shareholders' Equity $416,728 $451,121 ======== ======== See accompanying Notes to Consolidated Financial Statements.
2 WLR Foods, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity
Dollars and shares in thousands, except per share data Additional Fiscal years ended June 28, 1997, Common Stock Paid In Retained June 29, 1996 and July 1, 1995 Shares Amount Capital Earnings Total - ------------------------------------------- ------- ------- ------ ------- ------- Balance at July 2, 1994 16,514 $ 61,416 $3,253 $91,488 $156,157 Net Earnings 16,133 16,133 Cash dividends declared-$0.22 per share (4,073) (4,073) Issuance of common stock for acquisition of businesses 1,775 10,650 10,650 Common stock issued under Stock Option Plan including tax benefit of $182 29 173 173 Other common stock issued 38 563 563 Common stock repurchased (1,058) (16,020) (239) (16,259) ------ ------ ------ ------- ------- Balance at July 1, 1995 17,298 56,782 3,014 103,548 163,344 Net loss (4,686) (4,686) Cash dividends declared-$0.24 per share (4,233) (4,233) Issuance of common stock for acquisition of businesses (Note 2) 457 6,028 6,028 Common stock issued under Stock Option Plan including tax benefit of $104 20 78 78 Other common stock issued 102 1,298 1,298 Common stock repurchased (195) (2,779) (40) (2,819) ------ ------ ------ ------- ------- Balance at June 29, 1996 17,682 61,407 2,974 94,629 159,010 Net loss (32,183) (32,183) Cash dividends declared-$0.12 per share (2,078) (2,078) Stock dividend 85 976 (990) (14) Other common stock issued 161 1,823 1,823 Common stock repurchased (Note 8) (1,331) - - ------ ------ ------ ------- ------- Balance at June 28, 1997 16,597 $ 64,206 $2,974 $59,378 $126,558 ====== ======= ====== ======= ======== See accompanying Notes to Consolidated Financial Statements.
3 WLR Foods, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Dollars in thousands Fiscal years ended June 28, 1997, June 29, 1996 and July 1, 1995 1997 1996 1995 - ----------------------------------------------- ------- ------- ------ Cash Flows From Operating Activities: Net earnings (loss) $(32,183) $(4,686) $16,133 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation 28,088 28,243 24,817 (Gain) loss on sales of property, plant and equipment 772 67 (218) Deferred income taxes (14,060) 2,339 1,919 Other, net 286 395 498 Change in operating assets and liabilities net of acquired businesses: (Increase) decrease in accounts receivable 7,470 (16,583) 4,069 (Increase) decrease in inventories 6,395 (43,233) (14,430) (Increase) decrease in other current assets 8,209 (11,766) (878) Increase (decrease) in accounts payable 3,016 3,298 (2,713) Increase in accrued expenses and other 2,917 1,656 3,500 ------- ------- ------- Net cash provided by (used in ) operating activities 10,910 (40,270) 32,697 Cash Flows From Investing Activities: Additions to property, plant and equipment (11,245) (18,771) (17,251) Acquisition of businesses (200) (10,565) (42,489) Proceeds from sales of property, plant and equipment 424 833 1,505 (Additions to) proceeds from dispositions of other assets (677) 819 302 Minority interest in net earnings of consolidated subsidiary, net of dividends 40 25 52 ------- ------- ------- Net cash used in investing activities (11,658) (27,659) (57,881) Cash Flows From Financing Activities: Issuance of long-term and revolver debt 74,031 70,776 74,141 Reduction of long-term debt (55,838) (8,016) (25,020) Issuance of common stock 1,235 1,376 736 Repurchase of common stock (13,312) (2,819) (16,259) Increase (decrease) in excess checks over bank balances (2,670) 10,840 (4,563) Dividends paid (3,139) (4,210) (3,916) ------- ------- ------- Net cash provided by financing activities 307 67,947 25,119 ------- ------- ------- Increase (decrease) in cash and cash equivalents (441) 18 (65) Cash and cash equivalents at beginning of fiscal year 724 706 771 ------- ------- ------- Cash and cash equivalents at end of fiscal year $ 283 $ 724 $ 706 ======= ======= ======= 4
WLR Foods, Inc. and Subsidiaries Consolidated Statements of Cash Flows Continued
Supplemental cash flow information: Cash paid (received) for: Interest $12,297 $8,906 $6,555 Income taxes (10,608) 3,213 8,418 ======= ======= =======
Non-cash financing activities: In fiscal 1996: The Company issued 456,936 shares of WLR Foods, Inc. common stock valued at $6.0 million for the acquisition of New Hope Feeds, Inc. and a related company. (Note 2) In fiscal 1995: The Company issued 1,774,999 shares of WLR Foods, Inc. common stock valued at $28.4 million including $17.8 million of common stock subject to repurchase, in conjunction with the acquisition of Cuddy Farms, Inc. - USA Food Division. (Note 8) See accompanying Notes to Consolidated Financial Statements. 5 WLR Foods, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies and Other Information Organization WLR Foods, Inc. and Subsidiaries (WLR Foods or the Company) are primarily engaged in fully integrated turkey and chicken production, processing, further processing and marketing. The Company s operations are predominantly located in the mid-Atlantic region of the United States. WLR Foods sells products through a variety of selected national and international retail, food-service and institutional markets. Fiscal Year The Company s fiscal year ends on the Saturday closest to June 30. Fiscal years 1997, 1996 and 1995 ended on June 28, June 29 and July 1, respectively, and included 52 weeks in each year. Principles of Consolidation and Presentation The accompanying consolidated financial statements include the accounts of WLR Foods and all of its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories Inventories of feed, grain, eggs, packaging supplies, processed poultry and meat products are stated at the lower of cost or market as determined by the first-in, first-out valuation method. Live poultry and breeder flocks consist of poultry raised for slaughter and breeders. Poultry raised for slaughter are stated at the lower of average cost or market. Breeders are stated at average cost less accumulated amortization. The cost of breeders are accumulated during their development stage and then amortized into the cost of the eggs produced over the egg production cycle of the breeders. The Company has four methods of purchasing grain: cash purchasing, forward pricing,grain options, and hedging with futures contracts. Each purchasing method creates varying degrees of risk for WLR Foods. The Company uses futures contracts and forward purchases to hedge the risk of fluctuating grain prices. The results of closed hedging transactions become part of the cost of the related inventory items, and gains and losses in the market value of open hedging contracts are reported as an adjustment to the carrying amount of the hedged item. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the useful lives of the respective assets. In general, the estimated useful lives for computing depreciation are: 15 to 20 years for buildings; 3 to 5 years for machinery and equipment; and 4 to 6 years for transportation equipment. The costs of maintenance and repairs are charged to operations, while costs associated with renewals, improvements, and major replacements are capitalized. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net Earnings Per Common Share Net earnings per common share are based on the weighted average number of common shares and common share equivalents outstanding during the fiscal years (17,276,274 shares, 17,527,876 shares and 17,858,942 shares in 1997, 1996 and 1995, respectively). 6 Financial Instruments The estimated fair value of financial instruments has been determined by the Company using available market information. Except for financial instruments used for hedging and debt instruments (Notes 3 and 5), the carrying amounts of all financial instruments approximate their fair values due to their short maturities. Accounting Change In fiscal year 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires companies to review assets for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of this statement did not have an impact on the Company s consolidated financial statements. Stock-Based Compensation In fiscal year 1997, the Company also adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation. As permitted under SFAS No. 123, the Company continues to account for employee stock option plans using the intrinsic value method of accounting (Note 9). Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Reclassifications Certain 1996 and 1995 amounts have been reclassified to conform with fiscal 1997 presentations. 2. Business Acquisitions The transaction discussed here has been accounted for as a purchase, and, accordingly, the consolidated financial statements herein include the net assets acquired at fair value and the results of operations of the acquired business from the date of acquisition. On September 29, 1995, the Company acquired substantially all of the assets of New Hope Feeds, Inc. and an affiliated company for $10.6 million in cash, including costs, and $6.0 million in stock. The assets included a new chicken processing facility, a feedmill, a hatchery, and related operating equipment. The transaction was recorded as follows: Dollars in thousands Inventories $ 2,864 Other current assets 283 Property, plant and equipment 12,900 Other assets 2,537 ------- Total assets acquired 18,584 Cash paid (including costs) 10,565 Issuance of common stock 6,028 ------ Total liabilities assumed $ 1,991 ======= 3. Inventories A summary of inventories at June 28, 1997 and June 29, 1996 follows: Dollars in thousands 1997 1996 -------- -------- Live poultry and breeder flocks $ 74,984 $ 71,263 Processed poultry and meat products 53,981 66,895 Packaging supplies, parts and other 17,188 18,046 Feed, grain and eggs 19,398 15,742 -------- -------- Total inventories $165,551 $171,946 ======== ======== 7 The notional amounts of grain futures contracts were $21.2 million at June 28, 1997. The fair value of all derivative instruments used in hedging at June 28, 1997 was $19.3 million. There were no outstanding amounts at June 27, 1996. 4. Property, Plant and Equipment WLR Foods' investment in property, plant and equipment at June 28, 1997 and June 29, 1996 was as follows: Dollars in thousands 1997 1996 -------- -------- Land and improvements $ 22,161 $ 21,348 Buildings and improvements 119,190 116,006 Machinery and equipment 179,243 172,280 Transportation equipment 26,720 28,871 Construction in progress 2,443 5,764 -------- -------- 349,757 344,269 Less accumulated depreciation 190,331 167,578 -------- -------- Property, plant and equipment, net 159,426 176,691 ======== ======== The company capitalized interest costs with respect to certain major construction projects of $91,000, and $146,000 in fiscal years 1996 and 1995, respectively. The Company did not have any capitalized interest costs in fiscal year 1997. 5. Long-Term Debt and Bank Revolving Credits Long-term debt and other credit facilities at June 28, 1997 and June 29, 1996 consisted of the following obligations: Dollars in thousands 1997 1996
------- ------- Fixed Rate Notes: 9.41% Senior Unsecured Notes due 2001 $18,000 $ 21,000 7.47% Senior Unsecured Notes due 2007 22,000 22,000 Variable Rate Notes: Unsecured Bank Term Note due 2002 - 20,536 Unsecured Bank Term Note due 1997 - 30,000 Revolving Credit Notes: Unsecured Bank Revolving Credit Note due 1998 and 1997, respectively 4,031 776 Unsecured Bank Revolving Credit Note due 1998 - 75,000 Unsecured Bank Revolving Credit Note due 2000 145,000 - Other Notes: Notes with various terms and rates 6,431 7,957 ------- ------- Total debt 195,462 177,269 Less debt reclassed as current due to the Company failing to meet certain covenants 182,000 - Less revolving debt maturing in less than 1 year 4,031 776 Less term note maturing in less than 1 year - 30,000 Less current maturities of long term debt 4,391 7,983 ------- ------- Long-term debt and revolving debt, excluding current maturities $ 5,040 $138,510 ======= =======
The 9.41% Senior Unsecured Notes have $3 million principal payments due in May of each year through 2000. In 2001, a final balloon payment of $9 million is due. Interest is payable semiannually. The 7.47% Senior Unsecured Notes due 2007 were placed in June 1995. 8 The notes require interest payments on a semiannual basis through maturity. Annual principal payments of $4.4 million begin in 2003. The financial covenants for both senior notes include fixed charge coverage, debt-to-capital, tangible net worth and current ratio requirements. The Company refinanced its bank debt in February of 1997. The new facility is a three year $160 million revolver. The new facility replaces the credit note and two bank term notes. The debt is unsecured with an interest rate based on the London Inter-Bank Offering Rate (LIBOR) plus a spread determined by the Company s debt to capital ratio, calculated on a quarterly basis (7.19% at June 28, 1997). The loan matures in February 2000. On June 28, 1997, $145 million was outstanding, with $11 million available for borrowing. The facility provides for up to $10 million of standby letters of credit, including $4 million currently available for new standby letters of credit. The second revolving credit facility is a $10 million facility. At June 28, 1997, $4 million was outstanding. The revolving credit agreements contain various covenants, including maintenance of a minimum tangible net worth, current ratio, fixed charge coverage and a maximum debt-to-capital ratio. The Company also modified its fixed rate senior notes to conform to financial covenants under the revolving credit note. As of January 1, 1997, interest payments on the fixed rate senior notes were increased by 1% over the stated rates of the notes but may be returned to original levels under the conditions as defined in the revised agreements. The fair value of the fixed rate notes is estimated at $40.2 million based on quoted market prices for similar issues at June 28, 1997. The carrying value of all other debt approximates fair value at June 28, 1997. Required annual principal repayments of long-term debt and revolving credits with original maturities of greater than one year are as follows: Dollars in thousands - -------------------- Fiscal 1998 $ 8,423 Fiscal 1999 3,930 Fiscal 2000 148,924 Fiscal 2001 9,948 Fiscal 2002 858 The Company s credit agreements with its lenders contain restrictive covenants which include the maintenance of minimum tangible net worth, as defined, and certain other financial ratios. As of June 28, 1997, the Company was not in compliance with the minimum tangible net worth and the current ratio provisions set forth in its credit agreements. In August 1997, the Company secured waivers from its lenders covering both provisions as of June 28, 1997. The Company has reclassified $182 million of the debt under these agreements as current liabilities since the waivers only grant the Company relief for the year ended June 28, 1997. 6. Employee Benefits The Company maintains a Profit Sharing and Salary Savings Plan that is available to substantially all employees who meet certain age and service requirements. Most participants may elect to make contributions of up to 15% of their salary. For each employee dollar contributed (limited to the first 4% of an employee's compensation), the Company is required to contribute a matching amount of 50 cents. The Company can also make additional contributions at its discretion. WLR Foods total contributions under this plan were approximately $1.6 million, $1.7 million and $2.3 million, for fiscal 1997, 1996 and 1995, respectively. 7. Income Taxes The provision for income taxes from operations was as follows for fiscal years 1997, 1996 and 1995: Dollars in thousands 1997 1996 1995 - -------------------- ----- ----- ----- Current: Federal $ (4,120) $(4,092) $6,211 State (80) (857) 1,619 ------- ------- ------- (4,200) (4,949) 7,830 9 Deferred: Federal (12,129) 1,788 1,638 State (1,931) 551 281 -------- -------- -------- (14,060) 2,339 1,919 -------- -------- -------- Total tax provision (benefit) $(18,260) $(2,610) $9,749 ======== ======== ======== The provision for income taxes differs from the amounts resulting from applying the federal statutory tax rates (35%) to earnings before income taxes and minority interest as follows for fiscal years 1997, 1996 and 1995: Dollars in thousands 1997 1996 1995 - ----------------------------------- ----- ----- ----- Taxes computed using federal statutory tax rates $(17,639) $(2,542) $9,078 State income taxes, net of federal tax effect (1,307) (199) 908 Other, net 686 131 (237) -------- ------- ------ Total tax provision $(18,260) $(2,610) $9,749 ======== ======= ====== Effective tax rate 36.2% 35.9% 37.6% The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at June 28, 1997 and June 29, 1996 are listed below: Dollars in thousands 1997 1996 - --------------------------------------- ----- ----- Deferred tax liabilities: Inventories, principally due to the accounting for live inventories on the farm price method for tax purposes $(18,525) $(18,152) Plant and equipment, principally due to differences in depreciation and capitalized interest (7,718) (9,485) Investments in subsidiary companies, principally due to undistributed net income of the subsidiary (406) (375) Other (17) - ------- ------- Gross deferred tax liabilities (26,666) (28,012) Deferred tax assets: Net operating loss carryforwards 10,000 - Insurance accruals, principally due to timing of payments versus the recording of expenses 2,763 3,281 Deferred compensation, principally due to accrual for financial reporting purposes 1,008 945 Tax credits 3,079 836 Compensated absences, principally due to accrual for financial reporting purposes 1,053 970 Accounts receivable, principally due to allowance for doubtful accounts 605 276 Other 795 281 ------- -------- Gross deferred tax assets 19,303 6,589 ------- -------- Net deferred tax liability $ (7,363) $(21,423) ======== ======== 10 In assessing the recoverability of deferred tax assets, management considers whether it is reasonably probable that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent on the generation of future taxable income, during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the level of historical operating results, future expectation of taxable income and reversal of deferred tax liabilities, management believes it is more likely than not that the Company will realize the benefits of these deductible differences as reflected at June 28, 1997 and June 29, 1996. 8. Shareholders Equity and Common Stock Subject to Repurchase In February 1994, the Board of Directors approved the adoption of the Shareholder Protection Rights Plan (the Plan) wherein one right attaches to and trades with each share of common stock. Each right entitles the registered holder to purchase from the Company at an exercise price of $45.33, the number of shares of common stock or participating preferred stock having a market value of twice the exercise price. Such participating preferred stock is designed to have economic and voting terms similar to those of one share of common stock. Rights will separate from the common stock and become exercisable following the earlier of 1) the date a person or group acquires 15% or more of the outstanding stock, or 2) the tenth business day (or such later date the Board may decide) after any person commences a tender offer that would result in such person or group holding a total of 15% or more of the common stock. Additionally, in either case, rights owned by the acquiring person or group would automatically become void. If a person acquires between 15% and 50% of the outstanding common stock, the Board may, in lieu of allowing rights to be exercised, require each outstanding right to be exchanged for one share of common stock or participating preferred stock. A provision in the Plan allows for rights holders to acquire stock of the acquiring person or group, in the event a change in control of the Company has occurred. The rights are redeemable by the Company at $0.01 per right prior to becoming exercisable and expire 10 years from issuance. WLR Foods has 100,000,000 shares of common stock authorized, with 16,597,114 outstanding on June 28, 1997, and 17,681,893 outstanding on June 29, 1996. Additionally, there are 50,000,000 shares of preferred stock authorized with none outstanding as of June 28, 1997 or June 29, 1996. The Common Stock Subject to Repurchase arises due to WLR Foods commitment to repurchase the shares held by a trustee on behalf of Cuddy Farms, Inc. In January 1997, the Company entered into an agreement to repurchase the 1,774,999 shares (approximately 10% of the outstanding shares of its common stock) from Cuddy Farms, Inc. at $10 per share, in a private transaction. Fifty percent of the shares were repurchased in January 1997, 25% were repurchased in March 1997, and the final 25% will be repurchased early in fiscal year 1998. 9. Stock Option and Stock Purchase Plans Stock Option Plans WLR Foods Stock Option Plan was adopted by the Board of Directors in accordance with the Long-Term Incentive Plan which was ratified by the shareholders of the Company on November 1, 1988. The Plan provides for the granting of incentive or nonqualified common stock options. The option price under the Plan shall not be less than the fair market value of the common shares as of the date of the grant. The options vest after three years, with one-third vesting each year after the date of grant. The options are exercisable at varying dates not to exceed 10 years from the date of grant. 11 The changes in the outstanding common shares under option for fiscal 1997, 1996, and 1995 are listed below: Common shares Weighted Average under option Exercise Price - ------------------------------- ------------- ------------- Outstanding at July 2, 1994 742,875 $14.21 Exercised (137,625) $12.33 Granted in fiscal 1995 163,000 $15.00 -------- ------ Outstanding at July 1, 1995 768,250 $14.71 Canceled or expired (110,120) $13.59 Exercised (148,255) $11.92 Granted in fiscal 1996 190,500 $14.13 -------- ------ Outstanding at June 29, 1996 700,375 $15.08 Canceled or expired (159,125) $11.92 Granted in fiscal 1997 178,750 $8.31 -------- ------ Outstanding at June 28, 1997 720,000 $13.85 ======== ====== There were 385,247, 376,333 and 452,875 shares exercisable under option with weighted average exercise prices of $16.21, $14.99 and $15.31 at fiscal 1997, 1996 and 1995 respectively. The following table summarizes information about stock options outstanding as of June 28, 1997: Stock Options Stock Options Outstanding: Exercisable: - --------------------- -------------------------------- Weighted Average Remaining Contractual Exercise Price Shares Life (Years) Shares - -------------- ---------- -------------- -------- $8.310 178,750 10.0 - 14.125 171,250 9.0 57,080 14.666 128,625 1.0 128,625 15.000 129,250 7.9 87,417 20.000 112,125 1.7 112,125 ------- ------- Total 720,000 385,247 ======= ======= Accounting for Stock Option Plans The Company has elected to account for its employee stock option plans using the intrinsic value method of accounting. Accordingly, no compensation cost has been recognized in the accompanying financial statements because the exercise price of the stock options equals the market price of the underlying stock on the date of grant. Pro forma information regarding net income and earnings per share is required by SFAS No. 123. Assuming the Company accounted for its employee stock options using the fair value method, the Company's net income and earnings per share would approximate the pro forma amounts indicated below: Fiscal years ended Dollars in thousands June 28, 1997 June 29, 1996 - -------------------- --------------- ------------- Net loss As Reported $(32,183) $(4,686) Pro Forma (32,398) (4,686) Net loss per common share As Reported $(1.86) $(0.27) Pro Forma (1.88) (0.27) Note: The pro forma disclosures shown may not be representative of the effects on reported net income in future years. 12 The fair value of each stock option grant used to compute pro forma net income and net income per share disclosures is estimated at the time of the grant using the Black-Scholes option-pricing model. The weighted-average assumptions used in the model are as follows: 1997 1996 ---- ---- Expected dividend yield 1.1% 1.7% Expected volatility 43% 3% Risk-free interest rate 6.8% 6.6% Expected term (in years) 10 10 Using these assumptions in the Black-Scholes model, the weighted average fair value of options granted during 1997 and 1996 is $0.6 million and $1.1 million, respectively. On October 29, 1994, the shareholders of WLR Foods approved the Poultry Producer Stock Purchase Plan and amended and restated the Employee Stock Purchase Plan. These plans allow contract producers and employees to purchase stock at a 10% discount from the market price. All shares must be held in the plans for a period of two years. Upon termination of employment or contract, participants are terminated from the respective plans. 10. Leases WLR Foods has entered into various operating lease agreements for machinery and equipment. The leases are noncancelable and expire on various dates through 2004. Total rent expense was approximately $5.7 million, $3.5 million and $2.7 million for fiscal 1997, 1996, and 1995, respectively. The following schedule presents the future minimum rental payments required under the operating leases that have initial or remaining noncancelable lease terms in excess of one year as of June 28, 1997: Dollars in thousands - -------------------- Fiscal 1998 $2,025 Fiscal 1999 1,719 Fiscal 2000 1,290 Fiscal 2001 1,028 Fiscal 2002 807 Fiscal 2003 and thereafter 697 ------ Total minimum lease payments $7,566 ====== 11. Related Party Transactions Certain directors of WLR Foods are contract growers of live poultry for the Company. In addition, a WLR Foods director is a director/officer of a company which supplies fuel and related products to certain locations of the Company. A second director provided consulting services to WLR Foods during each fiscal year presented. As a result of an August 1994 acquisition, Cuddy Farms, Inc. (as an affiliate of Cuddy International) became a related party. The transactions include poultry purchases and feed sales to Cuddy Farms at pricing formulas established when the acquisition was completed. The contract terms are through 1998 with extensions available. Transactions with these related parties during the past three fiscal years are as follows (Dollars in thousands): Purchases from Sales to related parties related parties --------------- --------------- Fiscal 1997 $23,381 $ 8,998 Fiscal 1996 25,433 10,237 Fiscal 1995 21,020 7,939 In management's opinion, all related party transactions are conducted under normal business conditions, with no preferential treatment given to related parties. 13 12. Selected Quarterly Financial Data(Unaudited) The unaudited summary of quarterly results for fiscal 1997 and 1996 follows:
Dollars in thousands except per share data Fiscal year ended June 28, 1997 First Second Third Fourth - ------------------------------- ------- ------- ------- ------- Net sales $272,135 $264,424 $222,225 $254,993 Operating loss (9,621) (6,225) (12,010) (11,043) Net loss (8,095) (5,368) (9,637) (9,083) Per share data: Net loss per common share $ (0.46) $ (0.30) $ (0.56) $ (0.55) Cash dividends declared per common share $ - $ 0.12 $ - $ - Stock dividend declared per common share(in shares) - - 0.00525 0.00640 Market price(bid) - high 13.50 13.50 12.88 10.13 - low 11.13 11.38 9.50 8.13 Fiscal year ended June 29, 1996 First Second Third Fourth - ------------------------------- ------- ------- ------- ------- Net sales $250,798 $267,795 $216,263 $262,776 Operating income (loss) 8,947 9,919 (9,274) (7,176) Net earnings(loss) 4,296 4,843 (7,062) (6,763) Per share data: Net earnings (loss) per common share $ 0.25 $ 0.28 $ (0.40) $ (0.38) Cash dividends declared per common share $ 0.06 $ 0.06 $ 0.06 $ 0.06 Market price(bid) - high 14.50 16.50 16.25 14.00 - low 12.75 13.25 12.50 11.75
Per share calculations are based on each stand alone period presented; therefore, the annual per share results may not be the sum of the four quarters. 14 EX-13.4 8 INDEPENDENT AUDITOR'S REPORT Exhibit 13.4 Independent Auditors' Report The Board of Directors and Shareholders WLR Foods, Inc: We have audited the accompanying consolidated balance sheets of WLR Foods, Inc. and subsidiaries as of June 28, 1997 and June 29, 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the fiscal years in the three-year period ended June 28, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reason- able basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WLR Foods, Inc. and subsidiaries as of June 28, 1997 and June 29, 1996 and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended June 28, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Richmond, Virginia August 20, 1997 EX-21 9 LIST OF SUBSIDIARIES Exhibit 21 Subsidiary State of Incorporation Wampler Foods, Inc. Virginia P. O. Box 7275 Broadway, VA 22815 Cassco Ice & Cold Storage, Inc. Virginia 75 W. Bruce Street Harrisonburg, VA 22801 EX-23 10 CONSENT OF INDEPENDENT CPAS Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors WLR Foods, Inc.: We consent to incorporation by reference in the registration statements on Form S-8 (No. 33-27037, No 33-63364 and No. 33-55649), on Form S-3 (No. 33-56775) and on Form S-3(D) (No. 33-54692) of WLR Foods, Inc. of our reports dated August 20, 1997, relating to the consolidated balance sheets of WLR Foods, Inc. and subsidiaries as of June 28, 1997 and June 29, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the fiscal years in the three-year period ended June 28, 1997, and the related schedule, which reports appear or are incorporated by reference in the June 28, 1997 annual report on Form 10-K of WLR Foods, Inc. KPMG PEAT MARWICK LLP Richmond, Virginia September 25, 1997 EX-24 11 POWER OF ATTORNEY Exhibit 24 SPECIAL POWER OF ATTORNEY Each of the undersigned officers and directors of WLR Foods, Inc. (WLR Foods), a Virginia corporation, appoints James L. Keeler and Robert T. Ritter, or either of them (with full power to each of them to act alone) as his or her attorneys-in-fact and agents for him or her in such capacity either as an officer or director, or both, of WLR Foods, and authorizes such persons on behalf of WLR Foods, to sign and file any and all WLR Foods' registration statements, reports, schedules and other filings, and all amendments thereto, required or permitted to be filed under federal or state securities laws, including without limitation Forms 3, 4 and 5, registration statements, Form 10-K annual reports, Form 10-Q quarterly reports and Form 8-K current reports, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission, National Association of Securities Dealers, and any regulatory authority for any U.S. state or territory, and each of us hereby ratifies and confirms all that our attorneys-in-fact and agents or each of them may lawfully do or cause to be done by virtue hereof. WITNESS the following signatures and seals. _8/20/96____ /s/ John J. Broaddus________________(SEAL) Date John J. Broaddus _8/20/96____ /s/ Jane T. Brookshire______________(SEAL) Date Jane T. Brookshire _8/20/96____ /s/ George E. Bryan_________________(SEAL) Date George E. Bryan _8/20/96____ /s/ Charles L. Campbell_____________(SEAL) Date Charles L. Campbell _8/20/96____ /s/ Stephen W. Custer_______________(SEAL) Date Stephen W. Custer _8/20/96____ /s/ Calvin G. Germroth______________(SEAL) Date Calvin G. Germroth _8/20/96____ /s/ William H. Groseclose___________(SEAL) Date William H. Groseclose _8/20/96____ /s/ J. Craig Hott___________________(SEAL) Date J. Craig Hott _8/20/96____ /s/ Herman D. Mason_________________(SEAL) Date Herman D. Mason _8/20/96____ /s/ Chas. Wampler, Jr.______________(SEAL) Date Charles W. Wampler, Jr. _8/20/96____ /s/ William D. Wampler______________(SEAL) Date William D. Wampler _8/21/96____ /s/ Henry L. Holler_________________(SEAL) Date Henry L. Holler _8/21/96____ /s/ James L. Keeler_________________(SEAL) Date James L. Keeler _8/20/96____ /s/ James L. Mason__________________(SEAL) Date James L. Mason _8/20/96____ /s/ V. Eugene Misner________________(SEAL) Date V. Eugene Misner _8/20/96____ /s/ Robert T. Ritter________________(SEAL) Date Robert T. Ritter EX-27 12 FINANCIAL DATA SCHEDULE
5 1000 YEAR JUN-28-1997 JUN-28-1997 283 0 73,999 1,537 165,551 245,164 349,757 190,331 416,728 276,561 5,040 0 0 64,206 62,352 416,728 1,013,777 1,013,777 956,948 956,948 95,728 0 13,143 (50,396) (18,260) (32,183) 0 0 0 (32,183) (1.86) 0
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