-----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, R+eGXAUknMIzgESOM4TAax5IE+C4MtSZDwkqjfVJ1rrlUbRTziEgLJeoX3jNCrEd jXxSwdc6pkAhSnGrzPbTPw== 0000760775-98-000118.txt : 19980930 0000760775-98-000118.hdr.sgml : 19980930 ACCESSION NUMBER: 0000760775-98-000118 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19980925 DATE AS OF CHANGE: 19980929 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WLR FOODS INC CENTRAL INDEX KEY: 0000760775 STANDARD INDUSTRIAL CLASSIFICATION: 2015 IRS NUMBER: 541295923 STATE OF INCORPORATION: VA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-17060 FILM NUMBER: 98715473 BUSINESS ADDRESS: STREET 1: P O BOX 7000 CITY: BROADWAY STATE: VA ZIP: 22815 BUSINESS PHONE: 5408967001 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-K405 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 27, 1998 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 Securities 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. __X__ The aggregate value of the voting stock held by non-affiliates of the registrant as of September 22, 1998 was approximately $103,372,786. As of that date 16,453,145 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 (R) 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 70 countries. In 1998, WLR was ranked the third largest turkey producer by Turkey World magazine, the thirteenth largest chicken producer by Broiler Industry, and the seventh largest poultry company by Poultry magazine. Company sales for fiscal 1998 were $946 million, including approximately $393 million of chicken products and $457 million of turkey products, and representing approximately 561 million pounds of chicken and 510 million pounds of turkey. Remaining sales were comprised of feed, 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 nationwide, but primarily in the eastern United States. 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 1998. 2 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. During fiscal 1998, the Company operated a cold storage and ice manufacturing business through its Cassco Ice and Cold Storage, Inc. (Cassco) subsidiary, which generated sales of $29 million. In July 1998, the Company sold its Cassco subsidiary, and also completed the sale of its Goldsboro, North Carolina chicken complex. The volume lost from the sale of the Goldsboro complex will be replaced at the Marshville, North Carolina complex, which is currently being converted from turkey to chicken processing. Poultry Production WLR Foods' primary operations include the breeding, hatching, grow-out and processing of turkeys and chickens. For fiscal 1998, WLR Foods produced approximately 535 million pounds of dressed turkey and 644 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 61% 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. After hatching and vaccination, poults and chicks are transported to one of WLR Foods' approximately 800 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- 3 owned feedmills and provides grower support through WLR Foods' technicians and veterinarians. Grow-out and breeder farms provide WLR Foods with more than 53 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 four 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 seven 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. Processing, Distribution and Other WLR Foods' distribution business included fresh poultry, beef, and other meat products purchased from third parties for resale, along with certain products produced by the Company. This distribution business is being discontinued during the first quarter of fiscal 1999 and management feels that there will be no significant impact on operating performance. 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. 4 The following table approximates sales revenues from WLR Foods' products for the last three fiscal years. Fiscal 1998 Fiscal 1997 Fiscal 1996 (Dollars in ----------- ----------- ----------- Millions) Chicken, fresh and frozen $393 $400 $380 Turkey, fresh and frozen 457 490 485 Distribution, Feed and Other 96 105 113 ---- ---- ---- Total Net Sales $946 $995 $978 ==== ==== ==== Competition The poultry industry is highly competitive. WLR Foods markets its products in competition with both 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 The Company's Wampler Foods subsidiary markets products under the trademarks WAMPLER FOODS and WAMPLER FOODS and design, both of which are registered with the U.S. Patent and Trademark Office. Wampler Foods continues to market its products under the trademarks TRIM FREE, 5 COLONY FARMS, 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, KAFETERIA KIT and VALLEY PRIDE marks. 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. Wampler Foods holds a patent for pasteurized salads and a patent for processing turkey. Government Contracts WLR Foods' government contracts are a small portion 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 $5.1 million of governmental contracts outstanding as of June 27, 1998, compared to approximately $0.5 million as of June 28, 1997. Foreign Sales WLR Foods' export sales constituted approximately 10% of its total annual sales in each of fiscal 1998, 1997 and 1996. 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 70 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, 6 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 gains or losses from hedging transactions become part of the cost of the related inventory items and are expensed during the time period for which the hedge was intended. 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 land apply 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 biosolids management permit regulating the land application in 7 West Virginia of certain wastewater biosolids generated at the Moorefield 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 eight environmental permits, all of which were issued by the North Carolina Department of Environment, Health & Natural Resources. The Monroe 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 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. 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. 8 Employees WLR Foods employed over 7,350 persons as of June 27, 1998, none of whom were covered by a collective bargaining agreement. Item 2. PROPERTIES. WLR Foods' seven 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 550,000 turkeys per week (single shift) and 3.65 million chickens per week (double shift). WLR Foods owns and operates four 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; 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: Land Improvements 10-20 years Buildings & Improvements 5-20 years Machinery & Equipment 3-17 years Transportation Equipment 3-5 years Item 3. LEGAL PROCEEDINGS. There were no material pending legal proceedings during the fiscal year ended June 27, 1998, other than ordinary routine litigation incidental to the Company s business. 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 27, 1998. 9 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 63 Chief Executive Officer since President,Chief February 1988 Executive Officer Jane T. Brookshire 52 Vice President of Human Resources Vice President of since October 1993; previously, Human Resources Director of Human Resources for WLR Foods Dale S. Lam 35 Vice President of Finance and Vice President of Treasurer since August 1998; Finance and Treasurer previously, Controller for WLR Foods from December 1997 to August 1998, and Co-owner and Treasurer of Office Products, Inc. from 1989 to October 1997 Ruth J. Mack 43 Executive Vice President of Sales Executive Vice President and Marketing since May 1997; of Sales and Marketing previously, Executive Vice Wampler Foods, Inc. President for Marketing and Sales for Just Born, Inc., Bethlehem, Pennsylvania from 1994 to 1997, and Director of Marketing for Pepsi Cola Company from 1989 to 1994 Ronald E. Morris 45 Vice President of Turkey Operations Vice President of Turkey for Wampler Foods, Inc. since Operations for Wampler November 1997; previously, Complex Foods, Inc. Manager for Marshville, North Carolina Turkey Complex for Wampler Foods, Inc. from 1996 to 1997, Complex Manager for Butterball from 1994 to 1996 and General Manager of Rocco Turkeys, Inc. from 1987 to 1994 Walter F. Shafer, III 40 Vice President of Chicken Vice President of Chicken Operations for Wampler Operations for Wampler Foods, Inc. since November 1997; Foods, Inc. previously, Director of Chicken Operations for Wampler Foods, Inc. 10 from 1996 to 1997, Director of Chicken Processing for Wampler Foods, Inc. from 1995 to 1996, and Plant Manager of Moorefield Chicken Operations for Wampler Foods, Inc. from 1991 to 1995 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 15 to the Registrant's Consolidated Financial Statements in the Annual Report, attached hereto as Exhibit 13.3. As of September 4, 1998, the approximate number of shareholders of record was 4040. Item 6. SELECTED FINANCIAL DATA. Selected financial data for each of the fiscal years in the ten- year period ended June 27, 1998 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 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Market risks relating to the Company's operations result primarily from changes in interest rates and commodity prices. To 11 address these risks, the Company enters into various hedging transactions as described below. The Company does not use financial instruments for trading purposes and is not party to any leveraged derivatives. Interest Rate Sensitivity The Company hedges exposures to changes in interest rates on certain of its financial instruments. Under the terms of various term and revolving credit loans, the Company enters into interest rate swap agreements to effectively lock in a fixed interest rate for a portion of these borrowings. In addition, the Company enters into interest rate cap agreements to effectively limit the Company's exposure to increases in interest rates. The table below provides information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Expected Maturity Date ----------------------------------- Liabilities: Dollars in thousands 1999 2000 2001 2002 - - -------------------- ---- ---- ---- ---- Liabilities: Long-term debt, including Current Portion Fixed Rate $235 $213 $220 $232 Average interest rate 6.11% 6.12% 6.12% 6.11% Variable Rate $3,217 $191,101 $758 $662 Average interest rate 9.91% 10.74% 7.05% 7.08% Interest Rate Derivatives Dollars in thousands 1999 2000 2001 2002 - - ------------------------- ---- ---- ---- ---- Interest Rate Swaps Variable to Fixed $ - $50,000 $ - $ - Average pay rate - 6.26% - - Average receive rate - USD 1 month Libor Interest Rate Cap $ - $75,000 $ - $ - Average pay rate - 6.50% - - Average receive rate - USD 1 month Libor 12 Expected Maturity Date ------------------------------ Liabilities: There- Fair Dollars in thousands 2003 after Total Value - - -------------------- ---- ------ ----- ----- Liabilities: Long-term debt, including Current Portion Fixed Rate $107 $162 $1,169 $1,169 Average interest rate 6.24% 6.16% 6.13% Variable Rate $550 $223 $196,511 $196,511 Average interest rate 7.21% 8.99% 10.68% Interest Rate Derivatives There- Fair Dollars in thousands 2003 after Total Value - - ------------------------- ---- ------ ----- ----- Interest Rate Swaps Variable to Fixed $ - $ - $50,000 $(209) Average pay rate - - 6.26% Average receive rate - USD 1 month Libor Interest Rate Cap $ - $ - $75,000 $31 Average pay rate - - 6.50% Average receive rate - USD 1 month Libor Commodity Price Sensitivity The Company is a purchaser of certain commodities, primarily corn and soybeans. The Company uses commodity futures for hedging purposes to reduce the effect of changing commodity prices on a portion of its commodity purchases. The contracts that effectively meet risk reductions and correlation criteria are recorded using hedge accounting. Gains and losses on hedge transactions are recorded as a component of the underlying inventory purchase. The following table provides information about the Company's corn, soybean meal and other feed ingredient inventory and futures contracts that are sensitive to changes in commodity prices. For inventory, the table presents the carrying amount and fair value at June 27, 1998. For the furtures contracts, the table presents the notional amounts in bushels, the weighted average contract prices, and the total dollar contract amount by expected maturity dates, the latest of which occurs in March 1999. Contract amounts are used to calculate the contractual payments and quantity of corn and soybean meal to be exchanged under the futures contracts. On Balance Sheet Commodity Position and Related Derivatives Carrying Fair Dollars in thousands Amount Value - - ----------------------------------- -------- ----- 13 Corn, Soybean Meal and Other Feed Ingredient Inventory 11,009 11,009 Expected Maturity Fair Related Derivatives 1999 Value - - ------------------------------- -------- ----- Corn Futures Contracts Contract Volumes (100,000 bushels) 11 Weighted Average Price (per bushel) 2.67 2.64 Contract Amount (dollars in thousands) 2,942 2,906 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 18 of this report. 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 1998, 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 14 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 27, 1998. 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 27, 1998, June 28, 1997 and June 29, 1996 Consolidated Balance Sheets - June 27, 1998 and June 28, 1997 Consolidated Statements of Shareholders' Equity - Fiscal years ended June 27, 1998, June 28, 1997 and June 29, 1996 Consolidated Statements of Cash Flows - Fiscal years ended June 27, 1998, June 28, 1997 and June 29, 1996 Notes to Consolidated Financial Statements - Fiscal years ended June 27, 1998, June 28, 1997 and June 29, 1996 Independent Auditors' Report Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts Independent Auditors' Report on Schedule 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 Reporting date June 23, 1998. Item Reported - Item 5. Other Events. WLR Foods, Inc. reported the appointment to the Board of Directors of Katherine K. Clark, Chief Executive Officer of Landmark Communications, and the approval of a new three-year contract with James L. Keeler as President and Chief Executive Officer. 15 (c) Exhibits See Exhibit Index. [The remainder of this page is intentionally left blank.] 16 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 25, 1998 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 25, 1998 __/S/Dale S. Lam_______________ Treasurer and Vice President of Finance Date: September 25, 1998 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 25, 1998. Signature Title --------- ----- __________________________ Director Keith E. Alessi* __________________________ Director George E. Bryan* 17 __________________________ Director Charles L. Campbell* __________________________ Director Katherine K. Clark* __________________________ Director Stephen W. Custer* __________________________ Director Calvin G. Germroth* __________________________ Director William H. Groseclose* __________________________ Director J. Craig Hott* __________________________ Director James L. Keeler* __________________________ Director Herman D. Mason* __________________________ Director Charles W. Wampler, Jr.* __________________________ Director William D. Wampler* *By __/S/ Dale S. Lam_____________ Dale S. Lam, attorney-in-fact 18 WLR FOODS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR FISCAL YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 (in thousands)
Description Balance at Charged to Deductions- Balance at beginning cost and accounts end of period of period expenses charged off Fiscal year ended June 27, 1998 Allowance for Doubtful Accounts $1,550 $828 $863 $1,515 ------ ---- ---- ------ Total $1,550 $828 $863 $1,515 ====== ==== ==== ====== 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 ==== ==== ==== ====
19 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE The Board of Directors and Shareholders WLR Foods, Inc: Under date of August 18, 1998, we reported on the consolidated balance sheets of WLR Foods, Inc. and subsidiaries as of June 27, 1998, and June 28, 1997 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 27, 1998, as contained in the June 27, 1998 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the June 27, 1998 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 18, 1998 20 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 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. 4.3 Revolving Credit Agreement, dated as of February 25, 1998, incorporated by reference to Exhibit 2.1 of Form 10-Q filed with the Securities and Exchange Commission on May 11, 1998. 4.4 Form of Revolving Credit Note, dated as of February 25, 1998, incorporated by reference to Exhibit 2.2 of Form 10-Q, filed with the Securities and Exchange Commission on May 11, 1998. 4.5 Term Loan Agreement, dated as of February 25, 1998, incorporated by reference to Exhibit 2.3 of Form 10-Q, filed with the Securities and Exchange Commission on May 11, 1998. 4.6 Form of Term Note, dated as of February 25, 1998, incorporated by reference to Exhibit 2.4 of Form 10-Q, filed with the Securities and Exchange Commission on May 11, 1998. 4.7 Warrant Holders Rights Agreement, dated as of February 25, 1998, incorporated by reference to Exhibit 2.5 of Form 10-Q, filed with the Securities and Exchange Commission on May 11, 1998. 4.8 Form of Warrant to Purchase Common Stock at $0.1 Per Share, incorporated by reference to Exhibit 2.6 of Form 10-Q, filed with the Securities and Exchange Commission on May 11, 1998. 21 4.9 Security Agreement, dated as of February 25, 1998, incorporated by reference to Exhibit 2.7 of Form 10-Q, filed with the Securities and Exchange Commission on May 11, 1998, incorporated by reference to Exhibit 2.2 of Form 10-Q, filed with the Securities and Exchange Commission on May 11, 1998. 4.10 WLR Foods, Inc. Pledge Agreement, dated as of February 25, 1998, incorporated by reference to Exhibit 2.8 of Form 10-Q, filed with the Securities and Exchange Commission on May 11, 1998. 4.11 Wampler Foods, Inc. Pledge Agreement, dated as of February 25, 1998, incorporated by reference to Exhibit 2.9 of Form 10-Q, filed with the Securities and Exchange Commission on May 11, 1998. 4.12 Note Purchase Agreement, dated as of February 25, 1998, incorporated by reference to Exhibit 2.10 of Form 10-Q, filed with the Securities and Exchange Commission on May 11, 1998. 4.13 Form of Variable Rate Note, dated as of February 25, 1998, incorporated by reference to Exhibit 2.11 of Form 10-Q, filed with the Securities and Exchange Commission on May 11, 1998. 4.14 Form of Subsidiaries Guaranty Agreement, dated as of February 25, 1998, incorporated by reference to Exhibit 2.12 of Form 10-Q, filed with the Securities and Exchange Commission on May 11, 1998. 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 June 23, 1998 between the Registrant and James L. Keeler (Deferred Compensation Agreement attached thereto as Exhibit A). 10.2 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. 10.3 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. 10.4 Severance Agreement, dated February 4, 1994 between the Registrant and James L. Keeler, incorporated by reference to 22 Exhibit 10.4 of Form 10-Q filed with the Securities and Exchange Commission on February 15, 1994. 10.5 Severance Agreement, dated May 13, 1997 between the Registrant and Jane T. Brookshire, incorporated by reference to Exhibit 10.18 of Form 10-K filed with the Securities and Exchange Commission on September 26, 1997. 10.6 Severance Agreement, dated January 12, 1998 between the Registrant and Dale S. Lam. 10.7 Severance Agreement, dated May 13, 1997 between the Registrant and Ruth J. Mack. 10.8 Severance Agreement, dated February 6, 1998 between the Registrant and Ronald E. Morris. 10.9 Severance Agreement, dated February 6, 1998 between the Registrant and Walter F. Shafer, III. 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. 23 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 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. 10.18 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 27, 1998. 13.2 Management's Discussion and Analysis, from the Registrant's Annual Report to Shareholders for the fiscal year ended June 27, 1998. 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 27, 1998. 13.4 Independent Auditor Report on Consolidated Financial Statements, from the Registrant's Annual Report to Shareholders for the fiscal year ended June 27, 1998. 21 List of Subsidiaries of the Registrant. 23 Consent of Independent Certified Public Accountants. 24.1 Power of Attorney. 24.2 Power of Attorney. 27 Financial Data Schedule. 24 EX-10.1 2 EMPLOYMENT AGREEMENT JAMES L KEELER Exhibit 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT made as of the 23rd day of June, 1998 by and between WLR FOODS, INC. (WLR), a Virginia corporation, and JAMES L. KEELER (Keeler) who agree and bind themselves as follows: 1. Term. This Employment Agreement shall commence on June 27, 1998, and shall terminate at the end of the fiscal year ending in 2001. 2. Position. Keeler shall serve as President and Chief Executive Officer of WLR for the first two years of this three year contract on a full time basis using his best efforts and under the direction of the Board of Directors of WLR. The third year is anticipated to be a transition year, and the position and duties may be adjusted by the Board of Directors of WLR. As an employee of WLR, Keeler is subject to the direction of the Board of Directors of WLR, the WLR bylaws and relevant company policies as from time to time issued, updated or amended. 3. Base Salary. WLR shall pay Keeler a base salary during each fiscal year of this three-year Employment Agreement. The initial fiscal year salary shall be $292,248.00 and is payable bi-weekly during the term of this Employment Agreement. In the event of the death of Keeler while this Agreement is in full force and effect, his personal representative shall be entitled to receive such base salary up to the end of the last pay period in the month in which death occurs. The base salary shall be reviewed annually by the WLR Executive Compensation Committee to determine whether an increase would be appropriate. 4. Bonus. For each of the three (3) complete fiscal years of WLR covered by this Employment Agreement, Keeler shall receive a cash bonus calculated as follows: 4.0 x ROE x Base Salary. ROE means the ratio of fiscal year profits (before taxes, bonuses, and discretionary profit sharing) to beginning of year equity. The cash bonus shall be paid within seventy-five (75) days of the last day of each fiscal year. 5. Deferred Compensation Plan. Keeler shall be entitled to the benefits set forth in the Deferred Compensation Agreement entered into by Keeler and the Company dated as of the date hereof, a copy of which is attached hereto as Exhibit A. 6. Continuing Health Care Coverage. In addition to providing health care insurance coverage for Keeler and his wife during the term of this Agreement, consistent with coverage provided to other executives, the Company shall provide health care insurance coverage for Keeler and his wife for their respective lives, upon the termination of his employment with the Company. 7. Miscellaneous Fringe Benefits. During the term of this Employment Agreement, WLR shall provide Keeler with all other fringe benefits available to other executives of the company such as life insurance, travel expense reimbursement and other fringes. In addition, WLR shall cover all expenses necessary for Keeler to maintain professional status as a lawyer. 8. Vacation. Keeler shall be entitled to four (4) weeks paid vacation during each fiscal year of this Agreement. Keeler will also be entitled to all paid holidays as recognized by WLR. 9. Physical. Keeler must complete an annual physical examination during each year of the term of this Employment Agreement. 10. Change of Control Provision. A Severance Agreement dated February 4, 1994 provides for certain severance benefits to be paid should a "Change of Control" occur as defined in that Agreement (Severance Agreement). 11. Executive Succession Plan. As part of his employment responsibilities, Keeler agrees to work diligently with the Board of Directors or any of its appropriate committees, to identify his successor. Keeler agrees to consider seriously an extension to this Agreement if the Board determines additional time is needed to hire an appropriate successor. 12. Early Termination of Employment Agreement. If this Agreement is (i) terminated by the Board of Directors of WLR prior to the end of the three-year term for any reason other than death or Disability as defined in the Severance Agreement, or (ii) terminated 2 by Keeler based on his reasonable judgment that there has been an adverse change in his status as an executive officer of WLR during the third year of this Employment Agreement, all the benefits to be paid to Keeler as set forth in this Employment Agreement shall continue to be paid during the remaining term of the Agreement as if he were still fully employed. 13. Complete Agreement. This Agreement expresses the entire understanding between the parties and may not be modified except in writing signed by the parties. This Agreement supercedes all previous contracts of employment. 14. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, where it is made and to be performed. It sets forth the entire agreement between the parties concerning the subject matter thereof, and any amendment or discharge will be made only in writing. This Agreement will bind and benefit the parties and their legal representatives and successors. WITNESS the following signatures and seals. IN WITNESS WHEREOF, WLR Foods, Inc. has caused this writing to be signed in its name and on its behalf as thereunto duly authorized. _/s/ James L. Keeker___________ (SEAL) JAMES L. KEELER WLR FOODS, INC. By: _/s/ Wliiam H. Groseclose, Jr._ WILLIAM H. GROSECLOSE, JR. By: _/s/Stephen W. Custer___________ STEPHEN W. CUSTER By: _/s/ Charles W. Wampler, Jr.____ CHARLES W. WAMPLER, JR. Chairman of the Board 3 Exhibit A DEFERRED COMPENSATION AGREEMENT This Deferred Compensation Agreement made as of the 23rd day of June, 1998 by and between WLR FOODS, INC. (WLR), a Virginia corporation, and JAMES L. KEELER (Keeler) who agree and bind themselves as follows: 1. Preamble. WLR and Keeler entered into a Deferred Compensation Agreement dated July 4, 1993, which Agreement was amended on February 4, 1994, and on June 27, 1995, and restated on June 27, 1997. WLR and Keeler desire to continue and extend such Agreement. The 1993 Deferred Compensation Agreement was preceded by a five-year Deferred Compensation Agreement dated March 1, 1988. 2. Annual Determination of Deferred Bonus Amount. Within seventy-five (75) days of the last day of each fiscal year, commencing with the year ending June 27, 1998 and continuing until the last day of the fiscal year ending in 2001, WLR shall determine the increase, if any, in the book value of the shareholder's equity of WLR (Book Value) as of the last day of each fiscal year (the Determination Date). The Bonus Fund accrued as of June 28, 1997 (including the 1997 fiscal year Deferred Bonus Amount), both deferred compensation and accrued interest, totaled $1,481,185.25. 3. Book Value Determination. WLR shall direct its independent accounting firm to undertake the calculation of Book Value based on consolidated balance sheets of WLR and its subsidiaries using consistent practices and excluding any momentary increase in equity arising out of the acquisition of other entities or the issuance of additional stock, or any momentary decrease in equity arising out of the sale of a subsidiary or division, or the redemption of outstanding stock. Generally, Book Value increases or decreases should arise as a function of earnings, cash dividends and losses, if any, and not significant corporate transactions such as acquisitions, divestitures, redemptions and stock issuances. 4. Bonuses. Each fiscal year of WLR commencing the year ending June 27, 1998, and ending in 2001, WLR shall allocate, as of the Determination Date, an amount equal to one and one-half percent (1-1/2%) 4 of the increase, if any, in Book Value from the prior Determination Date to the current Determination Date to a book reserve account (the Bonus Fund). The Bonus Fund shall accrue interest at a rate equal to the Company's average cost of funds for permanent financing in effect on the last day of the Company's fiscal year for the following fiscal year, as adjusted from year to year (the Interest Rate). Interest shall compound monthly and shall accrue on the Bonus Fund until paid. The Bonus Fund in no event will decrease (for example, no decrease in the Bonus Fund shall occur if in any fiscal year the Book Value decreases) other than by reason of payment to Keeler as set forth in Section 5 below. If Keeler voluntarily terminates his employment with WLR during the first two fiscal years of this Agreement, then no bonus amount shall be allocated for the year in which the termination of employment occurs. If for any other reason Keeler is not employed on any Determination Date, then the allocation of the Bonus Fund shall be prorated. 5. Payment. The Bonus Fund shall be paid in lump sum or in such installments as WLR may permit, as Keeler may elect from time to time in writing delivered to WLR, commencing on January 2 of the year following the calendar year in which Keeler retires as an employee of WLR. Keeler may change his distribution election at any time prior to the commencement of distribution of the Bonus Fund, provided that no such election shall be effective until six (6) months following receipt by WLR. In the absence of an election to the contrary, Keeler's Bonus Fund shall be payable in sixty (60) consecutive monthly installments on the second day of each month, commencing on January 2 following the calendar year in which Keeler retires as an employee of WLR. The installment payments shall be determined on each July 2 during the term of the payout by dividing the Bonus Fund, plus the projected interest calculated by using the Interest Rate over the remaining term of the payout, by the number of remaining installment payments. The last installment shall be adjusted for any increase or decrease in the Interest Rate for the last payout year. If Keeler dies before the entire Bonus Fund has been distributed, then WLR shall continue to pay the installments to his designated beneficiary in accordance with the distribution election in effect at the time of his death. 5 The term "beneficiary" shall mean any person or trust, or combination thereof, last designated by Keeler in writing and filed with WLR by Keeler during his lifetime on a Nomination of Beneficiary form provided by WLR. Any such designation or designations of beneficiary shall be revocable at any time or times without the consent of any beneficiary, by written designations of beneficiaries made by Keeler and similarly filed with WLR during his lifetime. In the absence of or failure of designated beneficiaries, the personal representative of Keeler shall be his beneficiary. 6. Financing of Benefits. All benefits under the Plan shall be provided out of the general assets of WLR at the time such benefits are to be made. No specific amounts, therefore, shall be set aside in advance. 7. Not a Contract of Employment. This Agreement shall not be deemed to constitute a contract of employment between the parties, nor shall any provision restrict the right of WLR to discharge Keeler, or restrict the right of Keeler to terminate his employment. 8. Restriction on Alienation. It is agreed that neither Keeler nor any other payee hereunder shall have any right to commute, sell, assign, transfer or otherwise convey the right to receive any payments hereunder, which payments and the right thereto are expressly declared to be nonassignable and nontransferable, and in the event of any attempted assignment or transfer, this Agreement shall terminate and WLR shall have no further liability hereunder. 9. Change of Control. The Company has entered into a Severance Agreement with Keeler dated February 4, 1994, a copy of which is attached hereto as Exhibit A. Should a "Change of Control" occur as defined in the Severance Agreement then all the Bonus Fund and funds, if any, deferred by Keeler in the Company's 1995 Nonqualified Deferred Compensation Agreement shall be transferred to the Trust dated October 24, 1995, entered into by and between the Company and First Union National Bank of Virginia, a copy of which Trust is attached hereto as Exhibit B. 10. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, where it is made and to be performed. It sets forth the entire agreement between the parties concerning the subject matter thereof, and any amendment or discharge will be made only in writing. This 6 Agreement will bind and benefit the parties and their legal representatives and successors. This Agreement shall be executed in duplicate, each copy of which when so executed and delivered shall be an original, but both copies shall, together, constitute one and the same instrument. WITNESS the following signature and seal. IN WITNESS WHEREOF, WLR Foods, Inc. has caused this writing to be signed in its name and on its behalf as thereunto duly authorized. _/s/ James L. Keeler_______ (SEAL) JAMES L. KEELER WLR FOODS, INC. By: _/s/ William H. Groseclose, Jr._ WILLIAM H. GROSECLOSE By: _/s/ Stephen W. Custer__________ STEPHEN W. CUSTER Members of the Executive Compensation Committee By: _/s/ Charles W. Wampler, Jr.____ CHARLES W. WAMPLER, JR. Chairman of the Board 7 EX-10.6 3 SEVERANCE AGREEMENT DALE S LAM Exhibit 10.6 January 12, 1998 Mr. Dale S. Lam Controller WLR Foods, Inc. P.O. Box 7000 Broadway, VA 22815-7000 Dear Mr. Lam: 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 Mr. Dale S. Lam January 12, 1998 Page 2 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, 1998; provided, however, that commencing on January 1, 1999 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 twelve (12) 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 2 Mr. Dale S. Lam January 12, 1998 Page 3 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 3 Mr. Dale S. Lam January 12, 1998 Page 4 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. 4 Mr. Dale S. Lam January 12, 1998 Page 5 (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 twelve (12) 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 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 5 Mr. Dale S. Lam January 12, 1998 Page 6 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 a member of the senior management 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; 6 Mr. Dale S. Lam January 12, 1998 Page 7 (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 7 Mr. Dale S. Lam January 12, 1998 Page 8 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 8 Mr. Dale S. Lam January 12, 1998 Page 9 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 twelve (12) 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 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 twelve (12) 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, if any, 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. 9 Mr. Dale S. Lam January 12, 1998 Page 10 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 twelve (12) 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 (1) year 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 (1) year 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 (1) 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 (iv) or, if such insurance 10 Mr. Dale S. Lam January 12, 1998 Page 11 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 (iv) 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 paragraph (iii) 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 (vii) 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 (vi), 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 11 Mr. Dale S. Lam January 12, 1998 Page 12 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. 12 Mr. Dale S. Lam January 12, 1998 Page 13 (viii) The Gross-up Payment or portion thereof provided for in paragraph (vi) above shall be paid not later than the thirtieth (30th) day following payment of any amounts under Section 5(iii); 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 Section 5(iii). 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. 13 Mr. Dale S. Lam January 12, 1998 Page 14 (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 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(vi), 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 14 Mr. Dale S. Lam January 12, 1998 Page 15 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 Mr. Dale S. Lam January 12, 1998 Page 16 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. 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/ William H. Groseclose, Jr._ William H. Groseclose, Jr., Chair Executive Compensation Committee WLR Foods, Inc. Agreed to this _12th_ day of January, 1998 _/s/ Dale S. Lam_ Dale S. Lam 16 EX-10.7 4 SEVERANCE AGREEMENT RUTH J MACK Exhibit 10.7 May 13, 1997 Ms. Ruth J. Mack Vice President of Marketing & Sales Wampler Foods, Inc. Post Office Box 7275 Broadway, Virginia 22815-7275 Dear Ms. Mack: 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 Ms. Ruth J. Mack May 13, 1997 Page 2 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 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 2 Ms. Ruth J. Mack May 13, 1997 Page 3 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 3 Ms. Ruth J. Mack May 13, 1997 Page 4 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 4 Ms. Ruth J. Mack May 13, 1997 Page 5 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 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 5 Ms. Ruth J. Mack May 13, 1997 Page 6 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; 6 Ms. Ruth J. Mack May 13, 1997 Page 7 (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 7 Ms. Ruth J. Mack May 13, 1997 Page 8 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, but which have not yet been paid to you. Thereupon the Company shall have no further obligations to you under this Agreement. 8 Ms. Ruth J. Mack May 13, 1997 Page 9 (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 9 Ms. Ruth J. Mack May 13, 1997 Page 10 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 10 Ms. Ruth J. Mack May 13, 1997 Page 11 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 11 Ms. Ruth J. Mack May 13, 1997 Page 12 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 thirtieth (30th) day following payment of any amounts 12 Ms. Ruth J. Mack May 13, 1997 Page 13 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 13 Ms. Ruth J. Mack May 13, 1997 Page 14 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 14 Ms. Ruth J. Mack May 13, 1997 Page 15 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 inconsistent with any provision of this Agreement, 15 Ms. Ruth J. Mack May 13, 1997 Page 16 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, Chair Herman D. Mason, Chair Executive Compensation Committee WLR Foods, Inc. Agreed to this _13th_ day of May, 1997 _/s/ Ruth J. Mack_ Ruth J. Mack 16 EX-10.8 5 SEVERANCE AGREEMENT RONALD E MORRIS Exhibit 10.8 February 6, 1998 Mr. Ronald E. Morris Vice President of Turkey Operations Wampler Foods, Inc. Post Office Box 7275 Broadway, Virginia 22815-7275 Dear Mr. Morris: 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 Mr. Ronald E. Morris February 6, 1998 Page 2 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, 1998; provided, however, that commencing on January 1, 1999 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 2 Mr. Ronald E. Morris February 6, 1998 Page 3 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 3 Mr. Ronald E. Morris February 6, 1998 Page 4 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 4 Mr. Ronald E. Morris February 6, 1998 Page 5 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 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 5 Mr. Ronald E. Morris February 6, 1998 Page 6 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; 6 Mr. Ronald E. Morris February 6, 1998 Page 7 (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 7 Mr. Ronald E. Morris February 6, 1998 Page 8 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, but which have not yet been paid to you. Thereupon the Company shall have no further obligations to you under this Agreement. 8 Mr. Ronald E. Morris February 6, 1998 Page 9 (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 9 Mr. Ronald E. Morris February 6, 1998 Page 10 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. 10 Mr. Ronald E. Morris February 6, 1998 Page 11 (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 11 Mr. Ronald E. Morris February 6, 1998 Page 12 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 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 12 Mr. Ronald E. Morris February 6, 1998 Page 13 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 Company ceases to exist; provided, however, for purposes of determining whether a Change in Control 13 Mr. Ronald E. Morris February 6, 1998 Page 14 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 14 Mr. Ronald E. Morris February 6, 1998 Page 15 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 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 15 Mr. Ronald E. Morris February 6, 1998 Page 16 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/ William H. Groseclose, Jr._ William H. Groseclose, Jr., Chair Executive Compensation Committee WLR Foods, Inc. Agreed to this 6th day of February, 1998 _/s/ Ronald E. Morris_ Ronald E. Morris 16 EX-10.9 6 SEVERANCE AGREEMENT WALTER F SHAFER III Exhibit 10.9 February 6, 1998 Mr. Walter F. Shafer, III Vice President of Chicken Operations Wampler Foods, Inc. Post Office Box 7275 Broadway, Virginia 22815-7275 Dear Mr. Shafer: 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 Mr. Walter F. Shafer, III February 6, 1998 Page 2 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, 1998; provided, however, that commencing on January 1, 1999 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"); 2 Mr. Walter F. Shafer, III February 6, 1998 Page 3 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 3 Mr. Walter F. Shafer, III February 6, 1998 Page 4 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 4 Mr. Walter F. Shafer, III February 6, 1998 Page 5 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 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 5 Mr. Walter F. Shafer, III February 6, 1998 Page 6 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; 6 Mr. Walter F. Shafer, III February 6, 1998 Page 7 (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 7 Mr. Walter F. Shafer, III February 6, 1998 Page 8 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, but which have not yet been paid to you. Thereupon the Company shall have no further obligations to you under this Agreement. 8 Mr. Walter F. Shafer, III February 6, 1998 Page 9 (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 9 Mr. Walter F. Shafer, III February 6, 1998 Page 10 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. 10 Mr. Walter F. Shafer, III February 6, 1998 Page 11 (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 11 Mr. Walter F. Shafer, III February 6, 1998 Page 12 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 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 12 Mr. Walter F. Shafer, III February 6, 1998 Page 13 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 Company ceases to exist; provided, however, for purposes of determining whether a Change in Control 13 Mr. Walter F. Shafer, III February 6, 1998 Page 14 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 14 Mr. Walter F. Shafer, III February 6, 1998 Page 15 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 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 15 Mr. Walter F. Shafer, III February 6, 1998 Page 16 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/ William H. Groseclose, Jr._ William H. Groseclose, Jr., Chair Executive Compensation Committee WLR Foods, Inc. Agreed to this 6th day of February, 1998 _/s/ Walter F. shafer, III_ Walter F. Shafer, III 16 EX-13.1 7 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 27, June 28, June 29, July 1, July 2, Fiscal year ended: 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- OPERATIONS Net sales $945,967 $994,591 $978,258 $890,815 $709,703 Cost of sales 876,287 948,060 889,904 776,945 625,180 -------- -------- -------- -------- -------- Gross profit 69,680 46,531 88,354 113,870 84,523 Selling, general and administrative expenses 91,745 89,657 91,167 84,877 57,373 -------- -------- -------- -------- ------ Operating income (loss) (22,065) (43,126) (2,813) 28,993 27,150 Interest expense 22,539 12,804 8,922 6,386 4,816 Other (income) expense, net (106) (1,792) 129 (311) (342) -------- -------- -------- -------- -------- Total other (income) expense, net 22,433 11,012 9,051 6,075 4,474 -------- -------- -------- -------- -------- Earnings (loss) before income taxes and minority interest (44,498) (54,138) (11,864) 22,918 22,676 Income tax expense(benefit) (16,352) (19,577) (4,381) 8,614 8,446 Minority interest 66 47 32 55 38 -------- -------- -------- -------- -------- Net earnings (loss) from continuing operations (28,212) (34,608) (7,515) 14,249 14,192 Income from discontinued operations, net of tax 2,858 2,425 2,829 1,884 2,359 Net earnings (loss) (25,354) (32,183) (4,686) 16,133 16,551 Less preferred stock dividends - - - - - -------- -------- -------- -------- -------- Net earnings (loss) available to common shareholders ($25,354) ($32,183) ($4,686) $16,133 $16,551 ========= ========= ======== ======= ======= PER COMMON SHARE Basic earnings (loss), continuing operations ($1.72) ($1.99) ($0.42) $0.79 $0.85 Basic earnings, discontinued operations 0.17 0.14 0.16 0.10 0.14 -------- -------- -------- -------- -------- Total basic earnings (loss) per common share (1.55) (1.85) (0.26) 0.89 0.99 Dilutive earnings (loss), continuing operations (1.72) (1.99) (0.42) 0.79 0.85 Dilutive earnings, discontinued operations 0.17 0.14 0.16 0.10 0.14 -------- -------- -------- -------- -------- Total dilutive earnings (loss) per common share ($1.55) ($1.85) ($0.26) $0.89 $0.99 Cash dividends declared (excluding Cassco pooling) - 0.12 0.24 0.22 0.21 Book value 6.33 7.89 10.00 10.47 9.45 Year-end stock price 7.00 8.50 14.00 14.38 17.00 1
WLR FOODS, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS - Continued Dollars in thousands, except per share data
June 27, June 28, June 29, July 1, July 2, Fiscal year ended: 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Working capital (deficit) $118,695 ($31,397) $144,621 $120,562 $ 69,989 Property, plant and equipment, net 153,702 159,426 176,691 174,163 139,854 Total assets 381,742 416,728 451,121 372,525 283,051 Long-term debt 189,225 5,040 138,510 106,481 46,368 Common stock subject to repurchase - 4,438 17,750 17,750 - Preferred shareholders' equity - - - - - Common shareholders' equity $103,891 $126,558 $159,010 $163,344 $156,157 ======== ======== ======== ======== ======== ANALYTICAL & OTHER INFORMATION Current ratio (compared to 1) 2.40 0.89 2.18 2.67 2.02 Total debt/total capitalization 65.0% 61.2% 55.1% 44.7% 28.4% Return on beginning total equity NMF NMF NMF 10.3% 11.6% Capital expenditures $22,149 $11,245 $18,771 $17,251 $19,186 Depreciation expense 25,901 28,088 28,243 24,817 21,333 Amortization expense 2,420 500 742 598 520 Interest expense 22,635 13,143 9,359 6,666 4,989 Cash dividends declared: Common stock - 2,078 4,233 4,073 3,513 Preferred stock - - - - - Market capitalization of common stock at year end $114,800 $141,075 $247,547 $248,654 $280,738 ======== ======== ======== ======== ======== All information reflects the stock dividends issued in May 1997 and August 1997, and the three-for-two stock split in the form of a 50% stock dividend declared on February 28, 1995. In March 1993, the Company repurchased all the preferred stock issued in January 1992. Common stock subject to repurchase classified as debt. 2
WLR FOODS, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS - Continued Dollars in thousands, except per share data
July 3, June 27, June 29, June 30, July 1, Fiscal year ended: 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- OPERATIONS Net sales $603,634 $503,877 $491,618 $483,219 $454,519 Cost of sales 529,791 449,785 429,430 410,546 384,142 -------- -------- -------- -------- -------- Gross profit 73,843 54,092 62,188 72,673 70,377 Selling, general and administrative expenses 51,141 44,794 46,733 45,465 41,839 -------- -------- -------- -------- -------- Operating income (loss) 22,702 9,298 15,455 27,208 28,538 Interest expense 3,660 2,523 619 505 1,565 Other (income) expense, net (494) (142) (347) (651) 243 -------- -------- -------- -------- -------- Total other (income) expense, net 3,166 2,381 272 (146) 1,808 -------- -------- -------- -------- -------- Earnings (loss) before income taxes and minority interest 19,536 6,917 15,183 27,354 26,730 Income tax expense (benefit) 6,850 2,587 5,741 10,546 10,520 Minority interest 43 25 33 34 (206) -------- -------- -------- -------- -------- Net earnings (loss) from continuing operations 12,643 4,305 9,409 16,774 16,416 Income from discontinued operations, net of tax 1,964 1,591 1,272 621 812 Net earnings (loss) 14,607 5,896 10,681 17,395 17,228 Less preferred stock dividends 1,389 982 - - - ------- ------- ------- ------- ------- Net earnings (loss) available to common shareholders $13,218 $4,914 $10,681 $17,395 $17,228 ======= ====== ======= ======= ======= PER COMMON SHARE Basic earnings (loss), continuing operations $0.79 $0.23 $0.59 $1.06 $1.04 Basic earnings (loss), discontinued operations 0.14 0.11 0.08 0.04 0.05 ------- -------- -------- -------- -------- Total basic earnings (loss) per common share 0.93 0.34 0.67 1.10 1.09 Dilutive earnings (loss), continuing operations 0.78 0.23 0.59 1.05 1.04 Dilutive earnings (loss), discontinued operations 0.14 0.11 0.08 0.04 0.05 -------- -------- -------- -------- -------- Total dilutive earnings (loss) per common share $0.92 $0.34 $0.67 $1.09 $1.09 Cash dividends declared (excluding Cassco pooling) 0.21 0.21 0.21 0.19 0.18 Book value 8.66 6.44 7.33 6.86 5.86 Year-end stock price 11.33 9.67 12.00 12.33 11.87 3
WLR FOODS, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS - Continued Dollars in thousands, except per share data
July 3, June 27, June 29, June 30, July 1, Fiscal year ended: 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- Working capital (deficit) $ 57,509 $ 40,337 $49,532 $46,039 $42,914 Property, plant and equipment, net 140,540 113,017 88,807 71,414 59,687 Total assets 265,626 207,736 175,329 157,763 142,832 Long-term debt 52,253 38,148 18,678 6,402 7,858 Common stock subject to repurchase - - - - - Preferred shareholders' equity - 29,507 - - - Common shareholders' equity $142,255 $81,881 $115,625 $108,258 $91,455 ======== ======= ======== ======== ======= ANALYTICAL & OTHER INFORMATION Current ratio (compared to 1) 1.92 1.80 2.42 2.20 2.12 Total debt/total capitalization 33.5% 32.0% 16.1% 8.5% 13.9% Return on beginning total equity 13.1% 5.1% 9.9% 19.0% 22.3% Capital expenditures $31,766 $36,107 $29,471 $20,360 $16,001 Depreciation expense 18,115 14,041 11,544 9,932 8,595 Amortization expense 445 168 - - - Interest expense 3,816 2,755 928 925 2,037 Cash dividends declared: Common stock 3,124 2,854 3,314 2,948 2,643 Preferred stock 1,389 982 - - - Market capitalization of common stock at year end $186,168 $122,942 $189,378 $194,638 $185,432 ======== ======== ======== ======== ======== All information reflects the stock dividends issued in May 1997 and August 1997, and the three-for-two stock split in the form of a 50% stock dividend declared on February 28, 1995. In March 1993, the Company repurchased all the preferred stock issued in January 1992. Common stock subject to repurchase classified as debt. 4
EX-13.2 8 MD & A Exhibit 13.2 Management s Discussion and Analysis of Financial Condition and Results of Operations GENERAL Beginning in fiscal 1996, results of operations of WLR Foods, Inc. (WLR Foods or the Company) were adversely impacted by significantly higher grain costs in both its chicken and turkey operations. The average delivered costs paid for corn and soybean meal were approximately 46% and 23% higher, respectively, than the amounts paid in fiscal 1995. In fiscal 1997, overall grain costs continued to rise as soybean meal prices escalated an additional 26% over the prior year, while corn prices fell only 6% from the already high 1996 levels. In fiscal 1998, grain prices began to improve, particularly in the second half of the year. The average delivered prices for corn and soybean meal declined 19% and 15%, respectively, over the prior year, but were still 12% and 31%, respectively, above the levels seen in fiscal 1995. Translated into dollars, even though prices paid in fiscal 1998 were lower than in fiscal 1997, the total costs to the Company were still $41 million over the cost levels experienced in fiscal 1995. Unfortunately, excess supplies of poultry and competing meats prevented the Company from raising its prices enough to cover the increased costs of grains. The problem was most difficult in the turkey industry, where excess supplies have resulted in significantly reduced sales prices. In fiscal 1998, turkey sales prices were approximately 4% below the fiscal 1997 levels, which were already 1% below the prices realized one year earlier. In terms of a dollar impact to the Company, 1998's turkey sales prices were approximately $18 million less than in fiscal 1997. Current costs for corn and soybean meal have returned to normal or lower than normal levels, as the 1998 crop season appears to have been a success. Additionally, we remain cautiously optimistic that the supply and demand imbalance within the turkey industry is improving, as the number of eggs set in hatcheries and the number of poults placed in growout facilities have been declining during calendar year 1998. Since our fiscal year end, turkey commodity prices have begun to improve, but uncertainties have surfaced in Russia, an important export market for both chicken and turkey, due to the collapse of their currency. A significant undertaking for WLR Foods in the next fiscal year is the conversion of its Marshville, North Carolina turkey complex to chicken, which will take place during the first three quarters of fiscal 1999. The result of the conversion will be a reduction in the amount of commodity turkey product that the Company has available for sale, which should increase its overall turkey pricing in the marketplace. Additionally, the added chicken capacity will replace the volume of the Goldsboro complex, which was sold in August, 1998. 1 After the conversion is complete, the Company's mix of product will be approximately 58% chicken and 42% turkey, in terms of dressed pounds. RESULTS OF OPERATIONS Fiscal 1998 Compared to Fiscal 1997: Net sales from continuing operations were $946.0 million, a decrease of $48.6 million, or 4.9%, as compared to net sales from continuing operations for fiscal 1997 of $994.6 million. The decrease was primarily due to a $33 million decline in turkey sales to approximately $457 million. The decline in turkey was due to a 2.8% decrease in pounds sold and a 3.7% decrease in prices. Chicken sales decreased $7 million to approximately $393 million as a 0.8% increase in pounds was more than offset by a 4.3% decrease in prices. Cost of sales on continuing operations for fiscal 1998 was $876.3 million, a decrease of $71.8 million, or 7.6%, as compared to $948.1 million for fiscal 1997. The decrease was primarily attributable to $54 million in lower costs of corn and soybean meal consumed by birds processed at the Company's facilities. Additionally, the net decrease in pounds sold accounted for approximately $10 million of the decrease in cost of sales for fiscal 1998. Gross profit on continuing operations for fiscal 1998 was $69.7 million, an increase of $23.2 million, or 49.9%, as compared to $46.5 million for fiscal 1997. The vast majority of the increase was during the last fiscal quarter of the year, when gross profits increased $16.1 million over the same quarter in 1997. Gross profit as a percentage of sales was 7.4% for fiscal 1998, as compared to 4.7% for fiscal 1997. The increase in gross profit was primarily the result of lower corn and soybean meal ingredient costs. Partially offsetting the reduced grain costs were lower realized prices on chicken and turkey products. Selling, general and administrative expenses on continuing operations for fiscal 1998 were $91.7 million, an increase of $2.0 million, or 2.2%, as compared to $89.7 million for fiscal 1997. This was primarily the result of one-time costs for the debt refinancing during the third quarter of fiscal 1998. Interest expense from continuing operations was $22.5 million for fiscal 1998, an increase of $9.7 million over $12.8 million for fiscal 1997. This increase was attributable to higher borrowings and interest rates. The effective tax benefit rate on continuing operations in 1998 was 36.7% versus 36.2% in fiscal 1997. The net loss for fiscal 1998 on continuing operations was $28.2 million (or $1.72 per share), a decrease of $6.4 million as compared to the net loss of $34.6 million ($1.99 per share) for fiscal 1997. Fiscal 1997 Compared to Fiscal 1996: Net sales from continuing operations were $994.6 million, an increase of $16.3 million, or 1.7%, as compared to net sales from 2 continuing operations of $978.3 million in fiscal 1996. This increase was attributable to a $17 million increase in chicken sales to approximately $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 on continuing operations for fiscal 1997 was $948.1 million, an increase of $58.2 million, or 6.5%, as compared to $889.9 million for fiscal 1996. This increase was primarily attributable to a $37 million increase in the cost of corn and soybean meal consumed by birds processed at the Company's facilities; an increase in total pounds sold; higher growout costs due to the substitution of wheat for corn in feed early in fiscal 1997 and disease problems, particularly in the North Carolina turkey operations. Gross profit from continuing operations for fiscal 1997 was $46.5 million, a decrease of $41.9 million, or 47.4%, as compared to $88.4 million for fiscal 1996. Gross profit as a percentage of sales was 4.7% for fiscal 1997, as compared to 9.0% 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 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, staff reductions and savings from centralized purchasing. Selling, general and administrative expenses from continuing operations for fiscal 1997 were $89.7 million, a decrease of $1.5 million, or 1.6% as compared to $91.2 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 on continuing operations for fiscal 1997 was $12.8 million, an increase of $3.9 million over $8.9 million for fiscal 1996. This increase was attributable primarily to higher borrowing levels and slightly higher interest rates. The effective tax benefit rate on continuing operations in 1997 was 36.2% versus 36.9% in 1996. The net loss from continuing operations for fiscal 1997 was $34.6 million (or $1.99 per share), an increase of $27.1 million as compared to a net loss of $7.5 million ($0.42 per share) for fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's capital resources historically 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 3 improvements, equipment and facilities, repay indebtedness, pay cash dividends to shareholders, repurchase shares of common stock and make acquisitions. On June 27, 1998, the Company had net working capital of $118.7 million, compared to a net working capital deficit of $31.4 million on June 28, 1997. The net working capital deficit as of June 28, 1997 was due to the reclassification of $182 million of long-term debt to current liabilities. This reclassification was required because the Company was not in compliance with the minimum tangible net worth and the current ratio covenants set forth in its credit agreements. The Company fully refinanced its debt obligations as of February 25, 1998 and has remained in compliance with all financial covenants under the terms of the new agreement. On June 27, 1998, inventories were $128.0 million, a decrease of $37.6 million, or 22.7 %, as compared to $165.6 million on June 28, 1997. This decrease resulted primarily from lower costs of live chicken and turkey inventories, along with decreased levels of turkey finished goods inventories. Operating activities generated cash of $30.1 million in fiscal 1998, and $10.3 million in fiscal 1997 and used $39.4 million in fiscal 1996. The increase in cash generated in fiscal 1998, as compared to fiscal 1997, resulted primarily from the reduction of inventories, but was partially offset by a decrease in accounts payable. The increase in cash generated in fiscal 1997, as compared to fiscal 1996, resulted primarily from the reduction of accounts receivable, inventories and other assets partially offset by the operating loss. Capital expenditures were $22.1 million in fiscal 1998. The Company also leased equipment totaling $3.0 million using operating leases. Capital expenditures in fiscal 1997 totaled $11.2 million. Capital expenditures in fiscal years 1998 and 1997 were generally for normal replacements and upgrades of existing assets, except for $3.4 million in expenditures in fiscal 1998 to begin the conversion of the Marshville turkey complex to chicken. The Company expects capital expenditures in fiscal 1999 to range from $22 to $28 million to cover normal replacement and upgrades of existing facilities, and the completion of the Marshville conversion process, which is estimated to be approximately $8 million. Total debt to total capital at June 27, 1998 was 65.0%, an increase from 61.2% at June 28, 1997. In fiscal 1997, this calculation included $4.4 million of common stock subject to repurchase as debt. Under the terms of the private transaction, the final repurchase for $4.4 million was completed shortly after the close of the 1997 fiscal year. This eliminated the Company's obligation to repurchase common stock. The Company targets a total debt to total capital ratio of 40% to 45%. Subsequent to the close of the 1998 fiscal year, the Company completed the sales of its Goldsboro, North Carolina chicken complex and its Cassco Ice and Cold Storage, Inc. subsidiary. The net proceeds from these sales exceeded $91 million and were used to reduce 4 the Company's long term debt. These proceeds, along with cash flows from operations, have reduced the Company s total debt to total capital to less than 43% as of August 31, 1998. YEAR 2000 MATTERS The Company is aware of the issues associated with the "Year 2000" problem as the millennium approaches. Due to the recent implementation and ongoing upgrading of most of the Company's information systems, management does not expect that costs related to the Year 2000 issue will have a material impact on its financial condition or results of operations. ACCOUNTING MATTERS 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. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1. "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective for fiscal years beginning after December 15, 1998 and provides guidance on accounting for the described costs. SOP 98-1 should not have a material impact on our financial position, results of operations or cash flows when adopted. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is effective for us in our fiscal 2000. We have not yet determined the impact of adoption on our financial statements, however, we do not expect the impact to be material. 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 5 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 the uncertainties and other factors that could cause actual results to differ materially from such forward-looking statements. 6 EX-13.3 9 CONSOLIDATED FINANCIAL STATEMENT AND NOTES 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 27, 1998, June 28, 1997, 1998 1997 1996 and June 29, 1996 ------------------------------------------------ -------- -------- -------- Net sales (Note 11) $945,967 $994,591 $978,258 Cost of sales (Note 11) 876,287 948,060 889,904 -------- -------- -------- Gross profit 69,680 46,531 88,354 Selling, general and administrative expenses 91,745 89,657 91,167 -------- -------- -------- Operating loss (22,065) (43,126) (2,813) Other expense: Interest expense (Note 4) 22,539 12,804 8,922 Other expense (income), net (106) (1,792) 129 -------- -------- -------- Other expense, net 22,433 11,012 9,051 -------- -------- -------- Loss before income taxes and minority interest (44,498) (54,138) (11,864) Income tax benefit(Note 7) (16,352) (19,577) (4,381) Minority interest in net earnings of consolidated subsidiary 66 47 32 -------- -------- -------- Net loss from continuing operations ($28,212) ($34,608) ($7,515) Income from discontinued operations, net of tax (Note 13) 2,858 2,425 2,829 -------- -------- -------- Net loss ($25,354) ($32,183) ($4,686) ======== ======== ======== Basic and diluted loss per common share, continuing operations ($1.72) ($1.99) ($0.42) Basic and diluted earnings per common share, discontinued operations 0.17 0.14 0.16 -------- -------- -------- Total basic and diluted loss per common share ($1.55) ($1.85) ($0.26) ======== ======== ======== See accompanying Notes to Consolidated Financial Statements. 1
WLR Foods, Inc. and Subsidiaries Consolidated Balance Sheets
Dollars in thousands, June 27, 1998 and June 28, 1997 1998 1997 ------------------------------- -------- -------- Assets Current Assets Cash and cash equivalents $335 $283 Accounts receivable, less allowance for 72,457 72,462 doubtful accounts of $1,515 and $1,550 Inventories (Note 3) 128,031 165,551 Income taxes receivable 1,002 4,567 Other current assets 1,870 2,301 -------- -------- Total current assets 203,695 245,164 Property, plant and equipment, net (Note 4) 153,702 159,426 Deferred income taxes (Note 7) 18,247 4,996 Other assets 6,098 7,142 -------- -------- Total Assets $381,742 $416,728 ======== ======== Liabilities and Shareholders' Equity Current Liabilities Notes payable to banks (Note 5) $ - $4,031 Current maturities of long-term debt (Note 5) 3,452 186,391 Excess checks over bank balances 9,925 12,118 Trade accounts payable 28,742 35,005 Accrued expenses and other 32,245 26,657 Deferred income taxes (Note 7) 10,636 12,359 -------- -------- Total current liabilities 85,000 276,561 Long-term debt, excluding current maturities (Note 5) 189,225 5,040 Minority interest in consolidated subsidiary - 592 Other liabilities and deferred credits 3,626 3,539 Commitments and other matters (Notes 6, 10 and 11) Common stock subject to repurchase (Note 8) - 4,438 Shareholders' equity (Notes 8 and 9) Common stock, no par value 67,851 64,206 Additional paid-in capital 2,974 2,974 Retained earnings 33,066 59,378 -------- -------- Total shareholders' equity 103,891 126,558 -------- -------- Total Liabilities and Shareholders' Equity $381,742 $416,728 ======== ======== See accompanying Notes to Consolidated Financial Statements. 2
WLR Foods, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity
Dollars in thousands, except per share data Common Stock Additional Fiscal years ended June 27, 1998, June Paid-In Retained 28, 1997, and June 29, 1996 Shares Amount Capital Earnings Total -------------------------------------- -------- -------- -------- -------- -------- 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 Other common stock issued 122 1,376 1,376 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 Net loss (25,354) (25,354) Stock dividend 102 958 (958) - Other common stock issued 147 2,710 2,710 Common stock repurchased (Note 8) (446) (23) (23) -------- -------- -------- -------- -------- Balance at June 27, 1998 16,400 $67,851 $2,974 $33,066 $103,891 ======== ======== ======== ======== ======== 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 27, 1998, June 28, 1997 1998 1997 1996 and June 29, 1996 ----------------------------------------------- -------- -------- -------- Cash Flows from Operating Activities: Net loss ($25,354) ($32,183) ($4,686) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 28,321 28,088 28,243 Loss on sales of property, plant and equipment 916 772 67 Deferred income taxes (14,974) (14,060) 2,339 Other, net (592) 326 420 Change in operating assets and liabilities net of acquired businesses: (Increase) decrease in accounts receivable 5 7,470 (16,583) (Increase) decrease in inventories 37,520 6,395 (43,233) (Increase) decrease in other current assets 3,996 8,209 (11,766) (Increase) decrease in long term assets 815 (677) 819 Increase (decrease) in accounts payable (6,263) 3,016 3,298 Increase in accrued expenses and other 5,675 2,917 1,656 -------- -------- -------- Net cash provided by (used in ) operating activities 30,065 10,273 (39,426) Cash Flows from Investing Activities: Additions to property, plant and equipment (22,149) (11,245) (18,771) Acquisition of businesses (650) (200) (10,565) Proceeds from sales of property, plant and equipment 1,706 424 833 -------- -------- -------- Net cash used in investing activities (21,093) (11,021) (28,503) Cash Flows from Financing Activities: Proceeds from issuance of revolver debt and long-term debt 41,485 74,031 40,000 Payments on revolver and long-term debt (35,234) (29,093) (8,016) Financing costs paid (5,401) - - Notes payable to banks (4,031) (26,745) 30,776 Issuance of common stock 892 1,235 1,376 Repurchase of common stock (4,438) (13,312) (2,819) Increase (decrease) in excess checks over bank balances (2,193) (2,670) 10,840 Dividends paid - (3,139) (4,210) -------- -------- -------- Net cash provided by (used in) financing activities (8,920) 307 67,947 Increase (decrease) in cash and cash equivalents 52 (441) 18 Cash and cash equivalents at beginning of fiscal year 283 724 706 -------- -------- -------- Cash and cash equivalents at end of fiscal year $335 $283 $724 ======== ======== ======== Supplemental cash flow information: Cash paid (received) for: Interest $15,365 $12,297 $8,906 Income taxes (3,139) (10,608) 3,213 ======== ======== ======== 4
WLR Foods, Inc. and Subsidiaries Consolidated Statements of Cash Flows - Continued Non-cash financing activities: In fiscal 1998: The Company issued 102,296 shares of stock in lieu of a cash dividend in the first quarter. The Company issued 889,898 stock warrants in the third quarter relating to the debt refinancing; of these 266,969 were immediately exercisable and were recorded at a value of $1,695,256. (Note 5) In fiscal 1997: The Company issued 85,519 shares of stock in lieu of a cash dividend in the fourth quarter. 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) 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 1998, 1997 and 1996 ended on June 27, June 28 and June 29, 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 gains or losses from hedging transactions become part of the cost of the related inventory items and are expensed during the time period for which the hedge was intended. 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 8 years for machinery and equipment; and 3 to 5 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 6 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. 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 Changes In fiscal year 1998, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share," which supersedes APB Opinion No. 15. This statement serves to simplify the computation of earnings per share and requires restatement of all prior periods presented in conformity with the statement. Stock-Based Compensation In fiscal year 1997, the Company 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. 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 feed mill, 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 ======= 7 3. Inventories A summary of inventories at June 27, 1998 and June 28, 1997 follows: Dollars in thousands 1998 1997 ------- -------- Live poultry and breeder flocks $58,947 $74,984 Processed poultry and meat products 38,837 53,981 Packaging supplies, parts and other 15,879 17,188 Feed, grain and eggs 14,368 19,398 -------- -------- Total inventories $128,031 $165,551 ======== ======== The notional amount of grain futures contracts at June 27, 1998 and June 28, 1997 was $2.9 million and $21.2 million, respectively. The fair value of all derivative instruments used in hedging at June 27, 1998 and June 28, 1997 was $2.9 million and $19.3 million, respectively. 4. Property, Plant and Equipment WLR Foods investment in property, plant and equipment at June 27, 1998 and June 28, 1997 was as follows: Dollars in thousands 1998 1997 ------- -------- Land and improvements $ 22,133 $ 22,161 Buildings and improvements 123,620 119,190 Machinery and equipment 186,528 179,243 Transportation equipment 27,424 26,720 Construction in progress 5,054 2,443 -------- -------- 364,759 349,757 Less accumulated depreciation 211,057 190,331 -------- -------- Property, plant and equipment, net $153,702 $159,426 ======== ======== The Company capitalized interest costs with respect to certain major construction projects of $91,000 in fiscal year 1996. The Company did not have any capitalized interest costs in fiscal years 1998 or 1997. 5. Long-Term Debt and Bank Revolving Credits Long-term debt and other credit facilities at June 27, 1998 and June 28, 1997 consisted of the following obligations: Dollars in thousands 1998 1997 ------ ------ Fixed Rate Notes: 9.41% Senior Unsecured Notes $ - $ 18,000 7.47% Senior Unsecured Notes - 22,000 8 Variable Rate Notes: Secured Bank Term Note due 2000 110,000 - Senior Secured Notes 42,040 - Revolving Credit Notes: Unsecured Bank Revolving Credit Note due 1998 - 4,031 Unsecured Bank Revolving Credit Note due 2000 - 145,000 Secured Bank Revolving Credit Note due 2000 40,825 - Unamortized debt discount (5,003) - Other Notes: Notes with various terms and rates 4,815 6,431 ------- ------- Total debt 192,677 195,462 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 Less current maturities of long term debt 3,452 4,391 ------- -------- Long-term debt and revolving debt, excluding current maturities $189,225 $ 5,040 ======== ======== The Company refinanced its fixed rate Senior Unsecured Notes and variable rate Unsecured Credit Notes as of February 25, 1998. The new facility is a $110 million term loan, $42 million in senior secured notes, and a $105 million line of credit. The three facilities have an initial maturity of January 1, 2000, which may be extended by the Company for another year under certain circumstances. The debt is secured by essentially all of the Company's assets with interest on approximately half of the revolver and the term loan based on prime plus 225 basis points. The remaining amount of the outstanding revolver is priced according to the London Inter-Bank Offering rate plus 300 basis points or prime plus 175 basis points. In conjunction with the debt modification, the Company issued warrants to purchase 889,898 shares of its common stock at $0.01 per share. The warrants may be reduced if the debt is paid off by certain dates prior to maturity. Warrants totaling 266,969 were immediately exercisable and resulted in the recording of additional debt discount of $1.7 million. If the debt is not refinanced by August 31, 1998, and January 31, 1999, 20% and 50% of the remaining warrants become exercisable, respectively. The Company also incurred approximately $5 million of fees and costs to the lenders in conjunction with the refinancing which are being amortized as additional interest costs over the term of the debt. In addition, the Company expensed approximately $1.1 million of legal, consulting and appraisal costs incurred in the refinancing. The carrying value of all debt approximates fair value at June 27, 1998, based on quoted market prices for similar issues. In connection with the refinancing, the Company entered into interest rate swap and cap agreements. These agreements may allow the Company to reduce the impact of interest rate changes and lower its financing costs. The variable to fixed interest rate swap agreement has a notional value of $50 million, and fixes the Company's variable interest rate at 6.26% through January 4, 2000. The notional amount of the interest rate cap at the balance sheet date is $75 million, and the cap rate is 6.5%. At June 27, 1998, the fair value of both contracts was not significantly different than the notional value. The interest rate differential on the interest rate swap is recognized as an adjustment of interest expense or income over the term of the 9 agreement. The premiums paid/received for the interest rate cap agreement are included in other assets/liabilities and are amortized to interest expense over the terms of the agreement. The Company's credit agreement with its lenders contain restrictive covenants. As of June 27, 1998, the Company was in compliance with all covenants. 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 1999 3,452 Fiscal 2000 191,314 Fiscal 2001 978 Fiscal 2002 894 Fiscal 2003 657 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, $1.6 million and $1.7 million, for fiscal 1998, 1997 and 1996, respectively. 7. Income Taxes The provision for income taxes from continuing operations was as follows for fiscal years 1998, 1997 and 1996: Dollars in thousands 1998 1997 1996 ------ ------ ------ Current: Federal $ - $ (4,120) $ (4,092) State 166 (199) (965) -------- -------- ------- 166 (4,319) (5,057) Deferred: Federal (14,625) (13,242) 213 State (1,893) (2,016) 463 -------- -------- ------- (16,518) (15,258) 676 -------- -------- -------- Total tax benefit $(16,352) $(19,577) $ (4,381) ======== ======== ======== The provision for income taxes for continuing operations differs from the amounts resulting from applying the federal statutory tax rates (35%) to earnings for fiscal years 1998, 1997 and 1996 as follows: Dollars in thousands 1998 1997 1996 ------ ------ ------ Taxes computed using federal statutory tax rates $(15,574) $(18,948) $(4,153) 10 State income taxes, net of federal tax effect (1,123) (1,440) (326) Other, net 345 811 98 -------- -------- -------- Total tax benefit $(16,352) $(19,577) $(4,381) ======== ======== ======== Effective tax rate 36.7% 36.2% 36.9% The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at June 27, 1998 and June 28, 1997 are listed below: 1998 1997 Dollars in thousands ------ ------ Deferred tax liabilities: Inventories, principally due to the accounting for live inventories on the farm price method for tax purposes $(15,230) $(18,525) Plant and equipment, principally due to differences in depreciation and capitalized interest (6,386) (7,718) Investments in subsidiary companies, principally due to undistributed net income of the subsidiary - (406) Other (369) (17) -------- -------- Gross deferred tax liabilities (21,985) (26,666) Deferred tax assets: Net operating loss carryforwards $20,150 $10,000 Insurance accruals, principally due to timing of payments versus the recording of expenses 2,944 2,763 Deferred compensation, principally due to accrual for financial reporting purposes 1,062 1,008 Tax credits 2,861 3,079 Financing costs, principally due to accrual for financial reporting purposes 310 - Compensated absences, principally due to accrual for financial reporting purposes 1,107 1,053 Accounts receivable, principally due to allowance for doubtful accounts 591 605 Other 571 795 -------- -------- Gross deferred tax assets 29,596 19,303 -------- --------- Net deferred tax asset (liability) $7,611 $(7,363) ======== ======== 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 future expectation of taxable income and reversal of deferred tax 11 liabilities, management believes it is more likely than not that the Company will realize the benefits of these deductible differences as reflected at June 27, 1998 and June 28, 1997. 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 16,399,511 outstanding on June 27, 1998 and 16,597,114 outstanding on June 28, 1997. Additionally, there are 50,000,000 shares of preferred stock authorized with none outstanding as of June 27, 1998 or June 28, 1997. The Common Stock Subject to Repurchase arose 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% were 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 non-qualified 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. The changes in the outstanding common shares under option for fiscal 1998, 1997 and 1996 are listed below: Common shares Weighted Average under option Exercise Price 12 ------------- ---------------- Outstanding at July 1, 1995 768,250 14.71 Canceled or expired (110,120) 13.59 Exercised (148,255) 11.92 Granted in fiscal year 1996 190,500 14.13 ------- Outstanding at June 29, 1996 700,375 15.08 Canceled or expired (168,459) 12.12 Granted in fiscal 1997 178,750 8.31 ------- Outstanding at June 28, 1997 710,666 13.85 Canceled or expired (226,041) 14.29 Granted in fiscal 1998 158,750 6.88 ------- Outstanding at June 27, 1998 643,375 11.98 ======= There were 343,374, 385,247, and 376,333 shares exercisable under option with weighted average exercise prices of $15.08, $16.21 and $14.99 at fiscal 1998, 1997 and 1996, respectively. The following table summarizes information about stock options outstanding as of June 27, 1998: Stock Options Stock Options Outstanding: Exercisable: - - --------------------------------------------------------------------- Weighted Average Remaining Contractual Exercise Price Shares Life (Years) Shares - - -------------- ------ --------------------- ------ $6.875 158,750 7.9 - 8.310 143,750 6.6 47,914 14.125 136,250 5.2 90,835 14.666 21,750 2.0 21,750 15.000 96,250 5.5 96,250 20.000 86,625 0.9 86,625 - - ------------- ------- ------- Total 643,375 343,374 ============= ======= ======= 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 loss and net loss 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 loss and net loss per share would approximate the pro forma amounts indicated below: Fiscal years ended Dollars in thousands June 27, 1998 June 28, 1997 - - -------------------- ------------- ------------- Net loss As Reported $(28,212) $(34,608) Pro Forma $(28,537) $(34,823) Net loss per common share As Reported, basic and diluted $ (1.72) $ (1.99) 13 Pro Forma, basic and diluted $ (1.74) $ (2.00) Note: The pro forma disclosures shown may not be representative of the effects on reported net income in future years. 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: 1998 1997 ------ ------ Expected dividend yield 0.0% 1.1% Expected volatility 31% 43% Risk-free interest rate 5.7% 6.8% Expected term (in years) 10 10 Using these assumptions in the Black-Scholes model, the weighted average fair value of options granted was $0.6 million in 1998 and 1997. 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 2005. Total rent expense was approximately $5.1 million, $5.7 million, and $3.5 million for fiscal 1998, 1997 and 1996, 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 27, 1998: Fiscal 1999 $2,624 Fiscal 2000 1,933 Fiscal 2001 1,441 Fiscal 2002 913 Fiscal 2003 462 Fiscal 2004 and thereafter 272 ------ Total minimum lease payments $7,645 ====== 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 fiscal years 1997 and 1996. As a result of an August 1994 acquisition, Cuddy Farms, Inc. (as an affiliate of Cuddy International) was a related party through fiscal year 1997. The transactions included poultry purchases and feed sales 14 to Cuddy Farms at pricing formulas established when the acquisition was completed. Transactions with these related parties during the past three fiscal years are as follows : Purchases from Sales to Dollars in thousands related parties related parties - - -------------------- --------------- --------------- Fiscal 1998 $ 1,381 $ - Fiscal 1997 23,381 8,998 Fiscal 1996 25,433 10,237 In management's opinion, all related party transactions are conducted under normal business conditions, with no preferential treatment given to related parties. 12. Earnings Per Share The following is a reconciliation between the calculation of basic and diluted net loss per share: Dollars in thousands June 27, 1998 June 28, 1997 June 29, 1996 - - -------------------- ------------- ------------- ------------- Numerator: Basic and diluted net loss per common share numerator, continuing operations $(28,212) $(34,608) $(7,515) Denominator: Weighted average common shares outstanding 16,315 17,378 17,716 Effect of outstanding stock warrants 88 - - -------- -------- -------- Basic and diluted weighted average common shares outstanding 16,403 17,378 17,716 ======== ======== ======== Basic and diluted loss per share, continuing operations $(1.72) $(1.99) $(0.42) ======== ======== ======== Options to purchase 643,375, 710,666 and 700,375 of common stock, at prices between $6.88 and $20.00, $8.31 and $20.00, and $11.92 and $20.00 per share were outstanding in 1998, 1997, and 1996, respectively, but were not included in the computation of diluted earnings per share because the effect of including these options would have been anti-dilutive. 13. Discontinued Operations During fiscal year 1998, the Company's Board of Directors adopted a plan to discontinue operations of its subsidiary, Cassco Ice & Cold Storage. The transaction involved the sale of the division and was completed in July 1998. Net proceeds of approximately $54 million were received in a stock transaction, resulting in a gain of approximately $27 million($17 million after-tax). The gain will be reflected in the results of operations for the quarter ended September 26, 1998. Accordingly, the operating results of the Cassco Ice 15 operations have been segregated from continuing operations and reported as a separate line item on the statement of operations. The Company has restated its prior year financial statements to present the operating results of Cascco Ice as a discontinued operation. Operating results and net assets from discontinued operations are as follows: Dollars in thousands 1998 1997 1996 - - -------------------- ------- ------- ------- Net sales $22,063 $19,186 $19,374 Income before tax 4,529 3,742 4,600 Income tax expense 1,671 1,317 1,771 ------- ------- ------- Net income $2,858 $2,425 $2,829 ======= ======= ======= Net Assets of Discontinued Operations Dollars in thousands 1998 1997 - - ------------------------------------- ------- ------- Current assets $ 9,065 $ 5,940 Property, plant and equipment, net 22,840 23,853 Other assets 398 399 Current liabilities (4,124) (4,007) Other liabilities (3,573) (4,206) ------- ------- Net assets of discontinued operations $24,606 $21,979 ======= ======= 14. Subsequent Event On August 14, 1998, the Company completed the sale of its Goldsboro, North Carolina chicken complex. Net proceeds of approximately $37 million were received in exchange for assets totaling approximately $29 million. The gain of approximately $8 million($5 million after-tax) will be included in the results of operations for the quarter ended September 26, 1998. 15. Selected Quarterly Financial Data(Unaudited) The unaudited summary of quarterly results of continuing operations for fiscal 1998 and 1997 follows: Dollars in thousands except per share data Fiscal year ended June 27, 1998 First Second Third Fourth - - ------------------------------- ----- ------ ----- ------ Net sales $242,541 $247,683 $212,487 $243,256 Operating income (loss) (6,209) (7,627) (11,359) 3,130 Net loss from continuing operations (6,435) (8,089) (11,117) (2,571) Per share data: Net loss per common share, continuing operations $ (0.40) $(0.50) $(0.68) $(0.15) Cash dividends declared per common share $ - $ - $ - $ - Stock dividend declared per common share(in shares) - - - - Market price(bid) - high 10.00 10.25 8.63 7.38 - low 8.13 8.38 5.19 5.56 16 Fiscal year ended June 28, 1997 First Second Third Fourth - - ------------------------------- ----- ------ ----- ------ Net sales $264,595 $261,223 $219,661 $249,112 Operating loss (12,039) (6,448) (11,938) (12,701) Net loss from continuing operations (9,543) (5,452) (9,540) (10,073) Per share data: Net loss per common share, continuing operations $(0.54) $(0.30) $(0.55) $(0.61) 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 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. 17 EX-13.4 10 INDEPENDENT AUDITORS 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 27, 1998 and June 28, 1997 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 27, 1998. 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 reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WLR Foods, Inc. and subsidiaries as of June 27, 1998 and June 28, 1997 and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended June 27, 1998, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Richmond, Virginia August 18, 1998 1 EX-21 11 LIST OF SUBSIDIARIES Exhibit 21 Subsidiary State of Incorporation Wampler Foods, Inc. Virginia P.O. Box 7275 Broadway, Virginia 22815 1 EX-23 12 CONSENT OF IND CERTIFIED PUBLIC ACCOUNTANTS 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 18, 1998, relating to the consolidated balance sheets of WLR Foods, Inc. and subsidiaries as of June 27, 1998 and June 28, 1997, 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 27, 1998, and the related schedule, which reports appear or are incorporated by reference in the June 27, 1998 annual report on Form 10-K of WLR Foods, Inc. /s/ KPMG Peat Marwick LLP Richmond, Virginia September 25, 1998 1 EX-24.1 13 SPECIAL POWER OF ATTORNEY Exhibit 24.1 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 Dale S. Lam, 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. _8/24/98_ _/s/ Jane T. Brookshire_________ (SEAL) Date Jane T. Brookshire _8/24/98_ _/s/ George E. Bryan____________ (SEAL) Date George E. Bryan _8/24/98_ _/s/ Charles L. Campbell________ (SEAL) Date Charles L. Campbell _8/24/98_ _/s/ Stephen W. Custer__________ (SEAL) Date Stephen W. Custer _8/24/98_ _/s/ Calvin G. Germroth_________ (SEAL) Date Calvin G. Germroth _8/24/98_ _/s/ William H. Groseclose, Jr._ (SEAL) Date William H. Groseclose, Jr. _8/24/98_ _/s/ J. Craig Hott______________ (SEAL) Date J. Craig Hott _8/24/98_ _/s/ Herman D. Mason____________ (SEAL) Date Herman D. Mason _8/24/98_ _/s/ Charles W. Wampler, Jr.____ (SEAL) Date Charles W. Wampler, Jr. _8/24/98_ _/s/ William D. Wampler_________ (SEAL) Date William D. Wampler _8/24/98_ _/s/ James L. Keeler____________ (SEAL) Date James L. Keeler _8/24/98_ _/s/ Ruth J. Mack_______________ (SEAL) Date Ruth J. Mack _8/24/98_ _/s/ Ronald E. Morris___________ (SEAL) Date Ronald E. Morris _8/24/98_ _/s/ Dale S. Lam________________ (SEAL) Date Dale S. Lam _9/01/98_ _/s/ Katherine K. Clark_________ (SEAL) Date Katherine K. Clark _8/24/98_ _/s/ Walter F. Shafer, III______ (SEAL) Date Walter F. Shafer, III EX-24.2 14 SPECIAL POWER OF ATTORNEY Exhibit 24.2 SPECIAL POWER OF ATTORNEY The undersigned director of WLR Foods, Inc., a Virginia corporation (WLR Foods), appoints James L. Keeler, Dale S. Lam and Elizabeth A. McLean, any of whom may act (with full power to each of them to act alone) as his attorney-in-fact and agent for him in his capacity as a director of WLR Foods, and authorizes such persons, on behalf of WLR Foods or on his behalf individually, to sign and file any and all WLR Foods' Forms 3, 4 and 5, or any other reports that may be required pursuant to Section 16 of the Securities Act of 1934, with the Securities and Exchange Commission, National Association of Securities Dealers, and any regulatory authority for any U.S. state or territory, and he hereby ratifies and confirms that his attorneys-in- fact and agents may lawfully do or cause to be done by virtue hereof. WITNESS the following signature and seal. 9/25/98 _/s/ Keith E. Alessi_______ (SEAL) Date Keith E. Alessi EX-27 15 FDS
5 3-MOS JUN-27-1998 JUN-27-1998 335 0 72,457 1,515 128,031 203,695 364,759 211,057 381,742 85,000 192,677 0 0 67,851 36,040 381,742 945,967 945,967 876,287 876,287 91,745 0 22,539 (44,498) (16,352) (28,212) 2,858 0 0 (25,354) (1.55) (1.55)
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