-----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, GhkASEJQnTri+B3A+rPU1lP3PJLMd4ULRK/ABtlvkFtV9dMSdXf2H8hY8lm3cSpa F7yKv+lbFx6/xY+As8jjcA== 0000916641-99-000616.txt : 19990722 0000916641-99-000616.hdr.sgml : 19990722 ACCESSION NUMBER: 0000916641-99-000616 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990507 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990721 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMITHFIELD FOODS INC CENTRAL INDEX KEY: 0000091388 STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011] IRS NUMBER: 520845861 STATE OF INCORPORATION: VA FISCAL YEAR END: 0427 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-02258 FILM NUMBER: 99667933 BUSINESS ADDRESS: STREET 1: 200 COMMERCE STREET STREET 2: 999 WATERSIDE DRIVE CITY: SMITHFIELD STATE: VA ZIP: 23430 BUSINESS PHONE: 8043653000 MAIL ADDRESS: STREET 1: 900 DOMINION TOWER STREET 2: 999 WATERSIDE DRIVE CITY: NORFOLK STATE: VA ZIP: 23510 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY EQUITIES CORP DATE OF NAME CHANGE: 19710221 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY REAL ESTATE TRUST DATE OF NAME CHANGE: 19661113 8-K/A 1 SMITHFIELD FOODS, INC. 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) May 7, 1999 SMITHFIELD FOODS, INC. (Exact name of registrant as specified in its charter) VIRGINIA 0-2258 52-0845861 (State or other (Commission (IRS Employer jurisdiction of incorporation File Number) Identification No.) 200 COMMERCE STREET SMITHFIELD, VIRGINIA 23430 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (757) 365-3000 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS SMITHFIELD FOODS, INC. IS FILING THIS AMENDMENT TO ITS CURRENT REPORT ON FORM 8-K TO FILE CERTAIN HISTORICAL AND PRO FORMA FINANCIAL INFORMATION. THIS CURRENT REPORT REMAINS OTHERWISE IDENTICAL. Smithfield Foods, Inc. ("Smithfield Foods") on May 7, 1999 completed the acquisition of Carroll's Foods, Inc. and its affiliated companies and partnership interests ("Carroll's Foods") for 4.2 million shares of Smithfield Foods, Inc. common stock and the assumption of approximately $231 million in debt, plus other liabilities. Friday's closing price of Smithfield Foods, Inc. common stock on the Nasdaq Stock Market was $26.50. The acquisition includes 100% of the capital stock of Carroll's Foods, Inc.; Carroll's 50% interest in Smithfield-Carroll's; Carroll's 16% interest in Circle Four; Carroll's 50% interest in Tar Heel Turkey Hatchery, 100% of Carroll's turkey grow-out operation, Carroll's 49% interest in Carolina Turkeys, and certain hog production interests in Brazil and Mexico. Carroll's Foods, Inc. is the second largest hog production company in the U.S. and is headquartered in Warsaw, North Carolina. Smithfield-Carroll's is a hog production partnership with Smithfield Foods, headquartered in Waverly, Virginia. Circle Four is a hog production partnership with Smithfield Foods headquartered in Milford, Utah. Carolina Turkeys is a turkey processing partnership with Maxwell Farms, Inc., headquartered in Mount Olive, North Carolina, which produces approximately 290 million pounds of fresh turkeys and approximately 110 million pounds of processed turkey meats annually. The final acquisition price is substantially less than the $500 million transaction value contained in the previously disclosed Letter of Intent executed by the parties on February 25, 1999. The revised purchase price was mutually agreed to in negotiations between the parties subsequent to the execution of the Letter of Intent. "The final purchase price more accurately reflects the value of Carroll's Foods. Based on this purchase price, Carroll's Foods production costs are as competitive as any in the hog production industry and, based on what we expect for hog prices going forward, the acquisition will be accretive to Smithfield Foods earnings in fiscal 2000," Joseph W. Luter, III, Chairman and CEO of Smithfield Foods, said. The acquisition of Carroll's Foods makes Smithfield Foods the largest hog producer in the world, which complements its position as the largest pork processing company in the world. In addition, the Company has taken a major step toward achieving its long term strategic goal of becoming more vertically integrated by increasing its level of vertical integration to approximately 30% from its prior level of approximaetly 14%. The Company expects to produce approximately 5.6 million hogs and process approximately 19 million hogs in fiscal 2000. "This single transaction accomplished what the Company had otherwise hoped to achieve in added hog production over the next five to 10 years, assuming such new production could even be added or developed given the current political and environmental climate in existence today." Luter said. He went on to say that the added hog production will further insulate the Company from the effects of major market swings in hog prices and fresh pork margins. "This acquisition has put Smithfield Foods at what we consider to be an optimum and prudent level of vertical integration. As a consequence, we have no plans to increase our level of hog production in the United States in any significant way in the foreseeable future," Luter stated. 2 Going forward, the Carroll's Foods businesses will be conducted as a separate operating unit of Smithfield Foods that will be managed by its present management team which will remain substantially intact. "This is consistent with the Company's operating philosophy that permits its separate operating units a great deal of autonomy under their own management teams," Luter stated. He also said that the Company has worked very closely with Carroll's over the last decade and that he was very comfortable with Carroll's Foods management team. Separately, the Company's Board of Directors approved the purchase by the Company of up to 2 million shares of its common stock from time to time in the open market or in private transactions. Smithfield Foods, a major marketer of fresh pork and processed meats, includes among its brands Smithfield Lean Generation Pork, Smithfield Premium, Gwaltney, John Morrell, Patrick Cudahy, Lykes, Esskay, Kretschmar, Valleydale, Jamestown, Dinner Bell, Realean, Patrick's Pride, Great, Tobin's First Prize, Peyton's, Curly's, Ember Farms and others. This news release may contain "forward-looking" information within the meaning of the federal securities laws. The forward-looking information may include statements concerning the Company's outlook for the future, as well as other statements of beliefs, future plans and strategies or anticipated events, and similar expressions concerning matters that are not historical facts. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, the statements. The risks include availability and prices of raw materials, product pricing, the competitive environment and related market conditions, operating efficiencies, access to capital and actions of domestic and foreign governments. 3 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. The Company hereby incorporates by reference its Current Report on Form 8-K filed July 19, 1999, which report contains the Company's Audited Historical Financial Statements for the Fiscal Year Ended May 2, 1999. Page ---- (a) Combined Financial Statements of Carroll's Group Report of Independent Certified Public Accountants 5 Combined Balance Sheets - As of December 26, 1998 6 Combined Statements of Operations - For the year ended December 26, 1998 8 Combined Statement of Stockholders' Equity - For the year ended December 26, 1998 9 Combined Statements of Cash Flows - For the year ended December 26, 1998 10 Notes to Combined Financial Statements 12 (b) Pro Forma Consolidated Condensed Financial Statements of Smithfield Foods, Inc. and Subsidiaries (Unaudited) Pro Forma Consolidated Condensed Balance Sheet - As of May 2, 1999 28 Pro Forma Consolidated Condensed Statement of Operations - For the Fifty-two Weeks Ended May 2, 1999 29 Pro Forma Consolidated Condensed Statement of Operations - For the Fifty-three Weeks Ended May 3, 1998 30 Notes to Pro Forma Consolidated Condensed Financial Statements 31 (c) Exhibit Index Exhibit 2.1 Acquisition Agreement among Smithfield Foods, Carroll's Foods and certain affiliates, Carroll M. Baggett, James O. Mathews and Jeffrey S. Matthews, dated as of May 3, 1999 (exhibits as executed are filed below as exhibits 2.2, 2.3 and 2.4) (schedules are omitted, but the registrant hereby agrees upon request of the Commission to furnish schedules supplementally). Exhibit 2.2 Escrow Agreement among Smithfield Foods, Carroll M. Baggett, James O. Matthews, Jeffrey S. Matthews and McGuire, Woods, Battle & Boothe LLP, dated as of May 7, 1999. Exhibit 2.3 Agreement with Shareholders by and between Smithfield Foods and each of Jeffrey S. Matthews, Carroll M. Baggett and James O. Matthews, dated as of May 7, 1999. Exhibit 2.4 Registration Rights Agreement by and between Smithfield Foods and each of Jeffrey S. Matthews, Carroll M. Baggett and James O. Matthews, dated as of May 7, 1999. Exhibit 23.1 Consent of Independent Public Accountants Exhibit 23.2 Consent of Independent Public Accountants 4 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Carroll's Group: We have audited the accompanying combined balance sheet of Carroll's Group (the Company), comprised of the companies identified in Note 1, as of December 26, 1998, and the related combined statement of operations, stockholders' equity and cash flows for the year then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Carroll's Group at December 26, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. As explained in Note 14 to the combined financial statements, in 1998 the Company changed its method of accounting for start-up costs, lower of cost or market inventory valuation and capitalizing the costs of unborn pigs. /s/ Arthur Andersen LLP Raleigh, North Carolina, June 9, 1999. 5
CARROLL'S GROUP COMBINED BALANCE SHEET -- DECEMBER 26, 1998 ASSETS -------- CURRENT ASSETS: Cash and cash equivalents $ 725,266 Short-term marketable equity securities (Note 16) 22,140,625 Accounts receivable: Trade 2,092,501 Smithfield Foods, Inc. 15,633,548 Affiliate 24,769,015 Stockholders 4,960,293 Other 4,887,492 ------------- 58,238,972 Inventories: Swine 112,480,362 Turkeys 14,160,142 Feed 8,998,964 Other 1,839,167 ------------- 137,478,635 Prepaid expenses and other 2,727,952 ------------- Total current assets 221,311,450 ------------- PROPERTY, PLANT AND EQUIPMENT, at cost: Land 10,212,994 Feed manufacturing facilities 22,346,513 Swine facilities 87,042,824 Buildings and improvements 9,030,082 Prepaid leases and breeding stock 35,326,417 Vehicles 20,283,709 Machinery and equipment 31,566,590 Other 5,603,268 ------------- 221,412,397 Less - Accumulated depreciation (90,190,111) ------------- 131,222,286 ------------- OTHER ASSETS: Investments in affiliates 46,896,122 Marketable equity securities (Note 16) 75,705,413 Other investments 3,928,297 ------------- 126,529,832 ------------- Long-term notes receivable: Stockholders and officers 7,611,832 Affiliates 29,377,581 Growers and other 14,921,476 ------------- 51,910,889 License agreement, net of accumulated amortization of $3,156,074 3,354,978 Other assets 5,118,056 ------------- $539,447,491 =============
6
CARROLL'S GROUP COMBINED BALANCE SHEET -- DECEMBER 26, 1998 LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 8,754,487 Accrued expenses and other current liabilities 7,113,558 Accrued contract grower payments 10,106,277 Current installments of notes payable 109,784,000 Current installments of capital lease obligations 201,321 ------------- Total current liabilities 135,959,643 ------------- LONG-TERM DEBT AND NOTES PAYABLE: Long-term debt and notes payable 121,255,249 Loans payable to affiliates 19,941,041 Capital lease obligations, excluding current installments 2,538,585 ------------- Total long-term debt and notes payable 143,734,875 ------------- COMMITMENTS AND CONTINGENCIES (Notes 4, 6, 8, 9 and 10) DEFERRED AND OTHER LONG-TERM LIABILITIES: Deferred compensation and benefits 6,370,213 Other deferred liabilities 771,475 Reserve for phantom stock plan 2,709,166 ------------- 9,850,854 ------------- Total liabilities 289,545,372 ------------- STOCKHOLDERS' EQUITY: Contributed capital 45,388,191 Retained earnings 135,560,076 Accumulated other comprehensive income 68,953,852 ------------- Total stockholders' equity 249,902,119 ------------- $539,447,491 =============
The accompanying notes to combined financial statements are an integral part of this balance sheet. 7 CARROLL'S GROUP COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 26, 1998
SALES $347,937,638 COST OF SALES 319,884,606 ------------- Gross profit 28,053,032 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 81,320,193 ------------- Total operating loss (53,267,161) ------------- OTHER INCOME (EXPENSE): Equity in net losses of investments in affiliates (1,170,990) Interest income 12,813,038 Gain on sale of marketable securities 5,889,481 Interest expense (22,529,135) Decrease in phantom stock plan liability 2,426,657 Forgiveness of debt to affiliate (1,666,427) Miscellaneous income, net 2,258,099 ------------- (1,979,277) ------------- LOSS BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (55,246,438) CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (Note 14) 18,680,213 ------------- Net loss (36,566,225) OTHER COMPREHENSIVE INCOME - Change in unrealized gains on marketable securities (2,467,325) ------------- Comprehensive loss $(39,033,550) =============
The accompanying notes to combined financial statements are an integral part of this statement. 8 CARROLL'S GROUP COMBINED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 26, 1998
ACCUMULATED OTHER TOTAL CONTRIBUTED RETAINED COMPREHENSIVE STOCKHOLDERS' CAPITAL EARNINGS INCOME EQUITY ----------- -------- ------------- ------------- BALANCE, December 27, 1997 $45,388,191 $181,678,673 $71,421,177 $298,488,041 Change in unrealized gain on marketable securities 0 0 (2,467,325) (2,467,325) Dividends paid 0 (9,552,372) 0 (9,552,372) Net loss 0 (36,566,225) 0 (36,566,225) ----------- ------------- ------------ ------------ BALANCE, December 26, 1998 $45,388,191 $135,560,076 $68,953,852 $249,902,119 =========== ============= ============ ============
The accompanying notes to combined financial statements are an integral part of this statement. 9 CARROLL'S GROUP COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 26, 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ (36,566,225) Adjustment to reconcile net income to net cash provided by operating activities: Write-off of start-up costs 2,092,501 Depreciation and amortization 15,633,548 Gain on disposal of property, plant and equipment, excluding breeding stock (161,964) Loss on disposal of breeding stock 10,420,320 Gain of sale of marketable equity securities (5,889,481) Equity in net losses of subsidiaries 1,170,990 Change in assets and liabilities: Decrease in accounts receivable 38,952,336 Increase in inventories, excluding transfers of breeding stock (25,276,288) Increase in prepaid expenses and other (1,518,161) Increase in accounts payable 1,347,439 Decrease in reserve for phantom stock plan (2,426,657) Increase in other deferred and long-term liabilities 781,222 Increase in accrued expenses and contract grower payments 3,165,954 -------------- Net cash provided by operating activities 1,725,534 -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (9,711,200) Proceeds from sale of property, plant and equipment, excluding breeding stock 301,045 Proceeds from sale of breeding stock 9,800,412 Proceeds from sale of marketable equity securities 8,712,096 Increase in other investments (601,599) Increase in other assets (1,060,576) Increases in notes receivable, net (9,532,470) -------------- Net cash used in investing activities (2,092,292) -------------- 10 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt and notes payable - Banks $ 310,460,176 Repayments of long-term debt and notes payable - Banks (310,358,201) Principal payments under capital lease obligations (172,708) Proceeds from issuance of long-term debt and notes payable - Other 16,624,484 Repayments of long-term debt and notes payable - Other (4,896,680) Net change in borrowings with stockholders (4,600,006) Dividends (9,552,372) -------------- Net cash used in financing activities (2,495,307) -------------- Net decrease in cash (2,862,065) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,587,331 -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 725,266 ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid during the year for interest $ 27,090,053 ============== SUPPLEMENTAL DISCLOSURE OF INVESTING ACTIVITIES - During 1998, the Company transferred raised breeding stock of $15,379,613 from inventory to fixed assets
The accompanying notes to combined financial statements are an integral part of this statement. 11 CARROLL'S GROUP NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 26, 1998 1. SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION Carroll's Group (the Company) is the combination of several companies, which are related through common stock ownership. The combined financial statements include accounts of Carroll's Foods, Inc., and its consolidated subsidiaries Carroll's Realty Partnership (a 99% owned partnership) and Carroll's Swine Investment Partnership (a 99% owned partnership). The combined financial statements also include the accounts of Carroll's Processing, Inc., Carroll's Foods of Virginia, Inc., Carroll's Farms of Virginia, Inc., Carroll's Capital, Inc., Carroll's Foods of Utah, Inc., Carroll's Realty, Inc., Carroll's Foods of Mexico, Inc. and Carroll's Foods of Brazil, LLC. The other 1% of Carroll's Realty Partnership and Carroll's Swine Investment Partnership are owned by Carroll's Realty, Inc. and Carroll's Foods of Virginia, Inc., respectively. All significant intercompany accounts and transactions have been eliminated in combination. These entities are presented on a combined basis as they represent the businesses acquired by Smithfield Foods, Inc. (Note 16). The Company's main operations are the production of market hogs with operations primarily in Eastern North Carolina and Virginia. The Company is also a turkey producer with operations located in Eastern North Carolina. Market hog and turkey sales represent approximately 70% and 24% of combined sales, respectively, for fiscal year 1998. Affiliated companies (20- to 50-percent owned) are accounted for using the equity method. FISCAL YEAR The Company has adopted a 52- and 53-week year that ends the last Saturday in December. The fiscal year ended December 26, 1998, consisted of 52 weeks. USE OF ESTIMATES The combined financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the combined financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and income and expenses for the period presented. Actual results could differ significantly from these estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. 12 RECEIVABLES AND CONCENTRATION OF CREDIT RISK The Company writes off receivables when amounts are determined to be uncollectible. In the opinion of management, all uncollectible amounts have been written off. Therefore, there is no reserve recorded. The Company has credit risk due to the small number of customers. The Company sells substantially all of its turkeys to two principal customers. Approximately 19% of the Company's turkey production is sold to a customer under a contract where selling prices are determined primarily on a cost-plus basis. The customer annually notifies the Company of the pounds they would like to purchase for the year. The contract states the Company is to deliver an amount plus or minus 5% of the amount specified. The remaining 81% of turkey production is sold to one of its affiliates, Carolina Turkeys (Note 2). There are two customers, Smithfield Foods, Inc. and Carolina Turkeys, who accounted for 46% and 47% of combined accounts receivable at December 26, 1998, respectively. These same two customers accounted for 65% and 19% of combined sales in fiscal year 1998, respectively. Carroll's Foods, Inc. (Foods) sells substantially all of its swine to Smithfield Foods, Inc. under a sales agreement. The agreement specifies that Foods' swine production will be purchased by Smithfield Foods, Inc. with no minimum level of production required. The selling price is based on average market prices plus a premium based on carcass value. The term of this sales agreement, as amended, shall continue and exist through the date that is five years following the date of termination of the agreement given by either party thereto. Carroll's Foods of Virginia, Inc. (Foods of Virginia) sells substantially all of its swine to Smithfield Foods, Inc. who is an affiliate of Smithfield-Carroll's Farms. The sales agreement specifies that Foods of Virginia's swine production will be purchased by Smithfield Foods, Inc. with no minimum level of production required. The selling price is based on average market prices plus a premium adjusted for carcass value as compared to the customer's standard carcass value. In addition, profits or losses from Foods of Virginia's operations are shared equally between Foods of Virginia and Smithfield Foods, Inc. Included in accounts receivable at December 26, 1998, is approximately $4,800,000 of Smithfield Foods, Inc.'s share of losses for the current year. The sales agreement is automatically renewed for one year each January 1 unless there is notice of termination by either party. Management does not anticipate termination of the agreement. During the year ended December 26, 1998, Foods of Virginia had sales of $57,362,104 to Smithfield Foods, Inc., of which $1,016,060 is included in accounts receivable at December 26, 1998. In addition, sales for the year ended December 26, 1998, includes $9,336,783, which represents Smithfield Foods, Inc.'s reimbursement to the Company for its pro rata share of Foods of Virginia's loss from operations. REVENUE RECOGNITION The Company recognizes revenues when the goods are shipped to the customer. Amounts received from customers prior to shipment are classified as deferred revenues. 13 INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. Costs include materials, labor and overhead. HEDGING TRANSACTIONS The Company at times utilizes commodity futures contracts to hedge its positions in feed commodities. Gains and losses on open and closed futures contracts are deferred and recognized when the hedged commodities are sold or purchased. Any realized hedging gains or losses on feed activity are included as a component of direct cost of sales once the related hogs or turkeys are sold. PROPERTY, PLANT AND EQUIPMENT The Company expenses property, plant and equipment under $1,000 as incurred and capitalizes any purchases above that amount at their historical cost. Depreciation of property, plant and equipment is charged to operations using either the straight-line or declining balance methods over the estimated useful lives of the respective assets as follows: Feed manufacturing facilities 15 - 30 years Swine facilities 10 - 15 years Buildings and improvements 5 - 40 years Prepaid leases and breeding stock 2 - 3 years Vehicles 3 - 10 years Machinery and equipment 3 - 10 years Combined depreciation expense for the fiscal year was approximately $15,600,000. Included in other property, plant and equipment is construction-in-progress totaling $1,466,745 at December 26, 1998. Construction-in-progress consisted of construction of feed manufacturing facilities and swine facilities. Interest is capitalized based on the Company's average borrowing rate and the construction department cost are capitalized and allocated to projects based on their proportionate size. The amounts capitalized during fiscal year 1998 were not material. BREEDING STOCK Purchased and leased breeding animals are recorded at cost and depreciated over their estimated useful lives. Raised breeding animals are recorded at a standard value, which approximates salvage value. INCOME TAXES The companies comprising Carroll's Group operated as S corporations, with the exception of Carroll's Foods of Brazil, LLC, a limited liability corporation, for federal and state income tax purposes. As a result, the stockholders or members report the earnings of the companies on their individual tax returns. 14 START-UP COSTS During the year, the Company implemented Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities." As such, the Company wrote off costs that had previously been capitalized as incurred when initially populating swine facilities with breeding stock (see Note 14). MARKETABLE SECURITIES The majority of the Company's investments consist primarily of stock in Smithfield Foods, Inc., to which the Company sells substantially all of its swine. The Company has classified all equity securities as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These securities are carried at fair value based on quoted market prices with the unrealized gains and losses reported as a separate component of stockholders' equity. The cost of securities sold is determined using the average cost method when computing realized gains and losses. There was a realized gain of approximately $5,900,000 on investments sold during 1998 with total proceeds of approximately $8,700,000. At December 26, 1998, the net unrealized gain in the Company's investments was $68,953,852. Subsequent to year-end, the market price of stock in Smithfield Foods, Inc. declined significantly. Through May 2, 1999, the Company sold 200,000 shares with a gain of approximately $4.2 million. The fair market value and unrealized gain were reduced to approximately $55.6 million and $38.3 million, respectively. As of May 2, 1999, the shares held by the Company were distributed to the stockholders as they were excluded from the subsequent purchase of the Company by Smithfield Foods, Inc. (see Note 16). CONTRACT GROWER PAYMENTS Payments to swine and turkey growers are accrued based on the number (and size, for pigs) of animals on hand at month-end. This entry is reversed each month as payments are made to growers when the animals are either sold or transferred from the grower's farm to another farm. Also included in the grower payment accrual is a bonus to contract farrowing growers. They are paid a quarterly bonus for the number of pigs per sow per year over budget that are transferred live from their farm. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. This statement is effective for fiscal years beginning after June 15, 1999. The Company does not expect the adoption to have a material effect on the Company's financial statements. 15 2. INVESTMENT IN AFFILIATES: The Company has investments in affiliates that are accounted for using the equity method. The affiliates engage in turkey or hog production or activities that support the Company. Equity affiliates include Tar Heel Hatchery, Inc. (50%), Carroll's Foods do Brazil, S.A. (50%), Carolina Turkeys (49%), Granjas Carroll de Mexico (50%), Smithfield-Carroll's Farms (50%) and Circle Four Group (33%). The Company's share of earnings or losses of these affiliates is included in income as earned. The Company's total investment at December 26, 1998, is as follows: Investment in equity $73,740,961 Equity in cumulative losses (3,929,059) Distributions of investment (22,915,780) --------------- Total investment in affiliates $46,896,122 =============== Summarized combined balance sheet and statement of operations of the affiliates are as follows: 1998 (UNAUDITED) Combined balance sheets- Current assets $ 94,859,403 Noncurrent assets 244,701,279 ------------- Total assets $339,560,682 ============= Current liabilities 93,786,244 Noncurrent liabilities 85,581,660 ------------- Total liabilities 179,367,904 Equity 160,192,778 ------------- $339,560,682 ============= Combined statements of operations- Net sales $377,278,446 Cost of goods sold 315,067,368 ------------- Gross profit 62,211,078 Administrative and interest expense 73,543,160 ------------- Net losses $(11,332,082) ============= The above combined balance sheets and statements of operations excludes Carroll's Foods do Brazil, S.A. as the information was not available and is not material to the Company's overall financial position. Carroll's Foods do Brazil, S.A. had net sales of approximately $2,000,000 (unaudited) and net losses of approximately $292,000 (unaudited) for the year ended December 26, 1998. 16 3. NOTES RECEIVABLE:
Notes receivable consisted of the following: Prime rate (7.75% at December 26, 1998), notes receivable from officers and stockholders, due on demand $ 7,611,832 Prime rate (7.75% at December 26, 1998), notes receivable from A Taste of Country (an affiliated company), due on demand 173,717 Note receivable from Carroll's Foods of the Midwest, Inc. (an affiliated company) with interest at prime rate (7.75% at December 26, 1998), due on demand 18,497,309 Note receivable from Carroll's Foods of Kentucky, LLC (an affiliated company) with interest at Carroll's Foods, Inc.'s average borrowing rate (5.42% at December 26, 1998), due on demand 389,000 Receivable from Cape Fear Farm Credit Association, due in varying amounts, noninterest bearing 459,113 Prime rate (7.75% at December 26, 1998), note receivable from Circle Four Group (an affiliated company), due on demand 3,000,000 Receivable from Carolina Turkeys (an affiliated company) with interest at the Federal Funds Rate plus 1% (5.625% at December 26, 1998), due on demand 7,448,000 Notes receivable from growers and others with interest rates varying from prime (7.75% at December 26, 1998), less 1/2% to prime plus 2% 14,288,646 Other notes receivable from stockholders and affiliated companies 43,272 --------------- $51,910,889 ===============
The above notes receivable are reflected as noncurrent assets as no payments are anticipated during the coming year. Payments on the notes receivable from growers are deducted from contract payments made to growers by the Company as either an amount or a percentage of the gross payment agreed to by the Company and the borrower. Since the note payments are contingent on grower production, the entire balance is classified as noncurrent. The balance at December 26, 1998, includes receivables of $357,043 from affiliated companies and $785,734 from a stockholder who is also a grower. 17 4. LONG-TERM DEBT AND NOTES PAYABLE:
Long-term debt and notes payable to banks consisted of the following: Advances outstanding under a $55,000,000 line of credit expiring September 24, 1999, bearing interest at variable rates (5.31% at December 26, 1998) $ 12,300,000 Advances outstanding under a $80,000,000 line of credit expiring August 28, 2000, bearing interest at variable rates (5.76% at December 26, 1998) 80,000,000 Advances outstanding under a $55,000,000 line of credit due on demand and expiring January 27, 1999, bearing interest at variable rates (5.15% at December 26, 1998), paid in 1999 with cash on hand and borrowings on other existing lines 52,600,000 Advances outstanding under a $65,000,000 line of credit expiring August 28, 1999, bearing interest at variable rates (5.61% at December 26, 1998) 20,700,000 Variable rate note payable (7.025% at December 26, 1998), to Colonial Farm Credit, ACA under a $28,000,000 revolving credit agreement; payable on demand; interest payable monthly 24,184,000 Advances outstanding under a $50,000,000 line of credit expiring on August 28, 2000, bearing interest at variable rates (5.61% at December 26, 1998) 41,081,500 Other 173,749 ------------- 231,039,249 Less - Current portion 109,784,000 ------------- $121,255,249 =============
These lines of credit are used by the Company to meet seasonal working capital demands. The lines of credit are collateralized by all inventories and accounts receivable and a guarantee from Carroll's Foods of the Midwest, Inc., a company affiliated through common stock ownership. In addition, the banks have first lien on all properties of the Company. Availability on the unused portions of the above lines of credit is $51,686,610 at December 26, 1998. The loan agreements related to the above lines of credit contain covenants and restrictions relating to, among other things, the maintenance of certain financial ratios and the creation of additional indebtedness, liens and guarantees. In addition, the agreements limit the amount of dividends that may be paid to stockholders. At December 26, 1998, the Company is in compliance with the loan agreements. The Company is co-borrower on the Colonial Farm Credit, ACA notes with Smithfield-Carroll's Farms. The amount of these obligations included in the Company's financial statements is the line of credit for which the Company is primarily responsible. In addition, the Company is contingently liable for mortgage notes payable totaling $24,545,349, which are recorded on Smithfield-Carroll's Farms' books. 18 The loan agreement relating to the Colonial Farm Credit, ACA notes contains covenants and restrictions relating to, among other things, the maintenance of certain financial ratios, creation of additional indebtedness, liens and guarantees, and expenditures for property and equipment. In addition, the agreement limits the amount of dividends that may be paid to stockholders. At December 26, 1998, the Company is in compliance with these restrictive covenants. These notes are secured by substantially all of the Company's accounts receivable, inventory, equipment, farm products and personal property. At December 26, 1998, the Company had an unsecured $2,000,000 bank overdraft line of credit bearing interest at prime rate (7.75% at December 26, 1998). There were no borrowings against the bank overdraft line at December 26, 1998. The aggregate principal maturities of notes payable - banks are as follows: 1999 $109,784,000 2000 121,255,249 --------------- $231,039,249 =============== 5. NOTES PAYABLE TO AFFILIATES:
Notes payable to affiliates consisted of the following: Variable rate (7.025% at December 26, 1998), unsecured note payable to Pork Plus $ 50,000 Variable rate (7.025% at December 26, 1998), unsecured note payable to Mathews Family Properties 1,290,000 Prime rate (7.75% at December 26, 1998), note payable to Carroll's Foods of the Midwest, Inc., due on demand 6,761,845 Noninterest bearing unsecured note payable to Smithfield-Carroll's Farms 11,839,196 ------------ $19,941,041 ============
All of the above notes are classified as long-term liabilities since the holders of these notes have agreed to waive their right of repayment during 1999, unless the notes are refinanced with other long-term debt. 6. TRANSACTIONS WITH OFFICERS, STOCKHOLDERS AND AFFILIATES: The Company leases swine and feed mill facilities from Smithfield-Carroll's Farms. The lease is a noncancellable operating lease expiring January 31, 2007. The terms of the lease allow for the rental rate to be adjusted on an annual basis pursuant to the mutual agreement of the parties. During the year ended December 26, 1998, the Company incurred $7,428,698 in rentals under this lease. At December 26, 1998, the Company had $1,361,436 outstanding in accounts payable to Smithfield-Carroll's Farms. 19 The following is a schedule of future minimum rentals to be paid under the lease as of December 26, 1998. This schedule reflects only rentals on swine facilities (or portions of swine facilities) and feed mill facilities in use at December 26, 1998, and does not anticipate rental from completion of future construction. 1999 $ 7,637,895 2000 7,637,895 2001 7,637,895 2002 7,637,895 2003 7,637,895 Thereafter 23,550,174 ------------- $61,739,649 ============= The Company performs construction services for Smithfield-Carroll's Farms. Total construction sales for 1998 amounted to $97,227, which is included in sales in the accompanying statement of operations. At December 26, 1998, accounts receivable included $2,057 from Smithfield-Carroll's Farms for these construction services. During the year ended December 26, 1998, the Company had sales of approximately $66,924,000 to Carolina Turkeys, a 49%-owned partnership interest of the Company. The selling prices are determined using current market rates. In connection with these transactions, the Company had accounts receivable of $24,769,015 at December 26, 1998. The Company purchases the majority of its turkey poults from Tar Heel Hatchery, Inc., a 50%-owned company. Such purchases amounted to approximately $10,654,000 during the year ended December 26, 1998. The purchase price is based on each company's proportionate cost based on the end market sales price for the bird. In connection with these transactions, the Company had no trade accounts payable outstanding at December 26, 1998. The Company sold feeder pigs to Carroll's Foods of the Midwest, Inc., a company affiliated through common stockholder ownership. The total of these sales for the year was $1,268,783. The selling price was based on internal pricing standards. During 1998, the Company forgave debt in the amount of $1,666,427, which was due from Carroll's Foods of Kentucky, LLC, a company affiliated through common stockholder ownership. This amount is included as a component of miscellaneous income, net. The Company leases land and facilities from officers and stockholders. Total rent expense to these officers and stockholders totaled approximately $1,129,000 in 1998. In addition, certain officers of the Company operate contract swine and turkey farms for the Company. Grower payments made to these officers totaled approximately $727,000 in 1998. 20 7. LICENSE AGREEMENT: During 1991, the Company was assigned all rights and privileges of a license agreement that was entered into by Smithfield-Carroll's Farms. The license agreement is for the exclusive rights to breed and produce a line of swine within the United States. The license is being amortized on the straight-line method over its 25-year life. Amortization expense for fiscal year 1998 was $530,982. Additional management fees due in quarterly installments under this agreement, along with the breeding stock, are being amortized over 10 years, the expected useful life of the breeding stock. 8. EMPLOYEE BENEFIT PLANS: DEFINED BENEFIT PENSION PLAN The Company has a profit-sharing plan and a 401(k) savings plan. Effective January 1, 1989, these plans were frozen and a new noncontributory defined benefit plan was created. All eligible employees of the Company are covered by the Company's defined benefit pension plan (the Plan) which was effective on January 1, 1989, with benefits based on prior and future service. The Plan is available to all employees of the Company (as defined by the Internal Revenue Code) upon completion of a qualifying year of service (as defined) and the attainment of age 21. Recorded plan costs are the amounts determined as necessary to meet statutory funding requirements using the entry age actuarial cost method. 21 The Company has adopted SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits," which changes the disclosure requirements for pensions and other postretirement benefits. The following tables display information regarding the Company's retirement plan benefits in accordance with SFAS No. 132: Change in benefit obligation- Benefit obligation at beginning of year $(10,885,186) Service cost (976,815) Interest cost (730,116) Actuarial gain (loss) 333,528 Benefit payments 239,919 ------------- Benefit obligation at end of year $(12,018,670) ============= Change in plan assets- Fair value of plan assets at beginning of year $ 9,565,356 Actual return on plan assets 1,897,357 Employer contributions 300,462 Benefit payments (239,919) ------------- Fair value of plan assets at end of year $ 11,523,256 ============= Funded status $ (495,414) Unrecognized net gain (992,859) Unrecognized prior service cost 163,693 ------------- Net amount recognized $ (1,324,580) ============= Amounts recognized in the financial statements consist of- Prepaid benefit cost $ 1,143,420 Accrued benefit liability (2,468,000) ------------- Net amount recognized $ (1,324,580) ============= Weighted average assumptions as of December 26, 1998- Discount rate 7% Long-term return on assets 8% Rate of compensation increase 5% ============= Components of net periodic benefit cost- Service cost $ 976,815 Interest cost 730,116 Expected return on assets (784,398) Amortization of unrecognized prior service cost 16,369 ------------- Net periodic cost $ 938,902 ============= DEFERRED COMPENSATION AND BENEFITS Executives can elect to have a portion of their pay withheld and contributed to a deferred compensation plan on a tax-deferred basis. The Company remits the money to a trustee to be invested. As such, there is an investment of approximately $3.2 million on the balance sheet included in other investments, with a corresponding liability for the same amount. 22 PHANTOM STOCK PLAN Certain executives are eligible to participate in this plan based on shares of phantom stock of the Company which the individuals have been granted. Each year the participants receive a portion of the loss or income of the Company based on their number of phantom shares. The liability represents the cumulative balance of all participants. LIFE INSURANCE POLICIES The Company has purchased several life insurance policies on the stockholders and an officer with a combined face value of $29,500,000. Several of these policies are split dollar policies. As such, the Company records an asset to the extent of the premiums paid. Any excess cash surrender value would belong to the individual and, thus, is not recognized by the Company. There are no restrictions or loans outstanding on any of the policies. The asset recognized by the Company included in other assets is approximately $4,200,000 while the full cash surrender value of all policies combined is approximately $4,400,000. The premiums paid during the year were approximately $720,000. 9. COMMITMENTS AND CONTINGENCIES: Tar Heel Hatchery, Inc. has a $600,000 line of credit that has been guaranteed by the Company. At December 26, 1998, there were no outstanding borrowings on this line of credit. Local farm owners have contracted to provide labor and facilities to raise swine owned by the Company. These growers are compensated by a standard fee per pound of marketed meat. Amounts accrued under such contracts totaled approximately $10,106,277 at December 26, 1998, and such amounts are included in swine inventory. The Company has been named as a defendant in certain lawsuits. The suits are still in the discovery stages and trial dates have not been set. The Company does not believe that any of these actions will have a significant impact on its financial position or results of operations. The Company is under investigation in several EEOC claims made against the Company. The Company does not believe that these actions will have a significant impact on its financial position or results of operations. As is the case with other companies in the market hog industry, the Company could face significant exposure from potential claims and lawsuits involving environmental matters, some of which could involve substantial amounts. In addition, the Company could face significant future expenditures to comply with changing environmental laws and regulations. 23 The Company is partially self-insured for workers' compensation and medical and dental claims. The workers' compensation plan has a stop loss of $300,000 per accident. The medical and dental plan has a stop loss of $125,000 per individual per year with a lifetime maximum stop loss of $1,000,000. The liabilities are determined by estimating the run-out of known claims by a third-party administrator and adding an estimate for incurred but not reported claims based on historical results. At times, the Company enters into futures contracts for corn and soybean commodities that are designated as hedges. Gains and losses on such futures contracts are recognized in the same accounting period in which the related hedged commodities are sold or purchased. Amounts held by brokers to cover the Company's margin requirements amounted to $833,077 at December 26, 1998, and are included in prepaid expenses and other. The total commitment on open contracts at year-end, with closing dates through September 1999, was $27,833,593 with unrealized losses of $418,738. 10. LEASES: The Company has entered into various capital leases with a stockholder that expire at various dates during the next 12 years. Assets held under capital leases are included in swine facilities and amounted to $1,884,371 (net of accumulated amortization of $1,720,011) at December 26, 1998. At December 26, 1998, the minimum rental commitments under noncancelable leases are as follows:
YEAR ENDED CAPITAL LEASES - ------------------------------------------------------------------ ---------------- 1999 $ 610,500 2000 610,500 2001 610,500 2002 610,500 2003 610,500 Thereafter 1,731,750 ------------- Total minimum lease payments 4,784,250 Less - Amount representing interest (2,044,344) ------------- Total obligations under capital leases 2,739,906 Less - Current portion of capital lease obligations (201,321) ------------- Long-term obligations $ 2,538,585 =============
Amortization of leased property under capital leases was $238,802 in 1998 and is included in direct cost of sales in the accompanying statement of operations. 24 11. MARKET CONDITIONS: The Company's costs to produce turkeys and market swine, as well as the estimated costs to complete turkeys and market swine in inventory may individually exceed market sales prices periodically during the year. There was no write-down required in 1998 and there have been no significant downturns in the market since year-end. 12. STOCKHOLDERS' EQUITY: As discussed in Note 1, the companies comprising Carroll's Group elected S Corporation status, with the exception of Carroll's Foods of Brazil, LLC, which is a limited liability corporation, for federal and state income tax purposes. All companies are incorporated in North Carolina. The Company anticipates that it will make dividend distributions to the stockholders, subject to the limitations of the loan agreements as described in Note 4. Combined contributed capital is comprised of the following:
TOTAL ADDITIONAL SHAREHOLDER CONTRIBUTED COMPANY COMMON STOCK PAID-IN CAPITAL RECEIVABLE CAPITAL - ---------------------------------------------------- ------------ --------------- -------------- ---------------- Carroll's Foods, Inc., $100 par value, 2,000 shares authorized, 328 issued and outstanding $32,800 $37,354,963 $ 0 $37,387,763 Carroll's Processing, Inc., $1 par value, 100 shares authorized, issued and outstanding 100 0 0 100 Carroll's Foods of Virginia, Inc., $1 par value, 100,000 shares authorized, 328 issued and outstanding 328 7,899,672 0 7,900,000 Carroll's Farms of Virginia, Inc., $1 par value, 100,000 shares authorized, 328 issued and outstanding 328 99,672 0 100,000 Carroll's Capital, Inc., $10 par value, 328 shares authorized, issued and outstanding 3,280 96,720 (100,000) 0 Carroll's Foods of Utah, Inc., no par value, 100,000 shares authorized, 328 issued and outstanding 1,000 0 (1,000) 0 Carroll's Realty, Inc., no par value, 100,000 shares authorized, 328 issued and outstanding 328 0 0 328 Carroll's Foods of Mexico, Inc., no par value, 100,000 shares authorized, 328 issued and outstanding 1,000 0 (1,000) 0 Carroll's Foods of Brazil, LLC. contributed capital 0 1,000 (1,000) 0 ------------ --------------- ------------- ---------------- $39,164 $45,452,027 $(103,000) $45,388,191 ============ =============== ============= ================
25 13. FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's financial instruments are cash and cash equivalents, marketable equity securities, other investments, receivables, notes receivable, payables, notes payable, capital leases, debt and futures contracts. The carrying value of such instruments approximates market value. 14. ACCOUNTING CHANGES: During 1998, the Company changed its method of accounting for start-up costs, lower of cost or market valuation of inventories and capitalizing the costs of unborn pigs. The change in start-up costs involved expensing these costs as incurred, rather than capitalizing and subsequently amortizing such costs. The Company feels this method is preferable given emerging accounting guidance on these costs. The change in lower of cost or market inventory valuation method involved adopting a policy whereby the calculation is performed using the best available information two weeks after year-end when the books are closed. Any material changes at the time of financial statement preparation will be disclosed (see Note 11). The Company feels this method is preferable as it facilitates the timely closing of the books. The change in unborn pigs involved capitalizing the costs related to unborn pigs, rather than expensing those costs and capitalizing pigs at birth. The Company feels this method is preferable as it is industry practice and better matches the expenses with the related revenues. These changes in accounting principles resulted in the following adjustments, which are reflected as cumulative effect of changes in accounting principles in the accompanying statement of operations: Write-off of start-up costs $(2,092,501) Lower of cost or market adjustment 7,965,649 Capitalization of unborn pigs 12,807,065 ------------- Total cumulative effect $18,680,213 ============= 15. OPERATING SEGMENTS: In fiscal 1998, the Company implemented SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which changes the way the Company reports information about its operating segments. The Company has two main operating segments (swine and turkeys) that are managed separately because each segment has a different product, which requires different procedures and has unique production cycles and issues. The swine operations include breeding and raising swine to market weight to be sold either as breeding stock or to slaughter operations. The turkey operations involve the grow-out and sale of turkeys. All other operations such as the sale of feed and other general and administrative activities not directly attributable to the two segments are shown as other in the tables below. The Company does not have significant transactions between segments. 26 The accounting policies of the segments are the same as those described in the significant accounting policies footnote. The Company evaluates performance based on operating earnings of the respective business units. Segment information for the fiscal year ended December 26, 1998, is as follows:
SWINE TURKEYS ALL OTHER TOTAL ------------- --------------- ---------------- ---------------- Condensed income statement: Sales $258,234,894 $83,340,567 $ 6,362,177 $347,937,638 Cost of sales 246,599,328 78,748,813 (5,463,535) 319,884,606 ------------- --------------- ---------------- ---------------- Gross profit 11,635,566 4,591,754 11,825,712 28,053,032 General and administrative expenses 63,465,399 4,921,576 12,933,218 81,320,193 ------------- --------------- ---------------- ---------------- Operating loss (51,829,833) (329,822) (1,107,506) (53,267,161) Other income (expense), net 0 0 (1,979,277) (1,979,277) Cumulative effect of change in accounting principle 18,680,213 0 0 18,680,213 ------------- --------------- ----------------- ---------------- Net loss $(33,149,620) $ (329,822) $ (3,086,783) $(36,566,225) ============= =============== ================= ================ Other disclosures: Interest income $ 0 $ 0 $ 12,813,038 $ 12,813,038 Interest expense 0 0 (22,529,135) (22,529,135) Depreciation and amortization 9,552,123 763,914 5,317,511 15,633,548 Equity in the (loss) income of investees (4,150,764) 2,979,774 0 (1,170,990) Investment in affiliates 13,534,788 25,714,867 7,646,467 46,896,122 Capital expenditures 8,959,889 160,843 590,468 9,711,200 Total assets $316,683,431 $73,071,296 $ 149,692,764 $539,447,491 ============= =============== ================= ================
16. SUBSEQUENT EVENTS: On May 7, 1999, Smithfield Foods, Inc. completed the acquisition of the Company and its interests in affiliated companies for 4.2 million shares of Smithfield Foods, Inc. stock and the assumption of approximately $231 million in debt, plus other liabilities. The agreement specifically excludes certain assets, as defined, the most significant of which are the Company's shares of Smithfield Foods, Inc. common stock. 27 Smithfield Foods, Inc. and Subsidiaries Pro Forma Consolidated Condensed Balance Sheet (Unaudited) Purchase Assumption As of May 2, 1999
Historical ------------------------------ Smithfield Carroll's Foods Foods, Inc. Inc. Pro Forma as of as of Adjustments Pro Forma May 2, 1999 March 27, 1999 (Note 2) Combined ----------- -------------- ------------- ------------ In thousands Assets Current assets: Cash $ 30,590 $ 80 $ 24 (A) $ 30,694 Accounts receivable, net 252,332 28,338 1,323 (A) 281,993 Inventories 348,856 129,564 - 478,420 Other current assets 50,302 14,597 4 (A) 54,384 (10,519)(B) ----------- ---------- ------------- ------------ Total current assets 682,080 172,579 (9,168) 845,491 Net property, plant and equipment 790,776 126,647 49,346 (A) 1,007,640 40,871 (C) Other assets 298,758 159,857 24 (A) 380,063 (39,022)(A) (44,553)(B) 16,144 (C) (11,145)(F) ----------- ---------- ------------- ------------ $1,771,614 $459,083 $ 2,497 $2,233,194 =========== ========== ============= ============ Liabilities and Shareholders' Equity Current liabilities: Notes payable $ 63,900 $ 94,322 $ - $ 158,222 Current portion of long-term debt and capital lease obligations 25,828 201 6,322 (A) 32,351 Accounts payable 207,703 23,078 5 (A) 230,786 Accrued liabilities 168,784 15,803 434 (A) 185,021 ----------- ---------- ------------- ------------ Total current liabilities 466,215 133,404 6,761 606,380 Long-term debt and capital lease obligations 594,241 118,195 16,379 (A) 728,815 Other noncurrent liabilities 111,437 9,202 16,144 (D) 200,853 75,511 (E) (11,441)(A) Minority interests 57,475 - (11,145)(F) 46,330 Shareholders' equity 542,246 198,282 (55,072)(B) 650,816 (143,210)(G) 108,570 (H) ----------- ---------- ------------- ------------ $1,771,614 $459,083 $ 2,497 $2,233,194 =========== ========== ============= ============
See the accompanying Notes to the Pro Forma Consolidated Condensed Financial Statements. 28 Smithfield Foods, Inc. and Subsidiaries Pro Forma Consolidated Condensed Statement of Operations (Unaudited) Purchase Assumption 52 Weeks Ending May 2, 1999
Historical ------------------------------- Smithfield Carroll's Foods Foods, Inc. for Inc. for Pro Forma the 52 Weeks the 52 Weeks Adjustments Pro Forma Ending 5/2/99 Ending 3/27/99 (Note 3) Combined ------------- -------------- ----------- --------- In thousands Sales $3,774,989 $ 334,128 $ (216,348)(I) $ 3,892,769 Cost of sales 3,235,414 277,134 (216,348)(I) 3,296,200 ---------- --------- ---------- ----------- Gross profit 539,575 56,994 - 596,569 Selling, general and administrative expenses 295,610 69,662 300 (J) 375,334 9,762 (K) Depreciation expense 63,524 13,314 1,600 (L) 78,438 Interest expense 40,521 9,965 - 50,486 Minority interests (3,518) (3,518) ---------- --------- ---------- ----------- Income before income taxes 143,438 (35,947) (11,662) 95,829 - Income taxes 48,554 - (4,606)(M) 29,749 (14,199)(N) - ---------- --------- ---------- ----------- Net income $ 94,884 $ (35,947) $ 7,143 $ 66,080 ========== ========= ========== =========== Net income per share Basic $ 2.39 $ 1.51 ========== =========== Diluted $ 2.32 $ 1.46 ========== =========== Average common shares outstanding Basic 39,628 4,200 43,828 ========== ========== =========== Diluted 40,962 4,200 45,162 ========== ========== ===========
See the accompanying Notes to the Pro Forma Consolidated Condensed Financial Statements. 29 Smithfield Foods, Inc. and Subsidiaries Pro Forma Consolidated Condensed Statement of Operations (Unaudited) Purchase Assumption 53 Weeks Ending May 3, 1998
Historical -------------------------------- Smithfield Carroll's Foods Foods, Inc. for Inc. for Pro Forma the 53 Weeks the 53 Weeks Adjustments Pro Forma Ending 5/3/98 Ending 3/28/98 (Note 3) Combined -------------- --------------- ----------- ----------- In thousands Sales $3,867,442 $ 452,885 $ (325,653)(I) $ 3,994,674 Cost of sales 3,479,629 343,700 (325,653)(I) 3,497,676 ---------- --------- ---------- ----------- Gross profit 387,813 109,185 - 496,998 - Selling, general and administrative expenses 219,861 73,887 300 (J) 294,048 - Depreciation expense 42,300 13,290 1,600 (L) 57,190 Interest expense 31,891 7,422 - 39,313 Minority interests 199 - - 199 Nonrecurring item 12,600 - - 12,600 ---------- --------- ---------- ----------- - Income before income taxes 80,962 14,586 (1,900) 93,648 - Income taxes 27,562 - (751)(M) 32,573 5,762 (N) - ---------- --------- ---------- ----------- Net income $ 53,400 $ 14,586 $ (6,911) $ 61,075 ========== ========= ========== =========== Net income per share Basic $ 1.42 $ 1.46 ========== =========== Diluted $ 1.34 $ 1.39 ========== =========== Average common shares outstanding Basic 37,532 4,200 41,732 ========== ========== =========== Diluted 39,732 4,200 43,932 ========== ========== ===========
See the accompanying Notes to the Pro Forma Consolidated Condensed Financial Statements. 30 SMITHFIELD FOODS, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (1) Basis of Reporting The unaudited Pro Forma Consolidated Condensed Financial Statements of Smithfield Foods, Inc. and subsidiaries (the "Company") are provided to give effect to the acquisition completed May 7, 1999, of Carroll's Foods, Inc. ("CFI") and its affiliated companies and partnership interests in exchange for 4.2 million shares of the Company's common stock and the assumption of approximately $231.0 million in debt, plus other liabilities. The acquisition includes 100% of the capital stock of CFI, CFI's 50% interest in Smithfield-Carroll's ("Smithfield Carroll's"), CFI's 16% interest in Circle Four, CFI's 50% interest in Tar Heel Turkey Hatchery, 100% of CFI's turkey grow-out operation, CFI's 49% interest in Carolina Turkeys, and certain hog production interests in Brazil and Mexico. The acquisition agreement specifically excludes certain assets, as defined, the most significant of which is CFI's shares of the Company's common stock. The pro forma information is based on the historical financial statements of the Company and CFI giving effect to the acquisition under the purchase method of accounting. The purchase price allocations have been completed on a preliminary basis, and as a result, post closing adjustments to the carrying value of assets and liabilities may occur. The Company expects that any purchase price adjustment will not result in a material change to the purchase price. The pro forma information does not purport to be indicative of the combined historical or future results of operations or financial position that would have been or will be reported had the assumptions and adjustments been transacted as described below. The Pro Forma Consolidated Condensed Balance Sheet as of May 2, 1999 (for the period ended March 27, 1999 for CFI) presents the financial position assuming the acquisition had been completed as of that date. The Pro Forma Consolidated Condensed Statements of Operations for the 52 and 53 weeks ended May 2, 1999 and May 3, 1998 (for the 52 and 53 weeks ended March 27 and March 28, 1999 and 1998 respectively for CFI) present the results of operations for the combined entities assuming that the acquisition had been completed as of the beginning of the respective periods. The Pro Forma Consolidated Condensed Financial Statements should be read in conjunction with the Company's Annual Report for the fiscal year ended May 2, 1999 and the accompanying audited historical financial statements and notes of CFI for the year ended December 26, 1998. (2) Consolidated Condensed Balance Sheet Pro Forma Adjustments The Pro Forma Consolidated Condensed Balance Sheet gives effect to the adjustments described below. (A) To consolidate Smithfield-Carroll's, which prior to the acquisition, was a joint venture between the Company and CFI accounted for under the equity method by both companies. 31 (B) To eliminate the value of marketable securities, owned by CFI, that were excluded assets as part of the purchase agreement. (C) To adjust the carrying value of property, plant and equipment values to preliminary estimates of fair market value and to recognize the excess purchase price over the fair value of assets acquired and liabilities assumed as goodwill. (D) To record a deferred tax liability as part of the adjustment of the carrying value of property, plant and equipment. (E) To record income taxes associated with a change from the cash method to the accrual method of accounting for federal income tax purposes for CFI. This adjustment will be recognized ratably over 10 years. (F) To adjust for the acquisition of CFI's interest in the Company's 84% owned Circle Four hog production operations. (G) To eliminate the remaining equity of CFI related to the assets acquired and liabilities assumed not eliminated by other adjustments. (H) To record the issuance of 4.2 million shares in connection with the acquisition of CFI at an average of $25.85 per share. (3) Consolidated Condensed Statements of Operation Pro Forma Adjustments The Pro Forma Consolidated Condensed Statements of Operations give effect to the adjustments described below. (I) To eliminate intercompany sales. (J) To record amortization expense associated with acquisition costs. Acquisition costs are amortized over a five-year period. (K) To adjust for the gain realized by CFI on the sale of marketable securities that are excluded from the assets acquired. (L) To record additional pro forma depreciation and amortization expense associated with the increase in the carrying value for property, plant and equipment and goodwill over their estimated useful lives. See adjustment C. (M) To record the tax effect of the pro forma adjustments at the marginal tax rate. (N) To recognize, at the marginal tax rate, CFI's reported results that would have been realized as part of the consolidated group. 32 SIGNATURES Pursuant to the requirements 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. SMITHFIELD FOODS, INC. (Registrant) By: /s/ Aaron D. Trub ------------------------- (Signature) Aaron D. Trub Dated: July 20, 1999 33 EX-2 2 EXHIBIT 2.1 CONFORMED COPY ================================================================================ ACQUISITION AGREEMENT AMONG SMITHFIELD FOODS, INC., CARROLL'S FOODS, INC., CARROLL'S FOODS OF VIRGINIA, INC., CARROLL'S FOODS OF UTAH, INC., CARROLL'S FOODS OF MEXICO, INC., CARROLL'S CAPITAL, INC., CARROLL'S FARMS OF VIRGINIA, INC., CARROLL'S REALTY, INC., CARROLL'S PROCESSING, INC., CARROLL M. BAGGETT, JAMES O. MATTHEWS AND JEFFREY S. MATTHEWS Dated as of May 3, 1999 ================================================================================ TABLE OF CONTENTS Page Article I DEFINITIONS 1.1 Definitions......................................................1 Article II ACQUISITION 2.1 The Mergers......................................................9 2.2 Carroll's Brazil Acquisition....................................10 2.3 Carolina Turkeys Acquisition....................................10 2.4 Statement of Estimated Consideration; Exchange of Shares........10 2.5 Closing.........................................................11 2.6 Adjustment of Estimated Consideration...........................11 Article III REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS 3.1 Organization; Qualification.....................................14 3.2 Capitalization; Validity of Shares; Voting Trusts...............14 3.3 Authority Relative to Agreements................................15 3.4 Consents and Approvals..........................................15 3.5 Non-Contravention...............................................16 3.6 Real Property...................................................16 3.7 Personal Property...............................................16 3.8 Tax Matters.....................................................17 3.9 Securities Act and Other Securities Ownership Matters...........19 Article IV REPRESENTATIONS AND WARRANTIES OF BUYER 4.1 Organization; Qualification.....................................20 4.2 SEC Filings; Financial Statements...............................20 4.3 Absence of Certain Changes or Events............................21 4.4 Securities Act Matters..........................................21 4.5 Authority Relative to Agreements................................21 4.6 Consents and Approvals..........................................22 4.7 Non-Contravention...............................................22 i Article V ADDITIONAL AGREEMENTS 5.1 Conduct of Business.............................................22 5.2 Forbearances....................................................23 5.3 Negotiations with Others; Notification..........................26 5.4 Investigation of Business and Properties........................26 5.5 Confidentiality.................................................27 5.6 No Disclosure; Public Announcements.............................27 5.7 Transfer Taxes; Expenses........................................27 5.8 Efforts to Consummate...........................................28 5.9 Related Party Accounts..........................................28 5.10 Further Assurances............................................28 5.11 Rights to Examine Books and Records...........................28 5.12 Certain Tax Matters...........................................29 5.13 Additional Assets.............................................31 5.14 Carroll's Processing, Inc.....................................31 5.15 Allocation of Consideration...................................31 Article VI CONDITIONS TO OBLIGATIONS OF BUYER 6.1 Representations and Warranties..................................32 6.2 Performance of this Agreement...................................32 6.3 Consents and Approvals..........................................32 6.4 Injunction, Litigation, etc.....................................32 6.5 Legislation.....................................................32 6.6 Proceedings.....................................................32 6.7 Opinion of Counsel..............................................33 6.8 Closing Deliveries..............................................33 6.9 Material Change.................................................34 6.10 Companies Debt................................................34 6.11 Resignations..................................................34 6.12 Tax Matters...................................................34 6.13 Escrow Agreement..............................................35 6.14 Opinion of Financial Advisor; Approval of Buyer's Board of Directors..........................................35 Article VII CONDITIONS TO OBLIGATIONS OF THE SHAREHOLDERS 7.1 Representations and Warranties..................................35 7.2 Performance of this Agreement...................................35 7.3 Consents and Approvals..........................................36 7.4 Injunction, Litigation, etc.....................................36 ii 7.5 Legislation.....................................................36 7.6 Proceedings.....................................................36 7.7 Opinion of Counsel..............................................36 7.8 Closing Deliveries..............................................36 7.9 Escrow Agreement................................................37 7.10 Escrow Deposit and Estimated Consideration....................37 7.11 Registration Rights Agreement.................................37 7.12 Material Adverse Change.......................................37 7.13 Tax-Free Reorganizations......................................37 Article VIII SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION 8.1 Survival of Representations.....................................38 8.2 Indemnification by the Shareholders.............................38 8.3 Indemnification by Buyer........................................39 8.4 Notice and Defense of Claims....................................39 8.5 Calculation of Covered Liabilities..............................41 8.6 Exclusive Remedy................................................42 8.7 No Circular Recovery............................................42 Article IX TERMINATION 9.1 Termination.....................................................42 9.2 Procedure: Effect of Termination................................43 Article X GENERAL PROVISIONS 10.1 Notices.......................................................43 10.2 Interpretation................................................44 10.3 Entire Agreement..............................................45 10.4 No Third Party Beneficiaries..................................45 10.5 The Shareholders' Representative..............................45 10.6 Successors and Assigns........................................46 10.7 Severability..................................................46 10.8 Amendment.....................................................46 10.9 Extension; Waiver.............................................46 10.10 Disclosure Schedules..........................................47 10.11 Counterparts..................................................47 10.12 Governing Law.................................................47 10.13 Jurisdiction..................................................47 iii EXHIBITS A Form of Escrow Agreement B Form of Opinion of Counsel for the Shareholders C Form of Opinion of Counsel for Buyer D Form of Agreement with Shareholder E Form of Registration Rights Agreement SCHEDULES 1.1(a) Excluded Assets 1.1(b) Cash to Accrual tax Liability Methodology 1.1(c) Working Capital 1.1(d) Working Capital Methodology 2.1 Mergers 2.3 CPI Assets 3.1 Organization and Qualification 3.2 Capitalization 3.3 Authority 3.4 Consents and Approvals 3.5 Non-Contravention 3.8 Tax Matters 4.6 Consents and Approvals 4.7 Non-Contravention 5.1 Conduct of Business 5.2 Forbearances 5.9 Related Party Agreements 5.13 Additional Assets 5.15 Allocation of Consideration 10.2 Buyer's Executive Officers iv ACQUISITION AGREEMENT THIS ACQUISITION AGREEMENT (the "Agreement") dated as of May 3, 1999, is made among SMITHFIELD FOODS, INC., a Virginia corporation ("Buyer"), CARROLL'S FOODS, INC., a North Carolina corporation ("CFI"), CARROLL'S FOODS OF VIRGINIA, INC., a North Carolina corporation, CARROLL'S FOODS OF UTAH, INC., a North Carolina corporation, CARROLL'S FOODS OF MEXICO, INC., a North Carolina corporation, CARROLL'S CAPITAL, INC., a North Carolina corporation, CARROLL'S FARMS OF VIRGINIA, INC., a North Carolina corporation, CARROLL'S REALTY, INC., a North Carolina corporation (the foregoing corporations being referred to collectively as the "Carroll's Companies"), CARROLL'S PROCESSING, INC., a North Carolina corporation ("CPI") and CARROLL M. BAGGETT, JAMES O. MATTHEWS, JEFFREY S. MATTHEWS (collectively, the "Shareholders"). RECITALS The Shareholders own (i) all of the outstanding shares of capital stock of the Carroll's Companies and CPI and (ii) all of the equity interests in Carroll's Foods of Brazil, LLC, a North Carolina limited liability company ("Carroll's Brazil"). Buyer and the Shareholders desire that Buyer acquire substantially all of the assets and operations of the Carroll's Companies and CPI and the equity interests held by the Shareholders in Carroll's Brazil by (i) causing Subsidiaries of Buyer (each a "Buyer Sub" and collectively, "Buyer Subs") to merge into the Carroll's Companies with the Carroll's Companies being the surviving corporations, (ii) the Shareholders' transferring and conveying to a Subsidiary of Buyer all of the equity interests in Carroll's Brazil and (iii) causing CPI to sell to a Subsidiary of Buyer substantially all of its assets, including the 49% general partnership interests held by it in Carolina Turkeys, a North Carolina general partnership and the assumption of certain intercompany debt of CPI, all for the consideration hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing and the representations, warranties and agreements herein contained, the parties hereto agree as follows: Article I DEFINITIONS 1.1 Definitions. The following terms, as used herein, have the following meanings: 1 "Action" means any complaint, claim, prosecution, indictment, action, suit, arbitration, investigation, governmental audit, inquiry or proceeding by or before any Governmental Authority. "Affiliate" of a Person means a Person who, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. "Ancillary Agreements" means the Escrow Agreement, the Agreements with Shareholders and the Registration Rights Agreement. "Assets" means all of the Companies' right, title and interest in and to all properties, assets and rights of any kind, whether tangible or intangible, real or personal, owned by the Companies or in which the Companies have any interest (to the extent of such interest), other than the items specifically identified as Excluded Assets on Schedule 1.1(a). "Audited Financial Statements" means the audited combined financial statements of the Companies for the three years ended December 26, 1998. "Books and Records" means all books, records, lists, ledgers, files, reports, plans, drawings and operating records of every kind (in any form or medium) relating to the Companies, the Assets, Business operations, customers, suppliers and personnel, including (i) all corporate books and records of the Companies, (ii) all disk or tape files, printouts, runs or other computer-based information and the Companies' interest in all computer programs required to access, and the equipment containing, all such computer-based information, (iii) all product, business and marketing plans, (iv) all environmental control records, (v) all sales, maintenance and production records, (vi) equipment warranty information, (vii) litigation files, (viii) customer and supplier lists and information and (ix) personnel records. "Breaching Party" has the meaning set forth in Section 9.2. "Business" means the hog farming business and the turkey farming and processing business conducted by the Companies. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Raleigh, North Carolina or New York, New York are authorized by Law to close. "Buyer's Auditors" means Arthur Andersen LLP. "Buyer Claims" has the meaning set forth in Section 8.2(b). "Buyer Common Shares" means the Common Stock, par value $.50 per share, of Buyer. 2 "Buyer Indemnified Parties" has the meaning set forth in Section 8.2(a). "Buyer SEC Filings" has the meaning set forth in Section 4.2. "Buyer Sub" and "Buyer Subs" have the meaning set forth in the Recitals. "Capital Lease" means any lease of which any of the Companies is the lessee which is required to be capitalized on the balance sheet in accordance with GAAP. "Carolina Turkeys" means Carolina Turkeys, a North Carolina general partnership. "Carroll's Brazil" means Carroll's Foods of Brazil, LLC, a limited liability company organized under the laws of North Carolina. "Cash to Accrual Tax Liability" means the net present value (based on a 7% discount rate and a combined federal and state corporate income tax rate of 39.485%) of the tax liability that will be incurred by Buyer under Sections 447 and 481 of the Internal Revenue Code when it converts from the cash method to the accrual method of accounting with respect to the Carroll's Companies for federal income tax purposes as of the Effective Date, as determined in accordance with the methodology set forth in Schedule 1.1(b). "Cash to Accrual Tax Liability Adjustment" means the number of Buyer Common Shares equal to (i) the amount (which may be positive or negative) by which the Cash to Accrual Tax Liability is more or less than $45,000,000.00, divided by (ii) $31.11. Subject to the impact on the calculation of Consideration of the Companies Debt Adjustment and the Working Capital Adjustment, if the Cash to Accrual Tax Liability is more than $45,000,000, there will be a decrease in the number of Buyer Common Shares and if the Cash to Accrual Tax Liability is less than $45,000,000, there will be an increase in the number of Buyer Common Shares. "Claim" has the meaning set forth in Section 8.4. "Claim Notice" has the meaning set forth in Section 8.4. "Closing" has the meaning set forth in Section 2.5. "Closing Date" has the meaning set forth in Section 2.5. "Companies" means collectively the Carroll's Companies, Carroll's Brazil and CPI, and "Company" means whichever of the Companies the context suggests; provided that for purposes of Article III hereof "Companies" includes Carroll's Foods of the Midwest, Inc., a North Carolina corporation, and Matthews Family Properties, L.L.C., a North Carolina limited liability company. 3 "Companies Debt" means the interest bearing indebtedness (plus any accrued interest on such indebtedness) of the Companies, their respective Subsidiaries and certain other entities in which one or more of the Companies or their Subsidiaries own an interest, for borrowed money from third parties other than the Shareholders, the Companies or their respective Subsidiaries or Affiliates, computed pursuant to Schedule 1.1(c) and the percentages reflected therein. For example, in computing Companies Debt, 50% of the applicable indebtedness of Smithfield-Carroll's Farms, Carroll's Foods of Virginia, Inc., Carroll's Farms of Virginia, Inc., Granjas Carroll de Mexico, S.A. de C.V. and Tar Heel Turkey hatchery, Inc., 49% of the applicable indebtedness of Carolina Turkeys and the percentage ownership of Carroll's Foods of Utah, Inc. in Circle Four Farms, Circle Four Realty and Circle Four Sales as of the Effective Date, of the applicable indebtedness of Circle Four Farms, Circle Four Realty and Circle Four Sales, shall be included. "Companies Debt Adjustment" means the number of Buyer Common Shares equal to (i) the amount (which may be positive or negative) by which the Companies Debt on the Effective Date is more or less than $215,000,000 divided by (ii) $31.11. Subject to the impact on the calculation of Consideration of the Cash to Accrual Tax Liability Adjustment and the Working Capital Adjustment, if the Companies Debt as of the Effective Date is more than $215,000,000, there will be a decrease in the number of Buyer Common Shares and if the Companies Debt as of the Effective Date is less than $215,000,000, there will be an increase in the number of Buyer Common Shares. "Companies' Expenses" has the meaning set forth in Section 5.7(b). "Consideration" means 4,500,000 Buyer Common Shares adjusted for the Working Capital Adjustment adjusted for the Cash to Accrual Tax Liability Adjustment adjusted for the Companies Debt Adjustment. "Covered Liabilities" means any and all debts, losses, liabilities, claims, fines, royalties, deficiencies, damages, Actions, obligations, payments (including those arising out of any demand, assessment, settlement, judgment or compromise relating to any Action), costs (including costs of mitigation) and expenses (including interest and penalties due and payable with respect thereto and reasonable attorneys' and accountants' fees and expenses and any other out-of-pocket expenses incurred in investigating, preparing, defending, avoiding or settling any Action or in investigating, preserving or enforcing another party's obligations hereunder), matured or unmatured, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, including any of the foregoing arising under, out of or in connection with any Action, order or consent decree of any Governmental Authority or award of any arbitrator of any kind, or any law, rule, regulation, contract, commitment or undertaking. 4 "Effective Date" means (i) May 3, 1999 if the Closing occurs (A) on or before May 7, 1999 or (B) after May 7, 1999, and the failure to close on or before May 7, 1999 was the fault of Buyer, and (ii) the Closing Date if the Closing occurs after May 7, 1999 and the failure to close on or before May 7, 1999 was not the fault of Buyer. "Encumbrance" means any claim, lien, pledge, option, charge, easement, security interest, deed of trust, mortgage, right-of-way, encroachment, conditional sales agreement, encumbrance or other right of third parties, whether voluntarily incurred or arising by operation of law, and includes any agreement to give any of the foregoing in the future, and any contingent sale or other title retention agreement or lease in the nature thereof. "Escrow Agent" means the Person appointed as the escrow agent under the Escrow Agreement. "Escrow Agreement" means the agreement entered into by or on behalf of the Shareholders, on the one hand, and Buyer, on the other hand, substantially in the form of Exhibit A hereto. "Escrow Fund" means, at any time, the Buyer Common Shares held under the Escrow Agreement at such time. "Escrow Deposit" means 300,000 of the Buyer Common Shares. "Estimated Consideration" means 4,500,000 Buyer Common Shares adjusted for the estimated Working Capital Adjustment adjusted for the estimated Cash to Accrual Tax Liability Adjustment adjusted for the estimated Companies Debt Adjustment. "Exchange Act" means the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder. "Excluded Assets" means the items of real or personal property listed in Schedule 1.1(a). "Final Closing Date Adjustment Schedules" has the meaning set forth in Section 2.6(c). "Final Determination" has the meaning set forth in Section 8.4. "Financial Statements" means the Audited Financial Statements and the Interim Financial Statements. "GAAP" means generally accepted accounting principles in the United States of America, as in effect from time to time, consistently applied. 5 "Governmental Authority" means any federal, state, local, foreign, supernational or supranational court or tribunal, governmental, regulatory or administrative agency, department, bureau, authority or commission or arbitral panel. "indemnified party" has the meaning set forth in Section 8.4. "indemnifying party" has the meaning set forth in Section 8.4. "Interim Financial Statements" means the unaudited financial statements of the Companies for the three-month period ended in March 1999. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended. "Material Adverse Effect" or "Material Adverse Change" means as to any Person (i) any material adverse effect on or material adverse change with respect to (A) the business, operations, assets, liabilities, condition (financial or otherwise), results of operations or prospects of such Person and its Subsidiaries, taken as a whole, or (B) the right or ability of such Person or any of its Subsidiaries to consummate the transactions contemplated hereby or (ii) any event or condition which, with the passage of time, the giving or receipt of notice or the occurrence or nonoccurrence of any other circumstance, action or event, would reasonably be expected to constitute a "Material Adverse Effect" or "Material Adverse Change" with respect to such Person. "Mergers" has the meaning set forth in Section 2.1. "NCBCA" means the North Carolina Business Corporation Act. "Neutral Auditors" means Pricewaterhouse Coopers LLP. "Permitted Encumbrances" means (i) statutory liens for current state and local property taxes or assessments not yet due or delinquent; and (ii) mechanics', carriers', workers', repairers' and other similar liens arising or incurred in the ordinary course of business relating to obligations as to which there is no default on the part of the Companies. "Person" means an individual, a corporation, a partnership, a limited liability company, a limited liability partnership, an association, a trust or any other entity or organization, including a governmental or political subdivision or an agency or instrumentality thereof. "Personnel" of a corporation means all directors, officers and employees of such corporation, and "Personnel" of any Person other than an individual or a corporation means all persons responsible for or performing duties and functions similar to those of directors, officers and employees for such Person. 6 "Post-Closing Covenants" has the meaning set forth in Section 8.6. "Preliminary Closing Date Adjustment Schedules" has the meaning set forth in Section 2.6(a). "Real Property" has the meaning set forth in Section 3.6. "Required Working Capital" means $0.0. "Resolution Period" has the meaning set forth in Section 2.6(b). "Section 1374 Tax" has the meaning set forth in Section 5.12(b)(i). "Securities Act" means the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder. "Shareholder Claims" has the meaning set forth in Section 8.3(b). "Shareholder Indemnified Parties" has the meaning set forth in Section 8.3(a). "Shareholders' Auditors" means KPMG LLP. "Shareholders' Representative" has the meaning set forth in Section 10.5. "Subsidiary" means any corporation or other business entity, whether or not incorporated, of which at least 50% of the securities or interests having, by their terms, ordinary voting power to elect members of the Board of Directors, or other persons performing similar functions with respect to such entity, is held directly or indirectly by such party. "Survival Date" has the meaning set forth in Section 8.1. "Tax Audit" has the meaning set forth in Section 5.12(f). "Tax Benefit" means the tax effect of any item of loss, deduction or credit or any other item (including any increase in tax basis of Assets of the Companies) which decreases Taxes paid or payable. "Tax Returns" means any and all returns, reports, declarations and information statements with respect to Taxes required to be filed by or on behalf of any of the Companies with any Governmental Authority, including consolidated, combined or unitary returns and all amendments thereto. 7 "Tax Law" means the Internal Revenue Code, foreign, federal, state or local laws relating to Taxes and any regulations or official administrative pronouncements released thereunder. "Tax Loss" means the tax effect of any item (including any decrease in tax basis of Assets of the Companies) which increases Taxes paid or payable. "Taxes" means (i) all federal, state and local, whether domestic or foreign, taxes or assessments, including those relating to income, gross receipts, gross income, capital stock, franchise, profits, employees and payroll, withholding, foreign withholding, social security, unemployment, disability, license, real property, personal property, intangibles, stamp, excise, sales, use, transfer, occupation, value added, ad valorem, customs duties, premium, windfall profits, environmental (including taxes under Section 59A of the Internal Revenue Code), alternative minimum or estimated taxes or other similar tax, duty or governmental charge, together with any interest, penalties or additions to tax or additional amounts with respect to the foregoing, whether disputed or not and (ii) any obligations under any agreements or arrangements with respect to any Taxes described in clause (i) hereof. "Taxing Authority" means any Governmental Authority including social security administration, domestic or foreign, having jurisdiction over the assessment, determination, collection, or other imposition of Tax. "Third-Party Claim" has the meaning set forth in Section 8.4. "Working Capital" means the number determined by adjusting the amounts in the "Remaining" column in the "Carroll's Group Interest in Assets and Share of Liabilities for Purposes of Sale of Stock" dated March 27, 1999 which is attached hereto as Schedule 1.1(c) to the applicable amounts for each such line item as of the Effective Date, and as further adjusted pursuant to Schedule 1.1(d) (the "Working Capital Methodology"). For purposes of illustration, the Working Capital as of March 27, 1999 as shown in Schedule 1.1(c) is $11,185,969. "Working Capital Adjustment" means the number of Buyer Common Shares equal to (i) an amount (which may be positive or negative) by which the Working Capital of the Companies on the Effective Date is more or less than the Required Working Capital, divided by (ii) $31.11. Subject to the impact on the calculation of Consideration of the Cash to Accrual Tax Liability Adjustment and the Companies Debt Adjustment, if the Working Capital as of the Effective Date is less than the Required Working Capital, there will be a decrease in the number of Buyer Common Shares and if the Companies Debt as of the Effective Date is more than the Required Working Capital, there will be an increase in the number of Buyer Common Shares. "Working Capital Methodology" has the meaning set forth in the definition of Working Capital. 8 Article II ACQUISITION 2.1 The Mergers. (a) The Mergers. Upon the terms and subject to the satisfaction or waiver, if permissible, of the conditions hereof, and in accordance with the NCBCA, on the Closing the Buyer Subs shall be merged with and into the Carroll's Companies as set forth in Schedule 2.1 (the "Mergers"). Following the Mergers, the separate corporate existences of the Buyer Subs shall cease and the Carroll's Companies shall continue as the surviving corporations (the "Surviving Corporations") and shall be governed by the NCBCA. (b) Effective Time. On the Closing Date, the parties shall cause the Mergers to be consummated by causing articles of merger with respect to the Mergers to be executed and filed and the Mergers shall become effective in accordance with the relevant provisions of the NCBCA. ("Effective Time") (c) Effects of the Mergers. The Mergers shall have the effects set forth in Section 11-06 of the NCBCA. (d) Articles of Incorporation and By-Laws. The Articles of Incorporation of the applicable Carroll's Company, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation of the applicable Surviving Corporation. The By-Laws of the applicable Buyer Sub, as in effect immediately prior to the Effective Time, shall be the By-Laws of the applicable Surviving Corporation. (e) Directors. The directors of the applicable Buyer Sub immediately prior to the Effective Time shall be the initial directors of the applicable Surviving Corporation and shall hold office until their respective successors are duly elected and qualified, or their earlier death, resignation or removal. (f) Officers. The officers of the applicable Buyer Sub immediately prior to the Effective Time shall be the initial officers of the applicable Surviving Corporation and shall hold office until their respective successors are duly elected and qualified, or their earlier death, resignation or removal. (g) Conversion of Carroll's Companies Stock. Each share of common stock of each Carroll's Company outstanding immediately prior to the Effective Time (other than shares of common stock, if any, owned by Buyer, or any Subsidiary of Buyer) shall, by virtue of the Mergers and without any action on the part of the holder thereof, automatically be converted into the right to receive the Merger 9 Consideration allocated to such Carroll's Company as set forth in Schedule 2.1 divided by the aggregate number of shares of common stock of such Carroll's Company outstanding at the Effective Time (other than shares of common stock, if any, owned by Buyer or any Subsidiary of the Buyer). Each share of common stock of the Carroll's Companies owned by Buyer or any Subsidiary of Buyer immediately prior to the Effective Time shall, by virtue of the Mergers and without any action on the part of the holder thereof, automatically be canceled and cease to exist at and after the Effective Time and no consideration shall be paid with respect thereto. (h) Conversion of Buyer Sub Common Stock. Each share of common stock of each Buyer Sub issued and outstanding immediately prior to the Effective Time shall, by virtue of the Mergers and without any action on the part of the holder thereof, automatically be converted into and thereafter represent one validly issued, fully paid and nonassessable share of common stock of the applicable Surviving Corporation, so that thereafter Buyer will be the sole and exclusive owner of the outstanding capital stock of each of the Surviving Corporations. 2.2 Carroll's Brazil Acquisition. Upon the terms and subject to the satisfaction or waiver, if permissible, of the conditions hereof, at the Closing, Buyer shall cause its Subsidiary, Smithfield International Investments, Inc., a Delaware corporation ("SIII"), to acquire from the Shareholders, and each Shareholder agrees to transfer and convey to SIII all of the equity interests in Carroll's Brazil, free and clear of all Encumbrances, for an aggregate consideration of 100 Buyer Common Shares. 2.3 Carolina Turkeys Acquisition. Upon the terms and subject to the satisfaction or waiver, if permissible, of the conditions hereof, at the Closing, Buyer shall cause its Subsidiary, Carroll's Turkeys, Inc., a North Carolina corporation ("CTI"), to acquire from CPI all of the assets of CPI, including the assets set forth in Schedule 2.3 (the "CPI Assets"), and CPI agrees to transfer and convey to CTI the CPI Assets, free and clear of all Encumbrances except as expressly provided in Schedule 2.3, for an aggregate consideration of 1,000 Buyer Common Shares and the assumption of intercompany indebtedness of CPI set forth in Schedule 2.3 (the "Assumed CPI Debt"). 2.4 Statement of Estimated Consideration; Exchange of Shares. (a) Prior to the Closing Date, the Shareholders' Representative shall deliver to Buyer a statement signed by the president of CFI setting forth in reasonable detail the calculation of the Estimated Consideration, allocated among each of the Carroll's Companies, Carroll's Brazil and the CPI Assets, which calculation shall be acceptable to Buyer, acting reasonably. (b) At the Closing, Buyer will (i) deposit with the Escrow Agent the Escrow Deposit to be held and disbursed in accordance with the terms of the Escrow Agreement, and (ii) deliver to the Shareholders' Representative such number of Buyer Common Shares as shall equal the Estimated Consideration minus the Escrow Deposit. (c) If, after the Closing Date, certificates representing shares of common stock of the Carroll's Companies are presented to the Surviving Corporations, they shall be canceled and exchanged for Buyer Common Shares as provided in this Section 2.4. 10 2.5 Closing. The closing (the "Closing") shall take place at the offices of McGuire, Woods, Battle & Boothe LLP, One James Center, Richmond, Virginia, at 2:00 p.m. local time on May 6, 1999, or such other date as may be agreed upon by the parties (the "Closing Date"). If the Closing takes place, the Closing and all of the transactions contemplated by this Agreement shall be deemed for all purposes including (i) tax purposes and (ii) the transfer of the benefits and burdens of ownership, including income and loss, to have occurred as of the Effective Date. 2.6 Adjustment of Estimated Consideration. (a) As promptly as practicable, but in no event later than 30 days after the Closing Date, Buyer shall cause the appropriate auditors to deliver to Shareholders' Auditors (i) a proposed pro forma K-1 for each of Circle Four Realty and Circle Four Sales and (ii) financial statements (as of the day before the Effective Date) and the 1997 income tax working papers for Circle Four Farms and Circle Four Farms, LLC. As promptly as practicable, but in no event later than the later of (i) 90 days after the Closing Date and (ii) 30 days after the receipt by Buyer and Buyers' Auditors of the final federal income Tax Returns for the periods ending as of the day before the Effective Date for each of the Companies which shall have been prepared as contemplated by Section 5.12(b) hereof, Buyer shall prepare and deliver to the Shareholders' Representative (i) schedules showing (A) the line items comprising the Working Capital as of the Effective Date in accordance with the Working Capital Methodology, (B) the Companies Debt as of the Effective Date and (C) the net present value of the cash to accrual basis tax liability in accordance with the Cash to Accrual Tax Methodology and (ii) a schedule setting forth the calculation of the Consideration, in each case, setting forth in reasonable detail the data and calculations set forth therein, together with a certification, signed by the Vice President, Finance of Buyer, stating that the foregoing schedules have been prepared in conformity with GAAP applied on a basis consistent with the basis on which the Audited Financial Statements and the Interim Financial Statements were prepared, except as otherwise contemplated by the definitions of Working Capital and Companies Debt, and in conformity with the provisions of this Agreement (collectively, the "Preliminary Closing Date Adjustment Schedules"). (b) The Shareholders, Shareholders' Auditors and other representatives of the Shareholders shall have full access during normal business hours to all relevant books and records and employees of the Companies to the extent required to review the Preliminary Closing Date Adjustment Schedules and the resolution of any dispute with respect thereto, and shall be permitted to review the working papers, if any, of Buyer or Buyer's Auditors relating thereto. Buyer and Buyer's Auditors shall cooperate with the Shareholders and Shareholders' Auditors in 11 facilitating such review. Unless the Shareholders' Representative gives written notice to Buyer on or before the 45th day after the Shareholders' Representative's receipt of the Preliminary Closing Date Adjustment Schedules specifying in reasonable detail all disputed items and the basis therefor, the Shareholders shall be deemed to have accepted and agreed to the Preliminary Closing Date Adjustment Schedules. If the Shareholders' Representative so notifies Buyer of the Shareholders' objection to one or more items set forth in the Preliminary Closing Date Adjustment Schedules, Buyer and the Shareholders' Representative shall, within 30 days following such notice (the "Resolution Period"), attempt to resolve their differences with respect to any disputed amounts and any resolution by them as to any disputed amounts shall be final, binding and conclusive. The Shareholders shall be deemed to have accepted and agreed to the items set forth in the Preliminary Closing Date Adjustment Schedules that are not disputed in the manner set forth above. During the period of any dispute within the contemplation of this Section 2.6, Buyer, the Buyer's Auditors and other representatives of Buyer shall be permitted to review the working papers, if any, of the Shareholders' Auditors relating to the Preliminary Closing Date Adjustment Schedules. The Shareholders and the Shareholders' Auditors shall cooperate with Buyer and the Buyer's Auditors in facilitating such review. (c) If at the conclusion of the Resolution Period amounts remain in dispute, then all amounts remaining in dispute shall be submitted, as soon as practicable, to the Neutral Auditors. The parties agree to execute a reasonable engagement letter if requested by the Neutral Auditors. The Neutral Auditors shall act as an arbitrator to determine only those issues still in dispute. The Neutral Auditors' determination shall be made within 30 days after the expiration of the Resolution Period, shall be set forth in a written statement delivered to Buyer and the Shareholders' Representative and shall be final, binding and conclusive. The term "Final Closing Date Adjustment Schedules," as used herein, means the definitive Closing Date Adjustment Schedules agreed, or deemed to have been agreed, to by Buyer and the Shareholders' Representative in accordance with Section 2.6(b) or the definitive Closing Date Adjustment Schedules resulting from the determination by the Neutral Auditors in accordance with this Section 2.6(c) (in addition to those items theretofore agreed by Buyer and the Shareholders' Representative). (d) After the resolution of all disputes with respect to the Final Closing Date Adjustment Schedules the parties shall determine the difference between the Estimated Consideration and the Consideration (the "Consideration Adjustment"). In the event that the Consideration as set forth in the Final Closing Date Adjustment Schedules is greater than the Estimated Consideration, (i) the Escrow Agreement shall terminate and the entire Escrow Fund shall be distributed to the Shareholders' Representative for distribution to the Shareholders as their interests shall appear and (ii) Buyer shall issue to the Shareholders such additional whole number of Buyer Common Shares as equals the amount of the Consideration Adjustment (ignoring for this purpose any fractional share 12 calculated). In the event that the Consideration as set forth in the Final Closing Date Adjustment Schedules is less than the Estimated Consideration, and the Consideration Adjustment is not more than the number of Buyer Common Shares held in the Escrow Fund (i) there shall be delivered to Buyer from the Escrow Fund such whole number of Buyer Common Shares as equals the amount of the Consideration Adjustment (ignoring for this purpose any fractional share calculated), and the balance, if any, of the Escrow Fund shall be delivered to the Shareholders' Representative for distribution to the Shareholders as their interests shall appear. In the event that the Consideration as set forth in the Final Closing Date Adjustment Schedules is less than the Estimated Consideration, and the Consideration Adjustment is more than the number of Buyer Common Shares held in the Escrow Fund (i) there shall be delivered to Buyer the entire Escrow Fund and (ii) the Shareholders shall redeliver to Buyer such whole number of Buyer Common Shares received by the Shareholders at the Closing as equals the difference between the amount of the Consideration Adjustment minus the number of Buyer Common Shares distributed to Buyer from the Escrow Fund (ignoring for this purpose any fractional share calculated). All deliveries contemplated by this Section 2.6(d) shall be made within ten (10) Business Days after delivery of the Final Closing Date Adjustment Schedules. (e) The fees of Buyer's Auditors incurred in connection with the preparation of the Preliminary and Final Closing Date Adjustment Schedules shall be borne by Buyer, and the fees of the Shareholders' Auditors incurred in connection with their review of the Preliminary and Final Closing Date Adjustment Schedules shall be borne by the Shareholders. The fees of any Neutral Auditors shall be borne by the Shareholders and Buyer in such amount(s) as shall be determined by the Neutral Auditors based on the proportion that the aggregate amount of disputed items submitted to the Neutral Auditors that is unsuccessfully disputed by the Shareholders, on the one hand, or Buyer, on the other hand, as determined by the Neutral Auditors, bears to the total amount of such disputed items so submitted. Article III REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS As an inducement to Buyer to enter into this Agreement, the Shareholders hereby make, as of the date hereof and as of the Closing Date, the following representations and warranties to Buyer, except as otherwise set forth in written disclosure schedules (the "Schedules") delivered to Buyer prior to the execution hereof, a copy of which is attached hereto. The Schedules are numbered to correspond to the various sections of this Article III setting forth certain exceptions to the representations and warranties contained in this Article III and certain other information called for by this Agreement. Unless otherwise specified, no disclosure made in any particular Schedule shall be deemed made in any other Schedule unless expressly made therein (by cross-reference or otherwise). 13 The Shareholders, jointly and severally, represent and warrant to Buyer the following: 3.1 Organization; Qualification. (a) Each of the Companies is a corporation or limited liability company duly organized, validly existing and in good standing under the laws of the jurisdictions disclosed on Schedule 3.1. Carolina Turkeys is a validly existing general partnership under the laws of North Carolina. Each of the Companies and Carolina Turkeys has all power and authority to own or lease all of its respective properties and assets and to carry on its business as it is presently being conducted. To the knowledge of the Shareholders, each of the Companies and Carolina Turkeys is duly qualified and in good standing to transact business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to be in good standing or to be duly qualified would not, individually or in the aggregate, have a Material Adverse Effect on the Carroll's Companies. Each jurisdiction in which any of the Companies or Carolina Turkeys is qualified to do business is set forth in Schedule 3.1. (b) A complete list of the directors and officers (or persons having similar responsibilities or performing similar duties) of each of the Carroll's Companies and Carroll's Brazil is set forth in Schedule 3.1. (c) None of the Carroll's Companies has ever had any Subsidiary except as disclosed in Schedule 3.1. 3.2 Capitalization; Validity of Shares; Voting Trusts. (a) The authorized capitalization of each of the Companies and the shares of capital stock or the equity interests, as the case may be, thereof which are outstanding is set forth in Schedule 3.2. All of the outstanding shares of capital stock or equity interests (i) have been duly authorized, are validly issued, fully paid and nonassessable, and were not issued in violation of any preemptive rights, and (ii), except as set forth in Schedule 3.2, are owned beneficially and of record as set forth in Schedule 3.2, free and clear of any restrictions on transfer (other than restrictions under the Securities Act and state securities laws) and Encumbrances. All of the outstanding shares of capital stock or other equity interests of the Subsidiaries, as set forth in Schedule 3.2, are validly issued, fully paid and nonassessable and, except as set forth in Schedule 3.2, are owned by the Carroll's Companies, Carroll's Brazil or other Subsidiaries in the amounts set forth in Schedule 3.2. Except for Encumbrances set forth in Schedule 3.2 which will be released prior to the Closing, the shares of capital stock or other equity interests of Subsidiaries are owned free and clear of Encumbrances. 14 (b) Except as set forth in Schedule 3.2, (i) none of the Companies has any commitment to issue or sell any shares of capital stock or equity interests, or any securities or obligations convertible into or exchangeable for, or giving any Person any right to acquire from any of the Companies any shares of capital stock or equity interests, and no such securities or obligations are outstanding and (ii) there are no obligations or commitments of any kind for the repurchase, redemption or other acquisition of any shares of capital stock or equity interests of any of the Companies. (c) Except as set forth in Schedule 3.2, none of the Carroll's Companies or Carroll's Brazil, directly or indirectly, owns any capital stock of or other equity interest in any corporation, partnership or other Person. (d) Except as set forth in Schedule 3.2, there are no shareholders agreements, voting trusts, proxies or other agreements or understandings with respect to or concerning the purchase, sale or voting of the ownership interests of any of the Companies. 3.3 Authority Relative to Agreements. Each of the Carroll's Companies, CPI and the Shareholders has all necessary power and authority to execute and deliver this Agreement and the Ancillary Agreements and to consummate the transactions contemplated hereby and thereby and to perform their respective obligations hereunder and thereunder. The execution and delivery of this Agreement and the Ancillary Agreements, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by the board of directors and shareholders of each of the Carroll's Companies and CPI, and no other proceedings on the part of the Companies are necessary with respect thereto. This Agreement has been, and when executed the Ancillary Agreements will have been, duly executed and delivered by each of the Carroll's Companies, CPI and the Shareholders and, assuming that Buyer has duly authorized, executed and delivered this Agreement and the Ancillary Agreements, this Agreement constitutes, and the Ancillary Agreements, when executed and delivered will constitute, valid and binding obligations of each of the Carroll's Companies, CPI and the Shareholders, enforceable against each of them and the Shareholders' heirs, assigns and personal representatives in accordance with their terms. 3.4 Consents and Approvals. To the knowledge of the Shareholders, no consent, waiver, agreement, approval or authorization of, or declaration, filing, notice or registration to or with, any Governmental Authority is required to be made or obtained by any Shareholder or any of the Companies in connection with the execution, delivery and performance of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby other than those set forth in Schedule 3.4. To the knowledge of the Shareholders, except as set forth in Schedule 3.4, there is no requirement that any party to any note, bond, mortgage, indenture, license, agreement, lease or other instrument or obligation to which any Shareholder or any of the Companies is a party or by which any of them is bound, consent to the execution and delivery of this Agreement or the Ancillary Agreements by any Shareholder, the Companies or the consummation of the transactions contemplated hereby and thereby. 15 3.5 Non-Contravention. The execution, delivery and performance by the Carroll's Companies, CPI and the Shareholders of this Agreement and the Ancillary Agreements does not, and the consummation by the Carroll's Companies, CPI and the Shareholders of the transactions contemplated hereby and thereby will not (i) violate or result in a breach of any provision of the Articles of Incorporation, Bylaws or similar organizational documents of any of the Companies, (ii) to the knowledge of the Shareholders, except as described in Schedule 3.5, conflict with, result in a breach of or result in a default (or give rise to any right of termination, cancellation or acceleration) under the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement, lease or other instrument or obligation to which any of the Companies and the Shareholders is a party or by which any of the Companies and the Shareholders is bound, or (iii) to the knowledge of the Shareholders, violate any order, writ, injunction, decree, statute, rule or regulation applicable to any of the Companies and the Shareholders or any of their Assets. 3.6 Real Property. To the knowledge of the Shareholders, there are no defects in title to any of the real property owned by the Carroll's Companies or to be transferred or conveyed to one or more of the Carroll's Companies before the Closing as contemplated by Section 5.13 hereof (collectively, the "Real Property") that would make title to any such Real Property unmarketable. There are no mortgages or deeds of trust encumbering any of the Real Property, except mortgages and deeds of trust reflected in the Financial Statements. To the knowledge of the Shareholders, there are no special zoning ordinances or use permits required for the continued operation of the business of the Carroll's Companies as it currently is being conducted. There are no outstanding options or rights of first refusal or first offer to purchase the Real Property, or any portion thereof or interest therein. To the knowledge of the Shareholders, there are no eminent domain (which term, as used herein, shall include other compulsory acquisitions or takings by Governmental Authority) proceedings pending or, to the knowledge of the Shareholders, threatened against any real property or any material portion thereof which proceedings (if resulting in a taking of any real property by a Governmental Authority) could have a material adverse effect on the use of such real property as now used by the Carroll's Companies. 3.7 Personal Property. To the knowledge of the Shareholders, the Carroll's Companies own all tangible personal property owned by them, free and clear of any and all liens or security interests securing indebtedness, except liens and security interests reflected in the Financial Statements. With respect to each such item of tangible personal property (i) with the exception of contract growers of the Carroll's Companies, there are no outstanding options or rights of first refusal in favor of any other party to purchase any such item of tangible personal property or any portion thereof or interest therein and (iii) there are no parties (other than the Companies and their Personnel, and contract growers, in each case in their capacity as such) who are in possession of or who are using any such item of personal property; 16 3.8 Tax Matters. (a) Filing of Tax Returns. The Companies have timely filed with the appropriate taxing authorities all Tax Returns (including information returns and other material information) in respect of Taxes required to be filed through the date hereof and will timely file any such Tax Return required to be filed. All such Tax Returns are complete and accurate in all material respects. The Companies do not currently have outstanding any request for any extension of time within which to file Tax Returns in respect of any Taxes except for properly filed extensions of time necessary to complete the Companies' 1998 federal and state income Tax returns.. The Shareholders have delivered to Buyer complete and accurate copies of the federal, state and local income Tax Returns (and examination reports and statements of deficiency) for the years 1996 and 1997. (b) S-Corporation. Except as set forth in Schedule 3.8, each of the Companies is and has at all times been an "S corporation" (within the meaning of Section 1361(a) of the Internal Revenue Code) for each taxable year (or portion thereof) and no action has or will be taken to terminate and no condition exists which could result in the termination of such election. Except as set forth in Schedule 3.8, none of the Companies is or has been liable for the Tax imposed under Section 1375(a) of the Internal Revenue Code; and none of the Companies is or has been liable for the Tax imposed under Section 1374(a) of the Internal Revenue Code. (c) Payment of Taxes. All Taxes for which any of the Companies is or may be liable in respect of periods (or portions thereof) ending before the Effective Date, have been timely paid, or a reserve for Tax liability (other than any reserve for deferred Taxes established to reflect timing differences between book and tax income) adequate in accordance with GAAP has been established therefor, as set forth in the Financial Statements. (d) Audits, Investigations or Claims. No substantial deficiencies for Taxes have been claimed, proposed or assessed in writing by any Taxing Authority against any of the Companies which have not been paid or reserved in the Financial Statements. Since January 1, 1993, no claim has been made by any Taxing Authority in a jurisdiction in which a Company does not file Tax Returns that such Company is or may be subject to taxation by such jurisdiction. There are no pending or, to the knowledge of the Shareholders, threatened audits, investigations or claims for or relating to any liability in respect of Taxes that in the reasonable judgment of the Shareholders are likely to result in an additional amount of Taxes, and there are no matters under discussion with any Taxing Authority with respect to Taxes that in the reasonable judgment of the Shareholders is likely to result in an additional liability for Taxes to the Companies. Audits of federal, state, and local returns for Taxes, if any, by the relevant taxing or other governmental authorities have been completed for the periods set forth in Schedule 3.8. Except as set forth in Schedule 3.8, no Tax Return is currently the subject of audit and the Companies have not been notified in writing that any Taxing Authority intends to audit a Tax Return for Taxes for any other period. No extension of a statute of limitations relating to Taxes is in effect with respect to the Companies. Except as set forth in Schedule 3.8, no power of attorney has been executed by the Companies with respect to any matters relating to Taxes which is currently in force. 17 (e) Encumbrances. There are no Encumbrances for Taxes (other than current taxes not yet due and payable) on the Assets of the Companies. (f) Safe Harbor Lease Property. None of the Assets of the Companies is property that (i) is required to be treated as being owned by any other person pursuant to the so-called safe harbor lease provisions of former Section 168(f)(8) of the Internal Revenue Code, (ii) directly or indirectly secures any debt the interest on which is tax-exempt under Section 103(a) of the Internal Revenue Code or (iii) is "tax-exempt use property" within the meaning of Section 168(h) of the Internal Revenue Code. (g) Tax Election. All material elections with respect to Taxes affecting the Companies as of the date hereof are set forth in Schedule 3.8. None of Companies has agreed to make, or is required to make, any adjustment under Section 481(a) of the Internal Revenue Code (or similar provisions under state or local law) by reason of a change in accounting method or otherwise, except as a result of the consummation of the transactions contemplated hereby. (h) Withholding. The Companies have paid over all Taxes required to have been withheld and paid to any Governmental Authority in connection with amounts paid to any employee, independent contractor, creditor, shareholder, equity investor or other third party. (i) Combined Returns. Since January 1, 1990, no Company has been included in any consolidated, combined or unitary Tax Return provided for under the laws of the United States, any state or locality with respect to Taxes for any taxable period for which the statute of limitations has not expired. None of the Companies has any liability for the Taxes of any Person under Treasury Regulation Section 1.1502 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise. (j) Tax Sharing Agreements. There are no tax sharing agreements or similar arrangements (whether written or unwritten) with respect to or involving any of the Companies pursuant to which any of the Companies may be liable for Taxes of another Person. (k) Section 280G. None of the Companies has made any payments, is obligated to make any payments, or is a party to any agreement that could obligate it to make any payments that will not be deductible under Section 280G of the Internal Revenue Code. (l) Section 6662. Each of the Companies has disclosed on its federal income Tax Return all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662 of the Internal Revenue Code which could be a liability of Buyer or the Companies after the Effective Date. 18 3.9 Securities Act and Other Securities Ownership Matters. (a) Each of the Shareholders is an "accredited investor" as defined under both subsections (5) and (6) of Rule 501(a) of Regulation D under the Securities Act, and each is an individual resident in the State of North Carolina. Each Shareholder is acquiring Buyer Common Shares hereunder solely for investment purposes for his or her own account as principal and not with a view to resale or distribution except pursuant to an effective registration statement filed under the Securities Act or an applicable exemption from such registration. Each Shareholder acknowledges that Buyer's offering and sale of Buyer Common Shares hereunder will not be registered under the Securities Act or any other securities laws, and that accordingly restrictions will apply to the Shareholders' ability to transfer or sell such securities, and that an appropriate legend to such effect will be placed on each stock certificate representing any such shares. Each Shareholder acknowledges that none of the securities may be resold unless their offer and sale are registered under the Securities Act and applicable state securities laws, or unless appropriate exemptions from registration are available. Each Shareholder agrees that he or she will not directly or indirectly offer, transfer, sell, pledge, hypothecate or otherwise dispose of any Buyer Common Shares (or solicit any offer to buy, purchase or otherwise acquire, or to take a pledge of, any such shares) except in compliance with the Securities Act and applicable state securities laws and regulations. Each Shareholder acknowledges that he or she and his or her representatives have had an opportunity to examine the financial and business affairs of Buyer and an opportunity to ask questions of and receive answers from Buyer's management, and that he or she and his or her representatives have such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of an investment in Buyer in making an informed investment decision with respect thereto. (b) Each of the Shareholders is an individual who does not share the same principal residence as any of the other Shareholders. No Shareholder either directly or through entities controlled by such Shareholder will hold 15% or more of the outstanding common shares of Buyer following the consummation of the transactions contemplated hereby. 19 Article IV REPRESENTATIONS AND WARRANTIES OF BUYER As an inducement to the Carroll's Companies, CPI and the Shareholders to enter into this Agreement, Buyer hereby makes, as of the date hereof and as of the Closing Date, the following representations and warranties to the Carroll's Companies, CPI and the Shareholders, except as otherwise set forth in written disclosure schedules (the "Schedules") delivered to the Carroll's Companies, CPI and the Shareholders prior to the execution hereof, a copy of which is attached hereto. The Schedules are numbered to correspond to the various sections of this Article IV setting forth certain exceptions to the representations and warranties contained in this Article IV and certain other information called for by this Agreement. Unless otherwise specified, no disclosure made in any particular Schedule shall be deemed made in any other Schedule unless expressly made therein (by cross-reference or otherwise). Buyer represents and warrants to the Carroll's Companies, CPI and the Shareholders the following: 4.1 Organization; Qualification. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Virginia and has all power and authority to own all of its properties and assets and to carry on its business as it is presently being conducted. 4.2 SEC Filings; Financial Statements. (a) Buyer has timely filed all registration statements, prospectuses, forms, reports and documents required to be filed by it under the Securities Act or the Exchange Act, as the case may be, since April 29, 1996 (collectively, the "Buyer SEC Filings"). The Buyer SEC Filings (i) were prepared in accordance with the requirements of the Securities Act or the Exchange Act, as the case may be, and (ii) did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (b) Each of the consolidated financial statements (including, in each case, any notes thereto) contained in the Buyer SEC Filings was prepared in accordance with GAAP applied on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto) and each presented fairly the consolidated financial position of Buyer and the consolidated Buyer Subsidiaries as at the respective dates thereof and for the respective periods indicated therein, except as otherwise noted therein (subject, in the case of unaudited statements, to normal and recurring year-end adjustments which were not and are not expected, individually or in the aggregate, to have a Material Adverse Effect on Buyer). 20 (c) Except as and to the extent set forth on the consolidated balance sheet of Buyer and the consolidated Buyer Subsidiaries as of May 3, 1998 included in Buyer's Annual Report on Form 10-K for the year ended May 3, 1998, including the notes thereto, neither Buyer nor any Buyer Subsidiary has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on a balance sheet or in notes thereto prepared in accordance with GAAP, except for liabilities or obligations incurred in the ordinary course of business since May 3, 1998 that would neither, individually or in the aggregate, (i) have a Material Adverse Effect on Buyer nor (ii) prevent or materially delay the performance of this Agreement by Buyer. 4.3 Absence of Certain Changes or Events. Since May 3, 1998, except as contemplated by or as disclosed in this Agreement or as disclosed in any Buyer SEC Filing filed prior to the date hereof, there has not been (i) any Material Adverse Effect on the Buyer or an event or development (including in connection with the transactions contemplated hereby) that would, individually or in the aggregate, have a Material Adverse Effect on the Buyer, or (ii) any event that would reasonably be expected to prevent or materially delay Buyer's performance of its obligations under this Agreement. 4.4 Securities Act Matters. (a) Each of the Buyer Common Shares to be issued as contemplated by this Agreement has been duly authorized and, when issued in accordance with this Agreement, will be validly issued, fully paid and nonassessable and free of preemptive rights. (b) Neither Buyer nor any Person acting on its behalf has, directly or indirectly, offered any Buyer Common Shares to be issued hereunder for sale to, or solicited any offers to buy any thereof from, or otherwise approached or negotiated with respect thereto with, anyone other than the Shareholders, and neither Buyer nor any Person acting on its behalf has taken or will take any action that would cause Buyer's offer, issuance or sale of any such shares hereby to violate the provisions of Section 5 of the Securities Act or any applicable state securities laws and regulations. 4.5 Authority Relative to Agreements. Buyer has all necessary power and authority to execute and deliver this Agreement and the Ancillary Agreements and to consummate the transactions contemplated hereby and thereby and to perform its obligations hereunder and thereunder. This Agreement has been, and when executed and delivered the Ancillary Agreements will have been, duly executed and delivered by Buyer and, subject to the approval of the Board of Directors of Buyer and assuming that the Carroll's Companies, CPI and the Shareholders have duly authorized, executed and delivered this Agreement, this Agreement constitutes, and the Ancillary Agreements will constitute, valid and binding obligations of Buyer, enforceable against Buyer in accordance with their terms. 21 4.6 Consents and Approvals. No consent, waiver, agreement, approval or authorization of, or declaration, filing, notice or registration to or with, any Governmental Authority is required to be made or obtained by Buyer in connection with the execution, delivery and performance of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby or thereby. Except as set forth in Schedule 4.6, there is no requirement that any party to any agreement, contract, lease, note, loan, evidence of indebtedness, purchase order, letter of credit, franchise agreement, undertaking, covenant not to compete, employment agreement, license, instrument, obligation, commitment or purchase and sales order to which Buyer is a party or by which it is bound, consent to the execution and delivery of this Agreement or the Ancillary Agreements by Buyer or the consummation of the transactions contemplated hereby or thereby, other than those set forth in Schedule 4.6 and except for such consents the failure of which to obtain, individually or in the aggregate, would not have a Material Adverse Effect on Buyer or the Shareholders. 4.7 Non-Contravention. The execution, delivery and performance by Buyer of this Agreement and the Ancillary Agreements do not, and the consummation by Buyer of the transactions contemplated hereby or thereby will not (i) except as set forth in Schedule 4.7, violate or result in a breach of any provision of the Articles of Incorporation, as amended to date, or Bylaws of Buyer, (ii) conflict with, result in a breach of or result in a default (or give rise to any right of termination, cancellation or acceleration) under the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement, lease or other instrument or obligation to which Buyer is a party or by which Buyer is bound or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Buyer or its material assets or capital stock, excluding from the foregoing clauses (ii) and (iii) such requirements, defaults, breaches, rights or violations that would not have a Material Adverse Effect on Buyer or the Shareholders or that become applicable as a result of (1) the business or activities in which the Companies or any of their Affiliates is engaged, or (2) any acts or omissions by, or facts pertaining to, the Companies or any of their Affiliates. Article V ADDITIONAL AGREEMENTS 5.1 Conduct of Business. Except as set forth in Schedule 5.1, from the date hereof and until the Closing, the Shareholders will cause the Carroll's Companies, CPI and Carroll's Brazil and their respective Subsidiaries to conduct the Business only in the ordinary and usual course and in a manner consistent with past practices. 5.2 Forbearances. Except as set forth in Schedule 5.2, the Shareholders shall cause the Companies, from the date hereof until the earlier of (i) the Closing or (ii) termination under Article IX, without the written consent of Buyer, not to: 22 (i) sell, assign, lease or transfer any of the Assets that exceed $10,000 individually or $25,000 in the aggregate in book value or fair market value, other than inventory sold or disposed of in the ordinary course of business, consistent with past practice, to Buyer or persons who are not Affiliates (other than the Carroll's Companies and their Subsidiaries) of the Carroll's Companies for fair consideration; (ii) cancel or terminate, or amend, modify or waive any material term of, any material contract; (iii) (A) increase the compensation payable or to become payable to any of its directors or officers, (B) increase the base compensation payable or to become payable to any of its Personnel who are not directors or officers, except for normal periodic increases in such base compensation (not exceeding, in each case, 5%) in the ordinary course of business, consistent with past practice, (C) increase the sales commission rate payable or to become payable to any of its Personnel who are not directors or officers, (D) grant, make or accrue any loan, bonus, severance, termination or continuation fee, incentive compensation (excluding sales commissions), service award or other like benefit, contingently or otherwise, to or for the benefit of any of its Personnel, except pursuant to the employee plans in effect as of the date hereof, (E) adopt, amend or cause any addition to or modification of any employee plan, other than (1) contributions made in the ordinary course of business, consistent with past practice or (2) the extension of coverage to any of its Personnel who became eligible after the date of this Agreement, (F) grant any additional stock options or performance unit grants or other interest under any employee plan, (G) enter into any new employment or consulting agreement or cause any written or oral termination, cancellation or amendment of any such employment or consulting agreement to which it is a party (except with respect to any employee at will without a written agreement), (H) enter into any collective bargaining agreement or cause any termination or amendment of any collective bargaining agreement to which it is a party or (I) with respect to any Shareholder, or any Affiliate of any Shareholder, grant, make or accrue any payment or distribution or other like benefit, contingently or otherwise, or otherwise transfer Assets, including any payment of principal of or interest on any debt owed to any such Shareholder or Affiliate, other than (1) any payments to such person in the ordinary course of business in his capacity as an employee of the Carroll's Companies and (2) any transactions between the Carroll's Companies, in the ordinary course of business and on an arms' length basis; 23 (iv) make any capital expenditure or commitment to make any capital expenditure in excess of $50,000; (v) execute (A) any lease for real property or (B) any lease for personal property involving annual payments in excess of $50,000; (vi) make any payments or given any other consideration to customers or suppliers, other than payments under, and in accordance with the terms of, contracts in effect at the time of such payment; (vii) change its accounting methods, principles or practices, including any change in the application or interpretation of GAAP; (viii) (A) issue or sell, or enter into any agreement obligating it to issue or sell (B) directly or indirectly redeem, purchase or otherwise acquire, or split, combine, reclassify or otherwise adjust, any class or series of capital stock, or any securities convertible into or exchangeable for capital stock or (C) declare or pay any dividend or other distribution in respect of any class or series of capital stock; (ix) (A) incur any indebtedness for borrowed money or enter into any commitment to borrow money other than borrowings in the ordinary course of business under the Companies' working capital lines or (B) incur any obligations for any performance bonds, payment bonds, bid bonds, surety bonds, letters of credit, guarantees or similar instruments; (x) take any action in anticipation of the execution of this Agreement or for any other reason to delay or defer expenses (including delay or postponement of capital expenditures or the payment of accounts payable), liabilities or obligations of any kind whatsoever or to accelerate any income, revenue, payment or similar item, other than in the ordinary course of business consistent with past practice; 24 (xi) pay, discharge or satisfy any liability, other than any such payment, discharge or satisfaction in the ordinary course of business, consistent with past practice of (A) liabilities reflected or reserved against on the balance sheets in the Financial Statements or incur subsequent thereto in the ordinary course of business, consistent with past practice, or (B) liabilities under, and in accordance with the terms of, any material contracts, licenses and permits and other commitments set forth in the Schedules; (xii) change or amend any of their articles of incorporation or bylaws or similar organizational documents; (xiii) (A) acquire (by merger, consolidation, acquisition of stock, other securities or assets or otherwise), (B) make a capital investment (whether through the acquisition of an equity interest, the making of a loan or advance or otherwise) in or (C) guarantee indebtedness for borrowed money of, (1) any Person or (2) any portion of the assets of any Person that constitutes a division or operating unit of such Person; (xiv) mortgage or pledge, or otherwise make or suffer any Encumbrance (other than any Permitted Encumbrance) on, any of their material Assets or group of their Assets that is material in the aggregate; (xv) revalue any of their Assets, including any write-off of notes or accounts receivable or any increase in any reserve (other than in the ordinary course of business consistent with past practice), involving in excess of $10,000 individually or $50,000 in the aggregate (such amounts to be calculated without netting any decrease); (xvi) amend, cancel or terminate any license or permit that is material to any of the Companies; (xvii) cancel, waive or release any right or claim (or series of related rights or claims) involving in excess of $10,000 individually or $50,000 in the aggregate; or (xviii) make any material change in the policies or practices relating to selling practices, returns, discounts or other terms of sale or accounting therefor or in policies of employment; or entered into any contract to do any of the foregoing. 25 5.3 Negotiations with Others; Notification. (a) No Solicitation. From the date hereof until the earlier of (i) the Closing or (ii) termination of this Agreement under Article IX, the Shareholders shall not, and shall cause the Companies, and shall instruct each of their respective representatives (including investment bankers, attorneys and accountants) not to, directly or indirectly, enter into, solicit, initiate, conduct or continue any discussions or negotiations with, or encourage or respond to any inquiries or proposals by, or provide any information to, or otherwise cooperate in any other way with, any Person or group, other than Buyer and its representatives, concerning any sale of all or any substantial portion of the Assets or the Business of, or of any shares of capital stock or equity interest or other securities of, the Companies, or any merger, consolidation, recapitalization, liquidation, dissolution or similar transaction involving the Companies (each such transaction being referred to herein as a "Proposed Acquisition Transaction"). The Shareholders hereby represent that neither they nor the Companies are presently engaged in discussions or negotiations with any party other than Buyer with respect to any Proposed Acquisition Transaction. The Shareholders and the Companies agree not to release any third party from, or waive any provision of, any confidentiality or standstill agreement to which any of them is a party. (b) Notification. The Shareholders shall (i) immediately notify Buyer (orally and in writing) if any offer is made, any discussions or negotiations are sought to be initiated, any inquiry, proposal or contact is made or any information is requested with respect to any Proposed Acquisition Transaction, (ii) promptly notify Buyer of the terms of any proposal which they may receive in respect of any such Proposed Acquisition Transaction, including the identity of the prospective purchaser or soliciting party, (iii) promptly provide Buyer with a copy of any such offer, if written, or a written summary (in reasonable detail) of such offer, if not in writing, and (iv) keep Buyer informed of the status of such offer and the offeror's efforts and activities with respect thereto. 5.4 Investigation of Business and Properties. From the date hereof until the earlier of (i) the Closing and (ii) termination under Article IX, the Shareholders shall cause the Companies to afford Buyer, any financial institution providing financing to Buyer, and their respective counsel, accountants, financial advisors and other representatives, reasonable access during regular business hours upon reasonable notice, to make such reasonable inspection of the Assets, business and operations of the Companies and to inspect and make copies of contracts, Books and Records and all other documents and information reasonably requested by Buyer and related to the operations and business of the Companies, including historical financial information concerning the business of the Companies and to meet with designated Personnel of the Companies and/or their representatives; provided that any such access shall be conducted in such a manner as not to interfere unreasonably with the operation of the Business; provided further, that no disclosure to Buyer, its counsel, accountants or other representatives after the date hereof, except by amendment to the Schedules approved by Buyer, shall be deemed to be a reduction of, or 26 otherwise affect, the representations and warranties of the Shareholders set forth in this Agreement. The Shareholders shall furnish to Buyer promptly upon request (i) all additional documents and information with respect to the affairs of the Companies and (ii) access during regular business hours to the Companies' Personnel and to the Companies' accountants and counsel as Buyer, or its counsel or accountants, may from time to time reasonably request and the Shareholders shall instruct the Companies' Personnel, accountants and counsel to cooperate with Buyer, and to provide such documents and information as Buyer and its representatives may reasonably request. 5.5 Confidentiality. Unless and until the Closing has been consummated, Buyer shall hold, and shall cause its counsel, accountants and other representatives to hold, in confidence all confidential data and information relating to the Companies made available to Buyer, together with all analyses, compilations, studies and other documents and records prepared by Buyer or any of its representatives which contain or otherwise reflect or are generated from such information. If the transactions contemplated by this Agreement are not consummated, Buyer agrees to keep confidential all data and information relating to the Companies or the Business, and upon written request of the Shareholders' Representative, to return or cause to be returned to the Companies all written materials and all copies that contain any such confidential data or to certify to the Companies that such materials have been destroyed. Notwithstanding the foregoing, Buyer may disclose this Agreement and the information and data in Buyer's possession in connection therewith (i) to its lenders (and their counsel), (ii) to the investment bankers (and their counsel) in connection with any offering of securities by Buyer and (iii) to the extent such disclosure is required by law. 5.6 No Disclosure; Public Announcements. Prior to Closing, without the prior written consent of the other party, and except for filings required by Law, neither party will issue any press release or otherwise make any public statements with respect to this Agreement and the transactions contemplated hereby. 5.7 Transfer Taxes; Expenses. (a) All transfer taxes relating to the transfer of the real property to the Carroll's Companies as contemplated by Section 5.13 and all transfers of real property to the Shareholders or entities controlled by them as contemplated in Schedule 5.2 shall be paid by the Shareholders. (b) Except as otherwise provided in this Agreement, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby will be paid by the party incurring such costs and expenses; it being understood that the fees and expenses of BT Alex. Brown, KPMG LLP and Ward and Smith, P.A. with respect to this Agreement and the transactions contemplated hereby, Arthur Andersen LLP with respect to all matters for which such firm shall have been engaged by or on behalf of the Shareholders or the Companies (the "Companies' Expenses") shall be paid by the Companies, and that to the extent any such expenses shall not have been paid before the Effective Date they shall be accrued as a liability for purpose of calculating Working Capital as of the Effective Date pursuant to Section 2.6, and any such expenses not so accrued shall be the sole responsibility of, and paid by, the Shareholders. 27 5.8 Efforts to Consummate. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable to consummate, as promptly as practicable, the transactions contemplated hereby, including the obtaining of all necessary consents, waivers, authorizations, orders and approvals of third parties, whether private or governmental, required of it to enable it to comply with the conditions precedent to consummating the transactions contemplated by this Agreement. Each party agrees to cooperate fully with the other party in assisting it to comply with this Section 5.8. Furthermore, without limiting the generality of the foregoing, each party will cooperate with the others in structuring the transactions and the documentation thereof to be the most tax efficient for all parties. 5.9 Related Party Accounts. As of the Closing, no loans or receivables or payables to any of the Shareholders or their Affiliates (other than the Carroll's Companies and Carroll's Brazil) from the Carroll's Companies and Carroll's Brazil, or to any of the Carroll's Companies or Carroll's Brazil from any of the Shareholders shall be outstanding. Any liability for Taxes arising from the satisfaction or termination of such amounts shall be the responsibility of the Shareholders. 5.10 Further Assurances. At the Closing or from time to time thereafter, the parties hereto shall execute and deliver such other instruments of assignment, transfer and delivery and shall take such other actions as the other reasonably may request in order to consummate, complete and carry out the transactions contemplated by this Agreement. 5.11 Rights to Examine Books and Records. From and after the Closing, upon reasonable prior notice from the Shareholders, Buyer will afford Shareholders' authorized representatives, including its accountants and counsel, reasonable access during regular business hours and for reasonable purposes related to the Shareholders' prior interest in the Companies, in order to examine and review, or, at the Shareholders' expense, to make copies of, the Books and Records to the extent they relate to periods prior to the Closing Date; provided that any such access shall be conducted in such a manner as not to interfere unreasonably with the operation of the Business. 5.12 Certain Tax Matters. (a) The Shareholders shall be responsible for any and all tax imposed on any of the Carroll's Companies pursuant to Sections 1374 and 1375 of the Internal Revenue Code or any similar provisions of state and local Tax Laws). (b) The Shareholders shall prepare and file or shall cause each of the Companies, any Subsidiaries of the Companies and their Affiliates to prepare and file the following Tax Returns with respect to each of the Companies: (i) all United States federal income Tax Returns and any other income Tax Returns required to be filed in any jurisdiction in which the relevant Company has income tax nexus for any taxable period ending 28 on or before the Effective Date; provided that in the case of federal, state and local income Tax Returns including the transactions contemplated by this Agreement, that the Shareholder shall provide Buyer copies of the relevant portions of such proposed Returns at least 30 days prior to the due date of any such Returns, including valid extensions thereof; and (ii) all other Tax Returns with respect to Taxes required to be filed (taking into account extensions) prior to the Effective Date. (c) Buyer and the Carroll's Companies and Carroll's Brazil shall file all other Tax Returns with respect to the Carroll's Companies and Carroll's Brazil for all periods which begin on or after the Effective Date. With respect to any state, local or foreign income Tax Return for taxable periods beginning before the Effective Date and ending after the Effective Date, Buyer shall cause each of the Companies to consult with the Shareholders' Representative concerning such Return. Buyer shall provide the Shareholders' Representative a copy of its proposed Return at least 15 days prior to the filing of such Return, and the Shareholders' Representative may provide comments to Buyer, which comments shall be delivered to Buyer within 7 days of receiving such copies from Buyer. (d) As soon as practicable, but in any event within 30 days after the Shareholders' Representative's request, from and after the Effective Date, Buyer shall provide the Shareholders' Representative with such cooperation and shall deliver to the Shareholders' Representative such information and data concerning the pre-Closing operations of the Carroll's Companies and Carroll's Brazil as the Shareholders' Representative may request, including providing the information and data required by the Carroll's Companies' customary tax and accounting questionnaires, in order to enable the Shareholders to complete and file all Tax Returns which they may be required to file with respect to the operations and business of the Carroll's Companies and Carroll's Brazil through the Effective Date or to respond to audits by any Taxing Authorities with respect to such operations. Such cooperation and information shall include provision of powers of attorney for the purpose of signing Tax Returns and defending audits and forwarding copies of appropriate notices and forms or other communications received from or sent to any Taxing Authority which relate to the Carroll's Companies and Carroll's Brazil, and providing copies of relevant Tax Returns, together with accompanying schedules and related workpapers, documents relating to rulings or other determinations by any Taxing Authority and records concerning the ownership and tax basis of property, which Buyer or the Carroll's Companies may possess. 29 (e) Buyer and the Shareholders and their respective Affiliates shall cooperate in the preparation of all Tax Returns relating in whole or in part to taxable periods ending before the Effective Date that are required to be filed after such date. Such cooperation shall include furnishing prior years' Tax Returns or return preparation packages illustrating previous reporting practices or containing historical information relevant to the preparation of such Tax Returns, and furnishing such other information within such party's possession requested by the party filing such Tax Returns as is relevant to their preparation. In the case of any state, local or foreign joint, consolidated, combined, unitary or group relief system Tax Returns, such cooperation shall also relate to any other taxable periods in which one party could reasonably require the assistance of the other party in obtaining any necessary information. (f) The Shareholders shall have the right, at their own expense, to control any audit or examination by any Taxing Authority ("Tax Audit"), initiate any claim for refund, contest, resolve and defend against any assessment, notice of deficiency, or other adjustment or proposed adjustment which in any such case relates to Taxes for which the Shareholders are liable pursuant to Section 8.2(a); provided that no claim, contest or settlement shall be initiated, defended, or resolved by the Shareholders to the extent that such claim, contest, or settlement could reasonably be expected to have a material adverse effect on the Carroll's Companies or Carroll's Brazil after the Closing. Buyer shall have the right, at its own expense, to control any other Tax Audit, initiate any other claim for refund, and contest, resolve and defend against any other assessment, notice of deficiency, or other adjustment or proposed adjustment. The Shareholders shall furnish Buyer and the Carroll's Companies with their cooperation in a manner comparable to that described in paragraph (e) of this Section 5.12. (g) In order to prevent any inappropriate shifting of items of income, gain, loss, deduction or credit ("Tax Items"), and to the extent allowable under the Internal Revenue Code, Buyer and the Shareholders agree to determine their respective shares of Tax Items for the 1999 Tax year from the partnerships and limited liability companies in which any of the Carroll's Companies owns an interest (the "Lower Tier Partnerships") as though each Lower Tier Partnership had an interim closing of the books occurring simultaneously with the interim closing of the books of the respective Carroll's Companies which own an interest therein. 5.13 Additional Assets. Prior to the Closing the Shareholders shall transfer and convey, or shall cause entities controlled by them to transfer and convey, to one or more of the Carroll's Companies or Carroll's Realty Partnership the real estate set forth in Schedule 5.13, all pursuant to special warranty deeds in form and substance reasonably satisfactory to Buyer. Buyer agrees that it will cause Carroll's Realty Partnership to maintain ownership of the real estate transferred to it pursuant to this Section 5.13 until after the second anniversary of the Closing Date. 5.14 Carroll's Processing, Inc. The Shareholders agree that they will maintain in good standing the corporate existence of CPI, and will not liquidate CPI or distribute to the Shareholders any of the assets of CPI until after the second anniversary of the Closing Date. 30 5.15 Allocation of Consideration. The Consideration has been agreed upon by the parties and allocated among the Carroll's Companies, Carroll's Brazil and the CPI Assets as set forth in Schedule 5.15. With respect to the CPI Assets, CPI and Buyer agree to allocate the applicable consideration for federal and other income Tax purposes in accordance with Section 1060 of the Internal Revenue Code and any regulations promulgated thereunder, as set forth in Internal Revenue Service Form 8594 attached hereto as part of Schedule 5.15. The parties agree that the values reflected in Schedule 5.16 were separately established as a result of good faith bargaining and that in reporting the transactions contemplated hereby to the Internal Revenue Service as required by the Internal Revenue Code, they will use such amounts (subject to adjustment pursuant to Section 2.6) and cooperate with each other in meeting the requirements of the Internal Revenue Code and the regulations promulgated thereunder. Article VI CONDITIONS TO OBLIGATIONS OF BUYER The obligation of Buyer to consummate the transactions contemplated by this Agreement shall be subject, in the sole discretion of Buyer, to the satisfaction, at or prior to the Closing, of each of the following conditions, any of which may be waived by Buyer in accordance with Section 10.9: 6.1 Representations and Warranties. The representations and warranties of the Shareholders contained in Article III hereof shall be true and correct except to the extent that the failure to be true and correct would not have a Material Adverse Effect on the Carroll's Companies taken as a whole. 6.2 Performance of this Agreement. The Shareholders and CPI shall have, in all material respects, performed all covenants and agreements and complied with all conditions required by this Agreement to be performed or complied with by them prior to or at the Closing. 6.3 Consents and Approvals. All registrations, filings, applications, notices, consents, orders, approvals, qualifications, waivers and Licenses and Permits listed in Schedule 3.4 or otherwise necessary to effect the transactions contemplated hereby shall have been filed, made or obtained and all waiting periods specified by law with respect thereto shall have expired or been terminated. 6.4 Injunction, Litigation, etc. No Actions by any Governmental Authority or any other Person shall have been instituted for the purpose of enjoining or preventing, or which question the validity or legality of, the transactions contemplated hereby and which could reasonably be expected to damage the Companies materially or impair Buyer's ability to own and control the Companies if the transactions contemplated hereby are consummated. 31 6.5 Legislation. No statute, rule or regulation shall have been enacted which prohibits or might prohibit, restrict or materially delay the consummation of the transactions contemplated by this Agreement. 6.6 Proceedings. All corporate or similar proceedings of the Carroll's Companies and CPI that are required in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in form and substance to Buyer and its counsel. 6.7 Opinion of Counsel. The Shareholders shall have delivered to Buyer an opinion of Ward and Smith, P.A., counsel for the Shareholders, dated as of the date of Closing, substantially with respect to the matters set forth in Exhibit C hereto, and stating that such opinion is made for the benefit of Buyer and Buyer's institutional lenders and that Buyer's institutional lenders shall be entitled to rely thereon as if such opinion were addressed to them. 6.8 Closing Deliveries. Buyer shall have received, at or prior to the Closing, the following: (i) Special warranty deeds for the real property to be conveyed by as contemplated by Section 5.13 in form and substance reasonably satisfactory to Buyer; (ii) assignment of the limited liability company interests of the Shareholders in Carroll's Brazil in form and substance reasonably satisfactory to Buyer; (iii) assignment of the partnership interest held by CPI in Carolina Turkeys and the Carolina Turkeys receivable and assumption of the Assumed CPI Debt in form and substance reasonably satisfactory to Buyer; (iv) certificates executed by the secretary of each of the Carroll's Companies and Carroll's Brazil certifying as of the date of Closing (A) a true and correct copy of the certificate or articles of incorporation (or similar organizational document) of each of the Companies, (B) a true and correct copy of the bylaws (or similar organizational document) of each of the Carroll's Companies, (C) a true and correct copy of the Carolina Turkey partnership agreement and the Carroll's Brazil operating agreement and (D) incumbency matters; 32 (v) a certificate executed by the Shareholders' Representative certifying that, as of the date of Closing, (A) he or she has made inquiry of the appropriate Personnel of the Companies and (B) the conditions set forth in Sections 6.1, 6.2 and 6.9 have been satisfied; (vi) a copy of the certificate or articles of incorporation (or similar organizational document) of each of the Carroll's Companies and Carroll's Brazil and all amendments thereto, each certified as of a recent date by the Secretary of State of the applicable jurisdiction of organization or other appropriate governmental official; (vii) a certificate of the appropriate Secretary of State or other appropriate governmental official certifying the existence of the Carroll's Companies in their respective jurisdictions of organization; (viii) physical possession of all original minute books, corporate seals and stock or equity ownership records of the Carroll's Companies and Carroll's Brazil; (ix) physical possession of all Books and Records (other than those covered by clause (vii) above), licenses and permits, policies, contracts, plans or other instruments of the Carroll's Companies that are in the possession of the Carroll's Companies, all such materials to be deemed delivered to Buyer if they are present at any of the farms, plants, offices, processing or manufacturing facilities, stores, warehouses or administration buildings owned or leased by the Companies; and (x) all other documents and certificates required to be delivered by or on behalf of the Shareholders pursuant to the terms of this Agreement. 6.9 Material Change. Other than losses in the ordinary course of business, there shall not have been any Material Adverse Change in the Assets, liabilities, condition (financial or otherwise), results of operations or business of the Companies since December 26, 1998, nor any occurrence or circumstance that with the passage of time might reasonably be expected to result in such change, and there shall not be any material liability not shown in the Interim Financial Statements or otherwise disclosed herein. 6.10 Companies Debt. The Companies Debt shall not exceed $250,000,000. 6.11 Resignations. Each director (or person who bears a similar responsibility with respect to a limited liability company) of any of the Carroll's Companies and Carroll's Brazil shall have submitted resignations effective prior to or as of the Closing. 33 6.12 Tax Matters. The Shareholders shall have provided Buyer with a statement sworn to under penalty of perjury, setting forth the name, address and federal tax identification number of each Shareholder, CPI and Matthews Family Properties, L.L.C. and certifying that no such Person is a "foreign person" within the meaning of Section 1445 of the Internal Revenue Code and Treasury Regulations thereunder. Other than the execution, delivery and consummation of the transactions contemplated by this Agreement, no action shall have been taken and no condition shall exist which could result in the termination of the S corporation election of each of the Carroll's Companies. 6.13 Escrow Agreement. The Shareholders shall have executed and delivered to Buyer and the Escrow Agent the Escrow Agreement in substantially in the form of Exhibit A hereto. 6.14 Opinion of Financial Advisor; Approval of Buyer's Board of Directors. Scott & Stringfellow, Inc. shall have delivered to the Buyer's Board of Directors its written opinion dated not later than the Closing Date that as of such date, the transactions contemplated by this Agreement are fair to Buyer from a financial point of view. Buyer's Board of Directors shall have approved the execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby; provided that the condition set forth in this Section 6.14 shall be deemed to have been satisfied unless Buyer gives notice to the Shareholders before 5:00 p.m. on May 6, 1999 that the condition set forth in this Section 6.14 has not been satisfied. Article VII CONDITIONS TO OBLIGATIONS OF THE SHAREHOLDERS The obligation of the Carroll's Companies, CPI and the Shareholders to consummate the transactions contemplated by this Agreement shall be subject, in the sole discretion of the Shareholders, to the satisfaction, at or prior to the Closing, of each of the following conditions, any of which may be waived by the Shareholders' Representative in accordance with Section 10.9. 7.1 Representations and Warranties. The representations and warranties of Buyer contained in Article IV hereof shall be true and correct except to the extent that the failure to be true and correct would not have a Material Adverse Effect on Buyer and its Subsidiaries taken as a whole. 7.2 Performance of this Agreement. Buyer shall have, in all material respects, performed all covenants and agreements and complied with all conditions required by this Agreement to be performed or complied with by it prior to or on the date of Closing. 34 7.3 Consents and Approvals. All registrations, filings, applications, notices, consents, orders, approvals, qualifications or waivers listed in Schedule 4.6 or otherwise necessary to effect the transactions contemplated hereby shall have been filed, made or obtained and all waiting periods specified by law with respect thereto shall have expired or been terminated. 7.4 Injunction, Litigation, etc. No Actions by any Governmental Authority or any other Person shall have been instituted for the purpose of enjoining or preventing, or which question the validity or legality of, the transactions contemplated hereby and which could reasonably be expected to damage the Shareholders or the Companies materially if the transactions contemplated hereby are consummated. 7.5 Legislation. No statute, rule or regulation shall have been enacted which prohibits or might prohibit, restrict or materially delay the consummation of the transactions contemplated this Agreement. 7.6 Proceedings. All corporate or similar proceedings of Buyer that are required in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in form and substance to the Shareholders and their counsel. 7.7 Opinion of Counsel. Buyer shall have delivered to the Shareholders an opinion of McGuire, Woods, Battle & Boothe LLP, counsel for Buyer, dated as of the Closing Date, substantially with respect to the matters set forth in Exhibit D attached hereto. 7.8 Closing Deliveries. The Shareholders shall have received, at or prior to the Closing, the following: (i) a certificate executed by the Secretary of Buyer certifying as of the Closing Date (i) a true and correct copy of the articles of incorporation as amended of Buyer, (ii) a true and correct copy of the bylaws of Buyer, (iii) a true and correct copy of the resolutions of the board of directors of Buyer authorizing the execution, delivery and performance of this Agreement by Buyer and the consummation of the transactions contemplated hereby and (iv) incumbency matters; (ii) a certificate executed by a Vice President of Buyer certifying that, as of the date of Closing, the conditions set forth in Sections 7.1, 7.2, and 7.3 with respect to Buyer have been satisfied; (iii) a copy of the articles of incorporation of Buyer and all amendments thereto, each certified as of a recent date by the Clerk of the State Corporation Commission of the Commonwealth of Virginia; and 35 (iv) all other documents and certificates required to be delivered by Buyer pursuant to the terms of this Agreement. 7.9 Escrow Agreement. Buyer shall have executed and delivered to the Shareholders and the Escrow Agent the Escrow Agreement substantially in the form of Exhibit A hereto. 7.10 Escrow Deposit and Estimated Consideration. The Escrow Deposit shall have been deposited with the Escrow Agent, and the balance of the Estimated Consideration shall be ready for delivery to the Shareholders. 7.11 Registration Rights Agreement. Buyer shall have executed and delivered to the Shareholders the Registration Rights Agreement substantially in the form of Exhibit E hereto. 7.12 Material Adverse Change. There shall not have been any Material Adverse Change in the Assets, liabilities, condition (financial or otherwise), results of operations or business of Buyer after the date hereof, nor any occurrence or circumstance that with the passage of time might reasonably be expected to result in such change; provided that a decline in the market price for Buyer Common Shares shall not in and of itself be a Material Adverse Change. 7.13 Tax-Free Reorganizations. The Mergers shall qualify as tax-free reorganizations under Section 368(a) of the Internal Revenue Code. Article VIII SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION 8.1 Survival of Representations The representations and warranties of the Shareholders contained in this Agreement (including the Schedules hereto) or any certificate or instrument delivered pursuant hereto will survive until the earlier of (i) the 60th day after receipt by Buyer of the audited financial statements for Buyer for the fiscal year ending April 29, 2001 and (ii) October 31, 2001; provided that (i) the representations and warranties contained in Sections 3.1, 3.2 and 3.3 shall survive the Closing indefinitely and (ii) the representations and warranties in Section 3.8 shall survive until 90 days after the expiration of the last of the limitation periods contained in the Internal Revenue Code or other applicable Tax law during which an assessment or reassessment can be made (the respective dates on which the representations and warranties hereunder lapse are hereinafter referred to as the "Survival Date"). Notwithstanding the provisions of the preceding sentence, any representation or warranty in respect of which indemnification may be sought under Section 8.2 36 shall survive the Survival Date if written notice, given in good faith, of the specific breach thereof is given to the indemnifying party prior to the Survival Date, whether or not liability has actually been incurred. All representations and warranties of Buyer contained in this Agreement (including the Schedules hereto) or any certificate or instrument delivered pursuant hereto will survive until October 31, 2001; provided that the representations and warranties contained in Sections 4.1, 4.4(a) and 4.5 shall survive the Closing indefinitely. 8.2 Indemnification by the Shareholders. (a) Subject to the limitations contained in this Article VIII, the Shareholders will jointly and severally indemnify and hold harmless Buyer, its Subsidiaries, Affiliates, each of their respective partners, directors, officers, employees and agents, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "Buyer Indemnified Parties") from and against, and pay or reimburse the Buyer Indemnified Parties for, any and all Covered Liabilities actually incurred or paid by the Buyer Indemnified Parties as a result of: any inaccuracy contained in, omission from or breach of, a representation and warranty made by the Shareholders in this Agreement or in any document delivered pursuant hereto; provided that in determining whether an inaccuracy, omission or breach has occurred and the amount of any Covered Liabilities, any materiality, material adverse effect or substantial compliance qualification contained in or otherwise applicable to such representation or warranty shall be disregarded. (b) The claims for indemnity by Buyer Indemnified Parties pursuant to this Section 8.2 are referred to as "Buyer Claims." The indemnity provided for in this Section 8.2 is not limited to matters asserted by third parties against any Buyer Indemnified Party, but includes Covered Liabilities actually incurred or sustained by any Buyer Indemnified Party in the absence of third party claims. 8.3 Indemnification by Buyer. (a) Subject to the limitations contained in this Article VIII, Buyer will indemnify and hold harmless the Shareholders, their Affiliates, each of their respective partners, directors, officers, employees and agents, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "Shareholder Indemnified Parties") from and against, and pay or reimburse the Shareholder Indemnified Parties for, any and all Covered Liabilities actually incurred or paid by the Shareholder Indemnified Parties as a result of any inaccuracy contained in, omission from or breach of, a representation and warranty made by Buyer in this Agreement or in any document delivered pursuant hereto; provided that in determining whether an inaccuracy, omission or breach has occurred and the amount of any Covered Liabilities, any materiality, material adverse effect, substantial compliance or similar exception or qualification contained in or otherwise applicable to such representation or warranty shall be disregarded. (b) The claims for indemnity by Shareholder Indemnified Parties pursuant to this Section 8.3 are referred to as "Shareholder Claims." The indemnity provided for 37 in this Section 8.3 is not limited to matters asserted by third parties against any Shareholder Indemnified Party, but includes Covered Liabilities actually incurred or sustained by any Shareholder Indemnified Party in the absence of third party claims. 8.4 Notice and Defense of Claims. (a) Whenever a claim shall arise for indemnification hereunder (a "Claim"), the party seeking indemnification (an "indemnified party") shall give reasonably prompt notice to the party from whom indemnification is sought (an "indemnifying party") of the Claim and the facts, in reasonable detail, constituting the basis for such claim (a "Claim Notice"); provided that failure of an indemnified party to give prompt written notice of any Claim shall not release, waive or otherwise affect an indemnifying party's obligations with respect thereto except to the extent that the indemnifying party is adversely affected in its ability to defend against such Claim or is otherwise prejudiced thereby. (b) In the case of a Claim involving the assertion of a claim by a third party (whether pursuant to an Action or otherwise, a "Third-Party Claim"), if the indemnifying party shall acknowledge in writing to the indemnified party that the indemnifying party shall be obligated to indemnify the indemnified party under the terms of its indemnity hereunder in connection with such Third-Party Claim, then (i) the indemnifying party shall be entitled and, if it so elects, shall be obligated at its own cost and expense, (A) to take control of the defense and investigation of such Third-Party Claim and (B) to pursue the defense thereof in good faith by appropriate actions or proceedings promptly taken or instituted and diligently pursued, including to employ and engage attorneys of its own choice reasonably acceptable to the indemnified party to handle and defend the same, and (ii) the indemnifying party shall be entitled (but not obligated), if it so elects, to compromise or settle such claim, which compromise or settlement shall be made only with the written consent of the indemnified party, such consent not to be unreasonably withheld. In the event the indemnifying party elects to assume control of the defense and investigation of such lawsuit or other legal action in accordance with this Section 8.4(b), the indemnified party may, at its own cost and expense, participate in the investigation, trial and defense of such Third-Party Claim; provided that, if the named Persons to an Action include both the indemnifying party and the indemnified party and the indemnified party has been advised in writing by counsel that there may be one or more legal defenses available to such indemnified party that are different from or additional to those available to the indemnifying party, the indemnified party shall be entitled, at the indemnifying party's cost and expense, to separate counsel of its own choosing. If the indemnifying party fails to assume the defense of such Third-Party Claim or fails to acknowledge to the indemnified party that it is obligated to indemnify the indemnified party in accordance with this Section 8.4(b) within 15 calendar days after receipt of the notice of such Third Party Claim, the indemnified party against which such Third-Party Claim has been asserted shall (upon delivering notice to such effect to the indemnifying party) have the right to undertake, at the indemnifying party's cost and expense, the defense, compromise and settlement of such Third-Party Claim on behalf of and for the 38 account of the indemnifying party if the indemnifying party is held liable therefor; provided that such Third-Party Claim shall not be compromised or settled without the written consent of the indemnifying party, which consent shall not be unreasonably withheld. In the event the indemnifying party assumes the defense of the Third Party Claim, the indemnifying party shall keep the indemnified party reasonably informed of the progress of any such defense, compromise or settlement, and in the event the indemnified party assumes the defense of the Third Party Claim, the indemnified party shall keep the indemnifying party reasonably informed of the progress of any such defense, compromise or settlement. If the indemnifying party is held liable for the Third-Party Claim, the indemnifying party shall be liable for any settlement of any Third-Party Claim effected pursuant to and in accordance with this Section 8.4(b) and for any final judgment (subject to any right of appeal), and the indemnifying party agrees to indemnify and hold harmless each indemnified party from and against any and all Covered Liabilities by reason of such settlement or judgment. (c) Any Covered Liabilities for which an indemnifying party is responsible shall be paid directly by the indemnifying party. Upon Final Determination (as defined below) of the amount of a claim for indemnification, the indemnifying party shall pay the amount of such claim within 30 days after the date of such Final Determination together with interest at the prime rate of The Chase Manhattan Bank from time to time, from (and including) the later of (i) the date of delivery of the Claim Notice or (ii) the date such Covered Liability was paid, to (and including) the date immediately preceding the date of payment; provided that no such interest shall be paid if such claim is paid by the Shareholders to a Third Party. (d) If the claim for indemnification involves a matter other than a Third Party Claim, the indemnifying party shall have thirty (30) days to object to such Claim by delivery of a written notice of such objection to such indemnified party specifying in reasonable detail the basis for such objection. Failure to timely so object shall constitute a final and binding acceptance of the Claim by the indemnifying party, and the Claim shall be paid in accordance with the further provisions hereof. If an objection is timely interposed by the indemnifying party, then the indemnified party and the indemnifying party shall negotiate in good faith for a period of thirty (30) business days from the date the indemnified party receives such objection prior to commencing any arbitration, formal legal action, suit or proceeding with respect to such claim for indemnification. Upon Final Determination (as defined below) of the amount of a claim for indemnification, the indemnifying party shall pay the amount of such claim within thirty (30) days of the date of such Final Determination. (e) A "Final Determination" of a claim shall be (i) a judgment of any court determining the validity of a disputed claim, if no appeal is pending from such judgment or if the time to appeal therefrom has elapsed (it being understood that the indemnified party shall have no obligation to appeal); or (ii) an award of any arbitrator or arbitration panel determining the validity of such disputed Claim, if the arbitration is binding and there is not pending any motion to set 39 aside such award or if the time within which to move to set such award aside has elapsed; or (iii) a written termination of the dispute with respect to such Claim signed by all of the parties thereto or their attorneys; or (iv) a written acknowledgment of the indemnifying party that it no longer disputes the validity of such Claim; (v) settlement of the Claim reached and reduced to writing pursuant to negotiation of the parties or (vi) such other evidence of final determination of a disputed Claim as shall be reasonably acceptable to the parties. 8.5 Calculation of Covered Liabilities. (a) Insurance Proceeds. To the extent that any Buyer Claim or Shareholder Claim is covered by insurance held by such Buyer Indemnified Party or Shareholder Indemnified Party, such indemnified party shall be entitled to indemnification pursuant to Section 8.2 or 8.3, as applicable, only with respect to the amount of the Covered Liabilities that are in excess of the cash proceeds received by such indemnified party pursuant to such insurance. If such indemnified party receives such cash insurance proceeds prior to the time such Claim is paid, then the amount payable by the indemnifying party pursuant to such Claim shall be reduced by the amount of such proceeds. If such indemnified party receives such cash insurance proceeds after such Claim has been paid, then upon the receipt by the indemnified party of any cash proceeds pursuant to such insurance up to the amount of Covered Liabilities incurred by such indemnified party with respect to such Claim, such indemnified party shall promptly repay any portion of such amount which was previously paid by the indemnifying party to such indemnified party in satisfaction of such Claim. (b) Effect of Taxes. The amount of any indemnity payments for Covered Liabilities under Section 8.2 or 8.3 above shall be (i) decreased to reflect the actual Tax Benefit, if any, to the indemnified party resulting from the Covered Liabilities giving rise to such indemnity payments and (ii) increased to reflect the actual Tax Loss, if any, payable by such indemnified party as a result of the receipt of such Covered Liabilities. In either case, the amount shall be determined by the indemnified party taking into account only the taxable period in which such indemnity payment accrues (and prior periods) and not any subsequent periods. If an indemnity payment is made prior to the filing of relevant Tax Returns, the amount shall be determined on an estimated basis. Proper adjustments shall be made if the actual Tax Benefit or actual Tax Loss differ from the estimated amount. Any indemnity payment made pursuant to Section 8.2 or 8.3 shall be treated by Buyer and the Shareholders as an adjustment to the Consideration. 8.6 Exclusive Remedy. Except for covenants to be performed after the Closing ("Post-Closing Covenants") and actions grounded in fraud, the parties hereto acknowledge and agree that in the event the Closing occurs, the indemnification provisions in this Article VIII shall be the exclusive remedy of Buyer and the Shareholders with respect to the transactions contemplated by this Agreement. With respect to post-closing covenants and actions grounded in fraud, (i) the right of a party to be indemnified and held harmless pursuant to the indemnification provisions in this Agreement shall be in addition to and 40 cumulative of any other remedy of such party at law or in equity and (ii) no such party shall, by exercising any remedy available to it under this Article VIII, be deemed to have elected such remedy exclusively or to have waived any other remedy, whether at law or in equity, available to it. 8.7 No Circular Recovery. No Shareholder shall be entitled to make any claim for indemnification against Buyer or any of its Affiliates by reason of the fact that he was a controlling person, director, officer, manager, employee, agent or other representative of the Companies (whether such claim is pursuant to any statute, charter, bylaw, contractual obligation or otherwise) with respect to any matter relating to or arising out of a matter which is subject to the provisions of Section 8.2. Article IX TERMINATION 9.1 Termination. This Agreement may be terminated at any time prior to the Closing: (i) by the mutual written consent of the Shareholders' Representative and Buyer; (ii) by Buyer, if any event occurs which renders impossible compliance with one or more of the conditions set forth in Article VI hereof, which condition or conditions are not waived by Buyer; (iii) by the Shareholders' Representative, if any event occurs which renders impossible compliance with one or more of the conditions set forth in Article VII hereof, which condition or conditions are not waived by the Shareholders' Representative; or (iv) by the Shareholders' Representative or Buyer if the Closing has not occurred by 11:59 p.m. on August 30, 1999. 9.2 Procedure: Effect of Termination. If this Agreement is terminated as provided in Section 9.1, written notice thereof shall forthwith be given by the terminating party to the other party, and this Agreement shall thereupon terminate and become void and of no further force and effect and there shall be no further liability or obligation on the part of either party hereto except for the obligations under Sections 5.5, 5.7 and 9.1; provided that termination of this Agreement by Buyer or Shareholders pursuant to clause (ii) or (iii) of Section 9.1, respectively, shall not relieve the defaulting or breaching party (the "Breaching Party"), whether or not it is the terminating party, of liability for damages actually incurred by the other party as a result of breach of this Agreement by the Breaching Party. 41 Article X GENERAL PROVISIONS 10.1 Notices. All notices required to be given hereunder shall be in writing and shall be deemed to have been given if (i) delivered personally or by documented courier or delivery service, (ii) transmitted by facsimile during normal business hours or (iii) mailed by registered or certified mail (return receipt requested and postage prepaid) to the following listed persons at the addresses and facsimile numbers specified below, or to such other persons, addresses or facsimile numbers as a party entitled to notice shall give, in the manner hereinabove described, to the others entitled to notice: (a) If to any of the Carroll's Companies, CPI or the Shareholders, to: F. J. Faison, Jr. Carroll's Foods. Inc. 2822 Highway #24 West Warsaw, North Carolina 28398 Facsimile No.: 910-293-6957 with a copy to: Ward and Smith, P.A. 1001 College Court New Bern, North Carolina 28563-0867 Attention: J. Troy Smith, Jr. Facsimile No.: 252-636-2121 (b) If to Buyer, to: Smithfield Foods, Inc. 200 Commerce Street Smithfield, Virginia 23430 Attention: Richard J. M. Poulson Facsimile No.: 757-365-3017 and to: Smithfield Foods, Inc. 200 Commerce Street Smithfield, Virginia 23430 Attention: Michael H. Cole Facsimile No.: 757-365-3025 42 with a copy to: McGuire, Woods, Battle & Boothe LLP One James Center Richmond, Virginia 23219 Attention: Leslie A. Grandis Facsimile No.: 804-775-1061 If given personally or by documented courier or delivery service, or transmitted by facsimile, a notice shall be deemed to have been given when it is received. If given by mail, it shall be deemed to have been given on the third business day following the day on which it was posted. 10.2 Interpretation. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. For purposes of this Agreement, the words "includes" and "including" shall mean "including without limitation." As used herein, "knowledge of the Shareholders" shall mean the actual knowledge of any Shareholder together with the actual knowledge of the Shareholders' Representative after inquiry of other Personnel of the Companies who would reasonably be expected to have the relevant information, and "knowledge of Buyer" shall mean the actual knowledge of the executive officers of Buyer identified in Schedule 10.2 hereto after inquiry of other Personnel of Buyer who would reasonably be expected to have the relevant information. All accounting terms not defined in this Agreement (either in Article I or in the context in which it is used) shall have the meaning determined by GAAP. All capitalized terms defined herein are equally applicable to both the singular and plural forms. The language in all parts of this Agreement shall be construed, in all cases, according to its fair meaning. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that any rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. 10.3 Entire Agreement. This Agreement, together with the Schedules and Exhibits hereto, contain the entire agreement among the parties with respect to the subject matter hereof and there are no agreements, understandings, representations or warranties between the parties other than those set forth or referred to herein; provided that the forms of agreements and opinions attached hereto as Exhibits or Schedules shall be superseded by the copies of such agreements and opinions executed and delivered by the respective parties thereto, the execution and delivery of such agreements and opinions by the parties thereto to be conclusive evidence of such parties' approval of any change or modification therein. 43 10.4 No Third Party Beneficiaries. Except as set forth in Article VIII, nothing in this Agreement (whether expressed or implied) is intended to confer upon any person other than the parties hereto and their respective permitted successors and assigns, any rights or remedies under or by reason of this Agreement nor is anything in this Agreement intended to relieve or discharge the liability of any party hereto, nor shall any provision hereof give any person any right of subrogation against, or action over against any party. Without limiting the generality of the foregoing, nothing contained herein shall confer any third-party beneficiary right (actual or implied) upon any employee of the Companies or obligate the Companies to continue any such employee in its employ for any specified period of time or at any specified salary, wages or benefits after the Closing Date. 10.5 The Shareholders' Representative. F. J. Faison, Jr. shall be the designated representative of the Shareholders (the "Shareholders' Representative") with authority to make all decisions and determinations and to take all actions (including giving consents and waivers or agreeing to any amendments to this Agreement or to the termination hereof) required or permitted hereunder on behalf of such Shareholder, and any such action, decision or determination so made or taken shall be deemed the action, decision or determination of such Shareholder, and any notice, document, certificate or information required to be given to any Shareholder shall be deemed so given if given to the Shareholders' Representative. 10.6 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, as applicable; provided that Shareholders shall not assign their rights or delegate their obligations under this Agreement without the express prior written consent of Buyer; provided further, that in the event of assignment by Buyer, Buyer shall not be released from its obligations under this Agreement. 10.7 Severability. In the event that this Agreement or any other instrument referred to herein, or any of their respective provisions, or the performance of any such provision, is found to be invalid, illegal or unenforceable under applicable law now or hereafter in effect, the parties shall be excused from performance of such portions of this Agreement as shall be found to be invalid, illegal or unenforceable under the applicable laws or regulations without, to the maximum extent permitted by law, affecting the validity of the remaining provisions of the Agreement. Should any method of termination of this Agreement or a portion thereof be found to be invalid, illegal or unenforceable, such method shall be reformed to comply with the requirements of applicable law so as, to the greatest extent possible, to allow termination by that method. Nothing herein shall be construed as a waiver of any party's right to challenge the validity of such law. 10.8 Amendment. This Agreement may be amended, modified or supplemented at any time by the parties hereto only by an instrument in writing signed by each of the parties hereto. 44 10.9 Extension; Waiver. At any time prior to the Closing either the Shareholders, on the one hand, or the Buyer, on the other, may (i) extend the time for the performance of any of the obligations of the Buyer, on the one hand, or Shareholders, on the other, (ii) waive a breach of a representation or warranty of such other party or parties hereto or (iii) waive compliance by such other party or parties hereto with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid if set forth in a written instrument signed by such party or parties giving the extension or waiver. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 10.10 Disclosure Schedules. Certain of the representations and warranties set forth in this Agreement contemplate that there will be attached schedules setting forth information that might be "material" or have a "Material Adverse Effect on the Companies." The Shareholders may, at their option, include in such schedules items that are not material or are not likely to have a Material Adverse Effect on the Companies in order to avoid any misunderstanding, and any such inclusion shall not be deemed to be an acknowledgment or representation that such items are material or would have a Material Adverse Effect on the Companies, to establish any standard of materiality or Material Adverse Effect on the Companies or to define further the meaning of such terms for purposes of this Agreement. 10.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.12 Governing Law. This Agreement shall be governed in all respects by the laws of the State of North Carolina without regard to any laws or regulations relating to choice of laws (whether of the State of North Carolina or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of North Carolina. 10.13 Jurisdiction. The parties hereto irrevocably submit to the exclusive jurisdiction of the United States District Court for the Eastern District of Virginia (or, if subject matter jurisdiction in that court is not available, in the courts of the Commonwealth of Virginia, County of Isle of Wight) over any dispute arising out of or relating to this Agreement or any agreement or instrument contemplated hereby or entered into in connection herewith or any of the transactions contemplated hereby or thereby. Each party hereby irrevocably agrees that all claims in respect of such dispute or proceeding shall be heard and determined in such courts. The parties hereby irrevocably waive, to the fullest extent permitted by applicable Law, any objection which they may now or hereafter have to the laying of venue of any such dispute brought in such court or any defense of inconvenient forum in connection therewith. THE PARTIES HERETO 45 WAIVE THE RIGHT TO A JURY TRIAL IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING SEEKING ENFORCEMENT OF SUCH PARTY'S RIGHTS UNDER THIS AGREEMENT. Each Shareholder hereby designates Ward and Smith, P.A. as its agent for service of process, which agent may be substituted at any time upon ten days' notice to Buyer, but which substitute agent shall in no event be located outside the Commonwealth of Virginia or State of North Carolina, and each Shareholder irrevocably consents to the service of any and all process in any action or proceeding arising out of or relating to this Agreement by the delivery of such process to such agent. 46 IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed. SMITHFIELD FOODS, INC. By: /s/ Richard J. M. Poulson ------------------------- Title: Vice President CARROLL'S FOODS, INC. By: /s/ F. J. Faison, Jr. --------------------- Title: President CARROLL'S FOODS OF VIRGINIA, INC. By: /s/ F. J. Faison, Jr. --------------------- Title: President CARROLL'S FOODS OF UTAH, INC. By: /s/ F. J. Faison, Jr. --------------------- Title: President CARROLL'S FOODS OF MEXICO, INC. By: /s/ F. J. Faison, Jr. --------------------- Title: President CARROLL'S CAPITAL, INC. By: /s/ F. J. Faison, Jr. --------------------- Title: President CARROLL'S FARMS OF VIRGINIA, INC. By: /s/ F. J. Faison, Jr. --------------------- Title: President CARROLL'S REALTY, INC. By: /s/ F. J. Faison ---------------- Title: President CARROLL'S PROCESSING, INC. By: /s/ F. J. Faison, Jr. -------------------- Title: President /s/ Carroll M. Bagget --------------------- Carroll M. Baggett /s/ James O. Matthews --------------------- James O. Matthews /s/ Jeffrey S. Matthews ----------------------- Jeffrey S. Matthews EX-2 3 EXHIBIT 2.2 CONFORMED COPY ESCROW AGREEMENT This ESCROW AGREEMENT ("Escrow Agreement"), dated as of May 7, 1999, is made among SMITHFIELD FOODS, INC., a Virginia corporation ("Buyer"), CARROLL M. BAGGETT, JAMES O. MATTHEWS, JEFFREY S. MATTHEWS (collectively, the "Shareholders"), and McGUIRE, WOODS, BATTLE & BOOTHE LLP, a Virginia limited liability partnership (the "Escrow Agent"). RECITALS A. Buyer and the Shareholders are parties to an Acquisition Agreement, dated as of May 3, 1999 (the "Acquisition Agreement"), pursuant to which Buyer effectively will acquire substantially all of the assets and operations of the Carroll's Companies, Carroll's Brazil and CPI. Capitalized terms used in this Escrow Agreement and not otherwise defined herein have the meanings given to them in the Acquisition Agreement. B. The Acquisition Agreement requires that Buyer deposit the Escrow Deposit with the Escrow Agent to be held and disbursed in accordance with the terms of this Escrow Agreement. C. The Escrow Agent has agreed to serve as Escrow Agent, subject to the terms and conditions of this Escrow Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. Appointment of the Escrow Agent. Buyer and the Shareholders hereby appoint and engage the Escrow Agent, and by its execution hereof the Escrow Agent hereby agrees, to hold and administer the Escrow Fund in accordance with the terms of this Escrow Agreement. 2. Deposit of Escrow Deposit. Simultaneously with the execution of this Escrow Agreement, Buyer has delivered the Escrow Deposit to the Escrow Agent. The receipt of the Escrow Deposit is hereby acknowledged by the Escrow Agent. 3. Holding of Escrow Fund. The Escrow Agent will hold the Escrow Fund in escrow upon the terms and conditions set forth in this Escrow Agreement. 4. Claim Submission Procedure. After the resolution of all disputes with respect to the Final Closing Date Adjustment Schedules pursuant to and in accordance with the Acquisition Agreement, Buyer and the Shareholders' Representative shall deliver to the Escrow Agent a statement (the "Consideration Adjustment Statement") signed by both Buyer and the Shareholders' Representative setting forth (i) the Estimated Consideration, (ii) the Consideration as set forth in the Final Closing Date Adjustment Schedules, (iii) the Consideration Adjustment and (iv) the date the Final Closing Date Adjustment Schedules were delivered. 5. Release of Escrow Funds and Termination. The Escrow Agent shall not release or distribute all or any part of the Escrow Fund except upon the conditions set forth below in this Section 5. Upon delivery to the Escrow Agent of the Consideration Adjustment Statement signed by both Buyer and the Shareholders' Representative contemplated by Section 4 hereof: (a) If the Consideration as set forth in the Consideration Adjustment Statement is greater than the Estimated Consideration, the entire Escrow Fund shall be distributed to the Shareholders' Representative for distribution to the Shareholders as their interests shall appear; 2 (b) If the Consideration as set forth in the Consideration Adjustment Statement is less than the Estimated Consideration, and the Consideration Adjustment is not more than the number of Buyer Common Shares held in the Escrow Fund (i) there shall be delivered to Buyer from the Escrow Fund such whole number of Buyer Common Shares as equals the amount of the Consideration Adjustment (ignoring for this purpose any fractional share calculated), and the balance, if any, of the Escrow Fund shall be delivered to the Shareholders' Representative for distribution to the Shareholders as their interests shall appear. (c) If the Consideration as set forth in the Consideration Adjustment Statement is less than the Estimated Consideration, and the Consideration Adjustment is more than the number of Buyer Common Shares held in the Escrow Fund there shall be delivered to Buyer the entire Escrow Fund All deliveries and payments contemplated by this Section 5 shall be made within ten (10) Business Days after delivery of the Consideration Adjustment Statement. This Escrow Agreement shall terminate at such time as all of the Escrow Fund has been distributed by the Escrow Agent in accordance with this Section 5. 6. Concerning the Escrow Agent. (a) The Escrow Agent may resign at any time by giving notice to Buyer and the Shareholders' Representative, specifying a date on which its resignation is to take effect. Upon receipt of such notice Buyer and the Shareholders' Representative shall appoint a successor Escrow Agent, such successor Escrow Agent to become the Escrow Agent when the resignation of the former Escrow Agent becomes effective. If Buyer and the Shareholders' Representative are unable to agree upon a successor Escrow Agent within 30 days after receipt of such notice, the Escrow Agent shall appoint its own successor. The Escrow Agent shall continue to serve until its successor accepts its appointment by adoption of this Escrow Agreement in writing and receives the Escrow Fund. Buyer and the Shareholders' Representative shall have the right, at any time, by agreement, to substitute a new Escrow Agent by giving 3 30 days notice thereof to the Escrow Agent then acting. Any successor Escrow Agent shall be bound by the provisions of this Escrow Agreement as if it were the original Escrow Agent. (b) The Escrow Agent shall not be liable for any action it takes or fails to take which it reasonably believes is within the rights or powers conferred upon it hereunder, or for action which it takes, or fails to take, in good faith and in accordance with advice of counsel (which counsel may be of the Escrow Agent's own choosing but may not be McGuire, Woods, Battle & Boothe LLP itself). The Escrow Agent shall not be liable for any mistake it may make or for any acts or omissions of any kind unless caused by its willful misconduct or gross negligence. (c) Buyer and the Shareholders each agree to indemnify and hold harmless the Escrow Agent against any and all liabilities incurred by the Escrow Agent as a consequence of its, his or her own respective actions and, in the case of the Shareholders, the actions of the Shareholders' Representative. Buyer and the Shareholders agree jointly to indemnify and hold harmless the Escrow Agent from any and all liabilities incurred by the Escrow Agent that are not a consequence of the action of any party to this Escrow Agreement. However, the Escrow Agent shall be responsible for any liability incurred by it which is the result of its own willful misconduct or gross negligence. (d) The Shareholders acknowledge that the Escrow Agent has served as counsel to Buyer in connection with the Acquisition Agreement and the transactions contemplated thereby, and agree that nothing herein shall affect in any way Escrow Agent's continued representation of Buyer or other persons affiliated therewith and that in the event of a dispute between the Shareholders and Buyer with respect to any matter, including the Acquisition 4 Agreement, the transactions contemplated thereby or this Escrow Agreement, the Escrow Agent may represent Buyer in such dispute. Such representation shall not, in and of itself, cause the disqualification of the Escrow Agent. 7. Notices. All notices required to be given hereunder shall be in writing and shall be deemed to have been given if (i) delivered personally or by documented courier or delivery service, (ii) transmitted by facsimile during normal business hours or (iii) mailed by registered or certified mail (return receipt requested and postage prepaid) to the following listed persons at the addresses and facsimile numbers specified below, or to such other persons, addresses or facsimile numbers as a party entitled to notice shall give, in the manner hereinabove described, to the others entitled to notice: If to the Shareholders or the Shareholders' Representative, to: Jeffrey S. Matthews Carroll M. Bagett James O. Matthews Post Office Box 707 Warsaw, North Carolina 28398 and F. J. Faison, Jr. Carroll's Foods, Inc. 2822 Highway #24 West Warsaw, North Carolina 28398 Facsimile No.: (910) 293-6957 with a copy to : Ward and Smith, P.A. 1001 College Court New Bern, North Carolina 28563-0867 Attention: J. Troy Smith, Jr. Facsimile No.: (252) 636-2121 5 If to Buyer, to: Smithfield Foods, Inc. 200 Commerce Street Smithfield, Virginia 23430 Attention: Richard J. M. Poulson Facsimile No.: (757) 365-3017 and to: Smithfield Foods, Inc. 200 Commerce Street Smithfield, Virginia 23430 Attention: Michael H. Cole Facsimile No.: (757) 365-3025 with a copy to: McGuire, Woods, Battle & Boothe LLP One James Center Richmond, Virginia 23219 Attention: Leslie A. Grandis Facsimile No.: 804-775-1061 If to the Escrow Agent to: McGuire, Woods, Battle & Boothe LLP One James Center 901 East Cary Street Richmond, Virginia 23219 Attention: Leslie A. Grandis Facsimile No.: 804-775-1061 If given personally or by documented courier or delivery service, or transmitted by facsimile, a notice shall be deemed to have been given when it is received. If given by mail, it shall be deemed to have been given on the third Business Day following the day on which it was posted. 6 8. Miscellaneous. This Escrow Agreement together with the Acquisition Agreement (i) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof; (ii) is not intended to and shall not confer upon any other person or business entity, other than the parties hereto, any rights or remedies with respect to the subject matter hereof; (iii) shall not be assigned by operation of law or otherwise; and (iv) shall be governed in all respects by the laws of the State of North Carolina without regard to its choice of law rules. WITNESS the following signatures. SMITHFIELD FOODS, INC. By: /s/ Richard J. M. Poulson ------------------------- Title: Vice President /s/ Carroll M. Baggett ---------------------- Carroll M. Baggett /s/ James O. Matthews --------------------- James O. Matthews /s/ Jeffrey S. Matthews ----------------------- Jeffrey S. Matthews McGUIRE, WOODS, BATTLE & BOOTHE LLP By: /s/ Sam Young Garrett -------------------- Title: Partner EX-2 4 EXHIBIT 2.3 CONFORMED COPY AGREEMENT WITH SHAREHOLDERS This Agreement with Shareholders is made and entered into as of May 7, 1999, by and between SMITHFIELD FOODS, INC., a Virginia corporation (the "Company"), and each of JEFFREY S. MATTHEWS, CARROLL M. BAGGETT and JAMES O. MATTHEWS (each an "Investor" and collectively the "Investors"). W I T N E S S E T H : WHEREAS, the Company, the Investors and certain entities wholly-owned by the Investors are parties to an Acquisition Agreement dated as of May 3, 1999 (the "Acquisition Agreement"); and WHEREAS, upon the closing of the transactions contemplated by the Acquisition Agreement, such Investors will then respectively hold 2,185,333, 2,185,333 and 2,185,334 shares of Common Stock (as defined below); and WHEREAS, pursuant to the Acquisition Agreement and simultaneously with the execution of this Agreement, the Company and the Investors are entering into a Registration Rights Agreement and an Escrow Agreement; NOW, THEREFORE, for good and valuable consideration, the delivery and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following capitalized terms shall have the meanings ascribed to them below: "Affiliate" means, as to any Person, any other Person which, directly or indirectly, controls, is controlled by or is under common control with such person. For purposes of this definition, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting stock, by contract or otherwise. "Common Stock" means the Common Stock, par value $.50 per share, of the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Lockup Shares" means as to each Investor (i) initially, 700,000 shares of Common Stock issued to such Investor upon the closing under the Acquisition Agreement on the date hereof, and (ii) upon the making of the post-closing adjustments required by the Acquisition Agreement, such 700,000 shares (a) plus one-half the number of shares of Common Stock additionally issued by the Company to such Investor or (b) minus one-half the number of shares of Common Stock returned by such Investor or the escrow agent to the Company, as the case may be, pursuant to such adjustments. "Person" means an individual, partnership, joint venture, corporation, trust, unincorporated organization or government or any department or agency thereof. "Voting Securities" means any shares of any class of securities entitled to, or that may be entitled to, vote, including without limitation the Common Stock. ARTICLE II AGREEMENTS 2.1 Standstill Agreement. None of the Investors will, during the one-year period subsequent to the date hereof, without the written consent of the Company, singly or as part of a "partnership, limited partnership, syndicate or other group" (within the meaning of Section 13(d)(3) of the Exchange Act), directly or indirectly, individually, together with any other Investor, through one or more Affiliates, associates or intermediaries or otherwise: (a) make or in any way participate, directly or indirectly, in the making of any "solicitation" of "proxies" (as such terms are defined or used in Regulation 14A under the Exchange Act) to vote Voting Securities at any meeting of Company shareholders or become a "participant" in any "election contest" (as such terms are defined or used in Rule 14a-11 under the Exchange Act) with respect to the Company, or initiate, propose or otherwise solicit holders of Voting Securities for the approval of one or more shareholder proposals with respect to the Company as described in Rule 14a-8 under the Exchange Act; (b) oppose, or form, join or in any way participate in a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) opposing, any proposal presented by Company management at any meeting of Company shareholders; or (c) acquire or substantially affect the control of the Company, or directly or indirectly participate in the formation of any "group" (within the meaning of Section 13(d)(3) of the Exchange Act) which seeks to acquire beneficial ownership of more than 15% of the outstanding shares of any class of Voting Securities of the Company or to acquire or substantially affect control of the 2 Company; otherwise act, directly or indirectly, alone or in concert with others, to seek to control the Board of Directors of the Company; or solicit, seek to effect, negotiate with or provide any information to any other party with respect to, or make any statement or proposal, whether written or oral, to the Board of Directors of the Company or any director or officer of the Company, or otherwise make any public announcement of any proposal, with respect to any form of business combination transaction involving the Company, including, without limitation, a merger, exchange offer or sale of the Company's assets or instigate any third party to do any of the foregoing. 2.2 Restrictions on Transfer of Common Stock. During the one-year period subsequent to the date hereof, without the written consent of the Company, which shall not be unreasonably withheld: (a) no Investor will, individually or together with any other Investor, sell, transfer, donate, pledge, hypothecate, encumber, or otherwise agree or arrange to transfer, to one Person or "group" (within the meaning of Section 13(d)(3) of the Exchange Act) shares of Common Stock aggregating 5% or more of the outstanding Common Stock; and (b) each Investor will hold his or her Lockup Shares without sale, transfer, donation, pledge, hypothecation, encumbrance or any other agreement or arrangement of transfer, and without any exercise of any registration rights with respect thereto; provided, however, that any Investor may pledge any or all of his or her shares of Common Stock (including Lockup Shares) to a financial institution or investment bank in connection with obtaining a loan or effecting a "collar" transaction or other substantially similar derivative security or other such transaction; and provided further, it is understood that simply placing such shares in "street name" or the name of a nominee would not violate this provision, provided beneficial ownership remains with such Investor or Investors. ARTICLE III MISCELLANEOUS 3.1 Amendments and Waivers. This Agreement may be amended only by the written consent of all of the parties hereto. 3.2 Successors, Assigns and Transferees. No rights under this Agreement may be assigned or transferred to any Person, other than with the prior written consent of all of the parties hereto. 3.3 Integration. This Agreement, the Acquisition Agreement, the Escrow Agreement, the Registration Rights Agreement and any other documents referred to herein or delivered pursuant hereto that form a part hereof contain the entire understanding of the parties hereto with respect to its subject matter. There are no restrictions, agreements, promises, rights, representations, warranties, 3 covenants or undertakings with respect to the subject matter hereof other than those expressly set forth herein. This Agreement supersedes all prior agreements and understandings of the parties hereto with respect to its subject matter. 3.4 Notices. All notices and other communications provided for hereunder shall be in writing and shall be sent by first class mail, telex, telecopier or hand delivery. if to the Company, to: Smithfield Foods, Inc. 200 Commerce Street Smithfield, Virginia 23430 Attention: Secretary Telecopier: (757) 365-3017 Telephone Confirmation: (757) 365-3004 with copies to: McGuire, Woods, Battle & Boothe LLP One James Center 901 E. Cary Street Richmond, VA 23219 Attention: Sam Young Garrett Telecopier: (804) 775-1061 Telephone Confirmation: (804) 775-4384 If to any of the Investors, to their respective addresses, initially those set forth below: Jeffrey S. Matthews Carroll M. Baggett James O. Matthews Post Office Box 707 Warsaw, North Carolina 28398 with a copy to: Ward and Smith, P.A. 1001 College Court P. O. Box 867 New Bern, North Carolina 28563-0867 Attention: J. Troy Smith, Jr. Telecopier: (252) 636-2121 Telephone Confirmation: (252) 633-1000 4 All such notices and communications shall be deemed to have been given or made (i) when delivered by hand or by Federal Express or any other nationally recognized courier service, (ii) seven days after being deposited in the mail, postage prepaid, (iii) when telexed answer-back received or (iv) when telecopied, receipt acknowledged. 3.5 Termination. This Agreement will terminate upon the first anniversary of the date hereof. 3.6 Descriptive Headings. The headings in this Agreement are for convenience of reference only and shall not limit, expand or otherwise affect the meaning of the terms contained herein. 3.7 Severability. In the event that one or more of the provisions, paragraphs, words, clauses, phrases or sentences contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision, paragraph, word, clause, phrase or sentence in every other respect and of the remaining provisions, paragraphs, words, clauses, phrases or sentences hereof shall not be in any way impaired, it being intended that all rights, powers and privileges of the Company and the Investors shall be enforceable to the fullest extent permitted by law. 3.8 Governing Law. This Agreement shall be governed by the internal law of the Commonwealth of Virginia, without regard to principles of conflicts of law. 3.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. Any party's execution of this Agreement may be evidenced by physical delivery or by telecopier, facsimile or other written communication thereof to the other parties. 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. SMITHFIELD FOODS, INC. By: /s/ Aaron D. Trub ----------------- Name: Aaron D. Trub Title: Vice President, CFO & Secretary THE INVESTORS /s/ Jeffrey S. Matthews ----------------------- Jeffrey S. Matthews /s/ Carroll M. Baggett ---------------------- Carroll M. Baggett /s/ James O. Matthews --------------------- James O. Matthews EX-2 5 EXHIBIT 2.4 CONFORMED COPY REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement is made and entered into as of May 7, 1999, by and between SMITHFIELD FOODS, INC., a Virginia corporation (the "Company") and each of JEFFREY S. MATTHEWS, CARROLL M. BAGGETT and JAMES O. MATTHEWS (each individually an "Investor" and collectively "the Investors"). W I T N E S S E T H : WHEREAS, the Company, the Investors and certain entities wholly-owned by the Investors are parties to an Acquisition Agreement dated as of May 3, 1999 (the "Acquisition Agreement"); and WHEREAS, upon the closing of the transactions contemplated thereby, such Investors will then hold respectively 2,185,333 shares, 2,185,333 shares and 2,185,334 shares of Common Stock (as defined below); and WHEREAS, the parties thereto and hereto desire, in view of the Acquisition Agreement and this Registration Rights Agreement, to cause to be cancelled the registration rights provided for in the Subscription Agreement dated as of September 3, 1992 between the Company and Carroll's Foods, Inc., a North Carolina corporation all of the stock of which is owned by the Investors ("Carroll's Foods"); NOW, THEREFORE, for good and valuable consideration, the delivery and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following capitalized terms shall have the meanings ascribed to them below: "Affiliate" means, as to any Person, any other Person which, directly or indirectly controls, is controlled by or is under common control with such person. For purposes of this definition, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting stock, by contract or otherwise. "Agreement with Shareholders" means the Agreement with Shareholders dated as of the date hereof between the Company and each of the Investors. "Common Stock" means the Common Stock, par value $.50 per share, of the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Holder" means, as of any time, a signatory hereto who is the registered holder (or who holds such securities in "street name" or otherwise through a nominee) and the beneficial owner of Registrable Securities. "Person" means an individual, partnership, joint venture, corporation, trust, unincorporated organization or government or any department or agency thereof. "Prospectus" means the prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement or any other amendments and supplements to such prospectus, including without limitation any preliminary prospectus, any pre-effective or post-effective amendment and all material incorporated by reference in any prospectus. "Registrable Securities" means (i) the 2,185,333, the 2,185,333 and the 2,185,334 shares of Common Stock held on the date hereof by Jeffrey S. Matthews, Carroll M. Baggett and James O. Matthews, respectively, (including for purposes of this definition the numbers of such shares initially held in escrow and eventually delivered to such Investors, and excluding any such escrowed shares returned to the Company, in each case pursuant to the terms of such escrow and the Acquisition Agreement), plus any further shares issued to them pursuant to post-closing adjustments contemplated by the Acquisition Agreement, in each case so long as such Investor is continuously a Holder thereof thereafter, and (ii) any securities issued or issuable in respect of or in exchange for any Registrable Securities referred to in clause (i) by way of a stock dividend or other distribution, stock split, reverse stock split or other combination of shares, recapitalization, reclassification, merger, consolidation or exchange offer and continuously held by such Investor thereafter. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when (i) a Registration Statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such Registration Statement, (ii) such securities shall have been sold or otherwise transferred, or (iii) such securities shall have ceased to be outstanding. "Registration Expenses" has the meaning set forth in Section 2.4. "Registration Statement" means any registration statement of the Company which covers Registrable Securities pursuant to the provisions of this Agreement, all amendments and supplements to such Registration Statement, including post-effective amendments, and all exhibits and all material incorporated by reference in such Registration Statement. 2 "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. ARTICLE II. REGISTRATION RIGHTS 2.1 Demand Registration. (a) Requests for Registration. Subject to the provisions of paragraphs (b) and (c) of this Section 2.1, any Holder or Holders may at any time during the period beginning on the date hereof (subject to the share transfer restrictions provided for in the Agreement with Shareholders) and ending on the earlier to occur of (i) the first date that there are no Holders or fewer than 500,000 Registrable Securities and (ii) the seventh anniversary of the date hereof (the "Demand Registration Period") make a written request for registration under the Securities Act of all or any part of such Holder's or Holders' Registrable Securities (a "Demand Registration"). Such request shall specify the amount of Registrable Securities to be registered and the intended method or methods of disposition. If the Holders of a majority of the Registrable Securities to be registered in connection with a Demand Registration so elect (either in such written demand, and/or in their responses to the Company notice provided for in the next sentence), the offering of such Registrable Securities pursuant to such Demand Registration shall be in the form of an underwritten offering, subject to the further provisions herein concerning underwritten offerings. Within 10 days after receipt of such request, the Company shall send written notice of such request to all Holders and shall, subject to the provisions of paragraphs (b), (c), (d) and (e) of this Section 2.1, include in such Demand Registration all Registrable Securities with respect to which the Company receives written requests (specifying the amount of Registrable Securities to be registered and the intended method or methods of disposition) for inclusion therein within 20 days after such notice is sent; provided, however, that if all of the holders of Registrable Securities then outstanding acted together in making the initial request for a demand registration, the Company shall not be required to send any such notices and such notice periods shall not apply. The Company shall thereafter use reasonable best efforts to file with the SEC within the 3 applicable period specified in Section 2.3(a)(i) a Registration Statement registering all Registrable Securities that any Holders have requested the Company to register, for disposition in accordance with the intended method or methods set forth in their notices to the Company; provided, however, that nothing in this Agreement shall require the Company to file or maintain any registration statement pursuant to "Rule 415" or "shelf" procedures. The Company shall use reasonable best efforts to cause such Registration Statement to be declared effective as soon as reasonably practicable after filing and to remain effective until the date on which all of the Registrable Securities covered thereby are disposed of in accordance with the method or methods of disposition stated therein; provided, however, that, the Company shall not be required to use such efforts to cause the filing to remain effective for a period greater than 30 days following the date on which it was declared effective. (b) Number of Registrations. The Holders shall be entitled to request, and if requested the Company need effect only, an aggregate of six (6) Demand Registrations during the Demand Registration Period; provided, however, that the Company will not be obligated to comply with any such request unless (i) not less than 500,000 shares of Common Stock which are Registrable Securities are proposed to be registered in such Demand Registration, and (ii) at least 60 days have elapsed from the effective date of any registration statement for Common Stock of the Company (other than a registration statement on Form S-8 or any successor form), whether such registration statement was filed pursuant to any Demand Registration or otherwise by the Company. (c) Suspension of Registration. The Company shall have the right to delay the filing or effectiveness of a Registration Statement for any Demand Registration or to withdraw or require the Holders not to sell under any such Registration Statement, during up to two periods of not more than 90 days each in any consecutive twelve-month period during the Demand Registration Period if (A) (i) the Company would, in accordance with the advice of its outside counsel, find it appropriate to disclose in the Prospectus information not otherwise then required by law to be publicly disclosed and (ii) in the judgment of the Company's Board of Directors, as such judgment is set forth in a resolution of the Board of Directors, there is a reasonable likelihood that such disclosure, or any other action to be taken in connection with the Prospectus, would materially and adversely affect any existing or prospective material business situation, transaction or negotiation or otherwise materially and adversely affect the Company, or (B) the Company determines, in its reasonable business judgment, that such registration and offering would interfere with any financing, acquisition, corporate reorganization, or other material transaction involving the Company or any of its subsidiaries; provided, however, that the Company promptly gives the Holders requesting registration thereof pursuant to paragraph (a) of Section 2.1 hereof a written notice of such finding, judgment or determination containing a general statement of the reasons for such postponement and an approximation of the anticipated delay. In the event of such a Company notice, the Holders of a majority of the Registrable Securities to be offered and sold may by written notice to the Company, given prior to receiving a Company notice that such suspension has ended, withdraw the request for registration, and the request for registration shall not be counted for purposes of paragraph (b) of Section 2.1 hereof , and the Company shall be required (A) to pay in connection therewith all Registration Expenses and (B) to reimburse all out-of-pocket expenses incurred by the selling Holders to pay the reasonable fees and disbursements of their counsel and, to the extent the selling Holders prior to receiving the Company's notice have already agreed in writing so to reimburse the underwriters, if any, under such circumstances for their reasonable out-of-pocket costs and the reasonable fees and disbursements of their counsel, to reimburse such underwriters accordingly, in each case notwithstanding anything to the contrary contained herein (including Section 2.4). 4 (d) Offering by the Company. The Company may include in any Demand Registration additional shares of capital stock to be sold for the Company's account pursuant to such registration; provided, however, that if the managing underwriter for a Demand Registration that involves an underwritten offering shall advise the Company that, in its or their opinion, the inclusion of the amount and kind of shares of capital stock to be sold for the Company's account would adversely affect the success of the offering for the selling Holders, then the number and kind of shares of capital stock to be sold for the Company's account shall be reduced (and may be reduced to zero) in accordance with the managing underwriter's recommendation. (e) Reduction of Offering. In the event of a Demand Registration which is to be underwritten as contemplated by Section 2.1(a), if the managing underwriter or underwriters of such offering advise the Company in writing, with a copy to such Holders, that in its or their opinion the amount of Registrable Securities requested to be included in such Demand Registration is sufficiently large or otherwise likely to materially adversely affect the success of such offering (including, but not limited to, the offering price per share), the Company (i) will include in such registration the aggregate amount of Registrable Securities which in the opinion of such managing underwriter or underwriters can be sold without any such material adverse effect (such amount to be allocated pro rata among the Holders of Registrable Securities on the basis of the total amount of Registrable Securities which had been requested to be included in such registration by such Holders) and (ii) will allow any securities other than Registrable Securities to be included in such registration only if all Registrable Securities requested to be included shall have been included. 2.2 [Intentionally Omitted.] 2.3 Registration Procedures. (a) The Company to Use Reasonable Best Efforts. In connection with the Company's Demand Registration obligations pursuant to Section 2.1 hereof, the Company shall use reasonable best efforts to effect such registrations to permit the sale of such Registrable Securities in accordance with the intended method or methods of disposition thereof, and pursuant thereto the Company shall use reasonable best efforts: (i) to prepare (and to offer the selling Holders, any managing underwriter and their respective counsels reasonable opportunity to participate in the preparation of) and to file with the SEC within 45 days after the delivery of the relevant request under Section 2.1 a Registration Statement or Registration Statements relating to 5 Demand Registrations on any appropriate form under the Securities Act, and to cause such Registration Statements to become effective as soon as reasonably practicable and to remain continuously effective for the time period required by this Agreement to the extent permitted under applicable law; provided, however, that nothing in this Agreement shall require the Company to file or maintain any registration statement pursuant to "Rule 415" or "shelf" procedures; (ii) with respect to Demand Registrations, to prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period set forth in paragraph (a) of Section 2.1 and to cause the related Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed in accordance with the Securities Act and any rules and regulations promulgated thereunder; and otherwise to comply with the provisions of the Securities Act as may be necessary to facilitate the disposition of all Registrable Securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of disposition by the selling Holders thereof set forth in such Registration Statement or such Prospectus or Prospectus Supplement; (iii) to notify the selling Holders and the managing underwriters, if any, promptly if at any time (A) any Prospectus, Registration Statement or amendment or supplement thereto is filed, (B) any Registration Statement, or any post-effective amendment thereto, becomes effective, (C) the SEC requests any amendment or supplement to, or any additional information in respect of, any Registration Statement or Prospectus, (D) the SEC issues any stop order suspending the effectiveness of a Registration Statement or initiates any proceedings for that purpose, (E) the Company receives any notice that the qualification of any Registrable Securities for the sale in any jurisdiction has been suspended or that any proceeding has been initiated for the purpose of suspending such qualifications, or (F) any event occurs which requires that any changes be made in such Registration Statement or any related Prospectus so that such Registration Statement or Prospectus will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (iv) to make every reasonable best effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement, or the qualification of any Registrable Securities for sale in any U.S. jurisdiction, as soon as reasonably practicable; 6 (v) to furnish each selling Holder a signed counterpart, addressed to it, of (i) an opinion of counsel for the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement), and (ii) a "comfort" letter, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement), signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities and, in the case of the accountants' letter, such other financial matters, as the selling Holders and the managing underwriter may reasonably request; and to furnish to each selling Holder and each managing underwriter, if any, one signed copy of the Registration Statement or Registration Statements or any post-effective amendment thereto, including all financial statements and schedules thereto, all documents incorporated therein by reference and all exhibits thereto (including exhibits incorporated by reference); (vi) to deliver to each selling Holder and each underwriter, if any, as many copies of the Prospectus or Prospectuses (including each preliminary Prospectus) and any amendment or supplement thereto as such Persons may reasonably request; and to consent to the use of such Prospectus or any amendment or supplement thereto by each such selling Holder and underwriter, if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus, amendment or supplement; (vii) prior to any public offering of Registrable Securities, to register or qualify, or to cooperate with the selling Holders, the underwriters, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of such U.S. jurisdictions as may be requested by the Holders of a majority of the Registrable Securities included in such Registration Statement; with respect to Demand Registrations, to keep each such registration or qualification effective during the period set forth in paragraph (a) of Section 2.1 that the applicable Registration Statement is required to be kept effective and to do any and all other acts or things reasonably necessary to enable the disposition in such jurisdictions of the Registrable Securities covered by such 7 Registration Statement; provided, however, that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process or taxation in any jurisdiction where it is not then so subject; (viii) to cooperate with the selling Holders and the underwriters, if any, in the preparation and delivery of certificates representing the Registrable Securities to be sold, such certificates to be in such denominations and registered in such names as such selling Holders or managing underwriters may request at least two Business Days prior to any sale of Registrable Securities represented by such certificates; (ix) upon the occurrence of any event described in subclause (F) of clause (iii) of this paragraph (a), promptly to prepare and file a supplement or post-effective amendment to the applicable Registration Statement or Prospectus or any document incorporated therein by reference, and any other required document, so that such Registration Statement and Prospectus will not thereafter contain an untrue statement of a material fact or omit to state any material fact necessary to make the statement therein not misleading, and to cause such supplement or post-effective amendment to be filed or be effective as soon as reasonably practicable; (x) to take all other actions in connection therewith as are reasonably necessary or desirable in order to facilitate the disposition of the Registrable Securities included in such Registration Statement and, in the case of an underwritten offering to enter into an underwriting agreement in customary form, including, without limitation, customary indemnities; (xi) to make available for inspection by representatives of the Holders of Registrable Securities being sold pursuant to any Demand Registration and of the underwriters, if any, participating in such sale, copies or extracts of all pertinent financial and other records, corporate documents and properties of the Company as shall be reasonably necessary to enable such representatives to fulfill their due diligence responsibilities, and to cause the Company's officers, directors and employees to supply all information reasonably requested by any such representatives in connection with such Demand Registration; provided, however, that all information regarding such records, documents and properties shall be kept confidential by such Persons unless disclosure of such information is required by court or administrative order; 8 (xii) to comply with all applicable rules and regulations of the SEC relating to such Registration Statement and the distribution of the securities being offered or otherwise necessary in order to perform the Company's obligations under this paragraph (a); (xiii) to cooperate and assist in any filings required to be made with the National Association of Securities Dealers, Inc. (the "NASD"); and (xiv) to take all other reasonable steps necessary and appropriate to effect such registration in the manner contemplated by this Agreement. (b) Holders' Obligation to Furnish Information. The Company may require each Holder of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request. If the failure by a Holder of Registrable Securities to furnish such information as expeditiously as possible would prevent (i) the Registration Statement relating to such registration from being declared effective by the SEC or (ii) members of the NASD from participating in the distribution of the Registrable Securities, the Company may exclude such Holder's Registrable Securities from such registration. (c) Suspension of Sales Pending Amendment of Prospectus. Each Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in subclause (C), (D), (E) or (F) of clause (iii) of paragraph (a) of this Section 2.3, such Holder will forthwith forego or delay the disposition of any Registrable Securities covered by such Registration Statement or Prospectus until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by clause (ix) of such paragraph (a), or until it is advised in writing by the Company that the use of the applicable Prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in such Prospectus, and, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense, except as hereinafter provided in this paragraph (c)) all copies, other than permanent file copies, then in such Holder's possession of any Prospectus covering such Registrable Securities. If the Company shall have given any such notice during a period when a Demand Registration is in effect, the 30-day period described in paragraph (a) of Section 2.1 shall be extended by the number of days from and including the date of the giving of such notice to and including the date when each Holder of Registrable Securities covered by such Registration Statement shall have received the copies of the supplemented or amended Prospectus contemplated by clause (ix) of such paragraph (a) or shall have been advised in writing by the Company that the use of the applicable Prospectus may be resumed. Each Holder of Registrable Securities agrees that such Holder will, as expeditiously as possible, notify the Company at any time when a Prospectus relating to a Registration Statement covering such Holder's Registrable Securities is required to be delivered under the Securities Act, of the happening of any event of the kind described in subclause (F) of clause (iii) of paragraph (a) of this Section 2.3 as a result of any information 9 provided by such Holder for inclusion in such Prospectus included in such Registration Statement and, at the request of the Company, as expeditiously as possible prepare and furnish to it such information as may be necessary so that, after incorporation into a supplement or amendment of such Prospectus as thereafter delivered to the purchasers of such Registrable Securities, the information provided by such Holder shall not include an untrue statement of a material fact or a misstatement of a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading and, in such event the expenses of delivery to the Company of copies of any Prospectus in such Holder's possession will be at the expense of the Holder giving such notice pursuant to this sentence. 2.4 Registration Expenses. All expenses incident to the Company's performance of or compliance with its obligations under this Agreement with respect to any Demand Registration, including without limitation all (i) registration and filing fees, (ii) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications or registrations (or the obtaining of exemptions therefrom) of the Registrable Securities)), (iii) printing expenses (including expenses of printing Prospectuses), (iv) messenger and delivery expenses, (v) internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), (vi) reasonable fees and disbursements of its counsel and its independent certified public accountants (including the expenses of any "comfort" letters required by or incident to such performance or compliance), (vii) securities act liability insurance (if the Company elects to obtain such insurance), (viii) reasonable fees and expenses of any special experts retained by the Company in connection with any registration hereunder, and (ix) reasonable fees and expenses of other Persons retained by the Company (all such expenses being herein referred to as "Registration Expenses"), shall be borne by the Company. The following costs and expenses shall be excluded from the term "Registration Expenses": (1) all underwriting discounts and commissions, (2) all applicable transfer taxes, if any, (3) the fees and disbursements of counsel retained by the selling Holders, (4) certain specified registration costs and expenses as provided in the last sentence of paragraph (c) of Section 2.3 hereof, and (5) except as provided in the first sentence of this Section 2.4, all other costs, fees and expenses incurred by any Holder in connection with the exercise of its registration rights hereunder (all of the amounts set forth in this sentence to be borne by the selling Holders of any Registrable Securities pro rata on the basis of the total number of Registrable Securities being registered by such Holders). Notwithstanding anything to the contrary contained herein, if a request for any Demand Registration is withdrawn by the selling Holders (other than a withdrawal made by the selling Holders during a delay of filing or effectiveness or withdrawal or requirement not to sell pursuant to a Company notice under Section 2.1(c)), the Holders of the Registrable Securities which were or were to be registered under such Demand Registration shall be responsible for all Registration Expenses. 10 2.5 Indemnification. (a) Indemnification by the Company. In the event of any registration of any Registrable Securities under the Securities Act pursuant to Section 2.1 hereof, the Company will, and hereby does, indemnify and hold harmless, to the extent permitted by law, the Holder of any Registrable Securities covered by such Registration Statement, and if applicable its directors, officers and agents or general and limited partners (and the directors, officer and agents thereof), each other Person who participates as an underwriter, if any, in the offering or sale of such securities and each other Person, if any, who controls such Holder or any such underwriter within the meaning of the Securities Act, against any and all losses, claims, damages or liabilities, joint or several, and reasonable out-of-pocket expenses (including any amounts paid in any settlement effected with the Company's consent) to which such Holder or any such director, officer, agent, general or limited partner, underwriter or controlling Person may become subject under the Securities Act, common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement under which such securities were registered under the Securities Act or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary Prospectus, together with the documents incorporated by reference therein (as amended or supplemented if the Company shall have filed with the SEC any amendment thereof or supplement thereto), if used prior to the effective date of such Registration Statement, or contained in the Prospectus, together with the documents incorporated by reference therein (as amended or supplemented if the Company shall have filed with the SEC any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and the Company will reimburse such Holder and each such director, officer, agent, general or limited partner, underwriter and controlling Person for any legal or any other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, however, that the Company shall not be liable to any such Holder or any such director, officer, agent, general or limited partner, underwriter or controlling Person in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement or amendments thereof or supplement thereto or in any such preliminary, final or summary Prospectus in reliance upon and in conformity with written information furnished to the Company by or on behalf of 11 any such Holder or any such director, officer, agent, general or limited partner, underwriter or controlling Person, for use in the preparation thereof; and provided further, that the Company will not be liable to any Person who participates as an underwriter in any underwritten offering or sale of Registrable Securities, or to any Person who is a selling Holder in any non-underwritten offering or sale of Registrable Securities, or any other Person, if any, who controls such underwriter or Holder within the meaning of the Securities Act, under the indemnity agreement in this paragraph (a) of Section 2.5 with respect to any preliminary Prospectus or the final Prospectus (including any amended or supplemented preliminary or final Prospectus), as the case may be, to the extent that any such loss, claim, damage or liability of such underwriter, Holder or controlling Person results from the fact that such underwriter or Holder sold Registrable Securities to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the final Prospectus or of the final Prospectus as then amended or supplemented, whichever is most recent, if the Company had previously furnished copies thereof to such underwriter or Holder and such final Prospectus, as then amended or supplemented, had corrected any such misstatement or omission. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Holder or any such director, officer, agent, general or limited partner, underwriter or controlling Person and shall survive the transfer of such securities by such underwriter or Holder. (b) Indemnification by the Selling Holders. In consideration of the Company's including any Registrable Securities in any Registration Statement filed in accordance with Section 2.1 hereof, the Holder of such Registrable Securities and any underwriter shall be deemed to have agreed to indemnify and hold harmless (in the same manner and to the same extent as set forth in paragraph (a) of this Section 2.5) the Company and its directors, officers and agents and each person controlling the Company within the meaning of the Securities Act and all other prospective selling Holders and if applicable their directors, officers, agents, general and limited partners and respective controlling Persons with respect to any statement or alleged statement in or omission or alleged omission from such Registration Statement, any preliminary, final or summary Prospectus contained therein, or any amendment or supplement, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or its representatives by or on behalf of such Holder or underwriter for use in the preparation of such Registration Statement, preliminary, final or summary Prospectus or amendment or supplement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any of the prospective sellers or any of their respective directors, officers, agents, general or limited partners or controlling Persons and shall survive the transfer of such Holder. (c) Notices of Claims, Etc. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Section 2.5, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein (i) shall not relieve the indemnifying party of its obligations under the preceding paragraphs of this Section 2.5, except to the extent that the failure results in the forfeiture by the indemnifying party of substantial rights (ii) will not, in any event, relieve the indemnifying party from any obligation to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. If any such claim or action shall be brought against an indemnified 12 party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel of its choosing; provided, however, that if, in any indemnified party's reasonable judgment, a conflict of interest between the indemnified party and the indemnifying party exists in respect of such claim, then such indemnified party shall have the right to participate in the defense of such claim and to employ counsel reasonably satisfactory to the indemnifying party at the indemnifying party's reasonable expense to represent such indemnified party; provided, however, that if the indemnified party or parties in such instance is a Holder(s), then one such firm of attorneys shall be selected by a majority of the indemnified parties based upon their respective percentage ownership of Registrable Securities covered by such Registration Statement; and provided further, that if, in the reasonable judgment of any indemnified party, a conflict of interest between such indemnified party and any other indemnified parties exists in respect of such claim, each such indemnified party shall be entitled to one additional counsel reasonably satisfactory to the indemnifying party and the indemnifying party shall be obligated to pay the reasonable fees and expenses of such additional counsel or counsels. Once the indemnifying party has assumed the defense of any claim, no indemnified party will consent to entry of any judgment or enter into any settlement without the indemnifying party's consent to such judgment or settlement. (d) Other Indemnification. Indemnification similar to that specified in the preceding paragraphs of this Section 2.5 (with appropriate modifications) shall be given by the Company and each selling Holder of Registrable Securities with respect to any required registration or other qualification of securities under any state securities and "blue sky" laws. (e) Contribution. If the indemnification provided for in this Section 2.5 is unavailable or insufficient to hold harmless an indemnified party under paragraphs (a) or (b) of Section 2.5 of this Agreement, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, or damages or liabilities referred to in paragraphs (a) or (b) of Section 2.5 in such proportion as is appropriate to reflect the relative benefits received by and the relative fault of the indemnifying party on the one hand and the indemnified party on the other hand in connection with statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statements or omission. The Company agrees, and the Holders (in consideration of the Company's including any Registrable Securities in any Registration Statement filed in accordance with Section 2.1 hereof) and any underwriter shall be deemed to have agreed, that it would not be 13 just and equitable if contributions pursuant to this paragraph (e) of Section 2.5 were to be determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the first sentence of this paragraph (e) of Section 2.5. The amount paid by an indemnified party as a result of the losses, claims, and damages or liabilities referred to in the first sentence of this paragraph (e) of Section 2.5 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim (which shall be limited as provided in paragraph (c) of Section 2.5 if the indemnifying party has assumed the defense of any such action in accordance with the provisions thereof) which is the subject of this paragraph (e) of Section 2.5. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding anything contained in this paragraph (e) of Section 2.5 to the contrary, with respect to the offering to which the losses, claims, damages or liabilities of the indemnified parties relate, (i) no Holder who is an indemnifying party shall be required pursuant to this paragraph (e) of Section 2.5 to contribute any amount in excess of the proceeds received by such Holder from the sale of Registrable Securities and (ii) no underwriter who is an indemnifying party shall be required to contribute any amount in excess of the discounts and commissions received by such underwriter. 2.6 Rule 144; Nasdaq Listing. The Company shall file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder, and shall take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitations of the exemptions provided by Rule 144 (as it currently exists or as it may be amended, or any successor rule thereto) under the Securities Act. Upon the request of any Holder, the Company shall deliver to such Holder a written statement stating whether it has complied with such information and requirements. The Company will use reasonable best efforts to maintain the listing of the Common Stock (including the Registrable Securities) on the Nasdaq National Market System or, at the option of the Company, a national securities exchange (including without limitation the New York Stock Exchange). 2.7 Underwritten Registrations. (a) Selection of Underwriters. If any of the Registrable Securities covered by any Demand Registration are to be sold in an underwritten offering, the underwriter or underwriters and managing underwriter or managing underwriters that will administer the offering shall be selected by the Holders of a majority of the Registrable Securities included in such offering; provided, however, that such underwriters and managing underwriters and the terms material to the Company of any underwriting agreement and other underwriting arrangements shall be subject to the prior written approval of the Company, which approval shall not be unreasonably withheld. 14 (b) Agreements of Selling Holders. No Holder shall sell any of its Registrable Securities in any underwritten offering pursuant to a registration hereunder unless such Holder (i) agrees to sell such Registrable Securities on the basis provided in any underwriting agreement or other underwriting arrangements approved by the Persons entitled hereunder to approve such agreements or arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting agreements or other underwriting arrangements. In connection with any Registration Statement in which a Holder of Registrable Securities is participating, each such Holder will furnish to the Company in writing such information and affidavits with respect to such Holders as the Company reasonably requests for use in connection with any such Registration Statement or Prospectus. (c) Underwriting Agreement. If requested by the underwriters for any underwritten offering of Registrable Securities on behalf of a Holder of Registrable Securities pursuant to a registration requested under Section 2.1, the Company will enter into an underwriting agreement with such underwriters for such offering, such agreement to contain such representations and warranties by the Company and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities to the effect and to the extent provided in Section 2.5. Each Holder of Registrable Securities on whose behalf Registrable Securities are to be distributed by such underwriters shall be a party to any such underwriting agreement, and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such Holder of Registrable Securities. Such Holder of Registrable Securities shall not be required by the Company to make any representations or warranties to or agreements with the Company or the underwriters other than reasonable representations, warranties or agreements regarding such Holder, such Holder's Registrable Securities and such Holder's intended method or methods of disposition and any other representation required by law. 2.8 Holdback Agreements. (a) Restrictions on Public Sales by Holders. To the extent not inconsistent with applicable law, each Holder of Registrable Securities whose securities are covered by a Registration Statement filed pursuant to Section 2.1 hereof who is timely notified in writing by the managing underwriter or underwriters in an underwritten public offering of such proposed offering shall not effect (other than as part of such underwritten offering) any public sale or distribution (including a sale pursuant to Rule 144) of any issue being registered, or any securities of the Company similar to any such issue, or any securities of the 15 Company convertible into or exchangeable or exercisable for any such issue or any similar issue, during the 10-day period prior to the effective date of the applicable Registration Statement, or during the period beginning on such effective date and ending 90 days after such date, except as part of such registration. (b) Restrictions on Public Sales by the Company. The Company shall not effect any public sale or distribution of any issue of the same class or series as Registrable Securities being registered in an underwritten offering (other than pursuant to an employee stock option, stock purchase, stock bonus or similar plan, pursuant to a merger, exchange offer or other transaction comparable to or of the type specified in Rule 145(a) under the Securities Act), or any securities of the Company similar to any such issue or any securities of the Company convertible into or exchangeable or exercisable for any such issue, during the 10-day period prior to the effective date of the applicable Registration Statement, or during the period beginning on such effective date and ending 30 days after such effective date, except as part of such registration. 2.9 Termination Agreement. Simultaneously with the execution and delivery of this Agreement, and as a condition thereto, the Company will execute and deliver, and the Investors will cause Carroll's Foods to execute and deliver, a Termination Agreement in the form attached as Exhibit A hereto. 2.10 Controlling Agreements. Simultaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering the Termination Agreement, as contemplated by Section 2.9, and also an Escrow Agreement and an Agreement with Shareholders, each as contemplated by the Acquisition Agreement. The terms of such other agreements, to the extent of any conflict with the terms herein, shall control and govern over the terms of this Agreement. 2.11 Adjustments. References to shares of Common Stock herein are subject to adjustment in the event of any stock split, combination, subdivision, exchange or stock dividend with respect to the Common Stock (for instance, upon a 2-for-1 stock split, the 500,000 share minimum stated in Section 2.1(b) would become a 1,000,000 share minimum), it being understood that the Company will not effect or permit to occur any such event which would materially adversely affect the ability of the Holders of Registrable Securities to include such Registrable Securities in any registration under Section 2.1 or the marketability of such Registrable Securities under any such registration. 16 ARTICLE III. MISCELLANEOUS 3.1 Amendment and Waivers. This Agreement may be amended, and the Company or a Holder may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company or the Holder shall have obtained the written consent to such amendment, action or omission to act, of the Company and the Holders of at least a majority of the Registrable Securities then outstanding (and, in the case of any amendment, action or omission to act that adversely affects any Holder or group of Holders differently from any of the other Holders, the written consent of such Holder or a majority of the Registrable Securities held by such group of Holders). Holders shall be bound from and after the date of receipt of a written notice from the Company setting forth such amendment or waiver by any consent authorized by this Section 3.1, whether or not the certificates representing such Registrable Securities shall have been marked to indicate such consent. 3.2 Successors, Assigns and Transferees. This Agreement may not be transferred or assigned by the Company or by any Holder, other than by operation of law; provided, however, that a Holder or Holders may transfer or assign its rights with respect to any Registrable Securities under this Agreement to an investment bank which (A) has agreed in writing to be bound by the terms of this Agreement, (B) by such transfer then acquires from such Holder or Holders at least 500,000 Registrable Securities and (C) is receiving such shares for the purpose of effecting between such Holder or Holders and such investment bank a "collar" transaction or other substantially similar derivative security or other such transaction. This Agreement shall be binding upon and shall inure to the benefit of the Holders and the Company and their permitted successors, assigns and transferees. 3.3 Integration. Subject to Section 2.10, this Agreement and the documents referred to herein or delivered pursuant hereto that form a part hereof contain the entire understanding of the parties thereto with respect to its subject matter; there are no restrictions, agreements, promises, rights, representations, warranties, covenants or undertakings with respect to the subject matter hereof other than those expressly set forth herein; and this Agreement supersedes all prior agreements and understandings of the parties hereto with respect to its subject matter. 3.4 Notices. All notices and other communications provided for hereunder shall be in writing and shall be sent by first class mail, telex, telecopier or hand delivery, if to the Company, to: Smithfield Foods, Inc. 200 Commerce Street Smithfield, Virginia 23430 Attention: Secretary Telecopier: (757) 365-3017 Telephone Confirmation: (757) 365-3004 17 with copies to: McGuire, Woods, Battle & Boothe LLP One James Center 901 East Cary Street Richmond, Virginia 23219 Attention: Sam Young Garrett Telecopier: (804) 775-1061 Telephone Confirmation: (804) 775-4384 If to any Holders, to: Jeffrey S. Matthews Carroll M. Baggett James O. Matthews Post Office Box 707 Warsaw, North Carolina 28398 with a copy to: Ward and Smith, P.A. 1001 College Court P. O. Box 867 New Bern, North Carolina 28563-0867 Attention: J. Troy Smith, Jr. Telecopier: (252) 636-2121 Telephone Confirmation: (252) 633-1000 All such notices and communications shall be deemed to have been given or made (i) when delivered by hand or by Federal Express or any other nationally recognized courier service, (ii) seven days after being deposited in the mail, postage prepaid, (iii) when telexed answer-back received or (iv) when telecopied, receipt acknowledged. 3.5 Termination. This Agreement will terminate upon the earlier to occur of (i) the first date that there are no Holders or fewer than 500,000 Registrable Securities or (ii) the seventh anniversary of the date hereof. 3.6 Descriptive Headings. The headings in this Agreement are for convenience of reference only and shall not limit, expand or otherwise affect the meaning of the terms contained herein. 18 3.7 Severability. In the event that any one or more of the provisions, paragraphs, words, clauses, phrases or sentences contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision, paragraph, word, clause, phrase or sentence in every other respect and of the remaining provisions, paragraphs, words, clauses, phrases or sentences hereof shall not be in any way impaired, it being intended that all rights, powers and privileges of the Company and the Holders shall be enforceable to the fullest extent permitted by law. 3.8 Governing Law. This Agreement shall be governed by the internal law of the Commonwealth of Virginia, without regard to principles of conflicts of law. 3.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. Any party's execution and delivery of this Agreement may be evidenced by physical delivery or by telecopier, facsimile or other written communication thereof to the other parties. 19 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. SMITHFIELD FOODS, INC. By: /S/ Richard J. M. Poulson ------------------------- Name: Richard J. M. Poulson Title: Vice President INVESTORS: /s/ Jeffrey S. Matthews ----------------------- Jeffrey S. Matthews /s/ Carroll M. Baggett ---------------------- Carroll M. Baggett /s/ James O. Matthews --------------------- James O. Matthews 20 EXHIBIT A FORM OF TERMINATION AGREEMENT Reference is made to the Subscription Agreement between the parties hereto dated as of September 13, 1992 (the "1992 Registration Rights Agreement"), and to the Registration Rights Agreement, dated as of May 7, 1999, which Smithfield Foods, Inc., a Virginia corporation, and each of Jeffrey S. Matthews, Carroll M. Baggett and James O. Matthews (such individuals being all the shareholders of Carroll's Foods, Inc.) propose to enter into today, replacing and superseding the 1992 Registration Rights Agreement. The parties hereto, being also the parties to the 1992 Registration Rights Agreement, hereby agree to terminate immediately the 1992 Registration Rights Agreement, which shall be of no further force or effect. Dated: May 7, 1999 SMITHFIELD FOODS, INC. By: __________________________ Name: Title: CARROLL'S FOODS, INC. By: __________________________ Name: Title: EX-23 6 EXHIBIT 23.1 Exhibit 23.1 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our report incorporated by reference in this Form 8-K/A, into the Company's previously filed Registration Statement File Numbers 33-51024, 33-14219, 333-34553, and 333-81917. /s/ Arthur Andersen LLP Richmond, Virginia July 16, 1999 EX-23 7 EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report on the combined financial statements of Carroll's Group included in this Form 8-K/A, into the Company's previously filed Registration Statement File Numbers 33-51024, 33-14219, 333-34553, and 333-81917. It should be noted that we have not audited any financial statements of the company subsequent to December 26, 1998 or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP Raleigh, North Carolina, July 19, 1999 -----END PRIVACY-ENHANCED MESSAGE-----