-----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, ISCVOW1PoS7BzJHJMfn+hHjhjSj4wUEx0XEs3iVVlGWYSsrHiiCL6mGZ8ZQBQtqN qDyBx1BRomv6IbZPwBNfjw== 0000760775-99-000097.txt : 20000211 0000760775-99-000097.hdr.sgml : 20000211 ACCESSION NUMBER: 0000760775-99-000097 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WLR FOODS INC CENTRAL INDEX KEY: 0000760775 STANDARD INDUSTRIAL CLASSIFICATION: POULTRY SLAUGHTERING AND PROCESSING [2015] IRS NUMBER: 541295923 STATE OF INCORPORATION: VA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-17060 FILM NUMBER: 99720104 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-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 3, 1999 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. The aggregate value of the voting stock held by non-affiliates of the registrant as of September 3, 1999 was approximately $119,525,045. As of that date 16,557,582 shares of the registrant's common stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report to Shareholders for the fiscal year ending July 3, 1999 are incorporated by reference in Items 5-8 of Part II. Portions of the Company's Proxy Statement, to be filed within 120 days of the end of the Company's fiscal year, are incorporated by reference in Items 10-13 of Part III. 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 60 countries. In 1999, WLR was ranked the fourth largest turkey producer by Turkey World magazine, the twelfth largest chicken producer by Broiler Industry magazine, and the seventh largest poultry company by Poultry magazine. Company sales for fiscal 1999 were $888 million, including approximately $453 million of chicken segment sales and $428 million of turkey segment sales, and representing approx- imately 584 million pounds and 441 million pounds of poultry products in the chicken and turkey segments, respectively. Remaining sales were comprised of revenues from the Company's protein conversion plants. 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, turkey burgers and sausage, ground turkey and chicken and various fully cooked breast products. WLR markets branded and private label poultry products to retail, fast food, foodservice and institutional customers throughout the United States with an emphasis on the East Coast. 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 1999. 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 is able 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. Through July 1998, the Company operated a cold storage and ice manufacturing and distribution business through its Cassco Ice and Cold Storage, Inc. (Cassco) operating subsidiary. In July 1998, the Company sold its Cassco subsidiary. The Company also sold its Goldsboro, North Carolina chicken complex in August 1998. The volume produced at the Goldsboro complex was replaced by the conversion of the Marshville, North Carolina turkey complex to chicken processing, which was completed in the first fiscal quarter of 1999. Poultry Production WLR Foods' primary operations include the breeding, hatching, grow-out and processing of turkeys and chickens. For fiscal 1999, WLR Foods produced approximately 471 million pounds of dressed turkey and 685 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 69% of the Company's poult supply. The balance of the Company's poults are purchased from a third party. 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 173 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 900 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- 2 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 97% 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 to one of the Company's 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, skinning and ground turkey is also conducted in a number of these processing plants. Additional further processing, including grinding, marinating, spicing and cooking to produce delicatessen products, frankfurters, meat salads and foodservice products is conducted at the Company's further processing plant. Processing and Other The non-edible by-products of WLR Foods' poultry processing plants are sent to either of its two protein conversion plants, except for the Marshville, North Carolina processing plant, which sells its by-products to a third party vendor. The Company's two protein conversion plants convert the non-edible by-products into feed ingredients for use in its own operations or for sale to pet food manufacturers. The following table shows approximate sales revenues by operating segment from WLR Foods' products for the last three fiscal years. 3 Fiscal 1999 Fiscal 1998 Fiscal 1997 (Dollars in Millions) Chicken segment $ 453 $ 389 $ 378 Turkey segment 428 546 601 Other 7 11 16 ---- ---- ---- Total Net Sales $ 888 $ 946 $ 995 ==== ==== ==== 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 and turkey 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 and THE DELI ROAST COLLECTION and design, both 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 markets its export and foreign military sales 4 under the COLONEL ROCKINGHAM design, ROCKINGHAM and SHENVALLEY trademarks, as well as the WAMPLER FOODS trademark. Government Contracts WLR Foods' government contracts are a small percent of its total sales, consisting of bids on particular products for delivery at specified locations. Contracts are generally bid, and the product delivered, within a one to two month period. These contracts include both chicken and turkey products and can involve further processed products. WLR Foods had less than $0.2 million of governmental contracts outstanding as of July 3, 1999, compared to approximately $5.1 million as of June 27, 1998. Foreign Sales WLR Foods' export sales constituted approximately 10% of its total annual sales in each of fiscal 1999, 1998 and 1997. 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 60 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, transporting poultry to the processing plants, and transporting products to customers. Delivery of the Company's products to its customers is generally performed by refrigerated third party trucking companies. The Company works with a third party vendor to provide logistics services for the delivery of its products. WLR Foods has contracts with two railroad companies for the delivery of feed ingredients to WLR Foods' feedmills. Raw Materials WLR Foods' largest cost is for basic feed ingredients, namely corn and soybean meal. Feed grains are commodities and, as such, are subject to volatile price changes caused by weather, size of harvest, changes in demand, transportation and storage cost and the agricultural policies of the United States and foreign governments. Although WLR Foods can, and sometimes does, purchase grain in the forward markets, it cannot completely eliminate the potential adverse effect of grain price increases. The Company uses futures contracts 5 and forward purchases to hedge the risk of fluctuating grain prices. The results of closed hedging transactions become part of the cost of the related inventory items, and gains and losses in the market value of open hedging contracts are reported as an adjustment to the carrying amount of the hedged item. Environmental and Other Regulatory Compliance WLR Foods' facilities and operations are subject to the regulatory jurisdiction of various federal agencies, including the Food and Drug Administration, Department of Agriculture, Environmental Protection Agency, Occupational Safety and Health Administration, and of corresponding state agencies in Virginia, West Virginia, North Carolina and Pennsylvania. All environmental permits, such as air, water and solid waste disposal permits, are issued by appropriate state agencies. A total of seven environmental permits are held by Wampler Foods' 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 West Virginia of certain wastewater biosolids generated at the Moorefield facilities wastewater treatment works. The Moorefield 6 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 five environmental permits, all of which were issued by the North Carolina Department of Environment, Health & Natural Resources. The Marshville processing plant holds an industrial wastewater discharge permit which requires processed wastewater to be pretreated prior to discharge to a regional sewer system, and a stormwater permit which regulates stormwater discharges. 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. Wampler Foods recently applied for a third air permit at its Franconia facility to install and operate a wet scrubber to remove and abate odors. The New Oxford turkey processing facility holds one air permit which regulates combustion equipment. All of the Pennsylvania permits were issued by the Pennsylvania Department of Environmental Resources. In addition to the foregoing environmental permits, and where not otherwise addressed above, all facilities have taken steps to ensure compliance with stormwater regulations. Where applicable, facilities have applied for the necessary group, individual or general storm water permit in accordance with state and federal guidelines. Further, each facility has registered aboveground and underground storage tanks in accordance with relevant state and federal regulations. Management believes that all facilities and operations are currently in compliance with environmental and regulatory standards. Compliance has not had a materially adverse effect upon WLR Foods' earnings or competitive position in the past, and it is not anticipated to have a materially adverse effect in the future. Employees WLR Foods employed over 7,100 persons as of July 3, 1999, none of whom were covered by a collective bargaining agreement. 7 Cautionary Statement Concerning Forward Looking Information 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 unexpected results. WLR Foods' actual results may differ materially from those in the forward-looking statements. For example, operating results may be affected by external factors such as: actions of competitors, changes in laws and regulations, including changes in governmental interpretations of regulations and changes in accounting standards, customer demand and fluctuations in cost and availability of feed ingredients. Item 2. PROPERTIES. WLR Foods' seven poultry processing facilities and one further processing plant are located in Virginia, West Virginia, Pennsylvania and North Carolina. The processing facilities consist of three turkey facilities and four chicken facilities having a total slaughter capacity of approximately 450,000 turkeys per week (single shift) and 3.65 million chickens per week (double shift). WLR Foods owns and operates four feedmills with a total production capacity of approximately 2 million tons of finished feed per year; a turkey hatchery with a production capacity of approximately 350,000 poults per week and three chicken hatcheries with a total production capacity of approximately 4.0 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 15-20 years Machinery & Equipment 3-8 years Transportation Equipment 3-5 years Item 3. LEGAL PROCEEDINGS. As previously reported, on February 24, 1999, the Attorney General of the State of West Virginia filed suit against WLR Foods and its Wampler Foods, Inc. subsidiary in the Circuit Court of Hardy County, West Virginia under the West Virginia Consumer Credit and Protection Act, seeking unspecified damages. The suit alleged that Wampler provided substandard chicks and feed to broiler growers who raise chickens for Wampler. 8 On April 6, 1999, the Company was served with an Amended Complaint, alleging that the Company violated the West Virginia Consumer Credit and Protection Act, The West Virginia Antitrust Act and the federal Packers and Stockyard Act dealing with its broiler growers in West Virginia. In addition to seeking restitution to growers and damages of an unspecified amount, which would be trebled in the case of violations of the West Virginia Antitrust Act, the suit seekd a $100,000 civil penalty for alleged violations of the Antitrust Act and civil penalties of $5,000 for each alleged violation of the Consumer Credit and Protection Act. The State has also requested a preliminary injunction, enjoining Wampler foods from paying any grower less than the current average base rate, and from terminating any existing grower's contract. The Company filed a Notice of Removal in the U.S. District Court in Elkins, West Virginia, removing the case to federal court. On August 13, 1999, the District Court remanded the case back to the state Circuit Court. The lawsuit is not expected to have a material effect on the Company's financial statements. The Company continues to believe the suit is without merit, and intends to defend it vigorously. There were no other material pending legal proceedings during the fiscal year ended July 3, 1999, 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 July 3, 1999. 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 64 Chief Executive Officer President,Chief since February 1988 Executive Officer Jane T. Brookshire 53 Vice President of Vice President of Administration since Administration, November 1998, previously Secretary Vice President of Human Resources from 1993 to 1998. 9 Dale S. Lam 36 Chief Financial Officer Chief Financial Officer, since November 1998, Vice Vice President of Finance, President of Finance and Treasurer Treasurer since August 1998, previously Controller. Co-owner and Treasurer of Office Products, Inc. from 1989 to 1997. Ronald E. Morris 46 Vice President of Turkey Vice President of Turkey Operations for Wampler Operations for Wampler Foods, Inc. since November Foods, Inc. 1997; previously, Complex Manager for Marshville, North Carolina Turkey Complex for Wampler Foods, Inc. from 1996 to 1997 and Complex Manager for Butterball from 1994 to 1996. Walter F. Shaffer, III 41 Vice President of Chicken Vice President of Chicken Operations for Wampler Operations for Wampler Foods,Inc. since November Foods, Inc. 1997; previously, Director of Chicken Operations for Wampler Foods, Inc. 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. John A. Turner 48 Vice President of Sales Vice President of Sales and Marketing for Wampler and Marketing for Wampler Foods, Inc. since June, Foods, Inc. 1999; previously,Vice President of Sales and Marketing for Hatfield Quality Meats from 1996 to 1998, and President, Consumer Products Division of Rich Products Corporation from 1990 to 1996. 10 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 16 to the Registrant's Consolidated Financial Statements in the Annual Report, attached hereto as Exhibit 13.3. As of September 3, 1999, the approximate number of shareholders of record was 3,910. Item 6. SELECTED FINANCIAL DATA. Selected financial data for each of the fiscal years in the ten- year period ended July 3, 1999 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 dispositions is incorporated by reference to Notes 1, 12 and 13 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 DISCLOSURES ABOUT MARKET RISK Market risks relating to the Company's operations result primarily from changes in interest rates and commodity prices. To 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. 11 Interest Rate Sensitivity The Company hedges exposures to changes in interest rates on certain of its financial instruments. 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 2000 2001 2002 2003 - -------------------- ---- ---- ---- ---- Liabilities: Long-term debt, including Current Portion Fixed Rate $196 $202 $215 $89 Average interest rate 6.00% 6.00% 6.00% 6.00% Variable Rate $4,850 $5,850 $42,345 $0 Average interest rate 6.54% 6.54% 6.57% 0.00% Interest Rate Derivatives Dollars in thousands 2000 2001 2002 2003 - ------------------------- ---- ---- ---- ---- Interest Rate Swaps Variable to Fixed $50,000 $0 $0 $0 Average pay rate 6.29% - - - Average receive rate - USD 1 month Libor Interest Rate Cap $75,000 $0 $0 $0 Average pay rate 6.50% - - - Average receive rate - USD 1 month Libor 12 Expected Maturity Date Liabilities: There- Fair Dollars in thousands 2004 after Total Value - -------------------- ---- ------ ----- ----- Liabilities: Long-term debt, including Current Portion Fixed Rate $95 $49 $846 $846 Average interest rate 6.00% 6.00% 6.00% Variable Rate $0 $0 $53,045 $53,045 Average interest rate 0.00% 0.00% 6.56% Interest Rate Derivatives There- Fair Dollars in thousands 2004 after Total Value - ------------------------- ---- ------ ----- ----- Interest Rate Swaps Variable to Fixed $0 $0 $50,000 ($237) Average pay rate - - 6.29% Average receive rate - USD 1 month Libor Interest Rate Cap $0 $0 $75,000 $0 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 and forward purchasing for hedging purposes to reduce the effect of changing commodity prices on a portion of its commodity purchases. The contracts that effectively meet risk reduction 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, 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 July 3, 1999. For the futures 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 May 2000. Contract amounts are used to calculate the contractual payments and quantity of corn and soybean meal to be exchanged under the futures contracts. 13 On Balance Sheet Commodity 1999 1998 Position and Related ---------------- ---------------- Derivatives Carrying Fair Carrying Fair Dollars in thousands Amount Value Amount Value - ----------------------- -------- ----- ------- ----- Corn, Soybean Meal and Other Feed Ingredient Inventory $11,050 $11,050 $11,009 $11,009 1999 1998 ------------------- ------------------- Contractual Fair Contractual Fair Related Derivatives Amount Value Amount Value - ------------------- ----------- ----- ----------- ----- Corn Futures Contracts Contract Volumes (100,000 bushels) 60 11 Weighted Average Price (per bushel) $2.43 $2.11 $2.67 $2.64 Contract Amount (dollars in thousands) 14,494 12,564 2,942 2,906 Soy Bean Meal Futures Contracts Contract Volumes (100 tons) 541 - Weighted Average Price (per ton) $142.18 $129.15 $ - $ - Contract Amount (dollars in thousands) 7,692 6,987 - - 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 19 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. 14 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 1999, pursuant to Regulation 14A, a definitive proxy statement that will involve the election of directors. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under Section 16 of the Securities Exchange Act of 1934, the Company's directors, executive officers and beneficial owners of more than 10% of the outstanding common stock are required to file reports with the Securities and Exchange Commission concerning their ownership of and transactions in common stock. Based on copies of those reports and related information furnished to the Company, the Company believes that all such filing requirements were complied with in a timely manner for the fiscal year ended July 3, 1999, except for the filing of a Form 4 to report the purchase by Mr. Morris s wife, in May, 1998, of 2,000 shares of WLR Foods stock. A Form 4 was filed promptly upon discovery of the omission. 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 July 3, 1999, June 27, 1998, and June 28, 1997 Consolidated Balance Sheets - July 3, 1999 and June 27, 1998 Consolidated Statements of Shareholders' Equity - Fiscal years ended July 3, 1999, June 27, 1998 and June 28, 1997 Consolidated Statements of Cash Flows - Fiscal years ended July 3, 1999, June 27, 1998 and June 28, 1997 Notes to Consolidated Financial Statements - Fiscal years ended July 3, 1999, June 27, 1998, June 28, 1997 Independent Auditors' Report 15 Financial Statement Schedules Independent Auditors' Report on Schedules Schedule II - Valuation and Qualifying Accounts Schedules not included in this Item have been omitted because they are either not applicable or the information is included in the Consolidated Financial Statements or notes thereto. (b) 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 29, 1999 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 29, 1999 __/s/ Dale S. Lam__ Chief Financial Officer and Treasurer Date: September 29, 1999 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. Signature Title --------- ----- ______________________ Director Keith E. Alessi* ______________________ Director Charles L. Campbell* 17 ______________________ Director Katherine K. Clark* ______________________ Director Stephen W. Custer* ______________________ Director William H. Groseclose* ______________________ Director J. Craig Hott* __/S/ James L. Keeler__ Director James L. Keeler ______________________ Director Phillip C. Stone* ______________________ Director William D. Wampler* *By __/s/ Dale S. Lam__ Dale S. Lam, attorney-in-fact 18 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE The Board of Directors and Shareholders WLR Foods, Inc.: Under date of August 13, 1999, we reported on the consolidated balance sheets of WLR Foods, Inc. and subsidiaries as of July 3, 1999 and June 27, 1998, and the related consolidated statements of operations, shareholders equity and cash flows for each of the fiscal years in the three-year period ended July 3, 1999, as contained in the July 3, 1999 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the July 3, 1999 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 LLP Richmond, Virginia August 13, 1999 19 WLR FOODS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR FISCAL YEARS ENDED JULY 3, 1999, JUNE 27, 1998 AND JUNE 28, 1997 (in thousands) Charged to Balance at cost and Balance beginning other Charged to at end of Description of period expenses accounts period - ----------- --------- ---------- ---------- ---------- Fiscal year ended July 3, 1999 Allowance for Doubtful Accounts $1,515 $1,056 $662 $1,909 ------ ------ ---- ------ Total $1,515 $1,056 $662 $1,909 ====== ====== ==== ====== 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 ==== ==== ==== ====== 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 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. 4.4 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. 4.5 Credit Agreement, dated as of November 20, 1998, incorporated by reference to Exhibit 2.1 of Form 10-Q filed with the Securities and Exchange Commission on February 9, 1999. 4.6 Form of Revolving Credit Note, dated as of November 20, 1998, incorporated by reference to Exhibit 2.2 of Form 10-Q filed with the Securities and Exchange Commission on February 9, 1999. 4.7 Form of Term Credit Note, dated as of November 20, 1998, incorporated by reference to Exhibit 2.3 of Form 10-Q filed with the Securities and Exchange Commission on February 9, 1999. 4.8 First Amendment, dated as of February 25, 1999, to the Credit Agreement dated as of November 20, 1998. 21 4.9 Second Amendment, dated as of July 1, 1999, to the Credit Agreement dated as of November 20, 1999. 4.10 Third Amendment, dated as of September 14, 1999, to the Credit Agreement dated as of November 20, 1999. 10.1 Employment Agreement, dated June 23, 1998 between the Registrant and James L. Keeler (Deferred Compensation Agreement attached thereto as Exhibit A), incorporated by reference to Exhibit 10.1 of Form 10-K filed with the Securities and Exchange Commission on September 25, 1998. 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 1998 Long-Term Incentive Plan, incorporated by reference to Appendix A to the Company's definitive proxy statement (Schedule 14A), filed with the Securities and Exchange Commission on September 30, 1998. 10.4 Severance Agreement, dated February 4, 1994 between the Registrant and James L. Keeler, incorporated by reference to Exhibit 10.4 of Form 10-Q filed with the Securities and Exchange Commission on February 15, 1994. 10.5 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 November 2, 1998 between the Registrant and Dale S. Lam. 10.7 Severance Agreement, dated February 6, 1998 between the Registrant and Ronald E. Morris, incorporated by reference to Exhibit 10.8 of Form 10-K filed with the Securities and Exchange Commission on September 25, 1998. 10.8 Severance Agreement, dated February 6, 1998 between the Registrant and Walter F. Shafer, III, incorporated by reference to Exhibit 10.9 of Form 10-K filed with the Securities and Exchange Commission on September 25, 1998. 10.9 Severance Agreement, dated June 1, 1999 between the Registrant and John A. Turner. 22 10.10 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. 10.11 1995 Nonqualified Deferred Compensation Plan, incorporated by reference to Exhibit 10.16 of Form 10-K filed with the SEC on September 29, 1996. 10.12 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. 10.13 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. 10.14 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 July 3, 1999. 13.2 Management's Discussion and Analysis, from the Registrant's Annual Report to Shareholders for the fiscal year ended July 3, 1999. 13.3 Consolidated Financial Statements and Notes to Consolidated Financial Statements, from the Registrant's Annual Report to Shareholders for the fiscal year ended July 3, 1999. 13.4 Independent Auditor Report on Consolidated Financial Statements, from the Registrant's Annual Report to Shareholders for the fiscal year ended July 3, 1999. 21 List of Subsidiaries of the Registrant. 23 Consent of Independent Certified Public Accountants. 24.1 Power of Attorney, incorporated by reference to Exhibit 24.1 to Form 10-K, filed with the Securities and Exchange Commission on September 25, 1998. 23 24.2 Power of Attorney of Keith A. Alessi, incorporated by reference to Exhibit 24.2 of Form 10-K filed with the Securities and Exchange Commission on September 25, 1998. 24.3 Power of Attorney of Phillip C. Stone 27 Financial Data Schedule. 24 EX-4.8 2 FIRST ADMENDMENT TO CREDIT AGREEMENT Exhibit 4.8 Wampler Foods, Inc. First Admendment To Credit Agreement This First Amendment to Credit Agreement (herein, the "Amendment") is entered into as of February 25, 1999, between Wampler Foods, Inc., a Virginia corporation (the "Company"), WLR Foods, Inc., a Virginia corporation (the "Parent"), each of the Lenders party to the Credit Agreement (as such term is defined below) and Harris Trust and Savings Bank, as a Lender and in its capacity as agent under the Credit Agreement (the "Administrative Agent"). Preliminary Statements A. The Company and the Lenders entered into a certain Credit Agreement, dated as of November 20, 1998 (the "Credit Agreement"). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. B. The Company has requested that the Lenders confirm that limited sales of capital stock of the Parent and the Company pursuant to a dividend reinvestment plan do not in all events trigger a mandatory prepayment of the Term Loans, and the Lenders are willing to do so under the terms and conditions set forth in this Amendment. Now, Therefore, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Section 1. Amendment. Effective upon the acceptance hereof by the Required Lenders in the spaces provided for that purpose below, Section 3.3(c) of the Credit Agreement shall be amended by striking the phrase "any sale of capital stock of the Parent of the Company pursuant to a dividend reinvestment plan for its employees, producers and directors" appearing in clause (iii) of such Section and substituting therefor the following: "any sale of the capital stock of the Parent of the Company pursuant to a dividend reinvestment plan for its respective shareholders to the extent the cash proceeds from such sales aggregate not more than $100,000 during any one calendar year." Section 2. Representations. In order to induce the Lenders to execute and deliver this Amendment, the Company and Parent each hereby represents to each Lender that as of the date hereof, after giving effect to this Amendment, the representations and warranties set forth in Section 6 of the Credit Agreement are true and correct in all material respects (except that the representations contained in Section 6.5 shall be deemed to refer to the most recent financial statements of the Parent and Company delivered to the Administrative Agent) and no Default or Event of Default has occurred and is continuing under the Credit Agreement. Section 3.Miscellaneous. (a) Except as specifically amended herein, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Amendment need not be made in the Credit Agreement, the Notes, or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby. (b) The Company agrees to pay on demand all reasonable costs and expenses of or incurred by the Administrative Agent in connection with the negotiation, preparation, execution and delivery of this Amendment, as and to the extent provided in Section 12.4 of the Credit Agreement. (c) This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Amendment shall be governed by the internal laws of the State of Illinois. 2 Dated as of February 25, 1999. Wampler Foods, Inc. By: /s/ Dale S. Lam Name: Dale S. Lam Title: Treasurer WLR Foods, Inc. By: /s/ Dale S. Lam Name: Dale S. Lam Title: Treasurer Accepted and agreed to as of the date and year last above written. Harris Trust And Savings Bank, in its individual capacity as a Lender and as Administrative Agent By: /s/ William J. Kane Name: William J. Kane Title: Vice President Green Tree Financial Servicing Corporation By: /s/ C. A. Gouskos Name: C. A. Gouskos Title: Sr. Vice President NationsBank, N.A. By: /s/ Steven R. Kluemper Name: Steven R. Kluemper Title: Vice President U.S. Bancorp AG Credit, Inc. By: /s/ Alan J. Schuler Name: Alan J. Schuler Title: Vice President 3 The CIT Group/Business Credit, Inc. By: /s/ Levi K. Schatz Name: Levi K. Schatz Title: Vice President Blue Ridge Farm Credit, ACA By: /s/ Thomas H. Byerly Name: Thomas H. Byerly Title: Exec. Vice President Branch Banking and Trust Company of Virginia By: /s/ J. Charles Link Name: J. Charles Link Title: Vice President Mercantile Bank National Association By: /s/ Wayne C. Lewis Name: Wayne C. Lewis Title: Vice President 4 EX-4.9 3 SECOND AMENDMENT TO CREDIT AGREEMENT Exhibit 4.9 Wampler Foods, Inc. Second Amendment To Credit Agreement This Second Amendment to Credit Agreement (herein, the "Amendment") is entered into as of July 1, 1999, between Wampler Foods, Inc., a Virginia corporation (the "Company"), WLR Foods, Inc., a Virginia corporation (the "Parent"), each of the Lenders party to the Credit Agreement (as such term is defined below) and Harris Trust and Savings Bank, as a Lender and in its capacity as agent under the Credit Agreement (the "Administrative Agent"). Preliminary Statements A. The Company and the Lenders entered into that certain Credit Agreement, dated as of November 20, 1998 (said Credit Agreement as heretofore amended and as the same may from time to time hereafter be amended, modified or restated being referred to herein as the "Credit Agreement"). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. B. The Company has requested that the Lenders modify the Capital Expenditures covenant contained in the Credit Agreement to permit the Company to carry forward a portion of its unused Capital Expenditures in any year and the Lenders are willing to do so under the terms and conditions set forth in this Amendment. Now, Therefore, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Section 1. Amendment. Effective upon the acceptance hereof by the Required Lenders in the spaces provided for that purpose below, the Credit Agreement shall be and hereby is amended as follows: 1.1 Section 8.7 of the Credit Agreement shall be amended in its entirety and as so amended shall be restated to read as follows: Section 8.7. Capital Expenditures. Each of the Parent and Company shall not, nor shall it permit any subsidiary to, expend or become obligated for Capital Expenditures (as determined in accordance with GAAP), in an aggregate amount for the Parent, the Company and their Subsidiaries in excess of the Maximum Permitted Amount. For the purposes hereof the term "Maximum Permitted Amount" shall mean (i) during the Parent's fiscal year ending June 30, 1999 an amount equal to $26,000,000, and (ii) during any fiscal year of the Parent ending subsequent to June 30, 1999 an amount equal to 115% of the amount properly charged to depreciation on the books of the Parent, the Company and their Subsidiaries during such fiscal year (as determined in accordance with GAAP); provided, however, that the Maximum Permitted Amount for any fiscal year of the Parent ending subsequent to June 30, 1999 shall be increased by up to $3,000,000 of the amount, if any, by which the Maximum Permitted Amount for the immediately preceding fiscal year, computed without giving effect to any increase therein by reason of this proviso, exceeds the Capital Expenditures for such preceding year. 1.2 Schedule I to Exhibit D to the Credit Agreement shall be amended in its entirety and as so amended shall be restated to read as set forth on Exhibit A hereto. Section 2. Conditions Precedent. The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent: (a) The Company, the Parent, the Administrative Agent and the Required Lenders shall have executed and delivered this Amendment. (b) Legal matters incident to the execution and delivery of this Amendment shall be satisfactory to the Acquired Lenders and their counsel. Section 3. Representations. In order to induce the Lenders to execute and deliver this Amendment, the Company and Parent each hereby represents to each Lender that as of the date hereof, after giving effect to this Amendment, the representations and warranties set forth in Section 6 of the Credit Agreement are true and correct in all material respects (except that the representations contained in Section 6.5 shall be deemed to refer to the most recent financial statements of the Parent and Company delivered to the Administrative Agent) and no Default or Event of Default has occurred and is continuing under the Credit Agreement. Section 4. Miscellaneous. (a) Each of the Company and the Parent acknowledges and agrees that all of the Collateral Documents to which it is a party remain in full force and effect for the benefit and security of, among other things, the Obligations. (b) Except as specifically amended herein, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Amendment need not be made in the Credit Agreement, the Notes, or any other instrument or document executed in connection therewith, or in any certificate, letter or 2 communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby. (c) The Company agrees to pay on demand all reasonable costs and expenses of or incurred by the Administrative Agent in connection with the negotiation, preparation, execution and delivery of this Amendment, as and to the extent provided in Section 12.4 of the Credit Agreement. (d) This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Amendment shall be governed by the internal laws of the State of Illinois. 3 Dated as of July 1, 1999. Wampler Foods, Inc. By: /s/ Dale S. Lam Name: Dale S. Lam Title: Treasurer WLR Foods, Inc. By: /s/ Dale S. Lam Name: Dale S. Lam Title: Treasurer 4 Accepted and agreed to as of the date and year last above written. Harris Trust And Savings Bank, in its individual capacity as a Lender and as Administrative Agent By: /s/ William H. Kane Name: William H. Kane Title: Vice President Green Tree Financial Servicing Corporation By: /s/ C. A. Gouskos Name: C. A. Gouskos Title: Sr. Vice President NationsBank, N.A. By: /s/ Steven R. Kluemper Name: Steven R. Kluemper Title: Vice President U.S. Bancorp AG Credit, Inc. By: /s/ Alan V. Schuler Name: Alan V. Schuler Title: Vice President The CIT Group/Business Credit, Inc. By: /s/ Levi K. Schatz Name: Levi K. Schatz Title: Vice President 5 Blue Ridge Farm Credit, ACA By: /s/ Thomas H. Byerly Name: Thomas H. Byerly Title: Exec. Vice President Branch Banking and Trust Company of Virginia By: /s/ J. Charles Link Name: J. Charles Link Title: Vice President Mercantile Bank National Association By: /s/ Wayne C. Lewis Name: Wayne C. Lewis Title: Vice President 6 Exhibit A Schedule I Attachment To Compliance Certificate Wampler Foods, Inc. Compliance Calculations for Credit Agreement Dated as of ___________, 1998 Calculations as of _____________, 19___ - ---------------------------------------------------------------- A. Capital Expenditures (Section 8.7) 1. Capital expenditures $__________ 2. As set forth in Section 8.8, net capital expenditures (Line 3) must not exceed (NOTE: $26 million during year ending 6/30/99 and thereafter, 115% of depreciation plus up to $3,000,000 of unused capital expenditures from immediately preceding fiscal year) $__________ 3. Company is in compliance? (Circle yes or no) Yes/No B. Consolidated Tangible Net Worth (Section 8.8) 1. Total shareholders' equity __________ 2. Subordinated Indebtedness __________ 3. Sum of Lines 1 and 2 __________ 4. Intangible Assets as defined (book value) __________ 5. Write up of assets above cost __________ 6. Sum of Lines 4 and 5 __________ 7. Line 3 minus Line 6 __________ ("Consolidated Tangible Net Worth") 8. As listed in Section 8.8, for the date of this Certificate, Consolidated Tangible Net Worth must not be less than $__________ 7 9. Company is in compliance? (Circle yes or no) Yes/No C. Leverage Ratio (Section 8.9) 1. Senior Funded Debt __________ 2. Net Income for the Parent and Subsidiary $__________ specified four fiscal quarters of the Company most recently completed 3. Net Income from Cassco Ice & Cold Storage, Inc. $__________ 4. Subtract Line 3 from Line 2 $__________ (Consolidated Net Income) 5. Interest Expense for the same period $_________ 6. Federal, state and local income taxes $__________ for the same period 7. Depreciation of fixed assets for the $__________ same period 8. Amortization for the same period $__________ 9. Other non-cash charges $__________ 10. Add Lines 4 through 9 $__________ ("Consolidated Gross EBITDA") 11. Income from sale of Cassco Ice & Cold $__________ Storage and Goldsboro, NC broiler complex 12. Subtract Line 11 from Line 10 $__________ ("Consolidated EBITDA") 13. Senior Funded Debt (Line 1) to Consolidated EBITDA (Line 12) ("Leverage Ratio") ________:1 14. As listed in Section 8.8, for the date of this Certificate, the Leverage Ratio shall not be less than ________:1 15. Company is in compliance? (Circle yes or no) Yes/No 8 D. Fixed Charge Coverage Ratio (Section 8.10) 1. Consolidated EBITDA $__________ 2. Net cash federal, state and local income taxes paid $__________ 3. Taxes in respect of Net Income attributable to Cassco $__________ Ice & Cold Storage, Inc. 4. Taxes in respect of income from sale of Cassco Ice &Cold Storage, Inc. $__________ 5. Taxes in respect of income from sale of Company's Goldsboro, NC broker complex. $__________ 6. Add Lines 3 through 5 $__________ 7. Line 2 minus Line 6 $__________ 8. Capital Expenditures $__________ 9. Marshville conversion expenditures $__________ 10. Expenditures financed by other indebtedness $__________ 11. Net Capital Expenditures $__________ (Line 8 minus Lines 9 and 10) 12. Restricted Payments $__________ 13. Sum of Lines 3, 11 & 12 $__________ 14. Line 1 minus Line 13 $__________ 15. Fixed Charges $__________ (a) Principal payments on Funded Debt $__________ (b) Interest Expense $__________ 16. Sum of 15(a) and 15(b) ("Fixed Charges") $__________ 17. Ratio of Line 14 to Line 11 ("Fixed Charge Coverage Ratio") ________:1 18. As listed in Section 8.10 for the date of this Certificate, the Fixed Charge Coverage Ratio shall not be less than ________:1 9 19. Company is in compliance? (Circle yes or no) Yes/No E. Minimum Consolidated EBITDA (Section 8.11) 1. Consolidated EBITDA on rolling 4 quarter basis $__________ 2. As listed in Section 8.11 for the date of this Certificate, Consolidated EBITDA shall not be less than $__________ 3. Company is in compliance? Yes/No (Circle yes or no) 10 EX-4.10 4 THIRD AMENDMENT TO CREDIT AGREEMENT Exhibit 4.10 Wampler Foods, Inc. Third Amendment To Credit Agreement This third Amendment to Credit Agreement (herein, the "Amendment") is entered into as of September 14, 1999, between Wampler Foods, Inc., a Virginia corporation (the "Company"), WLR Foods, Inc., a Virginia corporation (the "Parent"), each of the Lenders party to the Credit Agreement (as such term is defined below) and Harris Trust and Savings Bank, as a Lender and in its capacity as agent under the Credit Agreement (the "Administrative Agent"). Preliminary Statements A. The Company, the Parent and the Lenders have entered into that certain Credit Agreement, dated as of November 20, 1998 (said Credit Agreement as heretofore amended being referred to herein as the "Credit Agreement"). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. B. The Company has requested that the Lenders modify the Restricted Payments covenant contained in the Credit Agreement to permit the Parent to repurchase a limited amount of its capital stock and make certain cash dividend payments to its shareholders and the Lenders are willing to do so under the terms and conditions set forth in this Amendment. Now, Therefore, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Section 1. Amendment. Effective upon the acceptance hereof by the Required Lenders in the spaces provided for that purpose below, the Credit Agreement shall be and hereby is amended as follows: 1.1 Section 8.18 of the Credit Agreement shall be amended in its entirety and as so amended shall be restated to read as follows: Section 8.18. Dividends and Other Restricted Payments. Without the prior written consent of the Required Lenders, neither the Parent nor the Company shall during any fiscal year (a) declare or pay any dividends on or make any other distributions in respect of any class or series of its capital stock (other than dividends payable solely in its capital stock) of any class or any warrants, rights or options to purchase any such shares or (b) directly or indirectly purchase, redeem or otherwise acquire or retire any of its capital stock of any class or any warrants, rights or options to purchase any such shares. Notwithstanding the foregoing, the Parent may (i) make cash dividend payments to the holders of its capital stock in an aggregate amount not in excess of $2,200,000 during any fiscal year of the Parent, and (ii) purchase, redeem or otherwise acquire or retire its capital stock for an aggregate consideration which does not on a cumulative basis exceed $15,000,000 during the period from and including the date hereof to and including the Termination Date so long as at the time of, and after giving effect to, such dividend or any such purchase, redemption or acquisition no Default or Event of Default exists; provided, however, that the sum of (a) the aggregate amount of cash dividends so made by the Parent and (b) the aggregate consideration paid by the Parent to so purchase, redeem or otherwise acquire or retire its capital stock, shall in no event exceed $15,000,000 on a cumulative basis during such period. 1.2 The definition of Fixed Charge Coverage Ratio appearing in Section 5.1 of the Credit Agreement shall be amended by striking the phrase "minus Restricted Payments" appearing in the twelfth line thereof and substituting therefor the phrase "minus Restricted Payments (other than distributions by the Parent as consideration for repurchases, redemptions or other acquisitions or retirements of its capital stock permitted by Section 8.18 hereto during such period". Section 2. Collateral Release. The Company has informed the Lenders that neither Company's real estate parcels known as the "Hilltop Hatchery" and "Timberville Warehouse" is used as a processing plant, further processing plant, feedmill or hatchery. Accordingly, Section 4.1 of the Credit Agreement does not require the Company to grant a lien on such parcels and the Company has requested that the Lenders release from the lien of the Collateral Documents the Company's real estate known as the "Hilltop Hatchery" and the "Timberville Warehouse". Each Lender by its execution hereof hereby consents to the release by the Administrative Agent from the lien of the Collateral Documents the real property owned by the Company known as the "Hilltop Hatchery" and the "Timberville Warehouse". Section 3. Conditions Precedent. The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent: (a) The Company, the Parent, the Administrative Agent and the Required Lenders shall have executed and delivered this Amendment. 2 (b) Legal matters incident to the execution and delivery of this Amendment shall be satisfactory to the Required Lenders and their counsel. Section 4. Representations. In order to induce the Lenders to execute and deliver this Amendment, the Company and Parent each hereby represents to each Lender that as of the date hereof, after giving effect to this Amendment, the representations and warranties set forth in Section 6 of the Credit Agreement are true and correct in all material respects (except that the representations contained in Section 6.5 shall be deemed to refer to the most recent financial statements of the Parent and Company delivered to the Administrative Agent) and no Default or Event of Default has occurred and is continuing under the Credit Agreement. Section 5. Miscellaneous. (a) Each of the Company and the Parent acknowledges and agrees that all of the Collateral Documents to which it is a party remain in full force and effect for the benefit and security of, among other things, the Obligations. (b) Except as specifically amended herein, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Amendment need not be made in the Credit Agreement, the Notes, or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby. (c) The Company agrees to pay on demand all reasonable costs and expenses of or incurred by the Administrative Agent in connection with the negotiation, preparation, execution and delivery of this Amendment, as and to the extent provided in Section 12.4 of the Credit Agreement. (d) This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Amendment shall be governed by the internal laws of the State of Illinois. 3 Dated as of September 14, 1999. Wampler Foods, Inc. By: /s/ Dale S. Lam Name: Dale S. Lam Title: Treasurer WLR Foods, Inc. By: /s/ Dale S. Lam Name: Dale S. Lam Title: Treasurer 4 Accepted and agreed to as of the date and year last above written. Harris Trust And Savings Bank, in its individual capacity as a Lender and as Administrative Agent By: /s/ William J. Kane Name: William J. Kane Title: Vice President Green Tree Financial Servicing Corporation By: /s/ C. A. Groukos Name: C. A. Grouskos Title: Sr. Vice President Bank of America, N.A. (formerly "NationsBank, N.A.") By: /s/ Steven R. Kluemper Name: Steven R. Kluemper Title: Vice President U.S. Bancorp AG Credit, Inc. By: /s/ Alan V. Schuler Name: Alan V. Schuler Title: Vice President The CIT Group/Business Credit, Inc. By: /s/ Levi K. Schatz Name: Levi K. Schatz Title: Vice President 5 Blue Ridge Farm Credit, ACA By: /s/ Thomas H. Byerly Name: Thomas H. Byerly Title: Exec. Vice President Branch Banking and Trust Company of Virginia By: /s/ J. Charles Link Name: J. Charles Link Title: Vice President Mercantile Bank National Association By: /s/ Wayne C. Lewis Name: Wayne C. Lewis Title: Vice President 6 EX-10.6 5 SEVERENCE AGREEMENT FOR DALE S. LAM Exhibit 10.6 November 2, 1998 Mr. Dale S. Lam Chief Financial Officer WLR Foods, Inc. Post Office Box 7000 Broadway, Virginia 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. This Agreement supercedes all previous severance agreements between you and the Company or any or its subsidiaries. 1. Agreement to Provide Services; Right to Terminate. (i) Except as otherwise provided in paragraph (ii) below, the Company or you may terminate your employment at any time following a Change in Control as defined herein, subject to the Company's providing the benefits hereinafter specified in accordance with the terms hereof. (ii) In the event a Person (as hereinafter defined) makes an offer which, if accepted by the Company and subsequently consummated, would constitute a Change in Control, you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement, as such terms are hereinafter defined) and will render the services contemplated in the recitals to this Agreement until such Change in Control offer has been abandoned or terminated or a Change in Control has occurred. For the purposes of this Agreement, Retirement shall mean a termination of your employment by you on or after you have reached age sixty-five (65) and have completed at least five (5) years of service for the Company (including any service for a predecessor of the Company where such prior service is recognized by the Company for the purpose of awarding other benefits). For purposes of this Section 1, "years of service" shall be defined as in the WLR Profit Sharing and Salary Savings Plan. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until December 31, 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 2 promulgated under the Exchange Act) of twenty percent (20%) or more of either the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that in no event may the following acquisitions constitute a Change in Control: (a) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (b) any acquisition by the Company, (c) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (d) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (a), (b) and (c) of paragraph (iii) of this Section 3 are satisfied, or (e) any sale or other disposition of all or substantially all of the assets of the Company, if , following such sale or other disposition, the conditions described in (1), (2) and (3) of paragraph (iv) of this Section 3 are satisfied; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least seventy-five percent (75%) of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation, unless, in each case following such reorganization, merger or consolidation, (a) more than sixty percent (60%) of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the 3 Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (b) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or a corporation resulting from such reorganization, merger or consolidation) beneficially owns, directly or indirectly, thirty-nine percent (39%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (c) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (iv) Approval by the shareholders of the Company of (a) a complete liquidation or dissolution of the Company or (b) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which following such sale or other disposition, (1) more than sixty percent (60%) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation) beneficially owns, directly or indirectly, thirty-nine percent (39%) or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (3) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial 4 agreement or action of the Board providing for such sale or other disposition of assets of the Company. (v) Notwithstanding anything in the paragraphs (i) - (iv) of this Section 3 to the contrary, no Change in Control shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in you, or a group of Persons which includes you, acquiring, directly or indirectly, twenty percent (20%) or more of the combined voting power of the Company's Voting Securities. 4. Termination Following Change in Control. If any of the events described in Section 3 hereof constituting a Change in Control of the Company shall have occurred, you shall be entitled to the benefits provided in Section 5 hereof upon the termination of your employment with the Company within thirty-six (36) months after such Change in Control, unless such termination is (a) because of your death, (b) by the Company for Cause or Disability or (c) by you other than for Good Reason (as all such capitalized terms are hereinafter defined). (i) Disability. Termination by the Company of your employment based on "Disability" shall mean termination because of your absence from your duties with the Company on a full time basis for one hundred eighty (180) consecutive days as a result of your incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given to you following such absence, you shall have returned to the full time performance of your duties. (ii) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon (a) the willful and continued failure by you to perform substantially your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to you by the Chairman of the Board or President of the Company which specifically identifies the manner(s) in which such executive believes that you have not substantially performed your duties, or (b) the willful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For purposes of this paragraph (ii), no act, or failure to act, on your part shall be considered "willful" unless done, or failed to be done, by you in bad faith and without reasonable belief that your 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 5 advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company. It is also expressly understood that your attention to matters not directly related to the business of the Company shall not provide a basis for termination for Cause so long as the Board has approved your engagement in such activities. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in clauses (a) or (b) of this paragraph (ii) and specifying the particulars thereof in detail. (iii) Good Reason. Termination by you of your employment for "Good Reason" shall mean termination based on: (A) a determination by you, in your reasonable judgment, that there has been an adverse change in your status or position(s) as an executive officer of the Company as in effect immediately prior to the Change in Control, including, without limitation, any adverse change in your status or position as a result of a diminution in your duties or responsibilities (other than, if applicable, any such change directly attributable to the fact that the Company is no longer publicly owned) or the assignment to you of any duties or responsibilities which are inconsistent with such status or position(s), or any removal of you from, or any failure to reappoint or reelect you to, such positions(s) (except in connection with the termination of your employment for Cause or Disability or as a result of your death or by you other than for Good Reason); (B) a reduction by the Company in your base salary as in effect immediately prior to the Change in Control; (C) the failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the Change in Control of the Company (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the Change in Control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such 6 Plans on at least as favorable a basis to you as is the case on the date of the Change in Control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the Change in Control; (D) the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Company's normal vacation policy as in effect immediately prior to the Change in Control; (E) the Company's requiring you to be based at any office that is greater than thirty (30) miles from where your office is located immediately prior to the Change in Control except for required travel on the Company's business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the Change in Control; (F) the failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 6 hereof; (G) any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (iv) below (and, if applicable, paragraph (ii) above); and for purposes of this Agreement, no such purported termination shall be effective; or (H) any refusal by the Company to continue to allow you to attend to matters or engage in activities not directly related to the business of the Company which, prior to the Change in Control, you were permitted by the Board to attend to or engage in. For purposes of this Agreement, "Plan" shall mean any compensation plan such as the Company Incentive Bonus Plan or any employee benefit plan such as a thrift, pension, profit sharing, medical, disability, accident, life insurance plan or a relocation plan or policy or any other plan, program or policy of the Company intended to benefit employees, except for the Company Restated Long- Term Incentive Plan. (iv) Notice of Termination. Any purported termination by the Company or by you following a Change in Control shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" 7 shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon. (v) Date of Termination. "Date of Termination" following a Change in Control shall mean (a) if your employment is to be terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (b) if your employment is to be terminated by the Company for Cause or by you pursuant to Sections 4(iii)(F) or 6 hereof or for any other Good Reason, the date specified in the Notice of Termination, (c) if your employment is to be terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which in no event shall be a date earlier than ninety (90) days after the date on which a Notice of Termination is given, unless an earlier date has been expressly agreed to by you in writing either in advance of, or after, receiving such Notice of Termination, or (d) if your employment is terminated on account of your death, the day after your death. In the case of termination of your employment by the Company for Cause, if you have not previously expressly agreed in writing to the termination, then within thirty (30) days after receipt by you of the Notice of Termination with respect thereto, you may notify the Company that a dispute exists concerning the termination, in which event the Date of Termination shall be the date set either by mutual written agreement of the parties or by such court having the matter before it. During the pendency of any such dispute, the Company will continue to pay you your full compensation in effect just prior to the time the Notice of Termination is given and until the dispute is resolved. However, if such court issues a final and non-appealable order finding that the Company had Cause to terminate you then you must return all compensation paid to you after the Date of Termination specified in the Notice of Termination previously received by you. 5. Compensation Upon Termination or During Disability; Other Agreements. (i) During any period following a Change in Control of the Company that you fail to perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your base salary at the rate then in effect and any benefits or awards under any Plans shall continue to accrue during such period, to the extent not inconsistent with such Plans, until your employment is terminated pursuant to and in accordance with paragraphs 4(iv) - 4(v) hereof. Thereafter, your benefits shall be determined in accordance 8 with the Plans then in effect. (ii) If your employment is terminated for Cause following a Change in Control of the Company, the Company shall pay to you your base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you. Thereupon the Company shall have no further obligations to you under this Agreement. (iii) Subject to Section 8 hereof, if, within thirty-six (36) months after a Change in Control of the Company has occurred, your employment by the Company is terminated other than on account of your death and is terminated (a) by the Company other than for Cause or Disability or (b) by you for Good Reason, then the Company shall pay to you, no later than the fifth (5th) day following the Date of Termination, without regard to any contrary provisions of any Plan, the following: (A) your base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you (including amounts which previously had been deferred at your request); (B) an amount in cash equal to three times the sum of (i) the higher of (a) your annual base salary on the Date of Termination or (b) your annual base salary in effect immediately prior to the Change in Control plus (ii) an amount equal to the average of the bonuses awarded to you in each of the three previous years. For the purposes of this Agreement, the term "base salary" shall include any amounts deducted by the Company with respect to you 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 9 equal to the Termination Fair Market Value (as hereinafter defined) less the exercise price of all options which were granted to you pursuant to the Company's Restated Long-Term Incentive Plan or any Plan succeeding thereto, and which shall not become exercisable prior to (a) the end of the one (1) year period immediately following the Date of Termination if your employment is terminated on account of your death, or (b) the end of the third (3rd) month following the Date of Termination if your employment is terminated for any reason other than death. The Company shall make such payment upon the fifth (5th) day following such Date of Termination. For the purposes of this Agreement, the "Termination Fair Market Value" shall be the higher of (a) the highest price of the Company's stock as quoted on the NASDAQ, or any other exchange complying with the requirements of the Securities and Exchange Act of 1934, as amended, within the period beginning ninety (90) days prior to the Date of Termination and ending upon such Date of Termination, and (b) the highest price of the Company's stock as quoted on the NASDAQ, or any other exchange complying with the requirements of the Securities and Exchange Act of 1934, as amended, within the period beginning ninety (90) days prior to a Change of Control and ending upon the date of a Change of Control. (v) If, within thirty-six (36) months after a Change in Control of the Company has occurred, your employment by the Company is terminated (a) by the Company other than for Cause or Disability, or (b) by you for Good Reason, then the Company shall maintain in full force and effect, for the continued benefit of you and your dependents for a period terminating on the earliest of (a) three (3) years after the Date of Termination or (b) the commencement date of equivalent benefits from a new employer, insured and self-insured employee welfare benefit Plans in which you were entitled to participate immediately prior to the Date of Termination, provided that your continued participation is possible under the general terms and provisions of such Plans (and any applicable funding media) and you continue to pay an amount equal to your regular contribution under such Plans for such participation. If three (3) years after the Date of Termination you have not previously received, nor are then receiving, equivalent benefits from a new employer, the Company shall offer you continuation coverage under COBRA as prescribed under Section 4980B of the Code. At the expiration of such continuation coverage (or, if COBRA continuation coverage is not applicable to the Plan, then upon the expiration of the three (3) year period beginning on the Termination Date), the Company shall arrange, at its sole cost and expense, to enable you to convert you and your dependents' coverage under such plans to individual policies and programs upon the 10 same terms as employees of the Company may apply for such conversions. In the event that your participation in any such Plan is barred, the Company, at its sole cost and expense, shall arrange to have issued for the benefit of you and your dependents individual policies of insurance providing benefits substantially similar (on an after-tax basis) to those which you otherwise would have been entitled to receive under such Plans pursuant to this paragraph (v) or, if such insurance is not available at a reasonable cost to the Company, the Company shall otherwise provide you and your dependents with equivalent benefits (on an after-tax basis). You shall not be required to pay any premiums or other charges in an amount greater than that which you would have paid in order to participate in such Plans. (vi) Except as specifically provided in paragraph (v) above, the amount of any payment provided for in this Section 5 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination, or otherwise. (vii) In the event that you become entitled to the payments provided by paragraphs (iii) and (iv) of Section 5(iii) hereof (the "Agreement Payments"), if any of the Agreement Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (or any similar tax that may hereafter be imposed), the Company shall pay to you at the time specified in paragraph (viii) below an additional amount (the "Gross-up Payment") such that the net amount retained by you, after deduction of any Excise Tax on the Total Payments (as hereinafter defined) and any federal, state and local income tax and Excise Tax upon the Gross-up Payment provided for by this paragraph (vii), but before deduction for any federal, state or local income tax on the Agreement Payments, shall be equal to the sum of (a) the Total Payments and (b) an amount equal to the product of any deductions disallowed because of the inclusion of the Gross-up Payment in your adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made. For purposes of determining whether any of the Agreement Payments will be subject to the Excise Tax and the amount of such Excise Tax, (a) any other payments or benefits received or to be received by you in connection with a Change in Control of the Company or your termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control of the 11 Company or any person affiliated with the Company or such person) (which, together with the Agreement Payments, shall constitute the "Total Payments") shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax; (b) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Total Payments or (2) the amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (a), above); and (c) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-up Payment, you shall be deemed to (a) pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made, (b) pay the applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes (determined without regard to limitations on deductions based upon the amount of your adjusted gross income), and (c) have otherwise allowable deductions for federal income tax purposes at least equal to those disallowed because of the inclusion of the Gross-up Payment in your adjusted gross income. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, you shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal state and local income tax imposed on the portion of the Gross-up Payment being repaid by you if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction), plus interest on 12 the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest payable with respect to such excess at the rate provided in Section 1274(b)(2)(B) of the Code) at the time that the amount of such excess is finally determined. (viii) The Gross-up Payment or portion thereof provided for in paragraph (vii) above shall be paid not later than the thirtieth (30th) day following payment of any amounts under paragraphs (iii) and (iv) of Section 5; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than the forty-fifth (45th) day after payment of any amounts under paragraphs (iii) and (iv) of Section 5. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you, payable on the fifth (5th) day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 6. Successors; Binding Agreement. (i) The Company will seek, by written request at least five (5) business days prior to the time a Person becomes a Successor (as hereinafter defined), to have such Person, by agreement in form and substance satisfactory to you, assent to the fulfillment of the Company's obligations under this Agreement. Failure of such Person to furnish such assent by the later of (a) three (3) business days prior to the time such Person becomes a Successor or (b) two (2) business days after such Person receives a written request to so assent shall constitute Good Reason for termination by you of your employment if a Change in Control of the Company occurs or has occurred. For purposes of this Agreement, "Successor" shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger or 13 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 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 14 required withholding of federal, state and local income and employment taxes. 9. Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 12 and 14 of this Agreement shall survive termination of this Agreement. 10. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employee, to the address set forth below his signature, provided that all notices to the Company shall be directed to the attention of the Chairman of the Board or President of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the Chairman of the Board or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 12. Governing Law and Venue. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Virginia. Venue for any proceeding related to the performance or interpretation of this Agreement, or in any way arising out of this Agreement, shall be either the Circuit Court of Rockingham County, Virginia, or the United States District Court for the Western District of Virginia, Harrisonburg Division. 13. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or 15 enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Employee's Commitment. You agree that subsequent to your period of employment with the Company, you will not at any time communicate or disclose to any unauthorized person, without the written consent of the Company, any proprietary processes of the Company or other confidential information concerning its business, affairs, products, suppliers or customers which, if disclosed, would have a material adverse effect upon the business or operations of the Company, taken as a whole; it being understood, however, that the obligations under this Section 14 shall not apply to the extent that the aforesaid matters (a) are disclosed in circumstances where you are legally required to do so or (b) become generally known to, and available for use by, the public otherwise than by your wrongful act or omission. 15. Related Agreements. To the extent that any provision of any other agreement between the Company and you shall limit, qualify or be inconsistent with any provision of this Agreement, then for purposes of this Agreement, while the same shall remain in force, the provision of such other agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose. Notwithstanding the effect of the preceding sentence, the letter agreement dated July 29, 1996 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 __2nd__ day of __November__, 1998 __/s/ Dale S. Lam__ Dale S. Lam 16 EX-10.9 6 SEVERENCE AGREEMENT FOR JOHN A. TURNER Exhibit 10.9 June 1, 1999 Mr. John A. Turner Vice President of Sales and Marketing Wampler Foods, Inc. P. O. Box 7275 Broadway, VA 22815-7275 Dear Mr. Turner: 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. This Agreement supercedes all previous severance agreements between you and the Company or any or its subsidiaries. 1. Agreement to Provide Services; Right to Terminate. (i) Except as otherwise provided in paragraph (ii) below, the Company or you may terminate your employment at any time following a Change in Control as defined herein, subject to the Company's providing the benefits hereinafter specified in accordance with the terms hereof. (ii) In the event a Person (as hereinafter defined) makes an offer which, if accepted by the Company and subsequently consummated, would constitute a Change in Control, you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement, as such terms are hereinafter defined) and will render the services contemplated in the recitals to this Agreement until such Change in Control offer has been abandoned or terminated or a Change in Control has occurred. For the purposes of this Agreement, Retirement shall mean a termination of your employment by you on or after you have reached age sixty-five (65) and have completed at least five (5) years of service for the Company (including any service for a predecessor of the Company where such prior service is recognized by the Company for the purpose of awarding other benefits). For purposes of this Section 1, "years of service" shall be defined as in the WLR Profit Sharing and Salary Savings Plan. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until December 31, 1999; provided, however, that commencing on January 1, 2000 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 2 generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that in no event may the following acquisitions constitute a Change in Control: (a) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (b) any acquisition by the Company, (c) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (d) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (a), (b) and (c) of paragraph (iii) of this Section 3 are satisfied, or (e) any sale or other disposition of all or substantially all of the assets of the Company, if , following such sale or other disposition, the conditions described in (1), (2) and (3) of paragraph (iv) of this Section 3 are satisfied; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least seventy-five percent (75%) of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation, unless, in each case following such reorganization, merger or consolidation, (a) more than sixty percent (60%) of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (b) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or a 3 corporation resulting from such reorganization, merger or consolidation) beneficially owns, directly or indirectly, thirty-nine percent (39%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (c) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (iv) Approval by the shareholders of the Company of (a) a complete liquidation or dissolution of the Company or (b) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which following such sale or other disposition, (1) more than sixty percent (60%) of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation) beneficially owns, directly or indirectly, thirty-nine percent (39%) or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (3) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. (v) Notwithstanding anything in the paragraphs (i) - (iv) of this Section 3 to the contrary, no Change in Control shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in you, or a group of Persons which includes you, acquiring, directly or indirectly, twenty percent (20%) or more of the combined voting power of the Company's Voting Securities. 4 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 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 5 above in clauses (a) or (b) of this paragraph (ii) and specifying the particulars thereof in detail. (iii) Good Reason. Termination by you of your employment for "Good Reason" shall mean termination based on: (A) a determination by you, in your reasonable judgment, that there has been an adverse change in your status or position(s) as an executive officer of the Company as in effect immediately prior to the Change in Control, including, without limitation, any adverse change in your status or position as a result of a diminution in your duties or responsibilities (other than, if applicable, any such change directly attributable to the fact that the Company is no longer publicly owned) or the assignment to you of any duties or responsibilities which are inconsistent with such status or position(s), or any removal of you from, or any failure to reappoint or reelect you to, such positions(s) (except in connection with the termination of your employment for Cause or Disability or as a result of your death or by you other than for Good Reason); (B) a reduction by the Company in your base salary as in effect immediately prior to the Change in Control; (C) the failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the Change in Control of the Company (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the Change in Control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the Change in Control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the Change in Control; (D) the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Company's normal vacation policy as in effect immediately prior to the Change in Control; (E) the Company's requiring you to be based at any office that is greater than thirty (30) miles from where your office is located immediately prior to the Change in Control except for required travel on the Company's business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the Change in Control; 6 (F) the failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 6 hereof; (G) any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (iv) below (and, if applicable, paragraph (ii) above); and for purposes of this Agreement, no such purported termination shall be effective; or (H) any refusal by the Company to continue to allow you to attend to matters or engage in activities not directly related to the business of the Company which, prior to the Change in Control, you were permitted by the Board to attend to or engage in. For purposes of this Agreement, "Plan" shall mean any compensation plan such as the Company Incentive Bonus Plan or any employee benefit plan such as a thrift, pension, profit sharing, medical, disability, accident, life insurance plan or a relocation plan or policy or any other plan, program or policy of the Company intended to benefit employees, except for the Company Restated Long- Term Incentive Plan. (iv) Notice of Termination. Any purported termination by the Company or by you following a Change in Control shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon. (v) Date of Termination. "Date of Termination" following a Change in Control shall mean (a) if your employment is to be terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (b) if your employment is to be terminated by the Company for Cause or by you pursuant to Sections 4(iii)(F) or 6 hereof or for any other Good Reason, the date specified in the Notice of Termination, (c) if your employment is to be terminated by the Company for any reason other than Cause, the date specified in the Notice of Termination, which in no event shall be a date earlier than ninety (90) days after the date on which a Notice of Termination is given, unless an earlier date has been expressly agreed to by you in writing either in advance of, or after, receiving such Notice of Termination, or (d) if your employment is terminated on account of your death, the day after your death. In the case of termination of your employment by the Company for Cause, if you have not previously expressly agreed in writing to the termination, then within thirty (30) days after 7 receipt by you of the Notice of Termination with respect thereto, you may notify the Company that a dispute exists concerning the termination, in which event the Date of Termination shall be the date set either by mutual written agreement of the parties or by such court having the matter before it. During the pendency of any such dispute, the Company will continue to pay you your full compensation in effect just prior to the time the Notice of Termination is given and until the dispute is resolved. However, if such court issues a final and non-appealable order finding that the Company had Cause to terminate you then you must return all compensation paid to you after the Date of Termination specified in the Notice of Termination previously received by you. 5. Compensation Upon Termination or During Disability; Other Agreements. (i) During any period following a Change in Control of the Company that you fail to perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your base salary at the rate then in effect and any benefits or awards under any Plans shall continue to accrue during such period, to the extent not inconsistent with such Plans, until your employment is terminated pursuant to and in accordance with paragraphs 4(iv) - 4(v) hereof. Thereafter, your benefits shall be determined in accordance with the Plans then in effect. (ii) If your employment is terminated for Cause following a Change in Control of the Company, the Company shall pay to you your base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you. Thereupon the Company shall have no further obligations to you under this Agreement. (iii) Subject to Section 8 hereof, if, within thirty-six (36) months after a Change in Control of the Company has occurred, your employment by the Company is terminated other than on account of your death and is terminated (a) by the Company other than for Cause or Disability or (b) by you for Good Reason, then the Company shall pay to you, no later than the fifth (5th) day following the Date of Termination, without regard to any contrary provisions of any Plan, the following: (A) your base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you 8 (including amounts which previously had been deferred at your request); (B) an amount in cash equal to three times the sum of (i) the higher of (a) your annual base salary on the Date of Termination or (b) your annual base salary in effect immediately prior to the Change in Control plus (ii) an amount equal to the average of the bonuses awarded to you in each of the three previous years. For the purposes of this Agreement, the term "base salary" shall include any amounts deducted by the Company with respect to you or for your account pursuant to Sections 125 and 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). (iv) If, within thirty-six (36) months after a Change in Control of the Company has occurred, your employment by the Company is terminated for any reason other than retirement, the Company shall pay to you, on the date specified below, an amount ("Spread") in cash equal to the Termination Fair Market Value (as hereinafter defined) less the exercise price of all options which were granted to you pursuant to the Company's Restated Long-Term Incentive Plan or any Plan succeeding thereto, and which shall not become exercisable prior to (a) the end of the one (1) year period immediately following the Date of Termination if your employment is terminated on account of your death, or (b) the end of the third (3rd) month following the Date of Termination if your employment is terminated for any reason other than death. The Company shall make such payment upon the fifth (5th) day following such Date of Termination. For the purposes of this Agreement, the "Termination Fair Market Value" shall be the higher of (a) the highest price of the Company's stock as quoted on the NASDAQ, or any other exchange complying with the requirements of the Securities and Exchange Act of 1934, as amended, within the period beginning ninety (90) days prior to the Date of Termination and ending upon such Date of Termination, and (b) the highest price of the Company's stock as quoted on the NASDAQ, or any other exchange complying with the requirements of the Securities and Exchange Act of 1934, as amended, within the period beginning ninety (90) days prior to a Change of Control and ending upon the date of a Change of Control. (v) If, within thirty-six (36) months after a Change in Control of the Company has occurred, your employment by the Company is terminated (a) by the Company other than for Cause or Disability, or (b) by you for Good Reason, then the Company shall maintain in full force and effect, for the continued benefit of you and your dependents for a period terminating on the earliest of (a) three (3) years after the Date of Termination or (b) the commencement date of equivalent 9 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. (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 10 of (a) the Total Payments and (b) an amount equal to the product of any deductions disallowed because of the inclusion of the Gross-up Payment in your adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made. For purposes of determining whether any of the Agreement Payments will be subject to the Excise Tax and the amount of such Excise Tax, (a) any other payments or benefits received or to be received by you in connection with a Change in Control of the Company or your termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control of the Company or any person affiliated with the Company or such person) (which, together with the Agreement Payments, shall constitute the "Total Payments") shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax; (b) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Total Payments or (2) the amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (a), above); and (c) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-up Payment, you shall be deemed to (a) pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made, (b) pay the applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes (determined without regard to limitations on deductions based upon the amount of your adjusted gross income), and (c) have otherwise allowable deductions for federal income tax purposes at least equal to those disallowed because of the inclusion of the Gross-up Payment in your adjusted gross income. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account 11 hereunder at the time the Gross-up Payment is made, you shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal state and local income tax imposed on the portion of the Gross-up Payment being repaid by you if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest payable with respect to such excess at the rate provided in Section 1274(b)(2)(B) of the Code) at the time that the amount of such excess is finally determined. (viii) The Gross-up Payment or portion thereof provided for in paragraph (vii) above shall be paid not later than the thirtieth (30th) day following payment of any amounts under paragraphs (iii) and (iv) of Section 5; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than the forty-fifth (45th) day after payment of any amounts under paragraphs (iii) and (iv) of Section 5. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you, payable on the fifth (5th) day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 6. Successors; Binding Agreement. (i) The Company will seek, by written request at least five (5) business days prior to the time a Person becomes a Successor (as hereinafter defined), to have such Person, by agreement in form and substance satisfactory to you, assent to the fulfillment of the Company's obligations under this Agreement. Failure of such Person to furnish such assent by the later of (a) three (3) business days prior to the time such Person becomes a Successor or (b) two (2) business days after such Person receives a written request to so assent shall constitute Good Reason for termination by you of your employment if a 12 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 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 13 required withholding of federal, state and local income and employment taxes. 9. Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 12 and 14 of this Agreement shall survive termination of this Agreement. 10. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employee, to the address set forth below his signature, provided that all notices to the Company shall be directed to the attention of the Chairman of the Board or President of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the Chairman of the Board or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 12. Governing Law and Venue. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Virginia. Venue for any proceeding related to the performance or interpretation of this Agreement, or in any way arising out of this Agreement, shall be either the Circuit Court of Rockingham County, Virginia, or the United States District Court for the Western District of Virginia, Harrisonburg Division. 13. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Employee's Commitment. You agree that subsequent to your period of employment with the Company, you will not at any time 14 communicate or disclose to any unauthorized person, without the written consent of the Company, any proprietary processes of the Company or other confidential information concerning its business, affairs, products, suppliers or customers which, if disclosed, would have a material adverse effect upon the business or operations of the Company, taken as a whole; it being understood, however, that the obligations under this Section 14 shall not apply to the extent that the aforesaid matters (a) are disclosed in circumstances where you are legally required to do so or (b) become generally known to, and available for use by, the public otherwise than by your wrongful act or omission. 15. Related Agreements. To the extent that any provision of any other agreement between the Company and you shall limit, qualify or be inconsistent with any provision of this Agreement, then for purposes of this Agreement, while the same shall remain in force, the provision of such other agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose. 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 __1st__ day of __June__, 1999 __/John A. Turner__ John A. Turner 15 EX-13.1 7 FINANCIAL HIGHLIGHTS Exhibit 13.1 Financial Highlights from Registrant's Annual Report of Shareholders
WLR Foods, Inc. and Subsidiaries Financial Highlights Dollars in thousands, except per share data July 3, June 27, June 28, June 29, July 1, Fiscal year ended: 1999 1998 1997 1996 1995 OPERATIONS Net sales $888,086 $945,967 $994,591 $978,258 $890,815 Cost of sales 750,942 876,287 948,060 889,904 776,945 ------- ------- ------- ------- ------- Gross profit 137,144 69,680 46,531 88,354 113,870 Selling, general and adminstrative expenses 98,478 91,745 89,657 91,167 84,877 ------- ------- ------- ------- ------- Operating income (loss) 38,666 (22,065) (43,126) (2,813) 28,993 Interest expense 10,931 22,539 12,804 8,922 6,386 Other (income) expense, net (8,214) (106) (1,792) 129 (311) ------- ------- ------- ------- ------- Total other (income) expense, net 2,717 22,433 11,012 9,051 6,075 ------- ------- ------- ------- ------- Earnings (loss) before income taxes and minority interest 35,949 (44,498) (54,138) (11,864) 22,918 Income tax expense (benefit) 13,211 (16,352) (19,577) (4,381) 8,614 Minority interest - 66 47 32 55 ------- ------- ------- ------- ------- Net earnings (loss) from continuing operations 22,738 (28,212) (34,608) (7,515) 14,249 Earnings from discontinued operations, net of tax 664 2,858 2,425 2,829 1,884 Gain on disposal of discontinued operations, net of tax 17,927 - - - - ------- ------- ------- ------- ------- Total earnings from discontinued operations 18,591 2,858 2,425 2,829 1,884 Extraordinary charge on early extinguishment of debt, net of tax (2,559) - - - - Net earnings (loss) 38,770 (25,354) (32,183) (4,686) 16,133 Less preferred stock dividends - - - - - ------- ------- ------- ------- ------- Net earnings (loss) available to common shareholders $38,770 ($25,354)($32,183) ($4,686) $16,133 ======= ======= ======= ======= ======= PER COMMON SHARE Basic earnings (loss), continuing operations $1.35 ($1.72) ($1.99) ($0.42) $0.79 Basic earnings, discontinued operations 1.11 0.17 0.14 0.16 0.10 Basic loss, extraordinary charge (0.15) - - - - ------- ------- ------- ------- ------- Total basic earnings (loss) per common share 2.31 (1.55) (1.85) (0.26) 0.89 Diluted earnings (loss), continuing operations 1.34 (1.72) (1.99) (0.42) 0.79 Diluted earnings, discontinued operations 1.10 0.17 0.14 0.16 0.10 Diluted loss, extraordinary charge (0.15) - - - - ------- ------- ------- ------- ------- Total diluted earnings (loss) per common share $2.29 ($1.55) ($1.85) ($0.26) $0.89 Cash dividends declared - - 0.12 0.24 0.22 Book value(based on actual shares outstanding) 8.70 6.33 7.89 10.00 10.47 Year-end stock price 8.19 7.00 8.50 14.00 14.38 FINANCIAL POSITION AT END OF YEAR Working capital (deficit) $84,016 $118,695 ($31,397) $144,621 $120,562 Property, plant and equipment, net 107,945 153,702 159,426 176,691 174,163 Total assets 289,097 381,742 416,728 451,121 372,525 Long-term debt 48,845 189,225 5,040 138,510 106,481 Common stock subject to repurchase - - 4,438 17,750 17,750 Preferred shareholders' equity - - - - - Common shareholders' $143,935 $103,891 $126,558 $159,010 $163,344 ======= ======= ======= ======= ======= ANALYTICAL & OTHER INFORMATION Current ratio (compared to 1) 1.95 2.40 0.89 2.18 2.67 Total debt/total capitalization 27.2% 65.0% 61.2% 55.1% 44.7% Return on beginning total equity 21.9% NMF NMF NMF 10.3% Capital expenditures $22,072 $22,149 $11,245 $18,771 $17,251 Depreciation expense 19,653 25,901 28,088 28,243 24,817 Amortization expense 2,102 2,420 500 742 598 Interest expense 10,931 22,635 13,143 9,359 6,666 Cash dividends declared: Common stock - - 2,078 4,233 4,073 Preferred stock - - - - - Market capitalization of common stock at year end $135,435 $114,800 $141,075 $247,547 $248,654 ======= ======= ======= ======= ======= 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. For 1999, return on beginning equity is based on net earnings from continuing operations.
WLR Foods, Inc. and Subsidiaries Financial Highlights - Continued Dollars in thousands, except per share data
Fiscal year ended: July 2, July 3, June 27, June 29, June 30, 1994 1993 1992 1991 1990 OPERATIONS Net sales $709,703 $603,634 $503,877 $491,618 $483,219 Cost Of Sales 625,180 529,791 449,785 429,430 410,546 ------- ------- ------- ------- ------- Gross Profit 84,523 73,843 54,092 62,188 72,673 Selling, general and adminstrative expenses 57,373 51,141 44,794 46,733 45,465 -------- ------- ------- ------- ------- Operating income (loss) 27,150 22,702 9,298 15,455 27,208 Interest expense 4,816 3,660 2,523 619 505 Other (income) expense, net (342) (494) (142) (347) (651) ------- ------- ------- ------- ------- Total other (income) expense, net 4,474 3,166 2,381 272 (146) ------- ------- ------- ------- ------- Earnings (loss) before income taxes and minority interest 22,676 19,536 6,917 15,183 27,354 Income tax expense (benefit) 8,446 6,850 2,587 5,741 10,546 Minority interest 38 43 25 33 34 ------- ------- ------- ------- ------- Net earnings (loss) from continuing operations 14,192 12,643 4,305 9,409 16,774 Earnings from discontinued operations, net of tax 2,359 1,964 1,591 1,272 621 Gain on disposal of discontinued operations, net of tax - - - - - ------- ------- ------- ------- ------- Total earnings from discontinued operations 2,359 1,964 1,591 1,272 621 Extraordinary charge on early extinguishment of debt, net of tax - - - - - Net earnings (loss) 16,551 14,607 5,896 10,681 17,395 Less preferred stock dividends - 1,389 982 - - ------- ------- ------- ------- ------- Net earnings (loss) available to common shareholders $16,551 $13,218 $4,914 $10,681 $17,395 ======= ======= ======= ======= ======= PER COMMON SHARE Basic earnings (loss), continuing operations $0.85 $0.79 $0.23 $0.59 $1.06 Basic earnings, discontinued operations 0.14 0.14 0.11 0.08 0.04 Basic loss, extraordinary charge - - - - - ------- ------- ------- ------- ------- Total basic earnings (loss) per common share 0.99 0.93 0.34 0.67 1.10 Diluted earnings (loss), continuing operations 0.85 0.78 0.23 0.59 1.05 Diluted earnings, discontinued operations 0.14 0.14 0.11 0.08 0.04 Diluted loss, extraordinary charge - - - - - ------- ------- ------- ------- ------- Total diluted earnings (loss) per common share $0.99 $0.92 $0.34 $0.67 $1.09 Cash dividends declared 0.21 0.21 0.21 0.21 0.19 Book value(based on actual shares outstanding) 9.45 8.66 6.44 7.33 6.86 Year-end stock price 17.00 11.33 9.67 12.00 12.33 FINANCIAL POSITION AT END OF YEAR Working capital (deficit) $69,989 $57,509 $40,337 $49,532 $46,039 Property, plant and equipment, net 139,854 140,540 113,017 88,807 71,414 Total assets 283,051 265,626 207,736 175,329 157,763 Long-term debt 46,368 52,253 38,148 18,678 6,402 Common stock subject to repurchase - - - - - Preferred shareholders' equity - - 29,507 - - Common shareholders' equity $156,157 $142,255 $81,881 $115,625 $108,258 ======= ======= ======= ======= ======= ANALYTICAL & OTHER INFORMATION Current ratio (compared to 1) 2.02 1.92 1.80 2.42 2.20 Total debt/total capitalization 28.4% 33.5% 32.0% 16.1% 8.5% Return on beginning total equity 11.6% 13.1% 5.1% 9.9% 19.0% Capital expenditures $19,186 $31,766 $36,107 $29,471 $20,360 Depreciation expense 21,333 18,115 14,041 11,544 9,932 Amortization expense 520 445 168 - - Interest expense 4,989 3,816 2,755 928 925 Cash dividends declared: Common stock 3,513 3,124 2,854 3,314 2,948 Preferred stock - 1,389 982 - - Market capitalization of common stock at year end $280,738 $186,168 $122,942 $189,378 $194,638 ======= ======= ======= ======= ======= 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. For 1999, return on beginning equity is based on net earnings from continuing operations.
EX-13.2 8 MANAGEMENT'S DISCUSSION AND ANALYSIS Exhibit 13.2 Management's Discussion and Analysis of Financial Condition and Results of operations GENERAL WLR Foods, Inc. (WLR Foods or the Company) is a fully integrated processor of chicken and turkey products, controlling all aspects of production from the hatching of eggs, live bird grow-out, processing, sales, and distribution. Consistent with other poultry processors, the Company is subject to fluctuations in commodity prices for chicken and turkey products, as well as for corn and soybean meal, the primary grain ingredients in the feed for its birds. Turkey segment pricing increased approximately 2.0% in fiscal 1999 when compared to fiscal 1998, responding to decreased production during calendar year 1998. Fiscal 1998 pricing was very unfavorable, coming in at 3.4% below the already low levels of fiscal 1997. Chicken segment pricing for fiscal 1999 was approximately 1.6% below the levels seen in fiscal 1998. During the early months of fiscal 1999, chicken supplies were limited and resulted in extremely favorable breast meat pricing. Supplies increased during the year, resulting in declining breast meat prices. Dark meat prices were depressed for the majority of the year as weaknesses in the export markets, particularly Russia, suppressed demand. Grain prices continued their improvement from the extremely high levels seen in the three prior fiscal years, with the 1999 average delivered price for corn and soybean meal declining 16% and 34%, respectively, over fiscal 1998, saving the company approximately $50 million in feed costs. This improvement was a continuation of the correction in grain pricing that began during the latter half of fiscal 1998, which resulted in 1998 average delivered pricing for corn and soybean meal declining 19% and 15%, respectively, over the fiscal 1997 levels. These price improvements were a relief from the high grain costs incurred during the latter half of fiscal 1996, all of fiscal 1997 and the first half of fiscal 1998. The prices reached in those years were the highest levels for corn in the last 30 years, and for soybean meal, the costs were the highest seen in the last 10 years. ORGANIZATIONAL CHANGES During fiscal 1999, WLR Foods, Inc. completed several significant organizational changes to align its operations for future competitiveness in the poultry industry. The conversion of the Marshville, North Carolina complex from turkey to chicken processing was completed during the first quarter. The goal of the conversion was to reduce the Company's excess supply of commodity turkey and to improve utilization of the Marshville facility. This process began during the latter part of fiscal 1998, but the conversion of the processing plant, the most significant aspect of the conversion process, did not occur until the first fiscal quarter of 1999. The plant reached full capacity in the third quarter of the fiscal year and improvements in operating performance at the plant have been significant. As expected, the plant was not profitable during the conversion and start-up phase, but progress has met or exceeded management's expectations, with the plant reporting a modest profit in June 1999. In July 1998, the Company sold its Cassco Ice & Cold Storage, Inc. subsidiary to concentrate on its core poultry business. The net proceeds from the sale were used to reduce long-term debt by approximately $55 million. As a result of the increased chicken capacity from the Marshville conversion, the Company sold its Goldsboro, North Carolina chicken complex in August 1998, resulting in net proceeds of approximately $38 million, which were used to reduce long term debt. In addition to the benefits of the reduced debt, the Marshville complex provides more economical expansion alternatives for the Company than were available at the Goldsboro complex. The Company closed its direct store distribution business in Pennsylvania during the first quarter of fiscal 1999. The Company's sales declined approximately $40 million during fiscal 1999 as a result of this decision, which eliminated the distribution of competing meats that were not produced by the Company. The Company estimates that the gross profits from the distribution business were not fully covering the expenses of the operations. Additionally, the closure of the business resulted in excess space available at the Franconia plant for the consolidation of all further processing operations to Pennsylvania. During the third quarter of the year, the Company transferred all further processing capabilities from its Monroe, North Carolina plant to the Franconia, Pennsylvania plant to increase cost effectiveness. The Monroe facility was sold during the fourth quarter of the year for approximately $4.3 million, with $0.6 million of the consideration in cash and the balance in a secured note from the purchasers. 2 RESULTS OF OPERATIONS The Company's results are reported on a consolidated basis. Portions of the following discussions of operating results pertain to the chicken and turkey segments, which account for over 98% of the Company's revenues. Any revenues and expenses not included in the chicken and turkey segments are reported in the Company's other segment for purposes of segment reporting. Fiscal 1999 Compared to Fiscal 1998: Net sales from continuing operations were $888.1 million, a decrease of $57.9 million, or 6.1% from fiscal 1998. The decrease is from decreases in turkey segment and other segment sales of $118.6 million and $3.3 million, respectively, offset by an increase in chicken segment sales of $64.0 million. The turkey segment net sales decline of $118.6 million, or 21.7%, to $427.6 million for fiscal 1999 is the result of the discontinuation of the distribution business, which reduced sales approximately $40 million, a decrease in outside feed sales of approximately $24 million at the Marshville plant, which was converted to chicken processing, with the balance primarily from reduced volumes in turkey production. Poultry products, primarily turkey, are the largest component of turkey segment revenues. Poultry product sales in the turkey segment decreased 10.9%, or $51.5 million, to $422.4 million in fiscal 1999. The 10.9% decrease is a result of decreased volumes of 12.9%, primarily the result of planned cutbacks at the Marshville facility, offset by increased prices of approximately 2.0%. In the chicken segment, the increase in net sales of $64.0 million, or 16.5%, to $452.5 million in fiscal 1999 is due to increased poultry product sales of approximately $54 million and increased outside feed sales of approximately $11 million. The $54 million increase, or 14.0%, in net sales of poultry products, primarily chicken, resulted in fiscal 1999 poultry product sales of $437.6 million. The 14% increase was the result of a volume increase of 15.6%, offset by a 1.6% decrease in pricing. Cost of sales on continuing operations was $750.9 million, a decrease of $125.4 million, or 14.3% from fiscal 1998. Cost of sales in the turkey segment decreased 30.8%, or $161.7 million, to $363.9 million in fiscal 1999. This decrease is primarily the result of planned decreases in production and sales volumes in turkey products, coupled with the closing of the distribution business. Lower costs of corn and soybean meal also lowered costs by approximately $20 million, as the average delivered cost of corn and soybean meal declined approximately 16% and 34%, respectively, over the prior year. In the chicken segment, cost of sales increased 12.3%, or $41.9 million, to $383.1 million in fiscal 1999. This increase is primarily 3 attributable to increased poultry pounds sold and additional outside feed sales, partially offset by lower costs of corn and soybean meal, which reduced cost of sales in the chicken segment approximately $30 million. Gross profits on continuing operations were $137.1 million, an increase of $67.5 million, or 96.8% from fiscal 1998. Lower grain costs for corn and soybean meal contributed approximately $50 million of the improvement. Improved performance in live bird growout, exclusive of grain costs, in both turkey and chicken increased gross profits by over $10 million during the year. The net effect of product pricing was an improvement of $3.5 million for the year, with higher turkey pricing of $9.6 million more than offsetting lower chicken prices of $6.1 million. Selling, general and administrative expenses on continuing operations for fiscal 1999 were $98.5 million, an increase of $6.7 million, or 7.3%. The increase includes two one-time charges: a non- cash charge of $1.5 million in the first quarter for assets, primarily at the Monroe facility, that could not be utilized in the company s turkey operations, and $0.6 million for one time deferred compensation accruals. Additionally, employee incentives based upon profitability resulted in an additional $2.0 million in expense during the year. There were no employee incentives in the prior year. Interest expense from continuing operations was $10.9 million for fiscal 1999, a decrease of $11.6 million when compared to fiscal 1998. The decrease is the result of substantially lower debt levels and lower interest rates resulting from a new credit facility entered into in November 1998. The gain on the sale of the Goldsboro complex resulted from the Company's sale, on August 14, 1998, of its Goldsboro, North Carolina chicken processing plant, feed mill and hatchery for approximately $38 million in net proceeds, which was used to reduce long term debt. The pre-tax gain on the sale was approximately $8 million. The effective tax rate for continuing operations was 36.7% for both fiscal 1999 and 1998. Net earnings from continuing operations were $22.7 million (or $1.34 per diluted share) for fiscal 1999, an increase of $50.9 million, as compared to the net loss of $28.2 million (or $1.72 per diluted share) for fiscal 1998. Turkey and chicken segment net income improved $33.1 million and $16.1 million, respectively. 4 On July 31, 1998, the Company sold its Cassco Ice & Cold Storage, Inc. subsidiary for approximately $55 million in net proceeds. The net proceeds from the sale were used to reduce long-term debt. The after-tax Cassco income from discontinued operations was $0.7 million in fiscal 1999 compared to $2.9 million for fiscal 1998. During the first quarter of fiscal 1999, the Company recorded a $15.5 million after-tax gain on the sale. Additional consideration was received in the third and fourth quarters of fiscal 1999. The final after-tax gain for the Cassco sale is $17.9 million. During fiscal 1999, the Company recorded extraordinary after-tax charges of $2.6 million for the early extinguishment of debt, with $1.6 million of the charge in the first quarter and $1.0 million in the second quarter of the year. In the first quarter, the permanent reduction in long-term debt resulting from the sale of the Cassco subsidiary and the Goldsboro complex resulted in an extraordinary after-tax charge of $1.6 million to write off capitalized debt costs. In conjunction with the November 20, 1998 debt refinancing, the Company recorded an extraordinary after-tax charge of $1.0 million to write off the remaining capitalized debt costs pertaining to the refinanced credit facility during the second quarter. Net earnings for fiscal 1999 were $38.8 million, or $2.29 per diluted share, and included: after-tax income of $0.7 million, or $0.04 per diluted share from the Company's Cassco Ice & Cold Storage subsidiary; an after-tax gain of $17.9 million or $1.06 per diluted share on the sale of Cassco; and an after-tax, non-cash write-off totaling $2.6 million, or $0.15 per diluted share, on the early extinguishment of debt. The net loss for fiscal 1998 was $25.4 million, or $1.55 per diluted share, and included after-tax income of $2.9 million, or $0.17 per diluted share, from the Cassco subsidiary. Fiscal 1998 Compared to Fiscal 1997: Net sales from continuing operations were $946.0 million in fiscal 1998, a decrease of $48.6 million, or 4.9% from fiscal 1997. The decrease was from reduced turkey segment and other segment sales of $54.3 million and $5.1 million, respectively, partially offset by an increase in chicken segment sales of $10.8 million. The turkey segment net sales decline of $54.3 million, or 9.0%, to $546.3 million in net sales for fiscal 1998 is the result of decreased outside feed sales of approximately $6 million, lower poultry sales pricing of approximately $17 million, with the balance primarily from reduced poultry product sales. Poultry products, 5 primarily turkey, are the largest component of turkey segment revenues. Poultry product sales in the turkey segment decreased 5.4%, or $27.1 million, to $473.9 million in fiscal 1998. The 5.4% decrease is a result of decreased volumes and prices of 2.0% and 3.4%, respectively. In the chicken segment, the increase in net sales of $10.8 million, or 2.9%, to $388.6 million in fiscal 1998 was due to increased poultry product sales of approximately $10 million and increased outside feed sales of approximately $1 million. The $10 million increase, or 2.6%, in net sales of poultry products, primarily chicken, resulted in fiscal 1998 poultry product sales of $383.7 million. The 2.6% increase was the result of a volume increase of 4.8%, offset partially by a 2.2% decrease in pricing. Cost of sales on continuing operations was $876.3 million, a decrease of $71.8 million, or 7.6% from fiscal 1997. Cost of sales in the turkey segment decreased $62.6 million, or 10.6%, to $525.6 million in fiscal 1998. The decrease was attributable to lower turkey volumes and a $21 million improvement in grain costs, as the average delivered cost of corn and soybean meal declined approximately 19% and 15%, respectively, over the prior year. In the chicken segment, cost of sales decreased $5.9 million, or 1.7%, to $341.2 million in fiscal 1998 as a $33 million improvement in the costs of corn and soybean meal was offset by increases in production volumes. Gross profits on continuing operations for fiscal 1998 were $69.7 million, an increase of $23.1 million, or 49.7%, from fiscal 1997. This increase was primarily the result of improved grain costs for corn and soybean meal of $54 million, offset by lower poultry product pricing of $25 million. The lower pricing is a combination of $17 million and $8 million from the turkey and chicken segments, respectively. Selling, general and administrative expenses on continuing operations for fiscal 1998 were $91.7 million, an increase of $2.1 million, or 2.3%, when compared to fiscal 1997. This increase was primarily the result of one-time costs for debt restructuring 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 $9.7 million increase was attributable to higher borrowings and higher interest rates. The effective tax benefit rate for continuing operations in fiscal 1998 was 36.7% versus 36.2% in fiscal 1997. Net loss for fiscal 1998 on continuing operations was $28.2 million (or $1.72 per diluted share), a decrease of $6.4 million as compared to the net loss of $34.6 million (or $1.99 per diluted share) for fiscal 1997. The turkey segment net loss from continuing operations increased $1.3 million in fiscal 1998 to $36.2 million, 6 while the chicken segment had an improvement in income from continuing operations of $7.4 million, from a net loss of $1.3 million in 1997 to a net income of $6.1 million in 1998. FINANCIAL CONDITION AND LIQUIDITY 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 improvements, equipment and facilities, repay indebtedness, pay cash dividends to shareholders, repurchase shares of common stock and make acquisitions. On July 3, 1999, the Company had net working capital of $84.0 million, compared to net working capital of $118.7 million on June 27, 1998. Accounts receivable and total inventory on July 3, 1999 were $13.4 million and $21.4 million lower, respectively, when compared to the end of fiscal year 1998. Live and processed inventories decreased $10.7 million and $7.3 million, respectively. The decrease in live inventory was primarily due to the reduction in the number of turkeys grown and lower feed costs, while the processed inventories decreased primarily due to decreased turkey production. Operating activities generated cash of $71.1 million in fiscal 1999, $30.1 million in fiscal 1998, and $10.3 million in fiscal 1997. The increase in cash generated in fiscal 1999 as compared to fiscal 1998 resulted primarily from increased earnings, but was partially offset by lower decreases of inventories. 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. Capital expenditures were $22.1 million in fiscal 1999 and operating lease payments totaled $2.3 million. Capital expenditures in fiscal 1998 totaled $22.1 million and operating lease payments totaled $3.0 million. Capital expenditures in fiscal years 1999 and 1998 were generally for normal replacements and upgrades of existing assets, except for $9.7 million in fiscal 1999 and $3.4 million in fiscal 1998 for expenditures to convert the Marshville turkey complex to chicken processing. The Company expects capital expenditures in fiscal 2000 to range from $17 to $20 million to cover normal replacement and upgrades of existing facilities. Total debt to total capital at July 3, 1999 was 27.2%, a significant decrease from 65.0% at June 27, 1998. Debt levels were reduced substantially during fiscal 1999, from $192.7 million at 7 fiscal 1998 year-end to $53.9 million on July 3, 1999. The decrease of $138.8 million is the result of approximately $93 million from the sales of the Cassco Ice & Cold Storage, Inc. division and the Goldsboro complex, with the remaining $45.8 million primarily the result of cash flow from continuing operations. YEAR 2000 MATTERS The Company began addressing Year 2000 issues in 1995 and elected to replace its multiple financial and order management systems with one set of integrated software from Oracle Corporation. An upgrade to a newer release of the Oracle software that supports the Year 2000 was completed in March 1999. The Company has assessed all personal computers and communication networks and believes there are no significant Year 2000 problems in these areas. A review of operational systems, including processing plants, feed mills, warehouses and hatcheries has been performed. This review has resulted in a plan for minor upgrades or replacements of equipment. At the present time, management is not aware of any significant operational problems resulting from Year 2000 related equipment. To ensure that WLR Foods' business with its vendors and customers will continue without interruption in the new millennium, the Company began assessing vendor and customer Year 2000 readiness by written questionnaires in November of 1998. Questionnaires were sent to customers comprising a majority of sales revenues and to all significant vendors. Presently, the Company has no reason to believe that such parties will not be Year 2000 compliant, but the Company has not yet completed its inquiry and, even where it has, the Company is not normally in a position to test or challenge the information provided by such third parties. If the responses of such parties are not satisfactory, the Company will consider new business relationships with alternate parties to the extent alternatives are available. The Company believes that its most significant exposure related to the Year 2000 issue is from reliance upon third parties for transportation services to deliver feed grains and for utilities such as electricity, natural gas and water that are necessary for operating the Company's plants. The Company's supply of feed grain on hand does not usually exceed that used in a matter of days. Shipping routes normally involve, at one or more points, rail transportation for which alternate suppliers are not readily available. Similarly, there are no effective alternative suppliers of utilities. Disruption of more than a few days in these transportation and utilities services used by 8 the Company would begin to have a material adverse effect that would increase as any such disruption continued. While the Company has no information that causes it to expect a prolonged disruption that would have a material adverse effect, the Company does not believe it can develop adequate contingency plans for any prolonged disruption. The Company considers disruptions of this nature to be its worst case Year 2000 scenario, but the Company cannot predict the likelihood of such disruptions or, if they occur, the duration. The Company is developing contingency plans, where practical, to help mitigate the effects of potential Year 2000 problems. Those plans include increasing supplies of feed grains and ingredients, preparing for manual, instead of electronic, operating procedures and the appointment of adequate personnel to test systems and address problems that might arise on January 1, 2000. The Company routinely receives inquiries from its suppliers and customers as to the Company's state of readiness for the Year 2000, just as the Company seeks such information from others. The Company believes that its own systems will be ready, however, there is no assurance that the systems of third parties upon which the Company relies will be converted on a timely basis. The Company cannot verify all of the information it has gathered or will gather, and cannot compel third parties to respond at all. Additionally, the Company can not predict the extent to which its financial condition and operations would be adversely affected if third persons are not ready for the Year 2000 on a timely basis. The Company has a committee that meets regularly to discuss progress and issues pertaining to the Year 2000 and reports, on a regular basis, to the Board of Directors. In light of recent computer upgrades, the Company's costs related to Year 2000 compliance are immaterial. ACCOUNTING MATTERS The Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities in June 1998. The statement establishes accounting and reporting standards for derivative instruments and hedging activities and requires, among other things, that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company does not believe the adoption of this statement; which is required to be adopted by the Company in fiscal 2001, will have a significant impact on the consolidated financial statements. 9 EX-13.3 9 CONSOLIDATED FINANCIAL STATEMENTS 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 July 3, 1999, June 27, 1998 and June 28, 1997 1999 1998 1997 - -------------------------------- ---- ---- ---- Net sales (Note 10) $888,086 $945,967 $994,591 Cost of sales (Note 10) 750,942 876,287 948,060 ------- ------- ------- Gross profit 137,144 69,680 46,531 Selling, general and administrative expenses 98,478 91,745 89,657 ------- ------- ------- Operating income (loss) 38,666 (22,065) (43,126) Other (income) expense: Interest expense (Note 4) 10,931 22,539 12,804 Gain on sale of Goldsboro complex (Note 13) (7,699) - - Other income, net (515) (106) (1,792) ------ ------ ------ Other expense, net 2,717 22,433 11,012 ------- ------- ------- Earnings (loss) before income taxes and minority interest 35,949 (44,498) (54,138) Income tax expense (benefit) (Note 6) 13,211 (16,352) (19,577) Minority interest in net earnings of consolidated subsidiary - 66 47 ------- ------- ------- Net earnings (loss) from continuing operations $22,738 ($28,212) ($34,608) Earnings from discontinued operations, net of tax (Note 12) 664 2,858 2,425 Gain on disposal of discontinued operations, net of tax (Note 12) 17,927 - - ------- ------- ------- Total earnings from discontinued operations 18,591 2,858 2,425 Extraordinary charge on early extinguishment of debt, net of tax (Note 4) (2,559) - - ------- ------- ------- Net earnings (loss) $38,770 ($25,354) ($32,183) ======= ======= ======= Basic net earnings (loss) per common share, continuing operations $1.35 ($1.72) ($1.99) Basic earnings per common share, discontinued operations 1.11 0.17 0.14 Basic loss per common share, extinguishment of debt (0.15) - - ------- ------- ------- Total basic earnings (loss) per common share $2.31 ($1.55) ($1.85) ======= ======= ======= Diluted net earnings (loss) per common share, continuing operations $1.34 ($1.72) ($1.99) Diluted earnings per common share, discontinued operations 1.10 0.17 0.14 Diluted loss per common share, extinguishment of debt (0.15) - - ------- ------- ------- Total diluted earnings (loss) per common share $2.29 ($1.55) ($1.85) ======= ======= ======= See accompanying Notes to Consolidated Financial Statements.
2 WLR Foods, Inc. and Subsidiaries
Consolidated Balance Sheets Dollars in thousands, July 3, 1999 and June 27, 1998 1999 1998 - ------------------------------ ---- ---- Assets Current Assets Cash and cash equivalents $210 $335 Accounts receivable, less allowance for doubtful accounts of $1,909 and $1,515 59,026 72,457 Inventories (Note 2) 106,679 128,031 Income taxes receivable 355 1,002 Other current assets 6,427 1,870 ------- ------- Total current assets 172,697 203,695 Property, plant and equipment, net (Note 3) 107,945 153,702 Deferred income taxes (Note 6 3,009 18,247 Other assets 5,446 6,098 ------- ------- Total Assets $289,097 $381,742 ======= ======= Liabilities and Shareholders' Equity Current Liabilities Current maturities of long-term debt (Note 4) $5,046 $3,452 Excess checks over bank balances 13,912 9,925 Trade accounts payable 26,500 28,742 Accrued payroll and related benefits 24,729 20,026 Other accrued expenses 8,677 12,219 Deferred income taxes (Note 6) 9,817 10,636 ------- ------- Total current liabilities 88,681 85,000 Long-term debt, excluding current maturities (Note 4) 48,845 189,225 Other liabilities 7,636 3,626 Commitments and other matters (Notes 9 and 14) Shareholders' equity (Notes 7 and 8) 3 Common stock, no par value (authorized 100,000,000 shares, issued and outstanding 16,541,691 and 16,399,511 shares) 69,125 67,851 Additional paid-in capital 2,974 2,974 Retained earnings 71,836 33,066 ------- ------- Total shareholders' equity 143,935 103,891 ------- ------- Total Liabilities and Shareholders' Equity $289,097 $381,742 ======= ======= See accompanying Notes to Consolidated Financial Statements.
4 WLR Foods, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity Dollars in thousands, except per share data Fiscal years ended Additional July 3, 1999, June 27, 1998 Common Stock Paid-In Retained and June 28, 1997 Shares Amount Capital Earnings Total - --------------------------- ------ ------ ------- -------- ----- 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 (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 (446) (23) - - (23) ------- ------- ------- ------- ------- Balance at June 27, 1998 16,400 67,851 2,974 33,066 103,891 Net earnings - - - 38,770 38,770 Common stock repurchased (17) (152) - - (152) Other common stock issued 159 1,426 - - 1,426 ------- ------- ------- ------- ------- Balance at July 3, 1999 $16,542 $69,125 $2,974 $71,836 $143,935 ======= ======= ======= ======= ======= See accompanying Notes to Consolidated Financial Statements.
5 WLR Foods, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Dollars in thousands Fiscal years ended July 3, 1999, June 27, 1998 and June 28, 1997 1999 1998 1997 - -------------------------------- ---- ---- ---- Cash Flows from Operating Activities: Net earnings (loss) $38,770 ($25,354) ($32,183) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Extraordinary loss on early extinguishment of debt 2,559 - - Depreciation and amortization 21,755 28,321 28,088 Loss on sales of property, plant and equipment 1,159 916 772 Gain on sale of Goldsboro complex (7,699) - - Gain on sale of discontinued operation (28,187) - - Deferred income taxes 14,419 (14,974) (14,060) Other, net 107 (592) 326 Change in operating assets and liabilities net of acquired businesses: Decrease in accounts receivable 8,355 5 7,470 Decrease in inventories 12,234 37,520 6,395 Increase) decrease in other current assets (598) 3,996 8,209 (Increase) decrease in long-term assets (170) 815 (677) Increase (decrease) in accounts payable (655) (6,263) 3,016 Increase in accrued expenses and other 9,042 5,675 2,917 ------- ------- ------- Net cash provided by operating activities 71,091 30,065 10,273 Cash Flows from Investing Activities: Additions to property, plant and equipment (22,072) (22,149) (11,245) Acquisition of businesses - (650) (200) Proceeds from sale of Goldsboro complex 37,582 - - Proceeds from sale of discontinued operation 55,068 - - 6 Proceeds from sales of property, plant and equipment 1,245 1,706 424 ------- ------- ------- Net cash provided by (used in) investing activities 71,823 (21,093) (11,021) Cash flows from Financing Activities: Proceeds from issuance of revolver and long-term debt 634,724 41,485 74,031 Payments on revolver and long-term debt (780,482) (35,234) (29,093) Financing costs paid (1,969) (5,401) - Notes payable to banks - (4,031) (26,745) Issuance of common stock 701 892 1,235 Repurchase of common stock - (4,438) (13,312) Increase (decrease) in excess checks over bank balances 3,987 (2,193) (2,670) Dividends paid - - (3,139) ------- ------- ------- Net cash provided by (used in) financing activities (143,039) (8,920) 307 Increase (decrease) in cash and cash equivalents (125) 52 (441) Cash and cash equivalents at beginning of fiscal year 335 283 724 ------- ------- ------- Cash and cash equivalents at end of fiscal year $210 $335 $283 ======= ======= ======= 7 Supplemental cash flow information: Cash paid (received) for: Interest $13,366 $15,365 $12,297 Income taxes 6,204 (3,139) (10,608) ======= ======= =======
Non-cash financing activities: In fiscal 1999: The Company recorded 142,384 stock warrants at a value of $904,136 which related to the February 1998 debt refinancing. The Company had 28,180 stock warrants expire at a value of $178,943 when a portion of the February 1998 debt was repaid in the first quarter. The Company incurred an extraordinary charge on early extinguishment of debt in the amount of $4.1 million. The Company recorded a note receivable in the amount of $3,750,000 for the sale of its Monroe division, due in fiscal year 2000. In fiscal 1998: The Company issued 102,296 shares as a stock 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. In fiscal 1997: The Company issued 85,519 shares of stock in lieu of a cash dividend in the fourth quarter. See accompanying Notes to Consolidated Financial Statements. 8 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 1999, 1998 and 1997 ended on July 3, June 27 and June 28, respectively, and included 53 weeks in fiscal year 1999 and 52 weeks in fiscal years 1998 and 1997. 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 9 eggs produced over the egg production cycle of the breeders. The Company has four methods of purchasing grain: cash purchasing, forward purchasing, 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 and improvements; 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 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 2 and 4), the carrying amounts of all financial instruments approximate their fair values due to their short maturities. 10 Stock-Based Compensation The Company accounts for employee stock compensation plans in accordance with 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 and provides the pro-forma disclosures of SFAS No. 123. 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. Inventories A summary of inventories at July 3, 1999 and June 27, 1998 follows: Dollars in thousands 1999 1998 - -------------------- ---- ---- Live poultry and breeder flocks $48,275 $58,947 Processed poultry and meat products 31,510 38,837 Packaging supplies, parts and other 12,859 15,879 Feed, grain and eggs 14,035 14,368 ------ ------ Total inventories $106,679 $128,031 ======= ======= The notional amount of grain futures contracts at July 3, 1999 and June 27, 1998 was $22.2 million and $2.9 million, respectively. The fair value of all derivative instruments used in hedging at July 3, 1999 and June 27, 1998 was $19.6 million and $2.9 million, respectively. 3. Property, Plant and Equipment WLR Foods' investment in property, plant and equipment at July 3, 1999 and June 27, 1998 was as follows: 11 Dollars in thousands 1999 1998 - -------------------- ---- ---- Land and improvements $18,198 $22,133 Buildings and improvements 97,670 123,620 Machinery and equipment 156,281 186,528 Transportation equipment 22,020 27,424 Construction in progress 2,382 5,054 ------- ------- 296,551 364,759 Less accumulated depreciation 188,606 211,057 ------- ------- Property, plant and equipment, net $107,945 $153,702 ======= ======= 4. Long-Term Debt and Bank Revolving Credits Long-term debt and other credit facilities at July 3, 1999 and June 27, 1998 consisted of the following obligations: Dollars in thousands 1999 1998 - -------------------- ---- ---- Variable Rate Notes: Secured Bank Term Note due 2001 $49,000 $0 Secured Bank Term Note due 2000 - 110,000 Senior Secured Notes - 42,040 Revolving Credit Notes: Secured Bank Revolving Credit Note due 2001 3,753 - Secured Bank Revolving Credit Note due 2000 - 40,825 Unamortized debt discount - (5,003) Other Notes: Notes with various terms and rates 1,138 4,815 ------ ------- Total debt 53,891 192,677 Less current maturities of long- term debt 5,046 3,452 ------ ------- Long-term debt and revolving debt, excluding current maturities $48,845 $189,225 ====== ======= The Company refinanced its Secured Term Notes and Secured Revolving Credit Notes due 2000 as of November 20, 1998. The new facility is a three-year financing agreement that provides a total borrowing capacity of $150 million. The Agreement includes a $50 million term loan and $100 million revolving credit facility. Both 12 facilities have a maturity date of November 20, 2001 and are secured by virtually all of the Company's assets. The carrying value of all debt approximates fair value at July 3, 1999, based on quoted market prices for similar issues. At July 3, 1999, borrowings on the term loan, which had $49 million outstanding, were based on a LIBOR rate of 5.14% plus the applicable margin of 140 basis points for a total rate of 6.54%. Revolving credit borrowings totaled $3.8 million as of July 3, 1999, with $3.0 million tied to a LIBOR rate of 5.14% plus the 140 basis point applicable margin for a total rate of 6.54%. The remaining $0.8 million in revolving credit borrowings was based on the prime rate of 8.00%. At the end of each quarter, the applicable margin is adjusted based upon certain Company performance metrics. As of July 3, 1999 the applicable margin was at its lowest possible point. Principal payments of $1.0 to $1.5 million are required at the end of each fiscal quarter beginning with the fourth quarter of fiscal 1999 for the Term Loan portion of the credit facility. Additionally, principal payments are required on the proceeds of asset sales in excess of $1.0 million annually and for substantial new issuances of common stock. During the first quarter ended September 26, 1998, the Company recorded an extraordinary charge of $2.6 million ($1.6 million after tax) for the early extinguishment of debt resulting from the permanent reduction of its prior credit facility due to the sale of its Cassco Ice & Cold Storage, Inc. subsidiary and its Goldsboro, North Carolina chicken complex. The Company recorded an extraordinary non-cash charge to write off the remaining unamortized debt issue costs of the prior credit facility during the quarter ended December 26, 1998 of $1.5 million ($1.0 million after tax). The charge is shown as an extraordinary item for the early extinguishment of debt. Total charges for the early extinguishment of debt are $4.1 million ($2.6 million after tax). The Company incurred approximately $2.0 million in costs to establish the new credit facility. These costs have been capitalized, included in other assets, and are being amortized to interest expense over the life of the loan. In connection with the refinancing, an interest rate swap and an interest rate cap that were required under the prior credit facility were assigned from First Union National Bank to the Bank of Montreal. Accordingly, the swap was marked to market as of November 20, 1998, with a non-cash charge of $0.6 million taken into interest expense. The related $0.6 million mark to market credit is being amortized as an offset to interest expense over the remaining life of the swap agreement. The variable to fixed interest rate swap agreement has a notional amount of $50.0 million, and fixes the Company's variable interest rate at 6.29% through January 4, 2000. The notional amount 13 of the interest rate cap at the balance sheet date is $75 million, and the cap rate is 6.5%. At July 3, 1999, the fair value of both contracts was not significantly different than the notional value. The Company's credit agreement with its lenders contain restrictive covenants. As of July 3, 1999, 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 2000 $ 5,046 Fiscal 2001 6,052 Fiscal 2002 42,559 Fiscal 2003 89 Fiscal 2004 94 5. 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. In fiscal years 1998 and 1997, most participants could contribute up to 15% of their salary. Under the Company's restated plan in 1999, most participants can contribute up to 20% 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 $2.4 million, $1.6 million and $1.6 million, for fiscal 1999, 1998 and 1997, respectively. 6. Income Taxes The provision for income taxes from continuing operations was as follows for fiscal years 1999, 1998 and 1997: Dollars in thousands 1999 1998 1997 - -------------------- ---- ---- ---- Current: Federal $3,908 $0 ($4,120) State 2,178 166 (199) ----- ---- ---- 6,086 166 (4,319) 14 Deferred: Federal 6,664 (14,625) (13,242) State 461 (1,893) (2,016) ------ ------ ------ 7,125 (16,518) (15,258) ------ ------ ------ Total tax expense (benefit) $13,211 ($16,352)($19,577) ====== ====== ====== The provision for income taxes from continuing operations differs from the amounts resulting from applying the federal statutory tax rates (35%) to earnings before income taxes and minority interest as follows for fiscal years 1999, 1998 and 1997: Dollars in thousands 1999 1998 1997 - -------------------- ---- ---- ---- Taxes computed using federal statutory tax rates $12,582 ($15,574) ($18,948) State income taxes, net of federal tax effect 1,715 (1,123) (1,440) Other, net (1,086) 345 811 ------ ------ ------ Total tax expense (benefit) $13,211 ($16,352) ($19,577) ====== ====== ====== Effective tax rate 36.7% 36.7% 36.2% Income tax expense (benefit) is included in the financial statements as follows for the fiscal year presented: Dollars in thousands 1999 1998 1997 - -------------------- ---- ---- ---- Continuing operations $13,211 ($16,352) ($19,577) Discontinued operations 10,667 1,671 1,317 Extraordinary charge (1,569) - - ------ ------ ------ $22,309 ($14,681) ($18,260) ====== ====== ====== The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at July 3, 1999 and June 27, 1998 are listed below: Dollars in thousands 1999 1998 - -------------------- ---- ---- Deferred tax liabilities: Inventories, principally due to the accounting for live inventories on the farm price method for tax purposes ($13,577) ($15,230) 15 Plant and equipment, principally due to differences in depreciation and capitalized interest (2,854) (6,386) Employee benefit deduction (1,326) - Other - (369) ------ ------ Gross deferred tax liabilities (17,757) (21,985) Deferred tax assets: Net operating loss carryforwards $1,230 $20,150 Insurance accruals, principally due to timing of payments versus the recording of expenses 3,085 2,944 Deferred compensation, principally due to accrual for financial reporting purposes 1,356 1,062 Tax credits 2,544 2,861 Financing costs, principally due to accrual for financial purposes 642 310 Compensated absences, principally due to accrual for financial reporting purposes 972 1,107 Accounts receivable, principally due to allowance for doubtful accounts 745 591 Other 375 571 ----- ------ Gross deferred tax assets 10,949 29,596 ------ ------ Net deferred tax (liability) asset ($6,808) $7,611 ====== ====== 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 liabilities, management believes it is more likely than not that the Company will realize the benefits of these deductible differences as reflected at July 3, 1999 and June 27, 1998. 7. Shareholders' Equity In February 1994, the Board of Directors approved the adoption of the Shareholder Protection Rights Plan (the Plan) wherein one right 16 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 16,541,691 outstanding on July 3, 1999 and 16,399,511 outstanding on June 27, 1998. Additionally, there are 50,000,000 shares of preferred stock authorized with none outstanding as of July 3, 1999 or June 27, 1998. 8. 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 October 31, 1998. The Plan provides for the granting of incentive or nonqualified common stock options. The option price under the Plan shall not be less than the fair market value of the common shares as of the date of the grant. The options vest after three years, with one-third vesting each year after the date of grant. The options are exercisable at varying dates not to exceed 10 years from the date of grant. The changes in the outstanding common shares under option for fiscal 1999, 1998 and 1997 are listed below: 17 Common Weighted shares Average under Exercise option Price ------ -------- 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 Canceled or expired (262,126) $13.85 Exercised (5,833) $8.31 Granted in fiscal 1999 142,500 $8.34 ------- ----- Outstanding at July 3, 1999 517,916 $10.07 ======= ===== There were 270,416, 343,374, and 385,247 shares exercisable under option with weighted average exercise prices of $12.06, $15.08 and $16.21 at fiscal 1999, 1998 and 1997, respectively. The following table summarizes information about stock options outstanding as of July 3, 1999: Stock Options Stock Options Outstanding: Exercisable: - ---------------------------------------------------------------- Weighted Average Remaining Contractual Exercise Price Shares Life (Years) Shares - -------------- ------- --------------------- ------ $ 6.875 111,000 9 36,999 8.281 134,000 10 - 8.310 93,000 8 62,001 9.219 8,500 9.4 - 14.125 90,166 6.5 90,166 15.000 81,250 5.4 81,250 ------ ------- Total 517,916 270,416 ======= ======= 18 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 earnings (loss) and net earnings (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 earnings (loss) and net earnings (loss) per share from continuing operations would approximate the pro forma amounts indicated below: Fiscal years ended July 3, June 27, June 28, 1999 1998 1997 Dollars in thousands, ------- -------- -------- except per share data - --------------------- Net earnings (loss) from continuing operations As Reported $22,738 ($28,212) ($34,608) Pro Forma $22,292 ($28,537) ($34,823) Net earnings (loss) per common share from continuing operations As Reported, basic $1.35 ($1.72) ($1.99) As Reported, diluted $1.34 ($1.72) ($1.99) Pro Forma, basic $1.33 ($1.74) ($2.00) Pro Forma, diluted $1.32 ($1.74) ($2.00) Note: The pro forma disclosures shown may not be representative of the effects on reported net earnings in future years. The fair value of each stock option grant used to compute pro forma net earnings and net earnings 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: 1999 1998 1997 ---- ---- ---- Expected dividend yield 0.0% 0.0% 1.1% Expected volatility 55% 31% 43% Risk-free interest rate 5.5% 5.7% 6.8% Expected term (in years) 10 10 10 19 Using these assumptions in the Black-Scholes model, the weighted average fair value of options granted was $0.8 million in 1999 and $0.6 million in 1998 and 1997, respectively. On October 29, 1994, the shareholders of WLR Foods approved the Poultry Producer Stock Purchase Plan and amended and restated the Employee Stock Purchase Plan. These plans allow contract producers and employees to purchase stock at a 10% discount from the market price. All shares must be held in the plans for a period of two years. Upon termination of employment or contract, participants are terminated from the respective plans. 9. 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 $3.4 million, $5.1 million, and $5.7 million for fiscal 1999, 1998 and 1997, 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 July 3, 1999: Dollars in thousands - -------------------- Fiscal 2000 $2,319 Fiscal 2001 1,855 Fiscal 2002 902 Fiscal 2003 431 Fiscal 2004 139 Fiscal 2005 35 ----- Total minimum lease payments $5,681 ===== 10. 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 year 1997. As a result of an August 1994 acquisition, Cuddy Farms, Inc. (as an affiliate of Cuddy International) was a related party shareholder through fiscal 20 year 1997. The transactions included poultry purchases and feed sales 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 (Dollars in thousands): Purchases Sales from to related related parties parties --------- ------- Fiscal 1999 $967 $- Fiscal 1998 1,381 - Fiscal 1997 23,381 8,998 In management's opinion, all related party transactions are conducted under normal business conditions, with no preferential treatment given to related parties. 11. Earnings Per Share The following is a reconciliation between the calculation of basic and diluted net earnings (loss) per share: July 3, June 27, June 28, Dollars in thousands 1999 1998 1997 - -------------------- ------- -------- -------- Numerator: Basic net earnings (loss) per common share numerator, continuing operations $22,738 ($28,212) ($34,608) Denominator: Weighted average common shares outstanding 16,479 16,315 17,378 Effect of outstanding stock warrants 300 88 - ------ ------ ------ Basic weighted average common shares outstanding 16,779 16,403 17,378 ====== ====== ====== Basic earnings (loss) per share, continuing operations $1.35 ($1.72) ($1.99) ====== ======= ====== 21 Numerator: Diluted net earnings (loss) per common share numerator, continuing operations $22,738 ($28,212) ($34,608) Denominator: Weighted average common shares outstanding 16,479 16,315 17,378 Effect of outstanding options 11 - - Effect of outstanding stock warrants 407 88 - ------ ------ ------ Diluted weighted average common shares outstanding 16,897 16,403 17,378 ====== ====== ====== Diluted earnings (loss) per share, continuing operations $1.34 ($1.72) ($1.99) ====== ====== ====== Options to purchase 517,916, 643,375 and 710,666 shares of common stock, at prices between $6.88 and $15.00, $6.88 and $20.00, and $8.31 and $20.00 per share were outstanding in 1999, 1998, and 1997, respectively. The outstanding options were not included in the computation of diluted earnings per share for fiscal years 1998 and 1997 because the effect of including these options would have been anti-dilutive. 12. 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 on July 31, 1998. Net proceeds of approximately $55 million were received resulting in a gain of approximately $28 million ($18 million after tax). Income from operations in the current fiscal year was approximately $1 million ($0.7 million after tax). Accordingly, the operating results of the Cassco Ice operations have been segregated from continuing operations and reported as separate line items on the consolidated statement of operations. Operating results and net assets from discontinued operations are as follows: 22 Dollars in thousands 1999 1998 1997 - -------------------- ---- ---- ---- Net sales $4,641 $22,063 $19,186 Income before tax 1,071 4,529 3,742 Income tax expense 407 1,671 1,317 ----- ------ ------ Net earnings $664 $2,858 $2,425 ===== ====== ====== Net assets of discontinued operations: Dollars in thousands 1998 - -------------------- ---- Current assets $9,065 Property, plant and equipment, net 22,840 Other assets 398 Current liabilities (4,124) Other liabilities (3,573) ------ Net assets of discontinued operations $24,606 ====== 13. Sale of Assets On August 14, 1998, the Company completed the sale of its Goldsboro, North Carolina chicken complex. Net proceeds of approximately $38 million were received in exchange for assets totaling approximately $30 million. The gain of approximately $8 million ($5 million after-tax) is included in the results of operations for the fiscal year 1999. The Company also completed the sale of its Monroe, North Carolina processing plant in fiscal year 1999. The sale resulted in a loss of approximately $1.5 million ($0.9 million after tax). 14. Contingencies The Company is a defendant in a pending litigation proceeding in the state of West Virginia alleging violations of the West Virginia Consumer Credit Protection Act and West Virginia Antitrust Law. The suit alleges, among other things, that the Company provided substandard chicks and feed to growers who raise chickens for the Company in West Virginia. While damages in the suit cannot be determined, the lawsuit is not expected to have a material effect on the Company's financial statements. The Company believes the suit is without merit, and intends to defend it vigorously. 23 15. Segment and Geographic Information The Company retroactively adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" for the year ended July 3, 1999. This statement requires companies to report certain information about operating segments in their financial statements and establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. Comparative information for prior years has been presented to conform to the requirements of SFAS 131. The Company has two reportable segments: Chicken and Turkey. The third segment, Other, includes revenues from the Company's protein conversion plants, unallocated corporate related items and other miscellaneous items. Chicken segment revenues are primarily sales of chicken related products, such as retail tray pack items, whole birds cut up for fast food restaurants and portion-controlled products for food service distributors. Turkey segment revenues are primariliy sales of turkey related products and further processed products, including both turkey and chicken items, produced at the Company's further processing plants. These items include fresh and frozen whole birds and parts, including retail tray pack items, turkey burgers and a full line of further processed products, including deli meats, frankfurters and salads. To better utilize its feed manufacturing capabilities, the Company sells feed to other users, primarily from its Marshville, NC feedmill. Sales from this mill were included in Turkey segment sales until the first quarter of fiscal 1999, when the complex was converted to chicken processing and the sales for the remaining three quarters were included in the Chicken segment. Each segment is evaluated by management based on operating profit (loss) and net earnings (loss). The following tables set forth specific operating information about each segment as reviewed by the Company's management. Net earnings (loss) for segment reporting is prepared on the same basis as that used for consolidated net earnings (loss). The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Administrative services provided by the corporate offices are primarily allocated to the individual segments based on levels of inventories and property, plant and equipment. Due to certain assets which are shared between segments, management evaluates assets and capital expenditures on a consolidated basis; therefore, such information is not presented on a segment basis. 24 Dollars in thousands Elimna- Year ended July 3, 1999 Chicken Turkey Other tions Total - ----------------------- ------- ------ ----- ------- ----- External segment revenues $452,513 $427,637 $7,936 $0 $888,086 Intersegment revenues - - 12,882 (12,882) - ------- ------- ------ ------ ------- Total revenues 452,513 427,637 20,818 (12,882) 888,086 Interest expense 4,974 6,060 - (103) 10,931 Depreciation expense 9,754 8,218 1,408 - 19,380 Gain on sale of Goldsboro complex 7,699 - - - 7,699 Interest income 1 103 299 (103) 300 Income taxes (benefit) 13,561 (1,861) 1,511 - 13,211 Net earnings (loss) from continuing operations 22,193 (3,046) 3,591 - 22,738 Extraordinary charge - - (2,559) - (2,559) Year ended June 27, 1998 External segment revenues $388,559 $546,256 $11,152 $0 $945,967 Intersegment revenues 22,912 - 13,460 (36,372) - ------- ------- ------ ------ ------- Total revenues 411,471 546,256 24,612 (36,372) 945,967 Interest expense 8,239 14,376 13 (89) 22,539 Depreciation expense 9,432 11,169 2,242 - 22,843 Interest income 70 6 88 (89) 75 Income taxes (benefit) 3,277 (20,563) 934 - (16,352) Net earnings (loss) from continuing operations 6,085 (36,158) 1,927 (66) (28,212) Year ended June 28, 1997 External segment revenues $377,784 $600,531 $16,276 $0 $994,591 Intersegment revenues 41,735 - 16,695 (58,430) - ------- ------- ------ ------ ------- Total revenues 419,519 600,531 32,971 (58,430) 994,591 Interest expense 4,413 8,340 56 (5) 12,804 Depreciation expense 9,592 12,453 3,181 - 25,226 Interest income 39 15 29 (5) 78 Income taxes (benefit) (720) (21,285) 2,428 - (19,577) Net earnings (loss) from continuing operations (1,268) (34,867) 1,574 (47) (34,608)
A reconciliation of total segment profits to consolidated net earnings (loss) is as follows: 25 July 3, June 27, June 28, 1999 1998 1997 ------- -------- ------- Segment profit (loss) $22,738 ($28,212) ($34,608) Unallocated: Income from discontinued operation, net of tax 664 2,858 2,425 Gain on sale of discontinued operation, net of tax 17,927 - - Extraordinary charge on early extinguishment of debt, net of tax (2,559) - - ------ ------ ------ $38,770 ($25,354) ($32,183) ====== ====== ====== Geographic Information. No individual foreign country accounts for 10% or more of sales to external customers. Revenues from one customer represent approximately $113 million, or 13% of the total Company sales in fiscal year 1999. No customer represented 10% or more of the total Company's sales in fiscal years 1998 or 1997. 16. Selected Quarterly Financial Data (Unaudited) The unaudited summary of quarterly results of continuing operations for fiscal 1999 and 1998 follows: Dollars in thousands except per share data Fiscal year ended July 3, 1999 First Second Third Fourth - ----------------- ----- ------ ----- ------ Net sales $237,941 $229,276 $192,881 $227,988 Operating income 15,889 15,094 759 6,924 Net earnings (loss) from continuing operations 11,717 7,222 (127) 3,926 Per share data: Diluted earnings (loss) per common share, continuing operations $0.70 $0.43 ($0.01) $0.23 Market price(bid) - high 9.25 9.38 9.69 8.50 - low 6.38 7.63 7.75 6.75 26 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: Diluted loss per common share, continuing operations ($0.40) ($0.50) ($0.68) ($0.15) Market price(bid) - high 10.00 10.25 8.63 7.38 - low 8.13 8.38 5.19 5.56 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. 27 EX-13.4 10 INDEPENDENT AUDITOR'S REPORT Exhibit 13.4 Independent Auditors' Report The Board of Directors and Shareholders WLR Foods, Inc.: We have audited the accompanying consolidated balance sheets of WLR Foods, Inc. and subsidiaries as of July 3, 1999 and June 27, 1998 and the related consolidated statements of operations, shareholders equity and cash flows for each of the fiscal years in the three-year period ended July 3, 1999. 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 July 3, 1999 and June 27, 1998 and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended July 3, 1999, in conformity with generally accepted accounting principles. KPMG LLP Richmond, Virginia August 13, 1999 EX-21 11 LIST OF SUBSIDIARIES Exhibit 21 Subsidiary State of Incorporation Wampler Foods, Inc. Virginia P.O. Box 7275 Broadway, Virginia 22815 EX-23 12 CONSENT OF INDEPENDENT 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. 33-63364 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 13, 1999, relating to the consolidated balance sheets of WLR Foods, Inc. and subsidiaries as of July 3, 1999 and June 27, 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the fiscal years in the three-year period ended July 3, 1999, and the related schedule, which reports appear or are incorporated by reference in the July 3, 1999 annual report on Form 10-K of WLR Foods, Inc. KPMG LLP Richmond, Virginia September 29, 1999 EX-24.3 13 SPECIAL POWER OF ATTORNEY FOR PHILLIP C. STONE Exhibit 24.3 SPECIAL POWER OF ATTORNEY The undersigned director of WLR Foods, Inc., a Virginia corporation, and its subsidiaries (WLR Foods) appoints James L. Keeler and Dale S. Lam, or either of them (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' 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 he hereby ratifies and confirms all that his 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. September 27, 1999 __/s/ Phillip C. Stone___(SEAL) Date Phillip C. Stone EX-27 14 EXHIBIT 27
5 Exhibit 27 3-MOS JUL-03-1999 JUL-03-1999 210 0 59,026 1,909 106,679 172,697 296,551 188,606 289,097 88,681 53,891 0 0 69,125 74,810 289,097 888,086 888,086 750,942 750,942 98,478 0 10,931 35,949 13,211 22,738 18,591 (2,559) 0 38,770 2.31 2.29
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