UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 27, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-17060
WLR FOODS, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1295923
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
P.O. Box 7000, Broadway, Virginia 22815
(Address of principal executive offices)
Registrant's telephone number, including area code
540-896-7001
Securities registered pursuant Name of exchange on which
to Section 12(b) of the Act: registered
N/A N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - no par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. (X) Yes _____ No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __X__
The aggregate value of the voting stock held by non-affiliates of the
registrant as of September 22, 1998 was approximately $103,372,786.
As of that date 16,453,145 shares of the registrant's common stock
were issued and outstanding.
<PAGE>
PART I
Item 1. BUSINESS.
General
WLR Foods, Inc. (with its subsidiaries, "WLR" or the "Company")
was incorporated in the Commonwealth of Virginia in 1984. WLR is a
leading producer, processor and marketer of poultry-based products,
including fresh, frozen and further processed chicken and turkey. The
Company markets products under its Wampler Foods (R) brand trademark
and under various private labels to customers in the retail,
foodservice and institutional markets, as well as to export customers
in more than 70 countries. In 1998, WLR was ranked the third largest
turkey producer by Turkey World magazine, the thirteenth largest
chicken producer by Broiler Industry, and the seventh largest poultry
company by Poultry magazine. Company sales for fiscal 1998 were $946
million, including approximately $393 million of chicken products and
$457 million of turkey products, and representing approximately 561
million pounds of chicken and 510 million pounds of turkey. Remaining
sales were comprised of feed, nonpoultry distribution and by-product
sales.
The Company markets a full line of chicken and turkey products,
including individually packaged fresh and frozen whole birds, fresh
and frozen bulk parts, fresh and frozen tray packs of individual parts
and a large assortment of further processed products. By offering a
broad array of products, the Company is able to shift production among
whole birds, parts and further processed products in response to
changes in customer demands and product prices. WLR is also actively
expanding its offering of further processed products, which offer
consumers added convenience and taste while generating higher margins
for WLR, and for which grain costs represent a smaller percentage of
overall production cost. Further processed products include a variety
of salads, sliced luncheon meats, turkey burgers and sausage, ground
turkey and chicken and various fully cooked breast products.
WLR markets branded, as well as, private label poultry products
to retailers, fast food operators, foodservice and institutional
customers nationwide, but primarily in the eastern United States. The
Company is positioning itself as a full-service supplier to these
customers for poultry-based products, offering a broad assortment of
branded and private label products across multiple price points. In
addition, WLR continues to expand its export sales, which have grown
from 4% of total Company sales in 1990 to 10% of sales in 1998.
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The Company is vertically integrated and controls the growing of
its poultry, and the processing, preparation, packaging and marketing
of its products. Such integration enables WLR to ensure a
consistently high degree of product quality, and to adjust its product
mix to changes in the prices of products, changes in customer
requirements and to geographic imbalances in supply. As an integrated
producer, the Company also has opportunities to reduce operating
costs, improve operating efficiency and deliver a higher yield of
harvestable birds to its processing plants through improvements in
processing facilities, automation and the active monitoring and
management of its breeder stock, hatching and growing conditions and
feed components.
During fiscal 1998, the Company operated a cold storage and ice
manufacturing business through its Cassco Ice and Cold Storage, Inc.
(Cassco) subsidiary, which generated sales of $29 million. In July
1998, the Company sold its Cassco subsidiary, and also completed the
sale of its Goldsboro, North Carolina chicken complex. The volume
lost from the sale of the Goldsboro complex will be replaced at the
Marshville, North Carolina complex, which is currently being converted
from turkey to chicken processing.
Poultry Production
WLR Foods' primary operations include the breeding, hatching,
grow-out and processing of turkeys and chickens. For fiscal 1998, WLR
Foods produced approximately 535 million pounds of dressed turkey and
644 million pounds of dressed chicken.
WLR Foods purchases breeder stock turkey eggs which it hatches
and places with growers who supply labor and housing to produce
breeder flocks. These breeder flocks produce eggs that are taken to
the company-owned turkey hatchery for incubation and hatching into
poults, providing approximately 61% of the Company's poult supply.
The balance of the Company's poults are purchased from Cuddy Farms,
Inc. (not affiliated with WLR Foods). In its chicken operations, WLR
Foods purchases breeder flock chicks and places them with growers who
supply labor and housing to raise the birds. The birds are then moved
to breeder farms where they begin providing eggs, which are in turn
transported to company-owned hatcheries. Once hatched, day-old poults
and chicks are inspected and vaccinated against common poultry
diseases. In total, WLR Foods contracts with 200 breeder growers who
grow approximately one-half of WLR Foods' turkey, and all of WLR
Foods' chicken, breeder flocks.
After hatching and vaccination, poults and chicks are transported
to one of WLR Foods' approximately 800 contract growers located in
Virginia, West Virginia, Pennsylvania, Maryland, North Carolina and
South Carolina who supply labor and housing to raise the turkeys and
chickens to maturity. WLR Foods supplies feed primarily from company-
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owned feedmills and provides grower support through WLR Foods'
technicians and veterinarians.
Grow-out and breeder farms provide WLR Foods with more than 53
million square feet of growing facilities. These farms typically are
grower-owned and operate under contract with WLR Foods, providing
facilities, utilities and labor. Contract growers are compensated on
a cost-based formula and several incentive-based formulas.
Approximately 99% of WLR Foods' turkeys and 100% of its chickens are
raised by contract growers, with the balance grown by independent
growers and company-owned farms. WLR Foods strives to maintain good
contract grower relationships and believes the availability of
contract growers is sufficient for anticipated needs.
An important factor in the grow-out of poultry is the rate at
which poultry converts feed into body weight. The Company purchases
it primary feed ingredients on the open market. These ingredients
consist primarily of corn and soybean meal. Because the quality and
composition of feed is critical to the feed conversion rate, WLR Foods
formulates and manufactures a majority of its feed at one of its four
feedmills. WLR Foods has an annual feed manufacturing capacity of
approximately 2 million tons and anticipates no difficulty in meeting
the Company's feed requirements in the future.
Once the turkeys and chickens reach marketable weight, they are
transported in WLR Foods' trucks to one of its seven poultry
processing plants. These plants utilize modern, highly automated
equipment to process and package the turkeys and chickens for sale or
preparation for further processing. Some further processing, such as
deboning and skinning, is also conducted in a number of these
processing plants. Additional further processing, including slicing,
grinding, marinating, spicing and cooking to produce delicatessen
products, frankfurters, meat salads, ground turkey and chicken, and
food service products is conducted at the Company's two further
processing plants.
Processing, Distribution and Other
WLR Foods' distribution business included fresh poultry, beef,
and other meat products purchased from third parties for resale, along
with certain products produced by the Company. This distribution
business is being discontinued during the first quarter of fiscal 1999
and management feels that there will be no significant impact on
operating performance. WLR Foods' protein conversion plants convert
the nonedible by-products of its poultry processing plants into feed
ingredients, with the balance sold to pet food manufacturers.
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The following table approximates sales revenues from WLR Foods'
products for the last three fiscal years.
Fiscal 1998 Fiscal 1997 Fiscal 1996
(Dollars in ----------- ----------- -----------
Millions)
Chicken, fresh
and frozen $393 $400 $380
Turkey, fresh
and frozen 457 490 485
Distribution, Feed
and Other 96 105 113
---- ---- ----
Total Net Sales $946 $995 $978
==== ==== ====
Competition
The poultry industry is highly competitive. WLR Foods markets
its products in competition with both larger and smaller poultry
companies on the basis of price, quality and service, with WLR Foods'
greatest competition coming from four or five of the country's larger
poultry producers and processors. The pricing of poultry products is
so competitive that any company with a cost advantage is in a
favorable competitive position. Seasonal increases in production and
customer buying patterns contribute to fluctuations in prices which
are controlled more by supply and demand than by cost of production.
WLR Foods primarily markets its chicken products in the highly
competitive eastern sections of the United States.
Seasonality
In general, the Company's sales are relatively stable throughout
the year. However demand for chicken and further processed products
is typically strongest in May through August while demand for turkey
products is typically strongest in September through December.
Management responds to this seasonality by attempting to manage
operating volumes and inventory levels, and the associated working
capital requirements, to meet expected demand. As a consequence, the
Company's short-term borrowings typically peak in the third and fourth
quarters of each fiscal year, reflecting the buildup of turkey product
inventories.
Trademarks and Patents
The Company's Wampler Foods subsidiary markets products under the
trademarks WAMPLER FOODS and WAMPLER FOODS and design, both of which
are registered with the U.S. Patent and Trademark Office. Wampler
Foods continues to market its products under the trademarks TRIM FREE,
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COLONY FARMS, THE DELI ROAST COLLECTION and design, all of which are
federally registered trademarks. Products are also sold under the
LEAN LITE DELI, ROUND HILL, FARMER'S CHOICE, KAFETERIA KIT and VALLEY
PRIDE marks. Wampler Foods continues to market its export and foreign
military sales under the COLONEL ROCKINGHAM design and ROCKINGHAM
trademarks, as well as the WAMPLER FOODS trademark.
Wampler Foods holds a patent for pasteurized salads and a patent
for processing turkey.
Government Contracts
WLR Foods' government contracts are a small portion of its total
sales, consisting of bids on particular products for delivery at
specified locations. Contracts are generally bid, and the product is
delivered, within a one- to two-month period. These contracts include
both chicken and turkey products and can involve further processed
products. WLR Foods had less than $5.1 million of governmental
contracts outstanding as of June 27, 1998, compared to approximately
$0.5 million as of June 28, 1997.
Foreign Sales
WLR Foods' export sales constituted approximately 10% of its
total annual sales in each of fiscal 1998, 1997 and 1996. Wampler
Foods has a full-time staffed export sales office which coordinates
export sales efforts on behalf of WLR Foods. Export sales originate
from that office and use independent brokers as needed. Sales are
made to customers in over 70 countries.
Transportation
Transportation logistics, including the availability of
transportation equipment and the efficiency of transportation systems,
are key elements in the raising of poultry, transporting feed to the
contract growers and outside purchasers, transporting poultry to the
processing plants, and transporting products to customers. WLR Foods
has contracts with two railroad companies for the delivery of feed
ingredients to WLR Foods' feedmills.
Delivery of the Company's products are generally made by truck.
WLR Foods maintains a fleet of refrigerated trucks and uses them,
along with refrigerated common carrier and customer-owned vehicles, to
deliver its products. Export products are loaded in refrigerated
containers and shipped overseas.
Raw Materials
WLR Foods' largest cost is for basic feed ingredients, namely
corn and soybean meal. Feed grains are commodities and, as such, are
subject to volatile price changes caused by weather, size of harvest,
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changes in demand, transportation and storage cost and the
agricultural policies of the United States and foreign governments.
Although WLR Foods can, and sometimes does, purchase grain in the
forward markets, it cannot completely eliminate the potential adverse
effect of grain price increases. The Company uses futures contracts
and forward purchases to hedge the risk of fluctuating grain prices.
The gains or losses from hedging transactions become part of the cost
of the related inventory items and are expensed during the time period
for which the hedge was intended.
Environmental and Other Regulatory Compliance
WLR Foods' facilities and operations are subject to the
regulatory jurisdiction of various federal agencies, including the
Food and Drug Administration, Department of Agriculture, Environmental
Protection Agency, Occupational Safety and Health Administration, and
of corresponding state agencies in Virginia, West Virginia, North
Carolina and Pennsylvania. All environmental permits, such as air,
water and solid waste disposal permits, are issued by appropriate
state agencies.
A total of seven environmental permits are held by Wampler
Foods's Virginia facilities, all of which were issued by the Virginia
Department of Environmental Quality. The Hinton turkey processing
facility holds an air permit which regulates certain combustion
equipment and a water permit which regulates the treatment of process
wastewater. The Harrisonburg turkey processing facility holds a water
permit requiring pretreatment of its process wastewater to meet
certain effluent standards before discharging into the regional sewer
system. Wampler Foods' Timberville chicken processing and protein
conversion facility holds a water permit which regulates the discharge
of process wastewater and an air permit which regulates the operation
of its protein conversion facility, as well as certain combustion
equipment. The chicken processing facility in Alma/Stanley holds one
water permit which regulates the discharge of process wastewater.
Finally, the Broadway feedmill holds an air permit which was issued
primarily for the control and abatement of dust. In addition to the
seven environmental permits held by Wampler Foods, WLR Foods holds a
Virginia Pollution Abatement permit which allows Wampler Foods'
Virginia facilities to land apply certain wastewater biosolids
generated by the facilities' wastewater treatment systems.
In West Virginia, Wampler Foods' Moorefield facilities hold four
environmental permits, all of which were issued by the West Virginia
Department of Commerce, Labor & Environmental Resources. The chicken
processing and protein conversion facility holds a water permit which
regulates the discharge of process wastewater, an air permit which
regulates the operation of the Company's protein conversion facility,
and a biosolids management permit regulating the land application in
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West Virginia of certain wastewater biosolids generated at the
Moorefield facilities wastewater treatment works. The Moorefield
feedmill holds one air permit which was issued primarily for the
control and abatement of dust.
Wampler Foods' North Carolina facilities hold a total of eight
environmental permits, all of which were issued by the North Carolina
Department of Environment, Health & Natural Resources. The Monroe
processing plant holds three permits: an industrial wastewater
discharge permit which requires process wastewater to be pretreated
prior to discharge to a regional sewer system, a stormwater permit
which regulates stormwater discharges, and an air permit which
regulates boiler emissions. The Marshville processing plant holds an
industrial wastewater discharge permit and stormwater permit which are
similar to the counterpart permits held by the Monroe facility. In
addition, the Marshville facility holds a stormwater permit which
regulates cooling water and boiler blowdown discharges. The Wingate
feedmill holds a stormwater permit which regulates stormwater
discharges and an air permit which regulates emissions from boilers,
bagfilters, and related equipment.
Pennsylvania facilities owned by Wampler Foods hold a total of
six environmental permits. The Franconia turkey processing plant
holds five permits: two water permits for the treatment of process
wastewater, two air permits to regulate operation of certain
combustion and incineration equipment, and one municipal solid waste
disposal permit for the disposal of incinerator ash. The New Oxford
turkey processing facility holds one air permit which regulates
combustion equipment. All of the Pennsylvania permits were issued by
the Pennsylvania Department of Environmental Resources.
In addition to the foregoing environmental permits, and where not
otherwise addressed above, all facilities have taken steps to ensure
compliance with stormwater regulations. Where applicable, facilities
have applied for the necessary group, individual or general storm
water permit in accordance with state and federal guidelines.
Further, each facility has registered aboveground and underground
storage tanks in accordance with relevant state and federal
regulations.
Management believes that all facilities and operations are
currently in compliance with environmental and regulatory standards.
Compliance has not had a materially adverse effect upon WLR Foods'
earnings or competitive position in the past, and it is not
anticipated to have a materially adverse effect in the future.
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Employees
WLR Foods employed over 7,350 persons as of June 27, 1998, none
of whom were covered by a collective bargaining agreement.
Item 2. PROPERTIES.
WLR Foods' seven poultry processing facilities and two further
processing plants are located in Virginia, West Virginia, Pennsylvania
and North Carolina, and have a total slaughter capacity of
approximately 550,000 turkeys per week (single shift) and 3.65 million
chickens per week (double shift). WLR Foods owns and operates four
feedmills with a production capacity of approximately 2 million tons
of finished feed per year; a turkey hatchery with a production
capacity of approximately 360,000 poults per week and three chicken
hatcheries with a production capacity of approximately 3.5 million
chicks per week; and two protein conversion plants with a total
production capacity of 4,500 tons of raw product weekly. The
diversity, number and geographic proximity of its processing and
support facilities provide WLR Foods with operating flexibility and
enable it to alter the size and mix of poultry processed among the
various facilities, as market conditions change. The Company's assets
are depreciated on a straight-line basis, based on the following asset
lives:
Land Improvements 10-20 years
Buildings & Improvements 5-20 years
Machinery & Equipment 3-17 years
Transportation Equipment 3-5 years
Item 3. LEGAL PROCEEDINGS.
There were no material pending legal proceedings during the
fiscal year ended June 27, 1998, other than ordinary routine
litigation incidental to the Company s business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the shareholders of the Company
during the fourth quarter of the fiscal year ended June 27, 1998.
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Executive Officers of the Registrant
The following information is given regarding WLR Foods' executive
officers.
_________________________________________________________________
Name and Position Principal Occupation
with the Company Age During the Last Five Years
_________________________________________________________________
James L. Keeler 63 Chief Executive Officer since
President,Chief February 1988
Executive Officer
Jane T. Brookshire 52 Vice President of Human Resources Vice
President of since October 1993; previously, Human
Resources Director of Human Resources for WLR
Foods
Dale S. Lam 35 Vice President of Finance and
Vice President of Treasurer since August 1998;
Finance and Treasurer previously, Controller for WLR
Foods from December 1997 to August
1998, and Co-owner and Treasurer of
Office Products, Inc. from 1989 to
October 1997
Ruth J. Mack 43 Executive Vice President of Sales
Executive Vice President and Marketing since May 1997;
of Sales and Marketing previously, Executive Vice
Wampler Foods, Inc. President for Marketing and Sales
for Just Born, Inc., Bethlehem,
Pennsylvania from 1994 to 1997, and
Director of Marketing for Pepsi
Cola Company from 1989 to 1994
Ronald E. Morris 45 Vice President of Turkey Operations
Vice President of Turkey for Wampler Foods, Inc. since
Operations for Wampler November 1997; previously, Complex
Foods, Inc. Manager for Marshville, North
Carolina Turkey Complex for Wampler
Foods, Inc. from 1996 to 1997,
Complex Manager for Butterball from
1994 to 1996 and General Manager of
Rocco Turkeys, Inc. from 1987 to
1994
Walter F. Shafer, III 40 Vice President of Chicken
Vice President of Chicken Operations for Wampler
Operations for Wampler Foods, Inc. since November 1997;
Foods, Inc. previously, Director of Chicken
Operations for Wampler Foods, Inc.
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from 1996 to 1997, Director of
Chicken Processing for Wampler
Foods, Inc. from 1995 to 1996, and
Plant Manager of Moorefield Chicken
Operations for Wampler Foods, Inc.
from 1991 to 1995
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
Public trading of shares of WLR Foods' common stock commenced on
May 10, 1988. The stock was included in NASDAQ as of September 12,
1988, and was included in NASDAQ/National Market System as of March 7,
1989. The range of high and low bid information for the stock, as
well as information regarding dividends declared by WLR Foods, for
each full quarterly period within the two most recent fiscal years is
incorporated by reference to Note 15 to the Registrant's Consolidated
Financial Statements in the Annual Report, attached hereto as Exhibit
13.3. As of September 4, 1998, the approximate number of shareholders
of record was 4040.
Item 6. SELECTED FINANCIAL DATA.
Selected financial data for each of the fiscal years in the ten-
year period ended June 27, 1998 is incorporated by reference to the
table entitled "Financial Highlights" in the Annual Report, attached
hereto as Exhibit 13.1. A summary of significant accounting policies
and business acquisitions and dispositions is incorporated by
reference to Notes 1 and 2 to the Registrant's Consolidated Financial
Statements in the Annual Report, attached hereto as Exhibit 13.3.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.<PAGE>
Management's discussion and analysis of financial condition and
results of operations is incorporated by reference to that section in
the Annual Report, attached hereto as Exhibit 13.2.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISKS
Market risks relating to the Company's operations result
primarily from changes in interest rates and commodity prices. To
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address these risks, the Company enters into various hedging
transactions as described below. The Company does not use financial
instruments for trading purposes and is not party to any leveraged
derivatives.
Interest Rate Sensitivity
The Company hedges exposures to changes in interest rates on
certain of its financial instruments. Under the terms of various term
and revolving credit loans, the Company enters into interest rate swap
agreements to effectively lock in a fixed interest rate for a portion
of these borrowings. In addition, the Company enters into interest
rate cap agreements to effectively limit the Company's exposure to
increases in interest rates.
The table below provides information about the Company's
derivative financial instruments and other financial instruments that
are sensitive to changes in interest rates. For debt obligations, the
table presents principal cash flows and related weighted average
interest rates by expected maturity dates. For interest rate swaps,
the table presents notional amounts and weighted average interest
rates by expected (contractual) maturity dates. Notional amounts are
used to calculate the contractual payments to be exchanged under the
contract.
Expected Maturity Date
-----------------------------------
Liabilities:
Dollars in thousands 1999 2000 2001 2002
- - -------------------- ---- ---- ---- ----
Liabilities:
Long-term debt, including
Current Portion
Fixed Rate $235 $213 $220 $232
Average interest rate 6.11% 6.12% 6.12% 6.11%
Variable Rate $3,217 $191,101 $758 $662
Average interest rate 9.91% 10.74% 7.05% 7.08%
Interest Rate Derivatives
Dollars in thousands 1999 2000 2001 2002
- - ------------------------- ---- ---- ---- ----
Interest Rate Swaps
Variable to Fixed $ - $50,000 $ - $ -
Average pay rate - 6.26% - -
Average receive rate - USD 1 month Libor
Interest Rate Cap $ - $75,000 $ - $ -
Average pay rate - 6.50% - -
Average receive rate - USD 1 month Libor
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Expected Maturity Date
------------------------------
Liabilities: There- Fair
Dollars in thousands 2003 after Total Value
- - -------------------- ---- ------ ----- -----
Liabilities:
Long-term debt, including
Current Portion
Fixed Rate $107 $162 $1,169 $1,169
Average interest rate 6.24% 6.16% 6.13%
Variable Rate $550 $223 $196,511 $196,511
Average interest rate 7.21% 8.99% 10.68%
Interest Rate Derivatives There- Fair
Dollars in thousands 2003 after Total Value
- - ------------------------- ---- ------ ----- -----
Interest Rate Swaps
Variable to Fixed $ - $ - $50,000 $(209)
Average pay rate - - 6.26%
Average receive rate - USD 1 month Libor
Interest Rate Cap $ - $ - $75,000 $31
Average pay rate - - 6.50%
Average receive rate - USD 1 month Libor
Commodity Price Sensitivity
The Company is a purchaser of certain commodities, primarily corn
and soybeans. The Company uses commodity futures for hedging purposes
to reduce the effect of changing commodity prices on a portion of its
commodity purchases. The contracts that effectively meet risk
reductions and correlation criteria are recorded using hedge
accounting. Gains and losses on hedge transactions are recorded as a
component of the underlying inventory purchase.
The following table provides information about the Company's
corn, soybean meal and other feed ingredient inventory and futures
contracts that are sensitive to changes in commodity prices. For
inventory, the table presents the carrying amount and fair value at
June 27, 1998. For the furtures contracts, the table presents the
notional amounts in bushels, the weighted average contract prices, and
the total dollar contract amount by expected maturity dates, the
latest of which occurs in March 1999. Contract amounts are used to
calculate the contractual payments and quantity of corn and soybean
meal to be exchanged under the futures contracts.
On Balance Sheet Commodity Position
and Related Derivatives Carrying Fair
Dollars in thousands Amount Value
- - ----------------------------------- -------- -----
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Corn, Soybean Meal and Other Feed
Ingredient Inventory 11,009 11,009
Expected
Maturity Fair
Related Derivatives 1999 Value
- - ------------------------------- -------- -----
Corn Futures Contracts
Contract Volumes (100,000 bushels) 11
Weighted Average Price (per bushel) 2.67 2.64
Contract Amount (dollars in thousands) 2,942 2,906
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item, except for the required
financial statement schedule, is incorporated by reference to the
Consolidated Financial Statements and Notes thereto in the Annual
Report, attached hereto as Exhibit 13.3. The required financial
statement schedule is included on page 18 of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There were no changes in or disagreements with accountants on
accounting and financial disclosure during WLR Foods' two most recent
fiscal years or any subsequent interim period.
PART III
Items 10 - 13 inclusive.
These items have been omitted in accordance with instructions to
Form 10-K Annual Report. The Registrant will file with the Commission
in September 1998, pursuant to Regulation 14A, a definitive proxy
statement that will involve the election of directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16 of the Securities Exchange Act of 1934, the
Company's directors, executive officers and beneficial owners of more
than 10% of the outstanding common stock are required to file reports
with the Securities and Exchange Commission concerning their ownership
of and transactions in common stock. Based on copies of those reports
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and related information furnished to the Company, the Company believes
that all such filing requirements were complied with in a timely
manner for the fiscal year ended June 27, 1998.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a)Financial Statements, Financial Statement Schedules and Exhibits
Financial Statements
Consolidated Statements of Operations - Fiscal years ended June 27,
1998, June 28, 1997 and June 29, 1996
Consolidated Balance Sheets - June 27, 1998 and June 28, 1997
Consolidated Statements of Shareholders' Equity - Fiscal years
ended June 27, 1998, June 28, 1997 and June 29, 1996
Consolidated Statements of Cash Flows - Fiscal years ended June 27,
1998, June 28, 1997 and June 29, 1996
Notes to Consolidated Financial Statements - Fiscal years
ended June 27, 1998, June 28, 1997 and June 29, 1996
Independent Auditors' Report
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Independent Auditors' Report on Schedule
Schedules not included in this Item have been omitted because they are
either not applicable or the information is included in the
Consolidated Financial Statements or notes thereto.
(b) Reports on Form 8-K
Reporting date June 23, 1998. Item Reported - Item 5. Other
Events. WLR Foods, Inc. reported the appointment to the Board of
Directors of Katherine K. Clark, Chief Executive Officer of Landmark
Communications, and the approval of a new three-year contract with
James L. Keeler as President and Chief Executive Officer.
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(c) Exhibits
See Exhibit Index.
[The remainder of this page is intentionally left blank.]
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WLR Foods, Inc.
By:_/S/ James L. Keeler________
Its President & Chief Executive
Officer
Date: September 25, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
__/S/ James L. Keeler______________
President & Chief Executive Officer
Date: September 25, 1998
__/S/Dale S. Lam_______________
Treasurer and Vice President of
Finance
Date: September 25, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities on September 25, 1998.
Signature Title
--------- -----
__________________________ Director
Keith E. Alessi*
__________________________ Director
George E. Bryan*
17
<PAGE>
__________________________ Director
Charles L. Campbell*
__________________________ Director
Katherine K. Clark*
__________________________ Director
Stephen W. Custer*
__________________________ Director
Calvin G. Germroth*
__________________________ Director
William H. Groseclose*
__________________________ Director
J. Craig Hott*
__________________________ Director
James L. Keeler*
__________________________ Director
Herman D. Mason*
__________________________ Director
Charles W. Wampler, Jr.*
__________________________ Director
William D. Wampler*
*By __/S/ Dale S. Lam_____________
Dale S. Lam, attorney-in-fact
18
<PAGE>
<TABLE>
WLR FOODS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR FISCAL YEARS ENDED
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
(in thousands)
<CAPTION>
Description Balance at Charged to Deductions- Balance at
beginning cost and accounts end of period
of period expenses charged off
<S> <C> <C> <C> <C>
Fiscal year ended
June 27, 1998 Allowance
for Doubtful Accounts $1,550 $828 $863 $1,515
------ ---- ---- ------
Total $1,550 $828 $863 $1,515
====== ==== ==== ======
Fiscal year ended
June 28, 1997 Allowance
for Doubtful Accounts $708 $946 $104 $1,550
---- ---- ---- ------
Total $708 $946 $104 $1,550
==== ==== ==== ======
Fiscal year ended
June 29, 1996 Allowance
for Doubtful Accounts $613 $297 $202 $708
---- ---- ---- ----
Total $613 $297 $202 $708
==== ==== ==== ====
</TABLE>
19
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders
WLR Foods, Inc:
Under date of August 18, 1998, we reported on the consolidated balance
sheets of WLR Foods, Inc. and subsidiaries as of June 27, 1998, and
June 28, 1997 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the fiscal years in
the three-year period ended June 27, 1998, as contained in the June
27, 1998 annual report to shareholders. These consolidated financial
statements and our report thereon are incorporated by reference in the
June 27, 1998 annual report on Form 10-K of WLR Foods, Inc. In
connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement
schedule as listed in Item 14(a) of this Form 10-K. This financial
statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set
forth therein.
KPMG Peat Marwick LLP
Richmond, Virginia
August 18, 1998
20
<PAGE>
EXHIBIT INDEX
3.1 Articles of Incorporation of the Registrant, restated effective
May 30, 1995, incorporated by reference to Exhibit 3.1 of Form
10-K filed with the Securities and Exchange Commission on October
2, 1995.
3.2 Bylaws of the Registrant, as amended on November 2, 1994,
incorporated by reference to Exhibit 3.2 of Form 10-K filed
with the Securities and Exchange Commission on October 2, 1995.
4.1 Specimen Stock Certificate incorporated by reference to
Exhibit 4 of Form 10-K filed with the Securities and Exchange
Commission on September 27, 1990.
4.2 Shareholder Protection Rights Agreement, dated as of February 4,
1994, which includes as Exhibit A the forms of Rights Certificate
and Election to Exercise and as Exhibit B the Form of Certificate
of Designation and Terms of the Participating Preferred Stock
incorporated by reference to Exhibit 1 of Form 8-A filed with the
Securities and Exchange Commission on September 30, 1993.
4.3 Revolving Credit Agreement, dated as of February 25, 1998,
incorporated by reference to Exhibit 2.1 of Form 10-Q filed
with the Securities and Exchange Commission on May 11, 1998.
4.4 Form of Revolving Credit Note, dated as of February 25, 1998,
incorporated by reference to Exhibit 2.2 of Form 10-Q, filed with
the Securities and Exchange Commission on May 11, 1998.
4.5 Term Loan Agreement, dated as of February 25, 1998,
incorporated by reference to Exhibit 2.3 of Form 10-Q, filed
with the Securities and Exchange Commission on May 11, 1998.
4.6 Form of Term Note, dated as of February 25, 1998,
incorporated by reference to Exhibit 2.4 of Form 10-Q, filed
with the Securities and Exchange Commission on May 11, 1998.
4.7 Warrant Holders Rights Agreement, dated as of February 25, 1998,
incorporated by reference to Exhibit 2.5 of Form 10-Q, filed with
the Securities and Exchange Commission on May 11, 1998.
4.8 Form of Warrant to Purchase Common Stock at $0.1 Per Share,
incorporated by reference to Exhibit 2.6 of Form 10-Q, filed
with the Securities and Exchange Commission on May 11, 1998.
21
<PAGE>
4.9 Security Agreement, dated as of February 25, 1998,
incorporated by reference to Exhibit 2.7 of Form 10-Q, filed
with the Securities and Exchange Commission on May 11, 1998,
incorporated by reference to Exhibit 2.2 of Form 10-Q, filed
with the Securities and Exchange Commission on May 11, 1998.
4.10 WLR Foods, Inc. Pledge Agreement, dated as of February 25, 1998,
incorporated by reference to Exhibit 2.8 of Form 10-Q, filed with
the Securities and Exchange Commission on May 11, 1998.
4.11 Wampler Foods, Inc. Pledge Agreement, dated as of February 25,
1998, incorporated by reference to Exhibit 2.9 of Form 10-Q,
filed with the Securities and Exchange Commission on May 11,
1998.
4.12 Note Purchase Agreement, dated as of February 25, 1998,
incorporated by reference to Exhibit 2.10 of Form 10-Q, filed
with the Securities and Exchange Commission on May 11, 1998.
4.13 Form of Variable Rate Note, dated as of February 25, 1998,
incorporated by reference to Exhibit 2.11 of Form 10-Q, filed
with the Securities and Exchange Commission on May 11, 1998.
4.14 Form of Subsidiaries Guaranty Agreement, dated as of February 25,
1998, incorporated by reference to Exhibit 2.12 of Form 10-Q,
filed with the Securities and Exchange Commission on May 11,
1998.
9.1 Voting Trust Agreement, dated September 29, 1995,
incorporated by reference to Exhibit 9.2 of Form 10-K filed
with the Securities and Exchange Commission on September 29,
1996.
10.1 Employment Agreement, dated June 23, 1998 between the Registrant
and James L. Keeler (Deferred Compensation Agreement attached
thereto as Exhibit A).
10.2 Executive Cash Bonus Program, incorporated by reference to
Exhibit 10.7 of Form 10-K filed with the Securities and
Exchange Commission on September 30, 1993.
10.3 Long-Term Incentive Plan, as amended, incorporated by reference
to Exhibit 28 to Post-Effective Amendment Number One to Form S-8
(No. 33-27037), filed with the Securities and Exchange Commission
on November 18, 1992.
10.4 Severance Agreement, dated February 4, 1994 between the
Registrant and James L. Keeler, incorporated by reference to
22
<PAGE>
Exhibit 10.4 of Form 10-Q filed with the Securities and
Exchange Commission on February 15, 1994.
10.5 Severance Agreement, dated May 13, 1997 between the Registrant
and Jane T. Brookshire, incorporated by reference to Exhibit
10.18 of Form 10-K filed with the Securities and Exchange
Commission on September 26, 1997.
10.6 Severance Agreement, dated January 12, 1998 between the
Registrant and Dale S. Lam.
10.7 Severance Agreement, dated May 13, 1997 between the Registrant
and Ruth J. Mack.
10.8 Severance Agreement, dated February 6, 1998 between the
Registrant and Ronald E. Morris.
10.9 Severance Agreement, dated February 6, 1998 between the
Registrant and Walter F. Shafer, III.
10.10 Deferred Compensation Agreement, dated February 4, 1994
between the Registrant and Charles W. Wampler, Jr.
incorporated by reference to Exhibit 10.9 of Form 10-Q filed
with the Securities and Exchange Commission on February 15,
1994.
10.11 Deferred Compensation Agreement, dated February 4, 1994
between the Registrant and Herman D. Mason incorporated by
reference to Exhibit 10.10 of Form 10-Q filed with the
Securities and Exchange Commission on February 15, 1994.
10.12 Amendment to Deferred Compensation Agreement, dated July 25,
1996 between the Registrant and Herman D. Mason, incorporated by
reference to Exhibit 10.13 of Form 10-K filed with the Securities
and Exchange Commission on September 29, 1996.
10.13 Deferred Compensation Agreement, dated February 4, 1994,
between the Registrant and George E. Bryan, incorporated by
reference to Exhibit 10.11 to Form 10-Q filed with the
Securities and Exchange Commission on February 15, 1994.
10.14 Deferred Compensation Agreement, dated February 4, 1994,
between the Registrant and William D. Wampler, incorporated
by reference to Exhibit 10.12 of Form 10-Q filed with the
Securities and Exchange Commission on February 15, 1994.
10.15 1995 Nonqualified Deferred Compensation Plan, incorporated
by reference to Exhibit 10.16 of Form 10-K filed with the SEC on
September 29, 1996.
23
<PAGE>
10.16 Amendment No. One to 1995 Deferred Compensation Plan,
incorporated by reference to Exhibit 10.17 of Form 10-K filed
with the SEC on September 29, 1996.
10.17 Trust Under WLR Foods, Inc. Nonqualified Deferred
Compensation Plan, incorporated by reference to Exhibit 10.18 of
Form 10-K filed with the SEC on September 29, 1996.
10.18 Description of Plan to Issue Stock for Director Compensation,
incorporated by reference to Exhibit 10.19 of Form 10-K filed
with the SEC on September 29, 1996.
13.1 Financial highlights, from the Registrant's Annual Report to
Shareholders for the fiscal year ended June 27, 1998.
13.2 Management's Discussion and Analysis, from the Registrant's
Annual Report to Shareholders for the fiscal year ended June
27, 1998.
13.3 Consolidated Financial Statements and Notes to Consolidated
Financial Statements, from the Registrant's Annual Report to
Shareholders for the fiscal year ended June 27, 1998.
13.4 Independent Auditor Report on Consolidated Financial
Statements, from the Registrant's Annual Report to
Shareholders for the fiscal year ended June 27, 1998.
21 List of Subsidiaries of the Registrant.
23 Consent of Independent Certified Public Accountants.
24.1 Power of Attorney.
24.2 Power of Attorney.
27 Financial Data Schedule.
24
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT made as of the 23rd day of June, 1998
by and between WLR FOODS, INC. (WLR), a Virginia corporation, and
JAMES L. KEELER (Keeler) who agree and bind themselves as follows:
1. Term. This Employment Agreement shall commence on June 27,
1998, and shall terminate at the end of the fiscal year ending in
2001.
2. Position. Keeler shall serve as President and Chief
Executive Officer of WLR for the first two years of this three year
contract on a full time basis using his best efforts and under the
direction of the Board of Directors of WLR. The third year is
anticipated to be a transition year, and the position and duties may
be adjusted by the Board of Directors of WLR. As an employee of WLR,
Keeler is subject to the direction of the Board of Directors of WLR,
the WLR bylaws and relevant company policies as from time to time
issued, updated or amended.
3. Base Salary. WLR shall pay Keeler a base salary during each
fiscal year of this three-year Employment Agreement. The initial
fiscal year salary shall be $292,248.00 and is payable bi-weekly
during the term of this Employment Agreement. In the event of the
death of Keeler while this Agreement is in full force and effect, his
personal representative shall be entitled to receive such base salary
up to the end of the last pay period in the month in which death
occurs.
The base salary shall be reviewed annually by the WLR
Executive Compensation Committee to determine whether an increase
would be appropriate.
4. Bonus. For each of the three (3) complete fiscal years of
WLR covered by this Employment Agreement, Keeler shall receive a cash
bonus calculated as follows:
4.0 x ROE x Base Salary.
ROE means the ratio of fiscal year profits (before taxes,
bonuses, and discretionary profit sharing) to beginning of year
equity.
<PAGE>
The cash bonus shall be paid within seventy-five (75) days
of the last day of each fiscal year.
5. Deferred Compensation Plan. Keeler shall be entitled to the
benefits set forth in the Deferred Compensation Agreement entered into
by Keeler and the Company dated as of the date hereof, a copy of which
is attached hereto as Exhibit A.
6. Continuing Health Care Coverage. In addition to providing
health care insurance coverage for Keeler and his wife during the term
of this Agreement, consistent with coverage provided to other
executives, the Company shall provide health care insurance coverage
for Keeler and his wife for their respective lives, upon the
termination of his employment with the Company.
7. Miscellaneous Fringe Benefits. During the term of this
Employment Agreement, WLR shall provide Keeler with all other fringe
benefits available to other executives of the company such as life
insurance, travel expense reimbursement and other fringes. In
addition, WLR shall cover all expenses necessary for Keeler to
maintain professional status as a lawyer.
8. Vacation. Keeler shall be entitled to four (4) weeks paid
vacation during each fiscal year of this Agreement. Keeler will also
be entitled to all paid holidays as recognized by WLR.
9. Physical. Keeler must complete an annual physical
examination during each year of the term of this Employment Agreement.
10. Change of Control Provision. A Severance Agreement dated
February 4, 1994 provides for certain severance benefits to be paid
should a "Change of Control" occur as defined in that Agreement
(Severance Agreement).
11. Executive Succession Plan. As part of his employment
responsibilities, Keeler agrees to work diligently with the Board of
Directors or any of its appropriate committees, to identify his
successor. Keeler agrees to consider seriously an extension to this
Agreement if the Board determines additional time is needed to hire an
appropriate successor.
12. Early Termination of Employment Agreement. If this
Agreement is (i) terminated by the Board of Directors of WLR prior to
the end of the three-year term for any reason other than death or
Disability as defined in the Severance Agreement, or (ii) terminated
2
<PAGE>
by Keeler based on his reasonable judgment that there has been an
adverse change in his status as an executive officer of WLR during the
third year of this Employment Agreement, all the benefits to be paid
to Keeler as set forth in this Employment Agreement shall continue to
be paid during the remaining term of the Agreement as if he were still
fully employed.
13. Complete Agreement. This Agreement expresses the entire
understanding between the parties and may not be modified except in
writing signed by the parties. This Agreement supercedes all previous
contracts of employment.
14. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia,
where it is made and to be performed. It sets forth the entire
agreement between the parties concerning the subject matter thereof,
and any amendment or discharge will be made only in writing. This
Agreement will bind and benefit the parties and their legal
representatives and successors.
WITNESS the following signatures and seals.
IN WITNESS WHEREOF, WLR Foods, Inc. has caused this writing
to be signed in its name and on its behalf as thereunto duly
authorized.
_/s/ James L. Keeker___________ (SEAL)
JAMES L. KEELER
WLR FOODS, INC.
By: _/s/ Wliiam H. Groseclose, Jr._
WILLIAM H. GROSECLOSE, JR.
By: _/s/Stephen W. Custer___________
STEPHEN W. CUSTER
By: _/s/ Charles W. Wampler, Jr.____
CHARLES W. WAMPLER, JR.
Chairman of the Board
3
<PAGE>
Exhibit A
DEFERRED COMPENSATION AGREEMENT
This Deferred Compensation Agreement made as of the 23rd day
of June, 1998 by and between WLR FOODS, INC. (WLR), a Virginia
corporation, and JAMES L. KEELER (Keeler) who agree and bind
themselves as follows:
1. Preamble. WLR and Keeler entered into a Deferred
Compensation Agreement dated July 4, 1993, which Agreement was amended
on February 4, 1994, and on June 27, 1995, and restated on June 27,
1997. WLR and Keeler desire to continue and extend such Agreement.
The 1993 Deferred Compensation Agreement was preceded by a five-year
Deferred Compensation Agreement dated March 1, 1988.
2. Annual Determination of Deferred Bonus Amount. Within
seventy-five (75) days of the last day of each fiscal year, commencing
with the year ending June 27, 1998 and continuing until the last day
of the fiscal year ending in 2001, WLR shall determine the increase,
if any, in the book value of the shareholder's equity of WLR (Book
Value) as of the last day of each fiscal year (the Determination
Date). The Bonus Fund accrued as of June 28, 1997 (including the 1997
fiscal year Deferred Bonus Amount), both deferred compensation and
accrued interest, totaled $1,481,185.25.
3. Book Value Determination. WLR shall direct its independent
accounting firm to undertake the calculation of Book Value based on
consolidated balance sheets of WLR and its subsidiaries using
consistent practices and excluding any momentary increase in equity
arising out of the acquisition of other entities or the issuance of
additional stock, or any momentary decrease in equity arising out of
the sale of a subsidiary or division, or the redemption of outstanding
stock. Generally, Book Value increases or decreases should arise as a
function of earnings, cash dividends and losses, if any, and not
significant corporate transactions such as acquisitions, divestitures,
redemptions and stock issuances.
4. Bonuses. Each fiscal year of WLR commencing the year ending
June 27, 1998, and ending in 2001, WLR shall allocate, as of the
Determination Date, an amount equal to one and one-half percent (1-1/2%)
4
<PAGE>
of the increase, if any, in Book Value from the prior Determination
Date to the current Determination Date to a book reserve account (the
Bonus Fund). The Bonus Fund shall accrue interest at a rate equal to
the Company's average cost of funds for permanent financing in effect
on the last day of the Company's fiscal year for the following fiscal
year, as adjusted from year to year (the Interest Rate). Interest
shall compound monthly and shall accrue on the Bonus Fund until paid.
The Bonus Fund in no event will decrease (for example, no
decrease in the Bonus Fund shall occur if in any fiscal year the Book
Value decreases) other than by reason of payment to Keeler as set
forth in Section 5 below.
If Keeler voluntarily terminates his employment with WLR
during the first two fiscal years of this Agreement, then no bonus
amount shall be allocated for the year in which the termination of
employment occurs. If for any other reason Keeler is not employed on
any Determination Date, then the allocation of the Bonus Fund shall be
prorated.
5. Payment. The Bonus Fund shall be paid in lump sum or in
such installments as WLR may permit, as Keeler may elect from time to
time in writing delivered to WLR, commencing on January 2 of the year
following the calendar year in which Keeler retires as an employee of
WLR. Keeler may change his distribution election at any time prior to
the commencement of distribution of the Bonus Fund, provided that no
such election shall be effective until six (6) months following
receipt by WLR. In the absence of an election to the contrary,
Keeler's Bonus Fund shall be payable in sixty (60) consecutive monthly
installments on the second day of each month, commencing on January 2
following the calendar year in which Keeler retires as an employee of
WLR.
The installment payments shall be determined on each July 2
during the term of the payout by dividing the Bonus Fund, plus the
projected interest calculated by using the Interest Rate over the
remaining term of the payout, by the number of remaining installment
payments. The last installment shall be adjusted for any increase or
decrease in the Interest Rate for the last payout year.
If Keeler dies before the entire Bonus Fund has been
distributed, then WLR shall continue to pay the installments to his
designated beneficiary in accordance with the distribution election in
effect at the time of his death.
5
<PAGE>
The term "beneficiary" shall mean any person or trust, or
combination thereof, last designated by Keeler in writing and filed
with WLR by Keeler during his lifetime on a Nomination of Beneficiary
form provided by WLR. Any such designation or designations of
beneficiary shall be revocable at any time or times without the
consent of any beneficiary, by written designations of beneficiaries
made by Keeler and similarly filed with WLR during his lifetime. In
the absence of or failure of designated beneficiaries, the personal
representative of Keeler shall be his beneficiary.
6. Financing of Benefits. All benefits under the Plan shall be
provided out of the general assets of WLR at the time such benefits
are to be made. No specific amounts, therefore, shall be set aside in
advance.
7. Not a Contract of Employment. This Agreement shall not be
deemed to constitute a contract of employment between the parties, nor
shall any provision restrict the right of WLR to discharge Keeler, or
restrict the right of Keeler to terminate his employment.
8. Restriction on Alienation. It is agreed that neither Keeler
nor any other payee hereunder shall have any right to commute, sell,
assign, transfer or otherwise convey the right to receive any payments
hereunder, which payments and the right thereto are expressly declared
to be nonassignable and nontransferable, and in the event of any
attempted assignment or transfer, this Agreement shall terminate and
WLR shall have no further liability hereunder.
9. Change of Control. The Company has entered into a Severance
Agreement with Keeler dated February 4, 1994, a copy of which is
attached hereto as Exhibit A. Should a "Change of Control" occur as
defined in the Severance Agreement then all the Bonus Fund and funds,
if any, deferred by Keeler in the Company's 1995 Nonqualified Deferred
Compensation Agreement shall be transferred to the Trust dated October
24, 1995, entered into by and between the Company and First Union
National Bank of Virginia, a copy of which Trust is attached hereto as
Exhibit B.
10. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia,
where it is made and to be performed. It sets forth the entire
agreement between the parties concerning the subject matter thereof,
and any amendment or discharge will be made only in writing. This
6
<PAGE>
Agreement will bind and benefit the parties and their legal
representatives and successors.
This Agreement shall be executed in duplicate, each copy of
which when so executed and delivered shall be an original, but both
copies shall, together, constitute one and the same instrument.
WITNESS the following signature and seal.
IN WITNESS WHEREOF, WLR Foods, Inc. has caused this writing
to be signed in its name and on its behalf as thereunto duly
authorized.
_/s/ James L. Keeler_______ (SEAL)
JAMES L. KEELER
WLR FOODS, INC.
By: _/s/ William H. Groseclose, Jr._
WILLIAM H. GROSECLOSE
By: _/s/ Stephen W. Custer__________
STEPHEN W. CUSTER
Members of the Executive Compensation Committee
By: _/s/ Charles W. Wampler, Jr.____
CHARLES W. WAMPLER, JR.
Chairman of the Board
7
<PAGE>
Exhibit 10.6
January 12, 1998
Mr. Dale S. Lam
Controller
WLR Foods, Inc.
P.O. Box 7000
Broadway, VA 22815-7000
Dear Mr. Lam:
WLR Foods, Inc., a Virginia corporation (the "Company"), considers the
establishment and maintenance of a sound and vital management to be
essential to protecting and enhancing the best interests of the
Company and its shareholders. In this connection, the Company
recognizes that, as is the case with many publicly held corporations,
the possibility of a Change in Control (as defined herein) may arise
and that such possibility, and the uncertainty and questions which it
may raise among management, may result in the departure or distraction
of management personnel to the detriment of the Company and its
shareholders. Accordingly, the Board of Directors of the Company (the
"Board") has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of
members of the Company's management to their assigned duties without
distraction in circumstances arising from the possibility of a Change
in Control of the Company. In particular, the Board believes it
important, should the Company or its shareholders receive a proposal
for transfer of control of the Company, that you be able to assess and
advise the Board whether such proposal would be in the best interests
of the Company and its shareholders and to take such other action
regarding such proposal as the Board might determine to be
appropriate, without being influenced by the uncertainties of your own
situation.
In order to induce you to remain in the employ of the Company, this
letter agreement ("Agreement"), which has been approved by the Board,
sets forth the severance benefits which the Company agrees will be
provided to you in the event your employment with the Company is
terminated subsequent to a Change in Control of the Company under the
circumstances described below.
1. Agreement to Provide Services; Right to Terminate.
(i)Except as otherwise provided in paragraph (ii) below, the
Company or you may terminate your employment at any
<PAGE>
Mr. Dale S. Lam
January 12, 1998
Page 2
time following a "Change in Control" as defined herein, subject to the
Company's providing the benefits hereinafter specified in accordance
with the terms hereof.
(ii) In the event a Person (as hereinafter defined) makes an
offer which, if accepted by the Company and subsequently consummated,
would constitute a Change in Control, you agree that you will not
leave the employ of the Company (other than as a result of Disability
or upon Retirement, as such terms are hereinafter defined) and will
render the services contemplated in the recitals to this Agreement
until such Change in Control offer has been abandoned or terminated or
a Change in Control has occurred. For the purposes of this Agreement,
Retirement shall mean a termination of your employment by you on or
after you have reached age sixty-five (65) and have completed at least
five (5) years of service for the Company (including any service for a
predecessor of the Company where such prior service is recognized by
the Company for the purpose of awarding other benefits). For purposes
of this Section 1, "years of service" shall be defined as in the WLR
Profit Sharing and Salary Savings Plan.
2. Term of Agreement. This Agreement shall commence on the
date hereof and shall continue in effect until December 31, 1998;
provided, however, that commencing on January 1, 1999 and each January
1 thereafter, the term of this Agreement shall automatically be
extended for one (1) additional year unless at least ninety (90) days
prior to such January 1st date, the Company or you shall have given
notice that this Agreement shall not be extended; and provided,
further, that, notwithstanding the delivery of any such notice, this
Agreement shall continue in effect for a period of twelve (12) months
after a Change in Control, if such Change in Control shall have
occurred while this Agreement is in effect. Notwithstanding anything
in this Section 2 to the contrary, this Agreement shall terminate if
you or the Company terminate your employment prior to a Change in
Control of the Company.
3. Change in Control. For the purpose of this Agreement, a
"Change in Control" shall mean:
(i) The acquisition by any individual, entity or group
(within the meaning of Section 13 (d) (3) or 14 (d) (2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of twenty percent (20%) or more of
either the then outstanding shares of common stock of
2
<PAGE>
Mr. Dale S. Lam
January 12, 1998
Page 3
the Company (the "Outstanding Company Common Stock") or the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however, that in
no event may the following acquisitions constitute a Change in
Control: (a) any acquisition directly from the Company (excluding an
acquisition by virtue of the exercise of a conversion privilege), (b)
any acquisition by the Company, (c) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company, (d) any acquisition by
any corporation pursuant to a reorganization, merger or consolidation,
if, following such reorganization, merger or consolidation, the
conditions described in clauses (a), (b) and (c) of paragraph (iii) of
this Section 3 are satisfied, or (e) any sale or other disposition of
all or substantially all of the assets of the Company, if , following
such sale or other disposition, the conditions described in (1), (2)
and (3) of paragraph (iv) of this Section 3 are satisfied; or
(ii) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by
a vote of at least seventy-five percent (75%) of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest
(as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board;
or
(iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation, unless, in each case
following such reorganization, merger or consolidation, (a) more than
sixty percent (60%) of, respectively, the then outstanding shares of
common stock of the corporation resulting from such reorganization,
merger or consolidation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting Securities
3
<PAGE>
Mr. Dale S. Lam
January 12, 1998
Page 4
immediately prior to such reorganization, merger or consolidation in
substantially the same proportions as their ownership immediately
prior to such reorganization, merger or consolidation, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (b) no Person (excluding the Company,
any employee benefit plan (or related trust) of the Company or a
corporation resulting from such reorganization, merger or
consolidation) beneficially owns, directly or indirectly, thirty-nine
percent (39%) or more of, respectively, the then outstanding shares of
common stock of the corporation resulting from such reorganization,
merger or consolidation or the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors, and (c) at least a majority of
the members of the board of directors of the corporation resulting
from such reorganization, merger or consolidation were members of the
Incumbent Board at the time of the execution of the initial agreement
providing for such reorganization, merger or consolidation; or
(iv) Approval by the shareholders of the Company of (a) a
complete liquidation or dissolution of the Company or (b) the sale or
other disposition of all or substantially all of the assets of the
Company, other than to a corporation with respect to which following
such sale or other disposition, (1) more than sixty percent (60%) of,
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately
prior to such sale or other disposition, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case
may be, (2) no Person (excluding the Company and any employee benefit
plan (or related trust) of the Company or such corporation)
beneficially owns, directly or indirectly, thirty-nine percent (39%)
or more of, respectively, the then outstanding shares of common stock
of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors and (3) at least a majority of
the members of the board of directors of such corporation were members
of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such sale or other
disposition of assets of the Company.
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Mr. Dale S. Lam
January 12, 1998
Page 5
(v) Notwithstanding anything in the paragraphs (i) - (iv)
of this Section 3 to the contrary, no Change in Control shall be
deemed to have occurred for purposes of this Agreement by virtue of
any transaction which results in you, or a group of Persons which
includes you, acquiring, directly or indirectly, twenty percent (20%)
or more of the combined voting power of the Company's Voting
Securities.
4. Termination Following Change in Control. If any of the
events described in Section 3 hereof constituting a Change in Control
of the Company shall have occurred, you shall be entitled to the
benefits provided in Section 5 hereof upon the termination of your
employment with the Company within twelve (12) months after such
Change in Control, unless such termination is (a) because of your
death, (b) by the Company for Cause or Disability or (c) by you other
than for Good Reason (as all such capitalized terms are hereinafter
defined).
(i) Disability. Termination by the Company of your
employment based on "Disability" shall mean termination because of
your absence from your duties with the Company on a full time basis
for one hundred eighty (180) consecutive days as a result of your
incapacity due to physical or mental illness, unless within thirty
(30) days after Notice of Termination (as hereinafter defined) is
given to you following such absence, you shall have returned to the
full time performance of your duties.
(ii) Cause. Termination by the Company of your employment
for "Cause" shall mean termination upon (a) the willful and continued
failure by you to perform substantially your duties with the Company
(other than any such failure resulting from your incapacity due to
physical or mental illness) after a written demand for substantial
performance is delivered to you by the Chairman of the Board or
President of the Company which specifically identifies the manner(s)
in which such executive believes that you have not substantially
performed your duties, or (b) the willful engaging by you in illegal
conduct which is materially and demonstrably injurious to the Company.
For purposes of this paragraph (ii), no act, or failure to act, on
your part shall be considered "willful" unless done, or failed to be
done, by you in bad faith and without reasonable belief that your
action or omission was in, or not opposed to, the best interests of
the Company. Any act or failure to act based upon authority given
pursuant to a resolution duly adopted by the Board or based upon the
advice of counsel for the Company shall be conclusively presumed to be
done, or omitted to be done, by you in good faith and in the best
interests of the Company. It is also expressly understood that your
attention to matters not
5
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Mr. Dale S. Lam
January 12, 1998
Page 6
directly related to the business of the Company shall not provide a
basis for termination for Cause so long as the Board has approved your
engagement in such activities. Notwithstanding the foregoing, you
shall not be deemed to have been terminated for Cause unless and until
there shall have been delivered to you a copy of a resolution duly
adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and
held for such purpose (after reasonable notice to you and an
opportunity for you, together with your counsel, to be heard before
the Board), finding that in the good faith opinion of the Board you
were guilty of the conduct set forth above in clauses (a) or (b) of
this paragraph (ii) and specifying the particulars thereof in detail.
(iii) Good Reason. Termination by you of your employment
for "Good Reason" shall mean termination based on:
(A) a determination by you, in your reasonable
judgment, that there has been an adverse change in your status or
position(s) as a member of the senior management of the Company as in
effect immediately prior to the Change in Control, including, without
limitation, any adverse change in your status or position as a result
of a diminution in your duties or responsibilities (other than, if
applicable, any such change directly attributable to the fact that the
Company is no longer publicly owned) or the assignment to you of any
duties or responsibilities which are inconsistent with such status or
position(s), or any removal of you from, or any failure to reappoint
or reelect you to, such positions(s) (except in connection with the
termination of your employment for Cause or Disability or as a result
of your death or by you other than for Good Reason);
(B) a reduction by the Company in your base salary as
in effect immediately prior to the Change in Control;
(C) the failure by the Company to continue in effect
any Plan (as hereinafter defined) in which you are participating at
the time of the Change in Control of the Company (or Plans providing
you with at least substantially similar benefits) other than as a
result of the normal expiration of any such Plan in accordance with
its terms as in effect at the time of the Change in Control, or the
taking of any action, or the failure to act, by the Company which
would adversely affect your continued participation in any of such
Plans on at least as favorable a basis to you as is the case on the
date of the Change in Control or which would materially reduce your
benefits in the future under any of such Plans or deprive you of any
material benefit enjoyed by you at the time of the Change in Control;
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Mr. Dale S. Lam
January 12, 1998
Page 7
(D) the failure by the Company to provide and credit
you with the number of paid vacation days to which you are then
entitled in accordance with the Company's normal vacation policy as in
effect immediately prior to the Change in Control;
(E) the Company's requiring you to be based at any
office that is greater than thirty (30) miles from where your office
is located immediately prior to the Change in Control except for
required travel on the Company's business to an extent substantially
consistent with the business travel obligations which you undertook on
behalf of the Company prior to the Change in Control;
(F) the failure by the Company to obtain from any
Successor (as hereinafter defined) the assent to this Agreement
contemplated by Section 6 hereof;
(G) any purported termination by the Company of your
employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of paragraph (iv) below (and, if
applicable, paragraph (ii) above); and for purposes of this Agreement,
no such purported termination shall be effective; or
(H) any refusal by the Company to continue to allow
you to attend to matters or engage in activities not directly related
to the business of the Company which, prior to the Change in Control,
you were permitted by the Board to attend to or engage in.
For purposes of this Agreement, "Plan" shall mean any
compensation plan such as the Company Incentive Bonus Plan or any
employee benefit plan such as a thrift, pension, profit sharing,
medical, disability, accident, life insurance plan or a relocation
plan or policy or any other plan, program or policy of the Company
intended to benefit employees, except for the Company Restated Long-
Term Incentive Plan.
(iv) Notice of Termination. Any purported termination by
the Company or by you following a Change in Control shall be
communicated by written Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon.
(v) Date of Termination. "Date of Termination" following a
Change in Control shall mean (a) if your employment is to be
terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have
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Mr. Dale S. Lam
January 12, 1998
Page 8
returned to the performance of your duties on a full-time basis during
such thirty (30) day period), (b) if your employment is to be
terminated by the Company for Cause or by you pursuant to Sections
4(iii)(F) or 6 hereof or for any other Good Reason, the date specified
in the Notice of Termination, (c) if your employment is to be
terminated by the Company for any reason other than Cause, the date
specified in the Notice of Termination, which in no event shall be a
date earlier than ninety (90) days after the date on which a Notice of
Termination is given, unless an earlier date has been expressly agreed
to by you in writing either in advance of, or after, receiving such
Notice of Termination, or (d) if your employment is terminated on
account of your death, the day after your death. In the case of
termination of your employment by the Company for Cause, if you have
not previously expressly agreed in writing to the termination, then
within thirty (30) days after receipt by you of the Notice of
Termination with respect thereto, you may notify the Company that a
dispute exists concerning the termination, in which event the Date of
Termination shall be the date set either by mutual written agreement
of the parties or by such court having the matter before it. During
the pendency of any such dispute, the Company will continue to pay you
your full compensation in effect just prior to the time the Notice of
Termination is given and until the dispute is resolved. However, if
such court issues a final and non-appealable order finding that the
Company had Cause to terminate you then you must return all
compensation paid to you after the Date of Termination specified in
the Notice of Termination previously received by you.
5. Compensation Upon Termination or During Disability; Other
Agreements.
(i) During any period following a Change in Control of the
Company that you fail to perform your duties as a result of incapacity
due to physical or mental illness, you shall continue to receive your
base salary at the rate then in effect and any benefits or awards
under any Plans shall continue to accrue during such period, to the
extent not inconsistent with such Plans, until your employment is
terminated pursuant to and in accordance with paragraphs 4(iv) - 4(v)
hereof. Thereafter, your benefits shall be determined in accordance
with the Plans then in effect.
(ii) If your employment is terminated for Cause following a
Change in Control of the Company, the Company shall pay to you your
base salary through the Date of Termination at
8
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Mr. Dale S. Lam
January 12, 1998
Page 9
the rate in effect just prior to the time a Notice of Termination is
given plus any benefits or awards (including both the cash and stock
components) which pursuant to the terms of any Plans have been earned
or become payable, but which have not yet been paid to you. Thereupon
the Company shall have no further obligations to you under this
Agreement.
(iii) Subject to Section 8 hereof, if, within twelve (12)
months after a Change in Control of the Company has occurred, your
employment by the Company is terminated other than on account of your
death and is terminated (a) by the Company other than for Cause or
Disability or (b) by you for Good Reason, then the Company shall pay
to you, no later than the fifth (5th) day following the Date of
Termination, without regard to any contrary provisions of any Plan,
the following:
(A) your base salary through the Date of Termination
at the rate in effect just prior to the time a Notice of Termination
is given plus any benefits or awards (including both the cash and
stock components) which pursuant to the terms of any Plans have been
earned or become payable, but which have not yet been paid to you
(including amounts which previously had been deferred at your
request);
(B) an amount in cash equal to the sum of (i) the
higher of (a) your annual base salary on the Date of Termination or
(b) your annual base salary in effect immediately prior to the Change
in Control plus (ii) an amount equal to the average of the bonuses
awarded to you in each of the three previous years.
For the purposes of this Agreement, the term "base salary"
shall include any amounts deducted by the Company with respect to you
or for your account pursuant to Sections 125 and 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code").
(iv) If, within twelve (12) months after a Change in Control
of the Company has occurred, your employment by the Company is
terminated for any reason other than retirement, the Company shall pay
to you, on the date specified below, an amount ("Spread") in cash
equal to the Termination Fair Market Value (as hereinafter defined)
less the exercise price of all options which were granted to you
pursuant to the Company's Restated Long-Term Incentive Plan or any
Plan succeeding thereto, if any, and which shall not become
exercisable prior to (a) the end of the one (1) year period
immediately following the Date of Termination if your employment is
terminated on account of your death, or (b) the end of the third (3rd)
month following the Date of Termination if your employment is
terminated for any reason other than death.
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Mr. Dale S. Lam
January 12, 1998
Page 10
The Company shall make such payment upon the fifth (5th) day following
such Date of Termination.
For the purposes of this Agreement, the "Termination Fair
Market Value" shall be the higher of (a) the highest price of the
Company's stock as quoted on the NASDAQ, or any other exchange
complying with the requirements of the Securities and Exchange Act of
1934, as amended, within the period beginning ninety (90) days prior
to the Date of Termination and ending upon such Date of Termination,
and (b) the highest price of the Company's stock as quoted on the
NASDAQ, or any other exchange complying with the requirements of the
Securities and Exchange Act of 1934, as amended, within the period
beginning ninety (90) days prior to a Change of Control and ending
upon the date of a Change of Control.
(v) If, within twelve (12) months after a Change in Control
of the Company has occurred, your employment by the Company is
terminated (a) by the Company other than for Cause or Disability, or
(b) by you for Good Reason, then the Company shall maintain in full
force and effect, for the continued benefit of you and your dependents
for a period terminating on the earliest of (a) one (1) year after the
Date of Termination or (b) the commencement date of equivalent
benefits from a new employer, insured and self-insured employee
welfare benefit Plans in which you were entitled to participate
immediately prior to the Date of Termination, provided that your
continued participation is possible under the general terms and
provisions of such Plans (and any applicable funding media) and you
continue to pay an amount equal to your regular contribution under
such Plans for such participation. If one (1) year after the
Termination Date, you have not previously received, nor are then
receiving, equivalent benefits from a new employer, the Company shall
offer you continuation coverage under COBRA as prescribed under
Section 4980B of the Code. At the expiration of such continuation
coverage (or, if COBRA continuation coverage is not applicable to the
Plan, then upon the expiration of the one (1) year period beginning on
the Termination Date) the Company shall arrange, at its sole cost and
expense, to enable you to convert you and your dependents' coverage
under such plans to individual policies and programs upon the same
terms as employees of the Company may apply for such conversions. In
the event that your participation in any such Plan is barred, the
Company, at its sole cost and expense, shall arrange to have issued
for the benefit of you and your dependents individual policies of
insurance providing benefits substantially similar (on an after-tax
basis) to those which you otherwise would have been entitled to
receive under such Plans pursuant to this paragraph (iv) or, if such
insurance
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Mr. Dale S. Lam
January 12, 1998
Page 11
is not available at a reasonable cost to the Company, the Company
shall otherwise provide you and your dependents with equivalent
benefits (on an after-tax basis). You shall not be required to pay
any premiums or other charges in an amount greater than that which you
would have paid in order to participate in such Plans.
(vi) Except as specifically provided in paragraph (iv)
above, the amount of any payment provided for in this Section 5 shall
not be reduced, offset or subject to recovery by the Company by reason
of any compensation earned by you as the result of employment by
another employer after the Date of Termination, or otherwise.
(vii) In the event that you become entitled to the payments
provided by paragraph (iii) of Section 5 hereof (the "Agreement
Payments"), if any of the Agreement Payments will be subject to the
tax (the "Excise Tax") imposed by Section 4999 of the Code (or any
similar tax that may hereafter be imposed), the Company shall pay to
you at the time specified in paragraph (vii) below an additional
amount (the "Gross-up Payment") such that the net amount retained by
you, after deduction of any Excise Tax on the Total Payments (as
hereinafter defined) and any federal, state and local income tax and
Excise Tax upon the Gross-up Payment provided for by this paragraph
(vi), but before deduction for any federal, state or local income tax
on the Agreement Payments, shall be equal to the sum of (a) the Total
Payments and (b) an amount equal to the product of any deductions
disallowed because of the inclusion of the Gross-up Payment in your
adjusted gross income and the highest applicable marginal rate of
federal income taxation for the calendar year in which the Gross-up
Payment is to be made.
For purposes of determining whether any of the Agreement
Payments will be subject to the Excise Tax and the amount of such
Excise Tax, (a) any other payments or benefits received or to be
received by you in connection with a Change in Control of the Company
or your termination of employment (whether pursuant to the terms of
this Agreement or any other plan, arrangement or agreement with the
Company, any Person whose actions result in a Change in Control of the
Company or any person affiliated with the Company or such person)
(which, together with the Agreement Payments, shall constitute the
"Total Payments") shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the Code, and all "excess parachute
payments" within the meaning of Section 280G(b)(1) of the Code shall
be treated as subject to the Excise Tax, unless in the opinion of tax
counsel selected by the Company's independent auditors such other
payments or benefits (in whole or in part) do not constitute parachute
payments, or such excess parachute
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Mr. Dale S. Lam
January 12, 1998
Page 12
payments (in whole or in part) represent reasonable compensation for
services actually rendered within the meaning of Section 280G(b)(4) of
the Code in excess of the base amount within the meaning of Section
280G(b)(3) of the Code, or are otherwise not subject to the Excise
Tax; (b) the amount of the Total Payments which shall be treated as
subject to the Excise Tax shall be equal to the lesser of (1) the
total amount of the Total Payments or (2) the amount of excess
parachute payments within the meaning of Section 280G(b)(1) of the
Code (after applying clause (a), above); and (c) the value of any non-
cash benefits or any deferred payment or benefit shall be determined
by the Company's independent auditors in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code.
For purposes of determining the amount of the Gross-up
Payment, you shall be deemed to (a) pay federal income taxes at the
highest marginal rate of federal income taxation for the calendar year
in which the Gross-up Payment is to be made, (b) pay the applicable
state and local income taxes at the highest marginal rate of taxation
for the calendar year in which the Gross-up Payment is to be made, net
of the maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes (determined
without regard to limitations on deductions based upon the amount of
your adjusted gross income), and (c) have otherwise allowable
deductions for federal income tax purposes at least equal to those
disallowed because of the inclusion of the Gross-up Payment in your
adjusted gross income. In the event that the Excise Tax is
subsequently determined to be less than the amount taken into account
hereunder at the time the Gross-up Payment is made, you shall repay to
the Company at the time that the amount of such reduction in Excise
Tax is finally determined, the portion of the Gross-up Payment
attributable to such reduction (plus the portion of the Gross-up
Payment attributable to the Excise Tax and federal state and local
income tax imposed on the portion of the Gross-up Payment being repaid
by you if such repayment results in a reduction in Excise Tax and/or a
federal and state and local income tax deduction), plus interest on
the amount of such repayment at the rate provided in Section
1274(b)(2)(B) of the Code. In the event that the Excise Tax is
determined to exceed the amount taken into account hereunder at the
time the Gross-up Payment is made (including by reason of any payment
the existence or amount of which cannot be determined at the time of
the Gross-up Payment), the Company shall make an additional Gross-up
Payment in respect of such excess (plus any interest payable with
respect to such excess at the rate provided in Section 1274(b)(2)(B)
of the Code) at the time that the amount of such excess is finally
determined.
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Mr. Dale S. Lam
January 12, 1998
Page 13
(viii) The Gross-up Payment or portion thereof provided
for in paragraph (vi) above shall be paid not later than the thirtieth
(30th) day following payment of any amounts under Section 5(iii);
provided, however, that if the amount of such Gross-up Payment or
portion thereof cannot be finally determined on or before such day,
the Company shall pay to you on such day an estimate, as determined in
good faith by the Company, of the minimum amount of such payments and
shall pay the remainder of such payments (together with interest at
the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the
amount thereof can be determined, but in no event later than the
forty-fifth (45th) day after payment of any amounts under Section
5(iii). In the event that the amount of the estimated payments
exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by the Company to you, payable on the
fifth (5th) day after demand by the Company (together with interest at
the rate provided in Section 1274(b)(2)(B) of the Code).
6. Successors; Binding Agreement.
(i) The Company will seek, by written request at least five
(5) business days prior to the time a Person becomes a Successor (as
hereinafter defined), to have such Person, by agreement in form and
substance satisfactory to you, assent to the fulfillment of the
Company's obligations under this Agreement. Failure of such Person to
furnish such assent by the later of (a) three (3) business days prior
to the time such Person becomes a Successor or (b) two (2) business
days after such Person receives a written request to so assent shall
constitute Good Reason for termination by you of your employment if a
Change in Control of the Company occurs or has occurred. For purposes
of this Agreement, "Successor" shall mean any Person that succeeds to,
or has the practical ability to control (either immediately or with
the passage of time), the Company's business directly, by merger or
consolidation, or indirectly, by purchase of the Company's Voting
Securities or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by your personal legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If you should die while any amount would still be payable
to you hereunder if you had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or,
if no such designee exists, to your estate.
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Mr. Dale S. Lam
January 12, 1998
Page 14
(iii) For purposes of this Agreement, the "Company"
shall include any subsidiary of the Company and any corporation or
other entity which is the surviving or continuing entity in respect of
any merger, consolidation or form of business combination in which the
Company ceases to exist; provided, however, for purposes of
determining whether a Change in Control has occurred herein, the term
"Company" shall refer to WLR Foods, Inc. or its successor(s).
7. Fees and Expenses; Mitigation.
(i) The Company shall reimburse you, on a current basis,
for all reasonable legal fees and related expenses incurred by you in
connection with the Agreement following a Change in Control of the
Company, including without limitation, (a) all such fees and expenses,
if any, incurred in contesting or disputing any termination of your
employment or incurred by you in seeking advice with respect to the
matters set forth in Section 8 hereof or (b) your seeking to obtain or
enforce any right or benefit provided by this Agreement, in each case,
regardless of whether or not your claim is upheld by a court of
competent jurisdiction; provided, however, you shall be required to
repay any such amounts to the Company to the extent that a court
issues a final and non-appealable order setting forth the
determination that the position taken by you was frivolous or advanced
by you in bad faith.
(ii) You shall not be required to mitigate the amount of any
payment the Company becomes obligated to make to you in connection
with this Agreement, by seeking other employment or otherwise.
8. Taxes. Subject to the provisions of Section 5(vi), all
payments to be made to you under this Agreement will be subject to
required withholding of federal, state and local income and employment
taxes.
9. Survival. The respective obligations of, and benefits
afforded to, the Company and you as provided in Sections 5, 6(ii), 7,
8, 12 and 14 of this Agreement shall survive termination of this
Agreement.
10. Notice. For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed
by United States registered mail, return receipt requested, postage
prepaid and addressed, in the case of the Company, to the address set
forth on the first page of this Agreement or, in the case of the
undersigned employee, to the
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Mr. Dale S. Lam
January 12, 1998
Page 15
address set forth below his signature, provided that all notices to
the Company shall be directed to the attention of the Chairman of the
Board or President of the Company, with a copy to the Secretary of the
Company, or to such other address as either party may have furnished
to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon receipt.
11. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or
discharge is agreed to in a writing signed by you and the Chairman of
the Board or President of the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or of
compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this
Agreement.
12. Governing Law and Venue. The validity, interpretation,
construction and performance of this Agreement shall be governed by
the laws of the Commonwealth of Virginia. Venue for any proceeding
related to the performance or interpretation of this Agreement, or in
any way arising out of this Agreement, shall be either the Circuit
Court of Rockingham County, Virginia, or the United States District
Court for the Western District of Virginia, Harrisonburg Division.
13. Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
14. Employee's Commitment. You agree that subsequent to your
period of employment with the Company, you will not at any time
communicate or disclose to any unauthorized person, without the
written consent of the Company, any proprietary processes of the
Company or other confidential information concerning its business,
affairs, products, suppliers or customers which, if disclosed, would
have a material adverse effect upon the business or operations of the
Company, taken as a whole; it being understood, however, that the
obligations under this Section 14 shall not apply to the extent that
the aforesaid matters (a) are disclosed in circumstances where you are
legally required to do so or (b) become generally known to, and
available for use by, the public otherwise than by your wrongful act
or omission.
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Mr. Dale S. Lam
January 12, 1998
Page 16
15. Related Agreements. To the extent that any provision of any
other agreement between the Company and you shall limit, qualify or be
inconsistent with any provision of this Agreement, then for purposes
of this Agreement, while the same shall remain in force, the provision
of such other agreement shall be deemed to have been superseded, and to
be of no force or effect, as if such other agreement had been formally
amended to the extent necessary to accomplish such purpose.
If this letter correctly sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy
of this letter which will then constitute our agreement on this
subject.
Sincerely,
WLR Foods, Inc.
By_/s/ William H. Groseclose, Jr._
William H. Groseclose, Jr., Chair
Executive Compensation Committee
WLR Foods, Inc.
Agreed to this _12th_ day of January, 1998
_/s/ Dale S. Lam_
Dale S. Lam
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Exhibit 10.7
May 13, 1997
Ms. Ruth J. Mack
Vice President of Marketing & Sales
Wampler Foods, Inc.
Post Office Box 7275
Broadway, Virginia 22815-7275
Dear Ms. Mack:
WLR Foods, Inc., a Virginia corporation (the "Company"),
considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best
interests of the Company and its shareholders. In this connection,
the Company recognizes that, as is the case with many publicly held
corporations, the possibility of a Change in Control (as defined
herein) may arise and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the
departure or distraction of management personnel to the detriment of
the Company and its shareholders. Accordingly, the Board of Directors
of the Company (the "Board") has determined that appropriate steps
should be taken to reinforce and encourage the continued attention and
dedication of members of the Company's management to their assigned
duties without distraction in circumstances arising from the
possibility of a Change in Control of the Company. In particular, the
Board believes it important, should the Company or its shareholders
receive a proposal for transfer of control of the Company, that you be
able to assess and advise the Board whether such proposal would be in
the best interests of the Company and its shareholders and to take
such other action regarding such proposal as the Board might determine
to be appropriate, without being influenced by the uncertainties of
your own situation.
In order to induce you to remain in the employ of the Company,
this letter agreement ("Agreement"), which has been approved by the
Board, sets forth the severance benefits which the Company agrees will
be provided to you in the event your employment with the Company is
terminated subsequent to a Change
in Control of the Company under the circumstances described below.
1. Agreement to Provide Services; Right to Terminate.
(i) Except as otherwise provided in paragraph (ii) below,
the Company or you may terminate your employment at any
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Ms. Ruth J. Mack
May 13, 1997
Page 2
time following a Change in Control as defined herein, subject to the
Company's providing the benefits hereinafter specified in accordance
with the terms hereof.
(ii) In the event a Person (as hereinafter defined) makes an
offer which, if accepted by the Company and subsequently consummated,
would constitute a Change in Control, you agree that you will not
leave the employ of the Company (other than as a result of Disability
or upon Retirement, as such terms are hereinafter defined) and will
render the services contemplated in the recitals to this Agreement
until such Change in Control offer has been abandoned or terminated or
a Change in Control has occurred. For the purposes of this Agreement,
Retirement shall mean a termination of your employment by you on or
after you have reached age sixty-five (65) and have completed at least
five (5) years of service for the Company (including any service for a
predecessor of the Company where such prior service is recognized by
the Company for the purpose of awarding other benefits). For purposes
of this Section 1, "years of service" shall be defined as in the WLR
Profit Sharing and Salary Savings Plan.
2. Term of Agreement. This Agreement shall commence on the
date hereof and shall continue in effect until December 31, 1997;
provided, however, that commencing on January 1, 1998 and each January
1 thereafter, the term of this Agreement shall automatically be
extended for one (1) additional year unless at least ninety (90) days
prior to such January 1st date, the Company or you shall have given
notice that this Agreement shall not be extended; and provided,
further, that, notwithstanding the delivery of any such notice, this
Agreement shall continue in effect for a period of thirty-six (36)
months after a Change in Control, if such Change in Control shall have
occurred while this Agreement is in effect. Notwithstanding anything
in this Section 2 to the contrary, this Agreement shall terminate if
you or the Company terminate your employment prior to a Change in
Control of the Company.
3. Change in Control. For the purpose of this Agreement, a
"Change in Control" shall mean:
(i) The acquisition by any individual, entity or group
(within the meaning of Section 13 (d) (3) or 14 (d) (2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of twenty percent (20%) or more of
either the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or the combined voting power of
the then outstanding voting securities of the Company entitled to vote
generally in
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Ms. Ruth J. Mack
May 13, 1997
Page 3
the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that in no event may the following
acquisitions constitute a Change in Control: (a) any acquisition
directly from the Company (excluding an acquisition by virtue of the
exercise of a conversion privilege), (b) any acquisition by the
Company, (c) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company, (d) any acquisition by any corporation
pursuant to a reorganization, merger or consolidation, if, following
such reorganization, merger or consolidation, the conditions described
in clauses (a), (b) and (c) of paragraph (iii) of this Section 3 are
satisfied, or (e) any sale or other disposition of all or
substantially all of the assets of the Company, if , following such
sale or other disposition, the conditions described in (1), (2) and
(3) of paragraph (iv) of this Section 3 are satisfied; or
(ii) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by
a vote of at least seventy-five percent (75%) of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest
(as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board;
or
(iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation, unless, in each case
following such reorganization, merger or consolidation, (a) more than
sixty percent (60%) of, respectively, the then outstanding shares of
common stock of the corporation resulting from such reorganization,
merger or consolidation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such reorganization, merger or
consolidation in substantially the same proportions as their ownership
immediately prior to such reorganization, merger or consolidation, of
the Outstanding Company Common Stock and
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Ms. Ruth J. Mack
May 13, 1997
Page 4
Outstanding Company Voting Securities, as the case may be, (b) no
Person (excluding the Company, any employee benefit plan (or related
trust) of the Company or a corporation resulting from such
reorganization, merger or consolidation) beneficially owns, directly
or indirectly, thirty-nine percent (39%) or more of, respectively, the
then outstanding shares of common stock of the corporation resulting
from such reorganization, merger or consolidation or the combined
voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors,
and (c) at least a majority of the members of the board of directors
of the corporation resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of the
execution of the initial agreement providing for such reorganization,
merger or consolidation; or
(iv) Approval by the shareholders of the Company of (a) a
complete liquidation or dissolution of the Company or (b) the sale or
other disposition of all or substantially all of the assets of the
Company, other than to a corporation with respect to which following
such sale or other disposition, (1) more than sixty percent (60%) of,
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately
prior to such sale or other disposition, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities,
as the case may be, (2) no Person (excluding the Company and any
employee benefit plan (or related trust) of the Company or such
corporation) beneficially owns, directly or indirectly,
thirty-nine percent (39%) or more of, respectively, the then
outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities
of such corporation entitled to vote generally in the election
of directors and (3) at least a majority of the members
of the board of directors of such corporation were members of the
Incumbent Board at the time of the execution of the initial agreement
or action of the Board providing for such sale or other disposition of
assets of the Company.
(v) Notwithstanding anything in the paragraphs (i) - (iv)
of this Section 3 to the contrary, no Change in Control shall be
deemed to have occurred for purposes of this Agreement
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Ms. Ruth J. Mack
May 13, 1997
Page 5
by virtue of any transaction which results in you, or a group of
Persons which includes you, acquiring, directly or indirectly, twenty
percent (20%) or more of the combined voting power of the Company's
Voting Securities.
4. Termination Following Change in Control. If any of the
events described in Section 3 hereof constituting a Change in Control
of the Company shall have occurred, you shall be entitled to the
benefits provided in Section 5 hereof upon the termination of your
employment with the Company within thirty-six (36) months after such
Change in Control, unless such termination is (a) because of your
death, (b) by the Company for Cause or Disability or (c) by you other
than for Good Reason (as all such capitalized terms are hereinafter
defined).
(i) Disability. Termination by the Company of your
employment based on "Disability" shall mean termination because of
your absence from your duties with the Company on a full time basis
for one hundred eighty (180) consecutive days as a result of your
incapacity due to physical or mental illness, unless within thirty
(30) days after Notice of Termination (as hereinafter defined) is
given to you following such absence, you shall have returned to the
full time performance of your duties.
(ii) Cause. Termination by the Company of your employment
for "Cause" shall mean termination upon (a) the willful and continued
failure by you to perform substantially your duties with the Company
(other than any such failure resulting from your incapacity due to
physical or mental illness) after a written demand for substantial
performance is delivered to you by the Chairman of the Board or
President of the Company which specifically identifies the manner(s)
in which such executive believes that you have not substantially
performed your duties, or (b) the willful engaging by you in illegal
conduct which is materially and demonstrably injurious to the Company.
For purposes of this paragraph (ii), no act, or failure to act, on
your part shall be considered "willful" unless done, or failed to be
done, by you in bad faith and without reasonable belief that your
action or omission was in, or not opposed to, the best interests of
the Company. Any act or failure to act based upon authority given
pursuant to a resolution duly adopted by the Board or based upon the
advice of counsel for the Company shall be conclusively presumed to be
done, or omitted to be done, by you in good faith and in the best
interests of the Company. It is also expressly understood that your
attention to matters not directly related to the business of the
Company shall not provide a basis for termination for Cause so long as
the Board has approved your engagement in such activities.
Notwithstanding the foregoing, you shall not be deemed to have been
terminated for
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Ms. Ruth J. Mack
May 13, 1997
Page 6
Cause unless and until there shall have been delivered to you a copy
of a resolution duly adopted by the affirmative vote of not less than
three-quarters of the entire membership of the Board at a meeting of
the Board called and held for such purpose (after reasonable notice to
you and an opportunity for you, together with your counsel, to be
heard before the Board), finding that in the good faith opinion of the
Board you were guilty of the conduct set forth above in clauses (a) or
(b) of this paragraph (ii) and specifying the particulars thereof in
detail.
(iii) Good Reason. Termination by you of your employment
for "Good Reason" shall mean termination based on:
(A) a determination by you, in your reasonable
judgment, that there has been an adverse change in your status or
position(s) as an executive officer of the Company as in effect
immediately prior to the Change in Control, including, without
limitation, any adverse change in your status or position as a result
of a diminution in your duties or responsibilities (other
than, if applicable, any such change directly attributable to the fact
that the Company is no longer publicly owned) or the assignment to you
of any duties or responsibilities which are inconsistent with such
status or position(s), or any removal of you from, or any failure to
reappoint or reelect you to, such positions(s) (except in connection
with the termination of your employment for Cause or Disability or as
a result of your death or by you other than for Good Reason);
(B) a reduction by the Company in your base salary as
in effect immediately prior to the Change in Control;
(C) the failure by the Company to continue in effect
any Plan (as hereinafter defined) in which you are participating at
the time of the Change in Control of the Company (or Plans providing
you with at least substantially similar benefits) other than as a
result of the normal expiration of any such Plan in accordance with
its terms as in effect at the time of the Change in Control, or the
taking of any action, or the failure to act, by the Company which
would adversely affect your continued participation in any of such
Plans on at least as favorable a basis to you as is the case on the
date of the Change in Control or which would materially reduce your
benefits in the future under any of such Plans or deprive you of any
material benefit enjoyed by you at the time of the Change in Control;
(D) the failure by the Company to provide and credit
you with the number of paid vacation days to which you are then
entitled in accordance with the Company's normal vacation policy as in
effect immediately prior to the Change in Control;
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Ms. Ruth J. Mack
May 13, 1997
Page 7
(E) the Company's requiring you to be based at any
office that is greater than thirty (30) miles from where your office
is located immediately prior to the Change in Control except for
required travel on the Company's business to an extent substantially
consistent with the business travel obligations which you undertook on
behalf of the Company prior to the Change in Control;
(F) the failure by the Company to obtain from any
Successor (as hereinafter defined) the assent to this Agreement
contemplated by Section 6 hereof;
(G) any purported termination by the Company of your
employment which is not effected pursuant to a Notice of
Termination satisfying the requirements of paragraph (iv) below (and,
if applicable, paragraph (ii) above); and for purposes of this
Agreement, no such purported termination shall be effective; or
(H) any refusal by the Company to continue to allow
you to attend to matters or engage in activities not directly related
to the business of the Company which, prior to the Change in Control,
you were permitted by the Board to attend to or engage in.
For purposes of this Agreement, "Plan" shall mean any
compensation plan such as the Company Incentive Bonus Plan or any
employee benefit plan such as a thrift, pension, profit sharing,
medical, disability, accident, life insurance plan or a relocation
plan or policy or any other plan, program or policy of the Company
intended to benefit employees, except for the Company Restated Long-
Term Incentive Plan.
(iv) Notice of Termination. Any purported termination by
the Company or by you following a Change in Control shall be
communicated by written Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon.
(v) Date of Termination. "Date of Termination" following a
Change in Control shall mean (a) if your employment is to be
terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such thirty
(30) day period), (b) if your employment is to be terminated by the
Company for Cause or by you pursuant to Sections 4(iii)(F) or 6 hereof
or for any other Good Reason, the date specified in the Notice of
Termination, (c) if your
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Ms. Ruth J. Mack
May 13, 1997
Page 8
employment is to be terminated by the Company for any reason other
than Cause, the date specified in the Notice of Termination, which in
no event shall be a date earlier than ninety (90) days after the date
on which a Notice of Termination is given, unless an earlier date has
been expressly agreed to by you in writing either in advance of, or
after, receiving such Notice of Termination, or (d) if your employment
is terminated on account of your death, the day after your death. In
the case of termination of your employment by the Company for Cause,
if you have not previously expressly agreed in writing to the
termination, then within thirty (30) days after receipt by you of the
Notice of Termination with respect thereto, you may notify the Company
that a dispute exists concerning the termination, in which event the
Date of Termination shall be the date set either by mutual written
agreement of the parties or by such court having the matter before it.
During the pendency of any such dispute, the Company will continue to
pay you your full compensation in effect just prior to the time the
Notice of Termination is given and until the dispute is resolved.
However, if such court issues a final and non-appealable order finding
that the Company had Cause to terminate you then you must return all
compensation paid to you after the Date of Termination specified in
the Notice of Termination previously received by you.
5. Compensation Upon Termination or During Disability; Other
Agreements.
(i) During any period following a Change in Control of the
Company that you fail to perform your duties as a result of incapacity
due to physical or mental illness, you shall continue to receive your
base salary at the rate then in effect and any benefits or awards
under any Plans shall continue to accrue during such period, to the
extent not inconsistent with such Plans, until your employment is
terminated pursuant to and in accordance with paragraphs 4(iv) - 4(v)
hereof. Thereafter, your benefits shall be determined in accordance
with the Plans then in effect.
(ii) If your employment is terminated for Cause following a
Change in Control of the Company, the Company shall pay to you your
base salary through the Date of Termination at the rate in effect just
prior to the time a Notice of Termination is given plus any benefits
or awards (including both the cash and stock components) which
pursuant to the terms of any Plans have been earned or become payable,
but which have not yet been paid to you. Thereupon the Company shall
have no further obligations to you under this Agreement.
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Ms. Ruth J. Mack
May 13, 1997
Page 9
(iii) Subject to Section 8 hereof, if, within thirty-six
(36) months after a Change in Control of the Company has occurred,
your employment by the Company is terminated other than on account of
your death and is terminated (a) by the Company other than for Cause
or Disability or (b) by you for Good Reason, then the Company shall
pay to you, no later than the fifth (5th) day following the Date of
Termination, without regard to any contrary provisions of any Plan,
the following:
(A) your base salary through the Date of Termination
at the rate in effect just prior to the time a Notice of Termination
is given plus any benefits or awards (including both the cash and
stock components) which pursuant to the terms of any Plans have been
earned or become payable, but which have not yet been paid to you
(including amounts which previously had been deferred at your
request);
(B) an amount in cash equal to three times the sum of
(i) the higher of (a) your annual base salary on the Date of
Termination or (b) your annual base salary in effect immediately prior
to the Change in Control plus (ii) an amount equal to the average of
the bonuses awarded to you in each of the three previous years.
For the purposes of this Agreement, the term "base salary"
shall include any amounts deducted by the Company with respect to you
or for your account pursuant to Sections 125 and 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code").
(iv) If, within thirty-six (36) months after a Change in
Control of the Company has occurred, your employment by the Company is
terminated for any reason other than retirement, the Company shall pay
to you, on the date specified below, an amount ("Spread") in cash
equal to the Termination Fair Market Value (as hereinafter defined)
less the exercise price of all options which were granted to you
pursuant to the Company's Restated Long-Term Incentive Plan or any
Plan succeeding thereto, and which shall not become exercisable prior
to (a) the end of the one (1) year period immediately following the
Date of Termination if your employment is terminated on account of
your death, or (b) the end of the third (3rd) month following the Date
of Termination if your employment is terminated for any reason other
than death. The Company shall make such payment upon the fifth (5th)
day following such Date of Termination.
For the purposes of this Agreement, the "Termination Fair
Market Value" shall be the higher of (a) the highest price of the
Company's stock as quoted on the NASDAQ, or any other
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Ms. Ruth J. Mack
May 13, 1997
Page 10
exchange complying with the requirements of the Securities and
Exchange Act of 1934, as amended, within the period beginning
ninety (90) days prior to the Date of Termination and ending upon such
Date of Termination, and (b) the highest price of the Company's stock
as quoted on the NASDAQ, or any other exchange complying with the
requirements of the Securities and Exchange Act of 1934, as amended,
within the period beginning ninety (90) days prior to a Change of
Control and ending upon the date of a Change of Control.
(v) If, within thirty-six (36) months after a Change in
Control of the Company has occurred, your employment by the Company is
terminated (a) by the Company other than for Cause or Disability, or
(b) by you for Good Reason, then the Company shall maintain in full
force and effect, for the continued benefit of you and your dependents
for a period terminating on the earliest of (a) three (3) years after
the Date of Termination or (b) the commencement date of equivalent
benefits from a new employer, insured and self-insured employee
welfare benefit Plans in which you were entitled to participate
immediately prior to the Date of Termination, provided that your
continued participation is possible under the general terms and
provisions of such Plans (and any applicable funding media) and you
continue to pay an amount equal to your regular contribution under
such Plans for such participation. If three (3) years after the Date
of Termination you have not previously received, nor are then
receiving, equivalent benefits from a new employer, the Company shall
offer you continuation coverage under COBRA as prescribed under
Section 4980B of the Code. At the expiration of such continuation
coverage (or, if COBRA continuation coverage is not applicable to the
Plan, then upon the expiration of the three (3) year period beginning
on the Termination Date), the Company shall arrange, at its sole cost
and expense, to enable you to convert you and your dependents'
coverage under such plans to individual policies and programs upon the
same terms as employees of the Company may apply for such conversions.
In the event that your participation in any such Plan is barred, the
Company, at its sole cost and expense, shall arrange to have issued
for the benefit of you and your dependents individual policies of
insurance providing benefits substantially similar (on an after-tax
basis) to those which you otherwise would have been entitled to
receive under such Plans pursuant to this paragraph (v) or, if such
insurance is not available at a reasonable cost to the Company, the
Company shall otherwise provide you and your dependents with
equivalent benefits (on an after-tax basis). You shall not be
required to pay any premiums or other charges in an
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Ms. Ruth J. Mack
May 13, 1997
Page 11
amount greater than that which you would have paid in order to
participate in such Plans.
(vi) Except as specifically provided in paragraph (v) above,
the amount of any payment provided for in this Section 5 shall not be
reduced, offset or subject to recovery by the Company by reason of any
compensation earned by you as the result of employment by another
employer after the Date of Termination, or otherwise.
(vii) In the event that you become entitled to the payments
provided by paragraphs (iii) and (iv) of Section 5(iii) hereof (the
"Agreement Payments"), if any of the Agreement Payments will be
subject to the tax (the "Excise Tax") imposed by Section 4999 of the
Code (or any similar tax that may hereafter be imposed), the Company
shall pay to you at the time specified in paragraph (viii) below an
additional amount (the "Gross-up Payment") such that the net amount
retained by you, after deduction of any Excise Tax on the Total
Payments (as hereinafter defined) and any federal, state and local
income tax and Excise Tax upon the Gross-up Payment provided for by
this paragraph (vii), but before deduction for any federal, state or
local income tax on the Agreement Payments, shall be equal to the sum
of (a) the Total Payments and (b) an amount equal to the product of
any deductions disallowed because of the inclusion of the Gross-up
Payment in your adjusted gross income and the highest applicable
marginal rate of federal income taxation for the calendar year in
which the Gross-up Payment is to be made.
For purposes of determining whether any of the Agreement
Payments will be subject to the Excise Tax and the amount of such
Excise Tax, (a) any other payments or benefits received or to be
received by you in connection with a Change in Control of the Company
or your termination of employment (whether pursuant to the terms of
this Agreement or any other plan, arrangement or agreement with the
Company, any Person whose actions result in a Change in Control of the
Company or any person affiliated with the Company or such person)
(which, together with the Agreement Payments, shall constitute the
"Total Payments") shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the Code, and all "excess parachute
payments" within the meaning of Section 280G(b)(1) of the Code shall
be treated as subject to the Excise Tax, unless in the opinion of tax
counsel selected by the Company's independent auditors such other
payments or benefits (in whole or in part) do not constitute parachute
payments, or such excess parachute payments (in whole or in part)
represent reasonable compensation for services actually rendered
within the meaning of Section 280G(b)(4) of the Code in excess of the
base amount within the
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Ms. Ruth J. Mack
May 13, 1997
Page 12
meaning of Section 280G(b)(3) of the Code, or are otherwise not
subject to the Excise Tax; (b) the amount of the Total Payments which
shall be treated as subject to the Excise Tax shall be equal to the
lesser of (1) the total amount of the Total Payments or (2) the amount
of excess parachute payments within the meaning of Section 280G(b)(1)
of the Code (after applying clause (a), above); and (c) the value of
any non-cash benefits or any deferred payment or benefit shall be
determined by the Company's independent auditors in accordance with
the principles of Sections 280G(d)(3) and (4) of the Code.
For purposes of determining the amount of the Gross-up
Payment, you shall be deemed to (a) pay federal income taxes at the
highest marginal rate of federal income taxation for the calendar year
in which the Gross-up Payment is to be made, (b) pay the applicable
state and local income taxes at the highest marginal rate of taxation
for the calendar year in which the Gross-up Payment is to be made, net
of the maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes (determined
without regard to limitations on deductions based upon the amount of
your adjusted gross income), and (c) have otherwise allowable
deductions for federal income tax purposes at least equal to those
disallowed because of the inclusion of the Gross-up Payment in your
adjusted gross income. In the event that the Excise Tax is
subsequently determined to be less than the amount taken into account
hereunder at the time the Gross-up Payment is made, you shall repay to
the Company at the time that the amount of such reduction in Excise
Tax is finally determined, the portion of the Gross-up Payment
attributable to such reduction (plus the portion of the Gross-up
Payment attributable to the Excise Tax and federal state and local
income tax imposed on the portion of the Gross-up Payment being repaid
by you if such repayment results in a reduction in Excise Tax and/or a
federal and state and local income tax deduction), plus interest on
the amount of such repayment at the rate provided in Section
1274(b)(2)(B) of the Code. In the event that the Excise Tax is
determined to exceed the amount taken into account hereunder at the
time the Gross-up Payment is made (including by reason of any payment
the existence or amount of which cannot be determined at the time of
the Gross-up Payment), the Company shall make an additional Gross-up
Payment in respect of such excess (plus any interest payable with
respect to such excess at the rate provided in Section 1274(b)(2)(B)
of the Code) at the time that the amount of such excess is finally
determined.
(viii) The Gross-up Payment or portion thereof provided
for in paragraph (vii) above shall be paid not later than the
thirtieth (30th) day following payment of any amounts
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Ms. Ruth J. Mack
May 13, 1997
Page 13
under paragraphs (iii) and (iv) of Section 5; provided, however, that
if the amount of such Gross-up Payment or portion thereof cannot be
finally determined on or before such day, the Company shall pay to you
on such day an estimate, as determined in good faith by the Company,
of the minimum amount of such payments and shall pay the remainder of
such payments (together with interest at the rate provided in Section
1274(b)(2)(B) of the Code) as soon as the amount thereof can be
determined, but in no event later than the forty-fifth (45th) day
after payment of any amounts under paragraphs (iii) and (iv) of
Section 5. In the event that the amount of the estimated payments
exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by the Company to you, payable on the
fifth (5th) day after demand by the Company (together with interest at
the rate provided in Section 1274(b)(2)(B) of the Code).
6. Successors; Binding Agreement.
(i) The Company will seek, by written request at least five
(5) business days prior to the time a Person becomes a Successor (as
hereinafter defined), to have such Person, by agreement in form and
substance satisfactory to you, assent to the fulfillment of the
Company's obligations under this Agreement. Failure of such Person to
furnish such assent by the later of (a) three (3) business days prior
to the time such Person becomes a Successor or (b) two (2) business
days after such Person receives a written request to so assent shall
constitute Good Reason for termination by you of your employment if a
Change in Control of the Company occurs or has occurred. For purposes
of this Agreement, "Successor" shall mean any Person that succeeds to,
or has the practical ability to control (either immediately or with
the passage of time), the Company's business directly, by merger or
consolidation, or indirectly, by purchase of the Company's Voting
Securities or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by your personal legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If you should die while any amount would still be payable
to you hereunder if you had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or,
if no such designee exists, to your estate.
(iii) For purposes of this Agreement, the "Company"
shall include any subsidiaries of the Company and any corporation or
other entity which is the surviving or continuing entity in
13
<PAGE>
Ms. Ruth J. Mack
May 13, 1997
Page 14
respect of any merger, consolidation or form of business combination
in which the Company ceases to exist; provided, however, for purposes
of determining whether a Change in Control has occurred herein, the
term "Company" shall refer to WLR Foods, Inc. or its successor(s).
7. Fees and Expenses; Mitigation.
(i) The Company shall reimburse you, on a current basis,
for all reasonable legal fees and related expenses incurred by you in
connection with the Agreement following a Change in Control of the
Company, including without limitation, (a) all such fees and expenses,
if any, incurred in contesting or disputing any termination of your
employment or incurred by you in seeking advice with respect to the
matters set forth in Section 8 hereof or (b) your seeking to obtain or
enforce any right or benefit provided by this Agreement, in each case,
regardless of whether or not your claim is upheld by a court of
competent jurisdiction; provided, however, you shall be required to
repay any such amounts to the Company to the extent that a court
issues a final and non-appealable order setting forth the
determination that the position taken by you was frivolous or advanced
by you in bad faith.
(ii) You shall not be required to mitigate the amount of any
payment the Company becomes obligated to make to you in connection
with this Agreement, by seeking other employment or otherwise.
8. Taxes. Subject to the provisions of Section 5(vii), all
payments to be made to you under this Agreement will be
subject to required withholding of federal, state and local income and
employment taxes.
9. Survival. The respective obligations of, and benefits
afforded to, the Company and you as provided in Sections 5, 6(ii), 7,
8, 12 and 14 of this Agreement shall survive termination of this
Agreement.
10. Notice. For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed
by United States registered mail, return receipt requested, postage
prepaid and addressed, in the case of the Company, to the address set
forth on the first page of this Agreement or, in the case of the
undersigned employee, to the address set forth below his signature,
provided that all notices to the Company shall be directed to the
attention of the Chairman of the Board or President of the Company,
with a copy to the
14
<PAGE>
Ms. Ruth J. Mack
May 13, 1997
Page 15
Secretary of the Company, or to such other address as either party may
have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon receipt.
11. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or
discharge is agreed to in a writing signed by you and the Chairman of
the Board or President of the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or of
compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this
Agreement.
12. Governing Law and Venue. The validity, interpretation,
construction and performance of this Agreement shall be governed by
the laws of the Commonwealth of Virginia. Venue for any proceeding
related to the performance or interpretation of this Agreement, or in
any way arising out of this Agreement, shall be either the Circuit
Court of Rockingham County, Virginia, or the United States District
Court for the Western District of Virginia, Harrisonburg Division.
13. Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
14. Employee's Commitment. You agree that subsequent to your
period of employment with the Company, you will not at any time
communicate or disclose to any unauthorized person, without the
written consent of the Company, any proprietary processes of the
Company or other confidential information concerning its business,
affairs, products, suppliers or customers which, if disclosed, would
have a material adverse effect upon the business or operations of the
Company, taken as a whole; it being understood, however, that the
obligations under this Section 14 shall not apply to the extent that
the aforesaid matters (a) are disclosed in circumstances where you are
legally required to do so or (b) become generally known to, and
available for use by, the public otherwise than by your wrongful act
or omission.
15. Related Agreements. To the extent that any provision of any
other agreement between the Company and you shall limit, qualify or be
inconsistent with any provision of this Agreement,
15
<PAGE>
Ms. Ruth J. Mack
May 13, 1997
Page 16
then for purposes of this Agreement, while the same shall remain in
force, the provision of such other agreement shall be deemed to have
been superseded, and to be of no force or effect, as if such other
agreement had been formally amended to the extent necessary to
accomplish such purpose. Notwithstanding the effect of the preceding
sentence, the conditional Employment Agreement, renewed on June 26,
1992 between the Company and you is hereby cancelled and shall be of
no force or effect.
If this letter correctly sets forth our agreement on the
subject matter hereof, kindly sign and return to the Company the
enclosed copy of this letter which will then constitute our agreement
on this subject.
Sincerely,
WLR Foods, Inc.
By_/s/ Herman D. Mason, Chair
Herman D. Mason, Chair
Executive Compensation Committee
WLR Foods, Inc.
Agreed to this _13th_ day of May, 1997
_/s/ Ruth J. Mack_
Ruth J. Mack
16
<PAGE>
Exhibit 10.8
February 6, 1998
Mr. Ronald E. Morris
Vice President of Turkey Operations
Wampler Foods, Inc.
Post Office Box 7275
Broadway, Virginia 22815-7275
Dear Mr. Morris:
WLR Foods, Inc., a Virginia corporation (the "Company"),
considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best
interests of the Company and its shareholders. In this connection,
the Company recognizes that, as is the case with many publicly held
corporations, the possibility of a Change in Control (as defined
herein) may arise and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the
departure or distraction of management personnel to the detriment of
the Company and its shareholders. Accordingly, the Board of Directors
of the Company (the "Board") has determined that appropriate steps
should be taken to reinforce and encourage the continued attention and
dedication of members of the Company's management to their assigned
duties without distraction in circumstances arising from the
possibility of a Change in Control of the Company. In particular, the
Board believes it important, should the Company or its shareholders
receive a proposal for transfer of control of the Company, that you be
able to assess and advise the Board whether such proposal would be in
the best interests of the Company and its shareholders and to take
such other action regarding such proposal as the Board might determine
to be appropriate, without being influenced by the uncertainties of
your own situation.
In order to induce you to remain in the employ of the Company,
this letter agreement ("Agreement"), which has been approved by the
Board, sets forth the severance benefits which the Company agrees will
be provided to you in the event your employment with the Company is
terminated subsequent to a Change in Control of the Company under the
circumstances described below.
1. Agreement to Provide Services; Right to Terminate.
(i) Except as otherwise provided in paragraph (ii) below,
the Company or you may terminate your employment at any time following
a Change in Control as defined herein, subject to
<PAGE>
Mr. Ronald E. Morris
February 6, 1998
Page 2
the Company's providing the benefits hereinafter specified in
accordance with the terms hereof.
(ii) In the event a Person (as hereinafter defined) makes an
offer which, if accepted by the Company and subsequently consummated,
would constitute a Change in Control, you agree that you will not
leave the employ of the Company (other than as a result of Disability
or upon Retirement, as such terms are hereinafter defined) and will
render the services contemplated in the recitals to this Agreement
until such Change in Control offer has been abandoned or terminated or
a Change in Control has occurred. For the purposes of this Agreement,
Retirement shall mean a termination of your employment by you on or
after you have reached age sixty-five (65) and have completed at least
five (5) years of service for the Company (including any service for a
predecessor of the Company where such prior service is recognized by
the Company for the purpose of awarding other benefits). For purposes
of this Section 1, "years of service" shall be defined as in the WLR
Profit Sharing and Salary Savings Plan.
2. Term of Agreement. This Agreement shall commence on the
date hereof and shall continue in effect until December 31, 1998;
provided, however, that commencing on January 1, 1999 and each January
1 thereafter, the term of this Agreement shall automatically be
extended for one (1) additional year unless at least ninety (90) days
prior to such January 1st date, the Company or you shall have given
notice that this Agreement shall not be extended; and provided,
further, that, notwithstanding the delivery of any such notice, this
Agreement shall continue in effect for a period of thirty-six (36)
months after a Change in Control, if such Change in Control shall have
occurred while this Agreement is in effect. Notwithstanding anything
in this Section 2 to the contrary, this Agreement shall terminate if
you or the Company terminate your employment prior to a Change in
Control of the Company.
3. Change in Control. For the purpose of this Agreement, a
"Change in Control" shall mean:
(i) The acquisition by any individual, entity or group
(within the meaning of Section 13 (d) (3) or 14 (d) (2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a
"Person") of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of twenty percent
(20%) or more of either the then outstanding shares of common stock of
the Company (the "Outstanding Company Common Stock") or the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the
"Outstanding Company Voting
2
<PAGE>
Mr. Ronald E. Morris
February 6, 1998
Page 3
Securities"); provided, however, that in no event may the following
acquisitions constitute a Change in Control: (a) any acquisition
directly from the Company (excluding an acquisition by virtue of the
exercise of a conversion privilege), (b) any acquisition by the
Company, (c) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company, (d) any acquisition by any corporation
pursuant to a reorganization, merger or consolidation, if, following
such reorganization, merger or consolidation, the conditions described
in clauses (a), (b) and (c) of paragraph (iii) of this Section 3 are
satisfied, or (e) any sale or other disposition of all or
substantially all of the assets of the Company, if , following such
sale or other disposition, the conditions described in (1), (2) and
(3) of paragraph (iv) of this Section 3 are satisfied; or
(ii) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by
a vote of at least seventy-five percent (75%) of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest
(as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board;
or
(iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation, unless, in each case
following such reorganization, merger or consolidation, (a) more than
sixty percent (60%) of, respectively, the then outstanding shares of
common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power
of the then outstanding voting securities of such corporation entitled
to vote generally in the election of directors is then beneficially
owned, directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners, respectively,
of the Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such reorganization, merger or
consolidation in substantially the same proportions as their ownership
immediately prior to such reorganization, merger or consolidation, of
the Outstanding Company Common Stock and
3
<PAGE>
Mr. Ronald E. Morris
February 6, 1998
Page 4
Outstanding Company Voting Securities, as the case may be, (b) no
Person (excluding the Company, any employee benefit plan (or related
trust) of the Company or a corporation resulting from such
reorganization, merger or consolidation) beneficially owns, directly
or indirectly, thirty-nine percent (39%) or more of, respectively, the
then outstanding shares of common stock of the corporation resulting
from such reorganization, merger or consolidation or the combined
voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors,
and (c) at least a majority of the members of the board of directors
of the corporation resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of the
execution of the initial agreement providing for such reorganization,
merger or consolidation; or
(iv) Approval by the shareholders of the Company of (a) a
complete liquidation or dissolution of the Company or (b) the sale or
other disposition of all or substantially all of the assets of the
Company, other than to a corporation with respect to which following
such sale or other disposition, (1) more than sixty percent (60%) of,
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately
prior to such sale or other disposition, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, as the
case may be, (2) no Person (excluding the Company and any employee
benefit plan (or related trust) of the Company or such corporation)
beneficially owns, directly or indirectly, thirty-nine percent (39%)
or more of, respectively, the then outstanding shares of common stock
of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors and (3) at least a majority of
the members of the board of directors of such corporation were members
of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such sale or other
disposition of assets of the Company.
(v) Notwithstanding anything in the paragraphs (i) - (iv)
of this Section 3 to the contrary, no Change in Control shall be
deemed to have occurred for purposes of this Agreement
4
<PAGE>
Mr. Ronald E. Morris
February 6, 1998
Page 5
by virtue of any transaction which results in you, or a group of
Persons which includes you, acquiring, directly or indirectly, twenty
percent (20%) or more of the combined voting power of the Company's
Voting Securities.
4. Termination Following Change in Control. If any of the
events described in Section 3 hereof constituting a Change in Control
of the Company shall have occurred, you shall be entitled to the
benefits provided in Section 5 hereof upon the termination of your
employment with the Company within thirty-six (36) months after such
Change in Control, unless such termination is (a) because of your
death, (b) by the Company for Cause or Disability or (c) by you other
than for Good Reason (as all such capitalized terms are hereinafter
defined).
(i) Disability. Termination by the Company of your
employment based on "Disability" shall mean termination because of
your absence from your duties with the Company on a full time basis
for one hundred eighty (180) consecutive days as a result of your
incapacity due to physical or mental illness, unless within thirty
(30) days after Notice of Termination (as hereinafter defined) is
given to you following such absence, you shall have returned to the
full time performance of your duties.
(ii) Cause. Termination by the Company of your employment
for "Cause" shall mean termination upon (a) the
willful and continued failure by you to perform substantially your
duties with the Company (other than any such failure resulting from
your incapacity due to physical or mental illness) after a written
demand for substantial performance is delivered to you by the Chairman
of the Board or President of the Company which specifically identifies
the manner(s) in which such executive believes that you have not
substantially performed your duties, or (b) the willful engaging by
you in illegal conduct which is materially and demonstrably injurious
to the Company. For purposes of this paragraph (ii), no act, or
failure to act, on your part shall be considered "willful" unless
done, or failed to be done, by you in bad faith and without reasonable
belief that your action or omission was in, or not opposed to, the
best interests of the Company. Any act or failure to act based upon
authority given pursuant to a resolution duly adopted by the Board or
based upon the advice of counsel for the Company shall be conclusively
presumed to be done, or omitted to be done, by you in good faith and
in the best interests of the Company. It is also expressly understood
that your attention to matters not directly related to the business of
the Company shall not provide a basis for termination for Cause so
long as the Board has approved your engagement in such activities.
Notwithstanding the foregoing, you shall not be deemed to have been
terminated for
5
<PAGE>
Mr. Ronald E. Morris
February 6, 1998
Page 6
Cause unless and until there shall have been delivered to you a copy
of a resolution duly adopted by the affirmative vote of not less than
three-quarters of the entire membership of the Board at a meeting of
the Board called and held for such purpose (after reasonable notice to
you and an opportunity for you, together with your counsel, to be
heard before the Board), finding that in the good faith opinion of the
Board you were guilty of the conduct set forth above in clauses (a) or
(b) of this paragraph (ii) and specifying the particulars thereof in
detail.
(iii) Good Reason. Termination by you of your
employment for "Good Reason" shall mean termination based on:
(A) a determination by you, in your reasonable
judgment, that there has been an adverse change in your status or
position(s) as an executive officer of the Company as in effect
immediately prior to the Change in Control, including, without
limitation, any adverse change in your status or position as a result
of a diminution in your duties or responsibilities (other
than, if applicable, any such change directly attributable to the fact
that the Company is no longer publicly owned) or the assignment to you
of any duties or responsibilities which are inconsistent with such
status or position(s), or any removal of you from, or any failure to
reappoint or reelect you to, such positions(s) (except in connection
with the termination of your employment for Cause or Disability or as
a result of your death or by you other than for Good Reason);
(B) a reduction by the Company in your base salary as
in effect immediately prior to the Change in Control;
(C) the failure by the Company to continue in effect
any Plan (as hereinafter defined) in which you are participating at
the time of the Change in Control of the Company (or Plans providing
you with at least substantially similar benefits) other than as a
result of the normal expiration of any such Plan in accordance with
its terms as in effect at the time of the Change in Control, or the
taking of any action, or the failure to act, by the Company which
would adversely affect your continued participation in any of such
Plans on at least as favorable a basis to you as is the case on the
date of the Change in Control or which would materially reduce your
benefits in the future under any of such Plans or deprive you of any
material benefit enjoyed by you at the time of the Change in Control;
(D) the failure by the Company to provide and credit
you with the number of paid vacation days to which you are then
entitled in accordance with the Company's normal vacation policy as in
effect immediately prior to the Change in Control;
6
<PAGE>
Mr. Ronald E. Morris
February 6, 1998
Page 7
(E) the Company's requiring you to be based at any
office that is greater than thirty (30) miles from where your office
is located immediately prior to the Change in Control except for
required travel on the Company's business to an extent substantially
consistent with the business travel obligations which you undertook on
behalf of the Company prior to the Change in Control;
(F) the failure by the Company to obtain from any
Successor (as hereinafter defined) the assent to this Agreement
contemplated by Section 6 hereof;
(G) any purported termination by the Company of your
employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of paragraph (iv) below (and, if
applicable, paragraph (ii) above); and for purposes of this Agreement,
no such purported termination shall be effective; or
(H) any refusal by the Company to continue to allow
you to attend to matters or engage in activities not directly related
to the business of the Company which, prior to the Change in Control,
you were permitted by the Board to attend to or engage in.
For purposes of this Agreement, "Plan" shall mean any
compensation plan such as the Company Incentive Bonus Plan or any
employee benefit plan such as a thrift, pension, profit sharing,
medical, disability, accident, life insurance plan or a relocation
plan or policy or any other plan, program or policy of the Company
intended to benefit employees, except for the Company Restated Long-
Term Incentive Plan.
(iv) Notice of Termination. Any purported termination by
the Company or by you following a Change in Control shall be
communicated by written Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon.
(v) Date of Termination. "Date of Termination" following a
Change in Control shall mean (a) if your employment is to be
terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such thirty
(30) day period), (b) if your employment is to be terminated by the
Company for Cause or by you pursuant to Sections 4(iii)(F) or 6 hereof
or for any other Good Reason, the date specified in the Notice of
Termination, (c) if your
7
<PAGE>
Mr. Ronald E. Morris
February 6, 1998
Page 8
employment is to be terminated by the Company for any reason other
than Cause, the date specified in the Notice of Termination, which in
no event shall be a date earlier than ninety (90) days after the date
on which a Notice of Termination is given, unless an earlier date has
been expressly agreed to by you in writing either in advance of, or
after, receiving such
Notice of Termination, or (d) if your employment is terminated on
account of your death, the day after your death. In the case of
termination of your employment by the Company for Cause, if you have
not previously expressly agreed in writing to the termination, then
within thirty (30) days after receipt by you of the Notice of
Termination with respect thereto, you may notify the Company that a
dispute exists concerning the termination, in which event the Date of
Termination shall be the date set either by mutual written agreement
of the parties or by such court having the matter before it. During
the pendency of any such dispute, the Company will continue to pay you
your full compensation in effect just prior to the time the Notice of
Termination is given and until the dispute is resolved. However, if
such court issues a final and non-appealable order finding that the
Company had Cause to terminate you then you must return all
compensation paid to you after the Date of Termination specified in
the Notice of Termination previously received by you.
5. Compensation Upon Termination or During Disability; Other
Agreements.
(i) During any period following a Change in Control of the
Company that you fail to perform your duties as a result of incapacity
due to physical or mental illness, you shall continue to receive your
base salary at the rate then in effect and any benefits or awards
under any Plans shall continue to accrue during such period, to the
extent not inconsistent with such Plans, until your employment is
terminated pursuant to and in accordance with paragraphs 4(iv) - 4(v)
hereof. Thereafter, your benefits shall be determined in accordance
with the Plans then in effect.
(ii) If your employment is terminated for Cause following a
Change in Control of the Company, the Company shall pay to you your
base salary through the Date of Termination at the rate in effect just
prior to the time a Notice of Termination is given plus any benefits
or awards (including both the cash and stock components) which
pursuant to the terms of any Plans have been earned or become payable,
but which have not yet been paid to you. Thereupon the Company shall
have no further obligations to you under this Agreement.
8
<PAGE>
Mr. Ronald E. Morris
February 6, 1998
Page 9
(iii) Subject to Section 8 hereof, if, within thirty-six
(36) months after a Change in Control of the Company has occurred,
your employment by the Company is terminated other than on account of
your death and is terminated (a) by the Company other than for Cause
or Disability or (b) by you for Good Reason, then the Company shall
pay to you, no later than the fifth (5th) day following the Date of
Termination, without regard to any contrary provisions of any Plan,
the following:
(A) your base salary through the Date of Termination
at the rate in effect just prior to the time a Notice of Termination
is given plus any benefits or awards (including both the cash and
stock components) which pursuant to the terms of any Plans have been
earned or become payable, but which have not yet been paid to you
(including amounts which previously had been deferred at your
request);
(B) an amount in cash equal to three times the sum of
(i) the higher of (a) your annual base salary on the Date of
Termination or (b) your annual base salary in effect immediately prior
to the Change in Control plus (ii) an amount equal to the average of
the bonuses awarded to you in each of the three previous years.
For the purposes of this Agreement, the term "base salary"
shall include any amounts deducted by the Company with respect to you
or for your account pursuant to Sections 125 and 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code").
(iv) If, within thirty-six (36) months after a Change in
Control of the Company has occurred, your employment by the Company is
terminated for any reason other than retirement, the Company shall pay
to you, on the date specified below, an amount ("Spread") in cash
equal to the Termination Fair Market Value (as hereinafter defined)
less the exercise price of all options which were granted to you
pursuant to the Company's Restated Long-Term Incentive Plan or any
Plan succeeding thereto, and which shall not become exercisable prior
to (a) the end of the one (1) year period immediately following the
Date of Termination if your employment is terminated on account of
your death, or (b) the end of the third (3rd) month following the Date
of Termination if your employment is terminated for any reason other
than death. The Company shall make such payment upon the fifth (5th)
day following such Date of Termination.
For the purposes of this Agreement, the "Termination Fair
Market Value" shall be the higher of (a) the highest price of the
Company's stock as quoted on the NASDAQ, or any other
9
<PAGE>
Mr. Ronald E. Morris
February 6, 1998
Page 10
exchange complying with the requirements of the Securities and
Exchange Act of 1934, as amended, within the period beginning ninety
(90) days prior to the Date of Termination and ending upon such Date
of Termination, and (b) the highest price of the Company's stock as
quoted on the NASDAQ, or any other exchange complying with the
requirements of the Securities and Exchange Act of 1934, as amended,
within the period beginning ninety (90) days prior to a Change of
Control and ending upon the date of a Change of Control.
(v) If, within thirty-six (36) months after a Change in
Control of the Company has occurred, your employment by the Company is
terminated (a) by the Company other than for Cause or Disability, or
(b) by you for Good Reason, then the Company shall maintain in full
force and effect, for the continued benefit of you and your dependents
for a period terminating on the earliest of (a) three (3) years after
the Date of Termination or (b) the commencement date of equivalent
benefits from a new employer, insured and self-insured employee
welfare benefit Plans in which you were entitled to participate
immediately prior to the Date of Termination, provided that your
continued participation is possible under the general terms and
provisions of such Plans (and any applicable funding media) and you
continue to pay an amount equal to your regular contribution under
such Plans for such participation. If three (3) years after the Date
of Termination you have not previously received, nor are then
receiving, equivalent benefits from a new employer, the Company shall
offer you continuation coverage under COBRA as prescribed under
Section 4980B of the Code. At the expiration of such continuation
coverage (or, if COBRA continuation coverage is not applicable to the
Plan, then upon the expiration of the three (3) year period beginning
on the Termination Date), the Company shall arrange, at its sole cost
and expense, to enable you to convert you and your dependents'
coverage under such plans to individual policies and programs upon the
same terms as employees of the Company may apply for such conversions.
In the event that your participation in any such Plan is barred, the
Company, at its
sole cost and expense, shall arrange to have issued for the benefit of
you and your dependents individual policies of insurance providing
benefits substantially similar (on an after-tax basis) to those which
you otherwise would have been entitled to receive under such Plans
pursuant to this paragraph (v) or, if such insurance is not available
at a reasonable cost to the Company, the Company shall otherwise
provide you and your dependents with equivalent benefits (on an after-
tax basis). You shall not be required to pay any premiums or other
charges in an amount greater than that which you would have paid in
order to participate in such Plans.
10
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Mr. Ronald E. Morris
February 6, 1998
Page 11
(vi) Except as specifically provided in paragraph (v) above,
the amount of any payment provided for in this Section 5 shall not be
reduced, offset or subject to recovery by the Company by reason of any
compensation earned by you as the result of employment by another
employer after the Date of Termination, or otherwise.
(vii) In the event that you become entitled to the
payments provided by paragraphs (iii) and (iv) of Section 5(iii)
hereof (the "Agreement Payments"), if any of the Agreement Payments
will be subject to the tax (the "Excise Tax") imposed by Section 4999
of the Code (or any similar tax that may hereafter be imposed), the
Company shall pay to you at the time specified in paragraph (viii)
below an additional amount (the "Gross-up Payment") such that the net
amount retained by you, after deduction of any Excise Tax on the Total
Payments (as hereinafter defined) and any federal, state and local
income tax and Excise Tax upon the Gross-up Payment provided for by
this paragraph (vii), but before deduction for any federal, state or
local income tax on the Agreement Payments, shall be equal to the sum
of (a) the Total Payments and (b) an amount equal to the product of
any deductions disallowed because of the inclusion of the Gross-up
Payment in your adjusted gross income and the highest applicable
marginal rate of federal income taxation for the calendar year in
which the Gross-up Payment is to be made.
For purposes of determining whether any of the Agreement
Payments will be subject to the Excise Tax and the amount of such
Excise Tax, (a) any other payments or benefits received or to be
received by you in connection with a Change in
Control of the Company or your termination of employment (whether
pursuant to the terms of this Agreement or any other plan, arrangement
or agreement with the Company, any Person whose actions result in a
Change in Control of the Company or any person affiliated with the
Company or such person) (which, together with the Agreement Payments,
shall constitute the "Total Payments") shall be treated as "parachute
payments" within the meaning of Section 280G(b)(2) of the Code, and
all "excess parachute payments" within the meaning of Section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax,
unless in the opinion of tax counsel selected by the Company's
independent auditors such other payments or benefits (in whole or in
part) do not constitute parachute payments, or such excess parachute
payments (in whole or in part) represent reasonable compensation for
services actually rendered within the meaning of Section 280G(b)(4) of
the Code in excess of the base amount within the meaning of Section
280G(b)(3) of the Code, or are otherwise not subject to the Excise
Tax; (b) the amount of the Total Payments which shall be treated as
subject to the Excise Tax shall be
11
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Mr. Ronald E. Morris
February 6, 1998
Page 12
equal to the lesser of (1) the total amount of the Total Payments or
(2) the amount of excess parachute payments within the meaning of
Section 280G(b)(1) of the Code (after applying clause (a), above); and
(c) the value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Company's independent auditors in
accordance with the principles of Sections 280G(d)(3) and (4) of the
Code.
For purposes of determining the amount of the Gross-up
Payment, you shall be deemed to (a) pay federal income taxes at the
highest marginal rate of federal income taxation for the calendar year
in which the Gross-up Payment is to be made, (b) pay the applicable
state and local income taxes at the highest marginal rate of taxation
for the calendar year in which the Gross-up Payment is to be made, net
of the maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes (determined
without regard to limitations on deductions based upon the amount of
your adjusted gross income), and (c) have otherwise allowable
deductions for federal income tax purposes at least equal to those
disallowed because of the inclusion of the Gross-up Payment in your
adjusted gross income. In the event that the Excise Tax is
subsequently determined to be less than the amount taken into account
hereunder at the time the Gross-up Payment is made, you shall
repay to the Company at the time that the amount of such reduction in
Excise Tax is finally determined, the portion of the Gross-up Payment
attributable to such reduction (plus the portion of the Gross-up
Payment attributable to the Excise Tax and federal state and local
income tax imposed on the portion of the Gross-up Payment being repaid
by you if such repayment results in a reduction in Excise Tax and/or a
federal and state and local income tax deduction), plus interest on
the amount of such repayment at the rate provided in Section
1274(b)(2)(B) of the Code. In the event that the Excise Tax is
determined to exceed the amount taken into account hereunder at the
time the Gross-up Payment is made (including by reason of any payment
the existence or amount of which cannot be determined at the time of
the Gross-up Payment), the Company shall make an additional Gross-up
Payment in respect of such excess (plus any interest payable with
respect to such excess at the rate provided in Section 1274(b)(2)(B)
of the Code) at the time that the amount of such excess is finally
determined.
(viii) The Gross-up Payment or portion thereof provided
for in paragraph (vii) above shall be paid not later than the
thirtieth (30th) day following payment of any amounts under paragraphs
(iii) and (iv) of Section 5; provided, however, that if the amount of
such Gross-up Payment or portion thereof cannot be finally determined
on or before such day, the Company
12
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Mr. Ronald E. Morris
February 6, 1998
Page 13
shall pay to you on such day an estimate, as determined in good faith
by the Company, of the minimum amount of such payments and shall pay
the remainder of such payments (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined, but in no event later than the forty-fifth
(45th) day after payment of any amounts under paragraphs (iii) and
(iv) of Section 5. In the event that the amount of the estimated
payments exceeds the amount subsequently determined to have been due,
such excess shall constitute a loan by the Company to you, payable on
the fifth (5th) day after demand by the Company (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Code).
6. Successors; Binding Agreement.
(i) The Company will seek, by written request at least five
(5) business days prior to the time a Person becomes a
Successor (as hereinafter defined), to have such Person, by agreement
in form and substance satisfactory to you, assent to the fulfillment
of the Company's obligations under this Agreement. Failure of such
Person to furnish such assent by the later of (a) three (3) business
days prior to the time such Person becomes a Successor or (b) two (2)
business days after such Person receives a written request to so
assent shall constitute Good Reason for termination by you of your
employment if a Change in Control of the Company occurs or has
occurred. For purposes of this Agreement, "Successor" shall mean any
Person that succeeds to, or has the practical ability to control
(either immediately or with the passage of time), the Company's
business directly, by merger or consolidation, or indirectly, by
purchase of the Company's Voting Securities or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by your personal legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If you should die while any amount would still be payable
to you hereunder if you had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or,
if no such designee exists, to your estate.
(iii) For purposes of this Agreement, the "Company" shall
include any subsidiaries of the Company and any corporation or other
entity which is the surviving or continuing entity in respect of any
merger, consolidation or form of business combination in which the
Company ceases to exist; provided, however, for purposes of
determining whether a Change in Control
13
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Mr. Ronald E. Morris
February 6, 1998
Page 14
has occurred herein, the term "Company" shall refer to WLR Foods, Inc.
or its successor(s).
7. Fees and Expenses; Mitigation.
(i) The Company shall reimburse you, on a current basis,
for all reasonable legal fees and related expenses incurred by you in
connection with the Agreement following a Change in Control of the
Company, including without limitation, (a) all such fees and expenses,
if any, incurred in contesting or disputing any termination of your
employment or incurred by you in seeking advice with respect to the
matters set forth in Section 8 hereof or (b) your seeking to obtain or
enforce any right or benefit provided by this Agreement, in each case,
regardless of whether or not your claim is upheld by a court of
competent jurisdiction; provided, however, you shall be required to
repay any such amounts to the Company to the extent that a court
issues a final and non-appealable order setting forth the
determination that the position taken by you was frivolous or advanced
by you in bad faith.
(ii) You shall not be required to mitigate the amount of any
payment the Company becomes obligated to make to you in connection
with this Agreement, by seeking other employment or otherwise.
8. Taxes. Subject to the provisions of Section 5(vii), all
payments to be made to you under this Agreement will be subject to
required withholding of federal, state and local income and employment
taxes.
9. Survival. The respective obligations of, and benefits
afforded to, the Company and you as provided in Sections 5, 6(ii), 7,
8, 12 and 14 of this Agreement shall survive termination of this
Agreement.
10. Notice. For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed
by United States registered mail, return receipt requested, postage
prepaid and addressed, in the case of the Company, to the address set
forth on the first page of this Agreement or, in the case of the
undersigned employee, to the address set forth below his signature,
provided that all notices to the Company shall be directed to the
attention of the Chairman of the Board or President of the Company,
with a copy to the Secretary of the Company, or to such other address
as either party may have furnished to the other in writing in
accordance
14
<PAGE>
Mr. Ronald E. Morris
February 6, 1998
Page 15
herewith, except that notice of change of address shall be effective
only upon receipt.
11. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or
discharge is agreed to in a writing signed by you and the Chairman of
the Board or President of the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or of
compliance with, any condition or provision of this Agreement to be
performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect
to the subject matter hereof have been made by either party which are
not expressly set forth in this Agreement.
12. Governing Law and Venue. The validity, interpretation,
construction and performance of this Agreement shall be governed by
the laws of the Commonwealth of Virginia. Venue for any proceeding
related to the performance or interpretation of this Agreement, or in
any way arising out of this Agreement, shall be either the Circuit
Court of Rockingham County, Virginia, or the United States District
Court for the Western District of Virginia, Harrisonburg Division.
13. Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
14. Employee's Commitment. You agree that subsequent to your
period of employment with the Company, you will not at any time
communicate or disclose to any unauthorized person, without the
written consent of the Company, any proprietary processes of the
Company or other confidential information concerning its business,
affairs, products, suppliers or customers which, if disclosed, would
have a material adverse effect upon the business or operations of the
Company, taken as a whole; it being understood, however, that the
obligations under this Section 14 shall not apply to the extent that
the aforesaid matters (a) are disclosed in circumstances where you are
legally required to do so or (b) become generally known to, and
available for use by, the public otherwise than by your wrongful act
or omission.
15. Related Agreements. To the extent that any provision of any
other agreement between the Company and you shall limit, qualify or be
inconsistent with any provision of this Agreement, then for purposes
of this Agreement, while the same shall remain in force, the provision
of such other agreement shall be deemed
15
<PAGE>
Mr. Ronald E. Morris
February 6, 1998
Page 16
to have been superseded, and to be of no force or effect, as if such
other agreement had been formally amended to the extent necessary to
accomplish such purpose. Notwithstanding the effect of the preceding
sentence, the conditional Employment Agreement, renewed on June 26,
1992 between the Company and you is hereby cancelled and shall be of
no force or effect.
If this letter correctly sets forth our agreement on the
subject matter hereof, kindly sign and return to the Company the
enclosed copy of this letter which will then constitute our agreement
on this subject.
Sincerely,
WLR Foods, Inc.
By_/s/ William H. Groseclose, Jr._
William H. Groseclose, Jr., Chair
Executive Compensation Committee
WLR Foods, Inc.
Agreed to this 6th day of February, 1998
_/s/ Ronald E. Morris_
Ronald E. Morris
16
<PAGE>
Exhibit 10.9
February 6, 1998
Mr. Walter F. Shafer, III
Vice President of Chicken Operations
Wampler Foods, Inc.
Post Office Box 7275
Broadway, Virginia 22815-7275
Dear Mr. Shafer:
WLR Foods, Inc., a Virginia corporation (the "Company"),
considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best
interests of the Company and its shareholders. In this connection,
the Company recognizes that, as is the case with many publicly held
corporations, the possibility of a Change in Control (as defined
herein) may arise and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the
departure or distraction of management personnel to the detriment of
the Company and its shareholders. Accordingly, the Board of Directors
of the Company (the "Board") has determined that appropriate steps
should be taken to reinforce and encourage the continued attention and
dedication of members of the Company's management to their assigned
duties without distraction in circumstances arising from the
possibility of a Change in Control of the Company. In particular, the
Board believes it important, should the Company or its shareholders
receive a proposal for transfer of control of the Company, that you be
able to assess and advise the Board whether such proposal would be in
the best interests of the Company and its shareholders and to take
such other action regarding such proposal as the Board might determine
to be appropriate, without being influenced by the uncertainties of
your own situation.
In order to induce you to remain in the employ of the Company,
this letter agreement ("Agreement"), which has been approved by the
Board, sets forth the severance benefits which the Company agrees will
be provided to you in the event your employment with the Company is
terminated subsequent to a Change in Control of the Company under the
circumstances described below.
1. Agreement to Provide Services; Right to Terminate.
(i)Except as otherwise provided in paragraph (ii) below, the
Company or you may terminate your employment at any time following a
Change in Control as defined herein, subject to
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 2
the Company's providing the benefits hereinafter specified in
accordance with the terms hereof.
(ii)In the event a Person (as hereinafter defined) makes an
offer which, if accepted by the Company and subsequently consummated,
would constitute a Change in Control, you agree that you will not
leave the employ of the Company (other than as a result of Disability
or upon Retirement, as such terms are hereinafter defined) and will
render the services contemplated in the recitals to this Agreement
until such Change in Control offer has been abandoned or terminated or
a Change in Control has occurred. For the purposes of this Agreement,
Retirement shall mean a termination of your employment by you on or
after you have reached age sixty-five (65) and have completed at least
five (5) years of service for the Company (including any service for a
predecessor of the Company where such prior service is recognized by
the Company for the purpose of awarding other benefits). For purposes
of this Section 1, "years of service" shall be defined as in the WLR
Profit Sharing and Salary Savings Plan.
2. Term of Agreement. This Agreement shall commence on the
date hereof and shall continue in effect until December 31, 1998;
provided, however, that commencing on January 1, 1999 and each January
1 thereafter, the term of this Agreement shall automatically be
extended for one (1) additional year unless at least ninety (90) days
prior to such January 1st date, the Company or you shall have given
notice that this Agreement shall not be extended; and provided,
further, that, notwithstanding the delivery of any such notice, this
Agreement shall continue in effect for a period of thirty-six (36)
months after a Change in Control, if such Change in Control shall have
occurred while this Agreement is in effect. Notwithstanding anything
in this Section 2 to the contrary, this Agreement shall terminate if
you or the Company terminate your employment prior to a Change in
Control of the Company.
3. Change in Control. For the purpose of this Agreement, a
"Change in Control" shall mean:
(i) The acquisition by any individual, entity or group
(within the meaning of Section 13 (d) (3) or 14 (d) (2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of twenty percent (20%) or more of
either the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or the combined voting power of
the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company
Voting Securities");
2
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 3
provided, however, that in no event may the following acquisitions
constitute a Change in Control: (a) any acquisition directly from the
Company (excluding an acquisition by virtue of the exercise of a
conversion privilege), (b) any acquisition by the Company, (c) any
acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any corporation controlled by the
Company, (d) any acquisition by any corporation pursuant to a
reorganization, merger or consolidation, if, following such
reorganization, merger or consolidation, the conditions described in
clauses (a), (b) and (c) of paragraph (iii) of this Section 3 are
satisfied, or (e) any sale or other disposition of all or
substantially all of the assets of the Company, if , following such
sale or other disposition, the conditions described in (1), (2) and
(3) of paragraph (iv) of this Section 3 are satisfied; or
(ii) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by
a vote of at least seventy-five percent (75%) of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest
(as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board;
or
(iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation, unless, in each case
following such reorganization, merger or consolidation, (a) more than
sixty percent (60%) of, respectively, the then outstanding shares of
common stock of the corporation resulting from such reorganization,
merger or consolidation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such reorganization, merger or
consolidation in substantially the same proportions as their ownership
immediately prior to such reorganization, merger or consolidation, of
the Outstanding Company Common Stock and
3
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 4
Outstanding Company Voting Securities, as the case may be, (b) no
Person (excluding the Company, any employee benefit plan (or related
trust) of the Company or a corporation resulting from such
reorganization, merger or consolidation) beneficially owns, directly
or indirectly, thirty-nine percent (39%) or more of, respectively, the
then outstanding shares of common stock of the corporation resulting
from such reorganization, merger or consolidation or the combined
voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors,
and (c) at least a majority of the members of the board of directors
of the corporation resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of the
execution of the initial agreement providing for such reorganization,
merger or consolidation; or
(iv) Approval by the shareholders of the Company of (a) a
complete liquidation or dissolution of the Company or (b) the sale or
other disposition of all or substantially all of the assets of the
Company, other than to a corporation with respect to which following
such sale or other disposition, (1) more than sixty percent (60%) of,
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately
prior to such sale or other disposition, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case
may be, (2) no Person (excluding the Company and any employee benefit
plan (or related trust) of the Company or such corporation)
beneficially owns, directly or indirectly, thirty-nine percent (39%)
or more of, respectively, the then outstanding shares of common stock
of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors and (3) at least a majority of
the members of the board of directors of such corporation were members
of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such sale or other
disposition of assets of the Company.
(v) Notwithstanding anything in the paragraphs (i) - (iv)
of this Section 3 to the contrary, no Change in Control shall be
deemed to have occurred for purposes of this Agreement
4
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 5
by virtue of any transaction which results in you, or a group of
Persons which includes you, acquiring, directly or indirectly, twenty
percent (20%) or more of the combined voting power of the Company's
Voting Securities.
4. Termination Following Change in Control. If any of the
events described in Section 3 hereof constituting a Change in Control
of the Company shall have occurred, you shall be entitled to the
benefits provided in Section 5 hereof upon the termination of your
employment with the Company within thirty-six (36) months after such
Change in Control, unless such termination is (a) because of your
death, (b) by the Company for Cause or Disability or (c) by you other
than for Good Reason (as all such capitalized terms are hereinafter
defined).
(i) Disability. Termination by the Company of your
employment based on "Disability" shall mean termination because of
your absence from your duties with the Company on a full time basis
for one hundred eighty (180) consecutive days as a result of your
incapacity due to physical or mental illness, unless within thirty
(30) days after Notice of Termination (as hereinafter defined) is
given to you following such absence, you shall have returned to the
full time performance of your duties.
(ii) Cause. Termination by the Company of your employment
for "Cause" shall mean termination upon (a) the willful and continued
failure by you to perform substantially your duties with the Company
(other than any such failure resulting from your incapacity due to
physical or mental illness) after a written demand for substantial
performance is delivered to you by the Chairman of the Board or
President of the Company which specifically identifies the manner(s)
in which such executive believes that you have not substantially
performed your duties, or (b) the willful engaging by you in illegal
conduct which is materially and demonstrably injurious to the Company.
For purposes of this paragraph (ii), no act, or failure to act, on
your part shall be considered "willful" unless done, or failed to be
done, by you in bad faith and without reasonable belief that your
action or omission was in, or not opposed to, the best interests of
the Company. Any act or failure to act based upon authority given
pursuant to a resolution duly adopted by the Board or based upon the
advice of counsel for the Company shall be conclusively presumed to be
done, or omitted to be done, by you in good faith and in the best
interests of the Company. It is also expressly understood that your
attention to matters not directly related to the business of the
Company shall not provide a basis for termination for Cause so long as
the Board has approved your engagement in such activities.
Notwithstanding the foregoing, you shall not be deemed to have been
terminated for
5
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 6
Cause unless and until there shall have been delivered to you a copy
of a resolution duly adopted by the affirmative vote of not less than
three-quarters of the entire membership of the Board at a meeting of
the Board called and held for such purpose (after reasonable notice to
you and an opportunity for you, together with your counsel, to be
heard before the Board), finding that in the good faith opinion of the
Board you were guilty of the conduct set forth above in clauses (a) or
(b) of this paragraph (ii) and specifying the particulars thereof in
detail.
(iii) Good Reason. Termination by you of your employment
for "Good Reason" shall mean termination based on:
(A) a determination by you, in your reasonable
judgment, that there has been an adverse change in your status or
position(s) as an executive officer of the Company as in effect
immediately prior to the Change in Control, including, without
limitation, any adverse change in your status or position as a result
of a diminution in your duties or responsibilities (other than, if
applicable, any such change directly attributable to the fact that the
Company is no longer publicly owned) or the assignment to you of any
duties or responsibilities which are inconsistent with such status or
position(s), or any removal of you from, or any failure to reappoint
or reelect you to, such positions(s) (except in connection with the
termination of your employment for Cause or Disability or as a result
of your death or by you other than for Good Reason);
(B) a reduction by the Company in your base salary as
in effect immediately prior to the Change in Control;
(C) the failure by the Company to continue in effect
any Plan (as hereinafter defined) in which you are participating at
the time of the Change in Control of the Company (or Plans providing
you with at least substantially similar benefits) other than as a
result of the normal expiration of any such Plan in accordance with
its terms as in effect at the time of the Change in Control, or the
taking of any action, or the failure to act, by the Company which
would adversely affect your continued participation in any of such
Plans on at least as favorable a basis to you as is the case on the
date of the Change in Control or which would materially reduce your
benefits in the future under any of such Plans or deprive you of any
material benefit enjoyed by you at the time of the Change in Control;
(D) the failure by the Company to provide and credit
you with the number of paid vacation days to which you are then
entitled in accordance with the Company's normal vacation policy as in
effect immediately prior to the Change in Control;
6
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 7
(E) the Company's requiring you to be based at any
office that is greater than thirty (30) miles from where your office
is located immediately prior to the Change in Control except for
required travel on the Company's business to an extent substantially
consistent with the business travel obligations which you undertook on
behalf of the Company prior to the Change in Control;
(F) the failure by the Company to obtain from any
Successor (as hereinafter defined) the assent to this Agreement
contemplated by Section 6 hereof;
(G) any purported termination by the Company of your
employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of paragraph (iv) below (and, if
applicable, paragraph (ii) above); and for purposes of this Agreement,
no such purported termination shall be effective; or
(H) any refusal by the Company to continue to allow
you to attend to matters or engage in activities not directly related
to the business of the Company which, prior to the Change in Control,
you were permitted by the Board to attend to or engage in.
For purposes of this Agreement, "Plan" shall mean any
compensation plan such as the Company Incentive Bonus Plan or any
employee benefit plan such as a thrift, pension, profit sharing,
medical, disability, accident, life insurance plan or a relocation
plan or policy or any other plan, program or policy of the Company
intended to benefit employees, except for the Company Restated Long-
Term Incentive Plan.
(iv) Notice of Termination. Any purported termination by
the Company or by you following a Change in Control shall be
communicated by written Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon.
(v) Date of Termination. "Date of Termination" following a
Change in Control shall mean (a) if your employment is to be
terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such thirty
(30) day period), (b) if your employment is to be terminated by the
Company for Cause or by you pursuant to Sections 4(iii)(F) or 6 hereof
or for any other Good Reason, the date specified in the Notice of
Termination, (c) if your
7
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 8
employment is to be terminated by the Company for any reason other
than Cause, the date specified in the Notice of Termination, which in
no event shall be a date earlier than ninety (90) days after the date
on which a Notice of Termination is given, unless an earlier date has
been expressly agreed to by you in writing either in advance of, or
after, receiving such Notice of Termination, or (d) if your employment
is terminated on account of your death, the day after your death. In
the case of termination of your employment by the Company for Cause,
if you have not previously expressly agreed in writing to the
termination, then within thirty (30) days after receipt by you of the
Notice of Termination with respect thereto, you may notify the Company
that a dispute exists concerning the termination, in which event the
Date of Termination shall be the date set either by mutual written
agreement of the parties or by such court having the matter before it.
During the pendency of any such dispute, the Company will continue to
pay you your full compensation in effect just prior to the time the
Notice of Termination is given and until the dispute is resolved.
However, if such court issues a final and non-appealable order finding
that the Company had Cause to terminate you then you must return all
compensation paid to you after the Date of Termination specified in
the Notice of Termination previously received by you.
5. Compensation Upon Termination or During Disability; Other
Agreements.
(i) During any period following a Change in Control of the
Company that you fail to perform your duties as a result of incapacity
due to physical or mental illness, you shall continue to receive your
base salary at the rate then in effect and any benefits or awards
under any Plans shall continue to accrue during such period, to the
extent not inconsistent with such Plans, until your employment is
terminated pursuant to and in accordance with paragraphs 4(iv) - 4(v)
hereof. Thereafter, your benefits shall be determined in accordance
with the Plans then in effect.
(ii) If your employment is terminated for Cause following a
Change in Control of the Company, the Company shall pay to you your
base salary through the Date of Termination at the rate in effect just
prior to the time a Notice of Termination is given plus any benefits
or awards (including both the cash and stock components) which
pursuant to the terms of any Plans have been earned or become payable,
but which have not yet been paid to you. Thereupon the Company shall
have no further obligations to you under this Agreement.
8
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 9
(iii) Subject to Section 8 hereof, if, within thirty-six
(36) months after a Change in Control of the Company has occurred,
your employment by the Company is terminated other than on account of
your death and is terminated (a) by the Company other than for Cause
or Disability or (b) by you for Good Reason, then the Company shall
pay to you, no later than the fifth (5th) day following the Date of
Termination, without regard to any contrary provisions of any Plan,
the following:
(A) your base salary through the Date of Termination
at the rate in effect just prior to the time a Notice of Termination
is given plus any benefits or awards (including both the cash and
stock components) which pursuant to the terms of any Plans have been
earned or become payable, but which have not yet been paid to you
(including amounts which previously had been deferred at your
request);
(B) an amount in cash equal to three times the sum of
(i) the higher of (a) your annual base salary on the Date of
Termination or (b) your annual base salary in effect immediately prior
to the Change in Control plus (ii) an amount equal to the average of
the bonuses awarded to you in each of the three previous years.
For the purposes of this Agreement, the term "base salary"
shall include any amounts deducted by the Company with respect to you
or for your account pursuant to Sections 125 and 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code").
(iv) If, within thirty-six (36) months after a Change in
Control of the Company has occurred, your employment by the Company is
terminated for any reason other than retirement, the Company shall pay
to you, on the date specified below, an amount ("Spread") in cash
equal to the Termination Fair Market Value (as hereinafter defined)
less the exercise price of all options which were granted to you
pursuant to the Company's Restated Long-Term Incentive Plan or any
Plan succeeding thereto, and which shall not become exercisable prior
to (a) the end of the one (1) year period immediately following the
Date of Termination if your employment is terminated on account of
your death, or (b) the end of the third (3rd) month following the Date
of Termination if your employment is terminated for any reason other
than death. The Company shall make such payment upon the fifth (5th)
day following such Date of Termination.
For the purposes of this Agreement, the "Termination Fair
Market Value" shall be the higher of (a) the highest price of the
Company's stock as quoted on the NASDAQ, or any other
9
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 10
exchange complying with the requirements of the Securities and
Exchange Act of 1934, as amended, within the period beginning ninety
(90) days prior to the Date of Termination and ending upon such Date
of Termination, and (b) the highest price of the Company's stock as
quoted on the NASDAQ, or any other exchange complying with the
requirements of the Securities and Exchange Act of 1934, as amended,
within the period beginning ninety (90) days prior to a Change of
Control and ending upon the date of a Change of Control.
(v) If, within thirty-six (36) months after a Change in
Control of the Company has occurred, your employment by the Company is
terminated (a) by the Company other than for Cause or Disability, or
(b) by you for Good Reason, then the Company shall maintain in full
force and effect, for the continued benefit of you and your dependents
for a period terminating on the earliest of (a) three (3) years after
the Date of Termination or (b) the commencement date of equivalent
benefits from a new employer, insured and self-insured employee
welfare benefit Plans in which you were entitled to participate
immediately prior to the Date of Termination, provided that your
continued participation is possible under the general terms and
provisions of such Plans (and any applicable funding media) and you
continue to pay an amount equal to your regular contribution under
such Plans for such participation. If three (3) years after the Date
of Termination you have not previously received, nor are then
receiving, equivalent benefits from a new employer, the Company shall
offer you continuation coverage under COBRA as prescribed under
Section 4980B of the Code. At the expiration of such continuation
coverage (or, if COBRA continuation coverage is not applicable to the
Plan, then upon the expiration of the three (3) year period beginning
on the Termination Date), the Company shall arrange, at its sole cost
and expense, to enable you to convert you and your dependents'
coverage under such plans to individual policies and programs upon the
same terms as employees of the Company may apply for such conversions.
In the event that your participation in any such Plan is barred, the
Company, at its sole cost and expense, shall arrange to have issued
for the benefit of you and your dependents individual policies of
insurance providing benefits substantially similar (on an after-tax
basis) to those which you otherwise would have been entitled to
receive under such Plans pursuant to this paragraph (v) or, if such
insurance is not available at a reasonable cost to the Company, the
Company shall otherwise provide you and your dependents with
equivalent benefits (on an after-tax basis). You shall not be
required to pay any premiums or other charges in an amount greater
than that which you would have paid in order to participate in such
Plans.
10
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 11
(vi) Except as specifically provided in paragraph (v) above,
the amount of any payment provided for in this Section 5 shall not be
reduced, offset or subject to recovery by the Company by reason of any
compensation earned by you as the result of employment by another
employer after the Date of Termination, or otherwise.
(vii) In the event that you become entitled to the payments
provided by paragraphs (iii) and (iv) of Section 5(iii) hereof (the
"Agreement Payments"), if any of the Agreement Payments will be
subject to the tax (the "Excise Tax") imposed by Section 4999 of the
Code (or any similar tax that may hereafter be imposed), the Company
shall pay to you at the time specified in paragraph (viii) below an
additional amount (the "Gross-up Payment") such that the net amount
retained by you, after deduction of any Excise Tax on the Total
Payments (as hereinafter defined) and any federal, state and local
income tax and Excise Tax upon the Gross-up Payment provided for by
this paragraph (vii), but before deduction for any federal, state or
local income tax on the Agreement Payments, shall be equal to the sum
of (a) the Total Payments and (b) an amount equal to the product of
any deductions disallowed because of the inclusion of the Gross-up
Payment in your adjusted gross income and the highest applicable
marginal rate of federal income taxation for the calendar year in
which the Gross-up Payment is to be made.
For purposes of determining whether any of the Agreement
Payments will be subject to the Excise Tax and the amount of such
Excise Tax, (a) any other payments or benefits received or to be
received by you in connection with a Change in Control of the Company
or your termination of employment (whether pursuant to the terms of
this Agreement or any other plan, arrangement or agreement with the
Company, any Person whose actions result in a Change in Control of the
Company or any person affiliated with the Company or such person)
(which, together with the Agreement Payments, shall constitute the
"Total Payments") shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the Code, and all "excess parachute
payments" within the meaning of Section 280G(b)(1) of the Code shall
be treated as subject to the Excise Tax, unless in the opinion of tax
counsel selected by the Company's independent auditors such other
payments or benefits (in whole or in part) do not constitute parachute
payments, or such excess parachute payments (in whole or in part)
represent reasonable compensation for services actually rendered
within the meaning of Section 280G(b)(4) of the Code in excess of the
base amount within the meaning of Section 280G(b)(3) of the Code, or
are otherwise not subject to the Excise Tax; (b) the amount of the
Total Payments which shall be treated as subject to the Excise Tax
shall be
11
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 12
equal to the lesser of (1) the total amount of the Total Payments or
(2) the amount of excess parachute payments within the meaning of
Section 280G(b)(1) of the Code (after applying clause (a), above); and
(c) the value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Company's independent auditors in
accordance with the principles of Sections 280G(d)(3) and (4) of the
Code.
For purposes of determining the amount of the Gross-up
Payment, you shall be deemed to (a) pay federal income taxes at the
highest marginal rate of federal income taxation for the calendar year
in which the Gross-up Payment is to be made, (b) pay the applicable
state and local income taxes at the highest marginal rate of taxation
for the calendar year in which the Gross-up Payment is to be made, net
of the maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes (determined
without regard to limitations on deductions based upon the amount of
your adjusted gross income), and (c) have otherwise allowable
deductions for federal income tax purposes at least equal to those
disallowed because of the inclusion of the Gross-up Payment in your
adjusted gross income. In the event that the Excise Tax is
subsequently determined to be less than the amount taken into account
hereunder at the time the Gross-up Payment is made, you shall repay to
the Company at the time that the amount of such reduction in Excise
Tax is finally determined, the portion of the Gross-up Payment
attributable to such reduction (plus the portion of the Gross-up
Payment attributable to the Excise Tax and federal state and local
income tax imposed on the portion of the Gross-up Payment being repaid
by you if such repayment results in a reduction in Excise Tax and/or a
federal and state and local income tax deduction), plus interest on
the amount of such repayment at the rate provided in Section
1274(b)(2)(B) of the Code. In the event that the Excise Tax is
determined to exceed the amount taken into account hereunder at the
time the Gross-up Payment is made (including by reason of any payment
the existence or amount of which cannot be determined at the time of
the Gross-up Payment), the Company shall make an additional Gross-up
Payment in respect of such excess (plus any interest payable with
respect to such excess at the rate provided in Section 1274(b)(2)(B)
of the Code) at the time that the amount of such excess is finally
determined.
(viii) The Gross-up Payment or portion thereof provided for
in paragraph (vii) above shall be paid not later than the thirtieth
(30th) day following payment of any amounts under paragraphs (iii) and
(iv) of Section 5; provided, however, that if the amount of such
Gross-up Payment or portion thereof cannot be finally determined on or
before such day, the Company shall
12
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 13
pay to you on such day an estimate, as determined in good faith by the
Company, of the minimum amount of such payments and shall pay the
remainder of such payments (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined, but in no event later than the forty-fifth
(45th) day after payment of any amounts under paragraphs (iii) and
(iv) of Section 5. In the event that the amount of the estimated
payments exceeds the amount subsequently determined to have been due,
such excess shall constitute a loan by the Company to you, payable on
the fifth (5th) day after demand by the Company (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Code).
6. Successors; Binding Agreement.
(i) The Company will seek, by written request at least five
(5) business days prior to the time a Person becomes a Successor (as
hereinafter defined), to have such Person, by agreement in form and
substance satisfactory to you, assent to the fulfillment of the
Company's obligations under this Agreement. Failure of such Person to
furnish such assent by the later of (a) three (3) business days prior
to the time such Person becomes a Successor or (b) two (2) business
days after such Person receives a written request to so assent shall
constitute Good Reason for termination by you of your employment if a
Change in Control of the Company occurs or has occurred. For purposes
of this Agreement, "Successor" shall mean any Person that succeeds to,
or has the practical ability to control (either immediately or with
the passage of time), the Company's business directly, by merger or
consolidation, or indirectly, by purchase of the Company's Voting
Securities or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by your personal legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If you should die while any amount would still be payable
to you hereunder if you had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or,
if no such designee exists, to your estate.
(iii) For purposes of this Agreement, the "Company" shall
include any subsidiaries of the Company and any corporation or other
entity which is the surviving or continuing entity in respect of any
merger, consolidation or form of business combination in which the
Company ceases to exist; provided, however, for purposes of
determining whether a Change in Control
13
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 14
has occurred herein, the term "Company" shall refer to WLR Foods, Inc.
or its successor(s).
7. Fees and Expenses; Mitigation.
(i) The Company shall reimburse you, on a current basis,
for all reasonable legal fees and related expenses incurred by you in
connection with the Agreement following a Change in Control of the
Company, including without limitation, (a) all such fees and expenses,
if any, incurred in contesting or disputing any termination of your
employment or incurred by you in seeking advice with respect to the
matters set forth in Section 8 hereof or (b) your seeking to obtain or
enforce any right or benefit provided by this Agreement, in each case,
regardless of whether or not your claim is upheld by a court of
competent jurisdiction; provided, however, you shall be required to
repay any such amounts to the Company to the extent that a court
issues a final and non-appealable order setting forth the
determination that the position taken by you was frivolous or advanced
by you in bad faith.
(ii) You shall not be required to mitigate the amount of any
payment the Company becomes obligated to make to you in connection
with this Agreement, by seeking other employment or otherwise.
8. Taxes. Subject to the provisions of Section 5(vii), all
payments to be made to you under this Agreement will be subject to
required withholding of federal, state and local income and employment
taxes.
9. Survival. The respective obligations of, and benefits
afforded to, the Company and you as provided in Sections 5, 6(ii), 7,
8, 12 and 14 of this Agreement shall survive termination of this
Agreement.
10. Notice. For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed
by United States registered mail, return receipt requested, postage
prepaid and addressed, in the case of the Company, to the address set
forth on the first page of this Agreement or, in the case of the
undersigned employee, to the address set forth below his signature,
provided that all notices to the Company shall be directed to the
attention of the Chairman of the Board or President of the Company,
with a copy to the Secretary of the Company, or to such other address
as either party may have furnished to the other in writing in
accordance
14
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 15
herewith, except that notice of change of address shall be effective
only upon receipt.
11. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or
discharge is agreed to in a writing signed by you and the Chairman of
the Board or President of the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or of
compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this
Agreement.
12. Governing Law and Venue. The validity, interpretation,
construction and performance of this Agreement shall be governed by
the laws of the Commonwealth of Virginia. Venue for any proceeding
related to the performance or interpretation of this Agreement, or in
any way arising out of this Agreement, shall be either the Circuit
Court of Rockingham County, Virginia, or the United States District
Court for the Western District of Virginia, Harrisonburg Division.
13. Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
14. Employee's Commitment. You agree that subsequent to your
period of employment with the Company, you will not at any time
communicate or disclose to any unauthorized person, without the
written consent of the Company, any proprietary processes of the
Company or other confidential information concerning its business,
affairs, products, suppliers or customers which, if disclosed, would
have a material adverse effect upon the business or operations of the
Company, taken as a whole; it being understood, however, that the
obligations under this Section 14 shall not apply to the extent that
the aforesaid matters (a) are disclosed in circumstances where you are
legally required to do so or (b) become generally known to, and
available for use by, the public otherwise than by your wrongful act
or omission.
15. Related Agreements. To the extent that any provision of any
other agreement between the Company and you shall limit, qualify or be
inconsistent with any provision of this Agreement, then for purposes
of this Agreement, while the same shall remain in force, the provision
of such other agreement shall be deemed
15
<PAGE>
Mr. Walter F. Shafer, III
February 6, 1998
Page 16
to have been superseded, and to be of no force or effect, as if such
other agreement had been formally amended to the extent necessary to
accomplish such purpose. Notwithstanding the effect of the preceding
sentence, the conditional Employment Agreement, renewed on June 26,
1992 between the Company and you is hereby cancelled and shall be of
no force or effect.
If this letter correctly sets forth our agreement on the
subject matter hereof, kindly sign and return to the Company the
enclosed copy of this letter which will then constitute our agreement
on this subject.
Sincerely,
WLR Foods, Inc.
By_/s/ William H. Groseclose, Jr._
William H. Groseclose, Jr., Chair
Executive Compensation Committee
WLR Foods, Inc.
Agreed to this 6th day of February, 1998
_/s/ Walter F. shafer, III_
Walter F. Shafer, III
16
<PAGE>
<TABLE>
Exhibit 13.1
Financial Highlights from Registrant's Annual Report to Shareholders
<CAPTION>
WLR FOODS, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS
Dollars in thousands, except
per share data
June 27, June 28, June 29, July 1, July 2,
Fiscal year ended: 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net sales $945,967 $994,591 $978,258 $890,815 $709,703
Cost of sales 876,287 948,060 889,904 776,945 625,180
-------- -------- -------- -------- --------
Gross profit 69,680 46,531 88,354 113,870 84,523
Selling, general and
administrative expenses 91,745 89,657 91,167 84,877 57,373
-------- -------- -------- -------- ------
Operating income (loss) (22,065) (43,126) (2,813) 28,993 27,150
Interest expense 22,539 12,804 8,922 6,386 4,816
Other (income) expense, net (106) (1,792) 129 (311) (342)
-------- -------- -------- -------- --------
Total other (income) expense, net 22,433 11,012 9,051 6,075 4,474
-------- -------- -------- -------- --------
Earnings (loss) before income
taxes and minority interest (44,498) (54,138) (11,864) 22,918 22,676
Income tax expense(benefit) (16,352) (19,577) (4,381) 8,614 8,446
Minority interest 66 47 32 55 38
-------- -------- -------- -------- --------
Net earnings (loss) from
continuing operations (28,212) (34,608) (7,515) 14,249 14,192
Income from discontinued operations,
net of tax 2,858 2,425 2,829 1,884 2,359
Net earnings (loss) (25,354) (32,183) (4,686) 16,133 16,551
Less preferred stock dividends - - - - -
-------- -------- -------- -------- --------
Net earnings (loss) available to
common shareholders ($25,354) ($32,183) ($4,686) $16,133 $16,551
========= ========= ======== ======= =======
PER COMMON SHARE
Basic earnings (loss),
continuing operations ($1.72) ($1.99) ($0.42) $0.79 $0.85
Basic earnings,
discontinued operations 0.17 0.14 0.16 0.10 0.14
-------- -------- -------- -------- --------
Total basic earnings (loss) per
common share (1.55) (1.85) (0.26) 0.89 0.99
Dilutive earnings (loss),
continuing operations (1.72) (1.99) (0.42) 0.79 0.85
Dilutive earnings,
discontinued operations 0.17 0.14 0.16 0.10 0.14
-------- -------- -------- -------- --------
Total dilutive earnings (loss)
per common share ($1.55) ($1.85) ($0.26) $0.89 $0.99
Cash dividends declared
(excluding Cassco pooling) - 0.12 0.24 0.22 0.21
Book value 6.33 7.89 10.00 10.47 9.45
Year-end stock price 7.00 8.50 14.00 14.38 17.00
1
</TABLE>
<PAGE>
<TABLE>
WLR FOODS, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS - Continued
Dollars in thousands, except
per share data
<CAPTION>
June 27, June 28, June 29, July 1, July 2,
Fiscal year ended: 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $118,695 ($31,397) $144,621 $120,562 $ 69,989
Property, plant and equipment, net 153,702 159,426 176,691 174,163 139,854
Total assets 381,742 416,728 451,121 372,525 283,051
Long-term debt 189,225 5,040 138,510 106,481 46,368
Common stock subject to repurchase - 4,438 17,750 17,750 -
Preferred shareholders' equity <F1> - - - - -
Common shareholders' equity $103,891 $126,558 $159,010 $163,344 $156,157
======== ======== ======== ======== ========
ANALYTICAL & OTHER INFORMATION
Current ratio (compared to 1) 2.40 0.89 2.18 2.67 2.02
Total debt/total capitalization <F2> 65.0% 61.2% 55.1% 44.7% 28.4%
Return on beginning total equity NMF NMF NMF 10.3% 11.6%
Capital expenditures $22,149 $11,245 $18,771 $17,251 $19,186
Depreciation expense 25,901 28,088 28,243 24,817 21,333
Amortization expense 2,420 500 742 598 520
Interest expense 22,635 13,143 9,359 6,666 4,989
Cash dividends declared:
Common stock - 2,078 4,233 4,073 3,513
Preferred stock - - - - -
Market capitalization of common
stock at year end $114,800 $141,075 $247,547 $248,654 $280,738
======== ======== ======== ======== ========
All information reflects the stock dividends issued in May 1997 and August 1997, and the
three-for-two stock split in the form of a 50% stock dividend declared on February 28,
1995.
<FN>
<F1> In March 1993, the Company repurchased all the preferred stock issued in January 1992.
<F2> Common stock subject to repurchase classified as debt.
</FN>
2
</TABLE>
<PAGE>
<TABLE>
WLR FOODS, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS - Continued
Dollars in thousands, except
per share data
<CAPTION>
July 3, June 27, June 29, June 30, July 1,
Fiscal year ended: 1993 1992 1991 1990 1989
<S> -------- -------- -------- -------- --------
<C> <C> <C> <C> <C>
OPERATIONS
Net sales $603,634 $503,877 $491,618 $483,219 $454,519
Cost of sales 529,791 449,785 429,430 410,546 384,142
-------- -------- -------- -------- --------
Gross profit 73,843 54,092 62,188 72,673 70,377
Selling, general and administrative
expenses 51,141 44,794 46,733 45,465 41,839
-------- -------- -------- -------- --------
Operating income (loss) 22,702 9,298 15,455 27,208 28,538
Interest expense 3,660 2,523 619 505 1,565
Other (income) expense, net (494) (142) (347) (651) 243
-------- -------- -------- -------- --------
Total other (income) expense, net 3,166 2,381 272 (146) 1,808
-------- -------- -------- -------- --------
Earnings (loss) before income taxes
and minority interest 19,536 6,917 15,183 27,354 26,730
Income tax expense (benefit) 6,850 2,587 5,741 10,546 10,520
Minority interest 43 25 33 34 (206)
-------- -------- -------- -------- --------
Net earnings (loss) from continuing
operations 12,643 4,305 9,409 16,774 16,416
Income from discontinued operations,
net of tax 1,964 1,591 1,272 621 812
Net earnings (loss) 14,607 5,896 10,681 17,395 17,228
Less preferred stock dividends 1,389 982 - - -
------- ------- ------- ------- -------
Net earnings (loss) available to
common shareholders $13,218 $4,914 $10,681 $17,395 $17,228
======= ====== ======= ======= =======
PER COMMON SHARE
Basic earnings (loss), continuing
operations $0.79 $0.23 $0.59 $1.06 $1.04
Basic earnings (loss), discontinued
operations 0.14 0.11 0.08 0.04 0.05
------- -------- -------- -------- --------
Total basic earnings (loss) per
common share 0.93 0.34 0.67 1.10 1.09
Dilutive earnings (loss),
continuing operations 0.78 0.23 0.59 1.05 1.04
Dilutive earnings (loss),
discontinued operations 0.14 0.11 0.08 0.04 0.05
-------- -------- -------- -------- --------
Total dilutive earnings (loss) per
common share $0.92 $0.34 $0.67 $1.09 $1.09
Cash dividends declared (excluding
Cassco pooling) 0.21 0.21 0.21 0.19 0.18
Book value 8.66 6.44 7.33 6.86 5.86
Year-end stock price 11.33 9.67 12.00 12.33 11.87
3
</TABLE>
<PAGE>
<TABLE>
WLR FOODS, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS - Continued
Dollars in thousands, except
per share data
<CAPTION>
July 3, June 27, June 29, June 30, July 1,
Fiscal year ended: 1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $ 57,509 $ 40,337 $49,532 $46,039 $42,914
Property, plant and equipment, net 140,540 113,017 88,807 71,414 59,687
Total assets 265,626 207,736 175,329 157,763 142,832
Long-term debt 52,253 38,148 18,678 6,402 7,858
Common stock subject to repurchase - - - - -
Preferred shareholders' equity <F1> - 29,507 - - -
Common shareholders' equity $142,255 $81,881 $115,625 $108,258 $91,455
======== ======= ======== ======== =======
ANALYTICAL & OTHER INFORMATION
Current ratio (compared to 1) 1.92 1.80 2.42 2.20 2.12
Total debt/total capitalization <F2> 33.5% 32.0% 16.1% 8.5% 13.9%
Return on beginning total equity 13.1% 5.1% 9.9% 19.0% 22.3%
Capital expenditures $31,766 $36,107 $29,471 $20,360 $16,001
Depreciation expense 18,115 14,041 11,544 9,932 8,595
Amortization expense 445 168 - - -
Interest expense 3,816 2,755 928 925 2,037
Cash dividends declared:
Common stock 3,124 2,854 3,314 2,948 2,643
Preferred stock 1,389 982 - - -
Market capitalization of common
stock at year end $186,168 $122,942 $189,378 $194,638 $185,432
======== ======== ======== ======== ========
All information reflects the stock dividends issued in May 1997 and August 1997, and the
three-for-two stock split in the form of a 50% stock dividend declared on February 28,
1995.
<FN>
<F1> In March 1993, the Company repurchased all the preferred stock issued in January 1992.
<F2> Common stock subject to repurchase classified as debt.
</FN>
4
</TABLE>
<PAGE>
Exhibit 13.2
Management s Discussion and Analysis of Financial Condition
and Results of Operations
GENERAL
Beginning in fiscal 1996, results of operations of WLR Foods,
Inc. (WLR Foods or the Company) were adversely impacted by
significantly higher grain costs in both its chicken and turkey
operations. The average delivered costs paid for corn and soybean
meal were approximately 46% and 23% higher, respectively, than the
amounts paid in fiscal 1995. In fiscal 1997, overall grain costs
continued to rise as soybean meal prices escalated an additional 26%
over the prior year, while corn prices fell only 6% from the already
high 1996 levels.
In fiscal 1998, grain prices began to improve, particularly in
the second half of the year. The average delivered prices for corn
and soybean meal declined 19% and 15%, respectively, over the prior
year, but were still 12% and 31%, respectively, above the levels seen
in fiscal 1995. Translated into dollars, even though prices paid in
fiscal 1998 were lower than in fiscal 1997, the total costs to the
Company were still $41 million over the cost levels experienced in
fiscal 1995.
Unfortunately, excess supplies of poultry and competing meats
prevented the Company from raising its prices enough to cover the
increased costs of grains. The problem was most difficult in the
turkey industry, where excess supplies have resulted in significantly
reduced sales prices. In fiscal 1998, turkey sales prices were
approximately 4% below the fiscal 1997 levels, which were already 1%
below the prices realized one year earlier. In terms of a dollar
impact to the Company, 1998's turkey sales prices were approximately
$18 million less than in fiscal 1997.
Current costs for corn and soybean meal have returned to normal
or lower than normal levels, as the 1998 crop season appears to have
been a success. Additionally, we remain cautiously optimistic that
the supply and demand imbalance within the turkey industry is
improving, as the number of eggs set in hatcheries and the number of
poults placed in growout facilities have been declining during
calendar year 1998. Since our fiscal year end, turkey commodity
prices have begun to improve, but uncertainties have surfaced in
Russia, an important export market for both chicken and turkey, due to
the collapse of their currency.
A significant undertaking for WLR Foods in the next fiscal year
is the conversion of its Marshville, North Carolina turkey complex to
chicken, which will take place during the first three quarters of
fiscal 1999. The result of the conversion will be a reduction in the
amount of commodity turkey product that the Company has available for
sale, which should increase its overall turkey pricing in the
marketplace. Additionally, the added chicken capacity will replace the
volume of the Goldsboro complex, which was sold in August, 1998.
1
<PAGE>
After the conversion is complete, the Company's mix of product will be
approximately 58% chicken and 42% turkey, in terms of dressed pounds.
RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997:
Net sales from continuing operations were $946.0 million, a decrease
of $48.6 million, or 4.9%, as compared to net sales from continuing
operations for fiscal 1997 of $994.6 million. The decrease was
primarily due to a $33 million decline in turkey sales to
approximately $457 million. The decline in turkey was due to a 2.8%
decrease in pounds sold and a 3.7% decrease in prices. Chicken sales
decreased $7 million to approximately $393 million as a 0.8% increase
in pounds was more than offset by a 4.3% decrease in prices.
Cost of sales on continuing operations for fiscal 1998 was $876.3
million, a decrease of $71.8 million, or 7.6%, as compared to $948.1
million for fiscal 1997. The decrease was primarily attributable to
$54 million in lower costs of corn and soybean meal consumed by birds
processed at the Company's facilities. Additionally, the net decrease
in pounds sold accounted for approximately $10 million of the decrease
in cost of sales for fiscal 1998.
Gross profit on continuing operations for fiscal 1998 was $69.7
million, an increase of $23.2 million, or 49.9%, as compared to $46.5
million for fiscal 1997. The vast majority of the increase was during
the last fiscal quarter of the year, when gross profits increased
$16.1 million over the same quarter in 1997. Gross profit as a
percentage of sales was 7.4% for fiscal 1998, as compared to 4.7% for
fiscal 1997. The increase in gross profit was primarily the result of
lower corn and soybean meal ingredient costs. Partially offsetting
the reduced grain costs were lower realized prices on chicken and
turkey products.
Selling, general and administrative expenses on continuing
operations for fiscal 1998 were $91.7 million, an increase of $2.0
million, or 2.2%, as compared to $89.7 million for fiscal 1997. This
was primarily the result of one-time costs for the debt refinancing
during the third quarter of fiscal 1998.
Interest expense from continuing operations was $22.5 million for
fiscal 1998, an increase of $9.7 million over $12.8 million for fiscal
1997. This increase was attributable to higher borrowings and
interest rates.
The effective tax benefit rate on continuing operations in 1998
was 36.7% versus 36.2% in fiscal 1997.
The net loss for fiscal 1998 on continuing operations was $28.2
million (or $1.72 per share), a decrease of $6.4 million as compared
to the net loss of $34.6 million ($1.99 per share) for fiscal 1997.
Fiscal 1997 Compared to Fiscal 1996:
Net sales from continuing operations were $994.6 million, an
increase of $16.3 million, or 1.7%, as compared to net sales from
2
<PAGE>
continuing operations of $978.3 million in fiscal 1996. This increase
was attributable to a $17 million increase in chicken sales to
approximately $400 million. The increase in chicken sales was due to
a 3% increase in pounds sold (the Goldsboro facility was in operation
for a full year in 1997) and a 1% increase in prices. Turkey sales
increased $5 million to approximately $490 million as a 2% increase in
pounds sold offset a 1% decrease in prices.
Cost of sales on continuing operations for fiscal 1997 was $948.1
million, an increase of $58.2 million, or 6.5%, as compared to $889.9
million for fiscal 1996. This increase was primarily attributable to
a $37 million increase in the cost of corn and soybean meal consumed
by birds processed at the Company's facilities; an increase in total
pounds sold; higher growout costs due to the substitution of wheat for
corn in feed early in fiscal 1997 and disease problems, particularly
in the North Carolina turkey operations.
Gross profit from continuing operations for fiscal 1997 was $46.5
million, a decrease of $41.9 million, or 47.4%, as compared to $88.4
million for fiscal 1996. Gross profit as a percentage of sales was
4.7% for fiscal 1997, as compared to 9.0% for fiscal 1996. The
decrease in gross profit was primarily the result of higher grain
costs and operating inefficiencies attributable to the effects of
disease and a change in feed rations necessitated by the scarcity of
corn in the fall of 1996. These factors were partially offset by
approximately $15 million annual cost savings from the Charlotte,
North Carolina plant closing, the move to a single operating shift in
the North Carolina turkey processing operation, staff reductions and
savings from centralized purchasing.
Selling, general and administrative expenses from continuing
operations for fiscal 1997 were $89.7 million, a decrease of $1.5
million, or 1.6% as compared to $91.2 million for fiscal 1996. This
was the result of a $1.5 million reduction in general and
administrative expense initiated near the end of fiscal 1996.
Interest expense on continuing operations for fiscal 1997 was
$12.8 million, an increase of $3.9 million over $8.9 million for
fiscal 1996. This increase was attributable primarily to higher
borrowing levels and slightly higher interest rates.
The effective tax benefit rate on continuing operations in 1997
was 36.2% versus 36.9% in 1996.
The net loss from continuing operations for fiscal 1997 was $34.6
million (or $1.99 per share), an increase of $27.1 million as compared
to a net loss of $7.5 million ($0.42 per share) for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital resources historically have included
funds from operations, the public offering of common stock, bank lines
of credit and other borrowings. The primary uses of cash have been to
provide funds for operations, make expenditures for capital
3
<PAGE>
improvements, equipment and facilities, repay indebtedness, pay cash
dividends to shareholders, repurchase shares of common stock and make
acquisitions.
On June 27, 1998, the Company had net working capital of $118.7
million, compared to a net working capital deficit of $31.4 million on
June 28, 1997. The net working capital deficit as of June 28, 1997
was due to the reclassification of $182 million of long-term debt to
current liabilities. This reclassification was required because the
Company was not in compliance with the minimum tangible net worth and
the current ratio covenants set forth in its credit agreements. The
Company fully refinanced its debt obligations as of February 25, 1998
and has remained in compliance with all financial covenants under the
terms of the new agreement.
On June 27, 1998, inventories were $128.0 million, a decrease of
$37.6 million, or 22.7 %, as compared to $165.6 million on June 28,
1997. This decrease resulted primarily from lower costs of live
chicken and turkey inventories, along with decreased levels of turkey
finished goods inventories.
Operating activities generated cash of $30.1 million in fiscal
1998, and $10.3 million in fiscal 1997 and used $39.4 million in
fiscal 1996. The increase in cash generated in fiscal 1998, as
compared to fiscal 1997, resulted primarily from the reduction of
inventories, but was partially offset by a decrease in accounts
payable. The increase in cash generated in fiscal 1997, as compared
to fiscal 1996, resulted primarily from the reduction of accounts
receivable, inventories and other assets partially offset by the
operating loss.
Capital expenditures were $22.1 million in fiscal 1998. The
Company also leased equipment totaling $3.0 million using operating
leases. Capital expenditures in fiscal 1997 totaled $11.2 million.
Capital expenditures in fiscal years 1998 and 1997 were generally for
normal replacements and upgrades of existing assets, except for $3.4
million in expenditures in fiscal 1998 to begin the conversion of the
Marshville turkey complex to chicken. The Company expects capital
expenditures in fiscal 1999 to range from $22 to $28 million to cover
normal replacement and upgrades of existing facilities, and the
completion of the Marshville conversion process, which is estimated to
be approximately $8 million.
Total debt to total capital at June 27, 1998 was 65.0%, an
increase from 61.2% at June 28, 1997. In fiscal 1997, this
calculation included $4.4 million of common stock subject to
repurchase as debt. Under the terms of the private transaction, the
final repurchase for $4.4 million was completed shortly after the
close of the 1997 fiscal year. This eliminated the Company's
obligation to repurchase common stock. The Company targets a total
debt to total capital ratio of 40% to 45%.
Subsequent to the close of the 1998 fiscal year, the Company
completed the sales of its Goldsboro, North Carolina chicken complex
and its Cassco Ice and Cold Storage, Inc. subsidiary. The net
proceeds from these sales exceeded $91 million and were used to reduce
4
<PAGE>
the Company's long term debt. These proceeds, along with cash flows
from operations, have reduced the Company s total debt to total
capital to less than 43% as of August 31, 1998.
YEAR 2000 MATTERS
The Company is aware of the issues associated with the "Year
2000" problem as the millennium approaches. Due to the recent
implementation and ongoing upgrading of most of the Company's
information systems, management does not expect that costs related to
the Year 2000 issue will have a material impact on its financial
condition or results of operations.
ACCOUNTING MATTERS
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-
purpose financial statements. SFAS 131 requires that companies report
certain information about operating segments in complete sets of
financial statements and in condensed financial statements of interim
periods issued to shareholders. Both SFAS Nos. 130 and 131 are
effective for fiscal years beginning after December 15, 1997.
The Company does not believe the adoption of these Statements of
Financial Accounting Standards will have a significant impact on the
Company's financial condition or results of operations.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-1. "Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use." SOP 98-1 is effective for fiscal years beginning after December
15, 1998 and provides guidance on accounting for the described costs.
SOP 98-1 should not have a material impact on our financial position,
results of operations or cash flows when adopted.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 is effective
for us in our fiscal 2000. We have not yet determined the impact of
adoption on our financial statements, however, we do not expect the
impact to be material.
This report contains certain forward-looking statements which are
based on management's current views and assumptions, and involve risks
and uncertainties that could significantly affect expected results.
WLR Foods' actual results may differ materially from those in the
forward-looking statements. For example: operating results may be
affected by external factors such as actions of competitors, changes
in laws and regulations, including changes in governmental
5
<PAGE>
interpretations of regulations and changes in accounting standards,
customer demand and fluctuations in the cost and availability of feed
ingredients. Stockholders may review reports filed with the
Securities and Exchange Commission for a more detailed description of
the uncertainties and other factors that could cause actual results to
differ materially from such forward-looking statements.
6
<PAGE>
Exhibit 13.3
<TABLE>
Consolidated Financial Statements and Notes to Consolidated Financial Statements
<CAPTION>
WLR Foods, Inc. and Subsidiaries
Consolidated Statements of Operations
Dollars in thousands, except per share data
Fiscal years ended June 27, 1998, June 28, 1997, 1998 1997 1996
and June 29, 1996
------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Net sales (Note 11) $945,967 $994,591 $978,258
Cost of sales (Note 11) 876,287 948,060 889,904
-------- -------- --------
Gross profit 69,680 46,531 88,354
Selling, general and administrative expenses 91,745 89,657 91,167
-------- -------- --------
Operating loss (22,065) (43,126) (2,813)
Other expense:
Interest expense (Note 4) 22,539 12,804 8,922
Other expense (income), net (106) (1,792) 129
-------- -------- --------
Other expense, net 22,433 11,012 9,051
-------- -------- --------
Loss before income taxes and minority interest (44,498) (54,138) (11,864)
Income tax benefit(Note 7) (16,352) (19,577) (4,381)
Minority interest in net earnings of consolidated
subsidiary 66 47 32
-------- -------- --------
Net loss from continuing operations ($28,212) ($34,608) ($7,515)
Income from discontinued operations, net of tax
(Note 13) 2,858 2,425 2,829
-------- -------- --------
Net loss ($25,354) ($32,183) ($4,686)
======== ======== ========
Basic and diluted loss per common share, continuing
operations ($1.72) ($1.99) ($0.42)
Basic and diluted earnings per common share,
discontinued operations 0.17 0.14 0.16
-------- -------- --------
Total basic and diluted loss per common share ($1.55) ($1.85) ($0.26)
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
1
</TABLE>
<PAGE>
<TABLE>
WLR Foods, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
Dollars in thousands,
June 27, 1998 and June 28, 1997 1998 1997
------------------------------- -------- --------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $335 $283
Accounts receivable, less allowance for 72,457 72,462
doubtful accounts of $1,515 and $1,550
Inventories (Note 3) 128,031 165,551
Income taxes receivable 1,002 4,567
Other current assets 1,870 2,301
-------- --------
Total current assets 203,695 245,164
Property, plant and equipment, net (Note 4) 153,702 159,426
Deferred income taxes (Note 7) 18,247 4,996
Other assets 6,098 7,142
-------- --------
Total Assets $381,742 $416,728
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable to banks (Note 5) $ - $4,031
Current maturities of long-term debt (Note 5) 3,452 186,391
Excess checks over bank balances 9,925 12,118
Trade accounts payable 28,742 35,005
Accrued expenses and other 32,245 26,657
Deferred income taxes (Note 7) 10,636 12,359
-------- --------
Total current liabilities 85,000 276,561
Long-term debt, excluding current maturities (Note 5)
189,225 5,040
Minority interest in consolidated subsidiary - 592
Other liabilities and deferred credits 3,626 3,539
Commitments and other matters (Notes 6, 10 and 11)
Common stock subject to repurchase (Note 8) - 4,438
Shareholders' equity (Notes 8 and 9)
Common stock, no par value 67,851 64,206
Additional paid-in capital 2,974 2,974
Retained earnings 33,066 59,378
-------- --------
Total shareholders' equity 103,891 126,558
-------- --------
Total Liabilities and Shareholders' Equity $381,742 $416,728
======== ========
See accompanying Notes to Consolidated Financial Statements.
2
</TABLE>
<PAGE>
<TABLE>
WLR Foods, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
<CAPTION>
Dollars in thousands,
except per share data Common Stock Additional
Fiscal years ended June 27, 1998, June Paid-In Retained
28, 1997, and June 29, 1996 Shares Amount Capital Earnings Total
-------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1995 17,298 $56,782 $3,014 $103,548 $163,344
Net loss (4,686) (4,686)
Cash dividends declared-$0.24 per share (4,233) (4,233)
Issuance of common stock for
acquisition of businesses (Note 2) 457 6,028 6,028
Other common stock issued 122 1,376 1,376
Common stock repurchased (195) (2,779) (40) (2,819)
-------- -------- -------- -------- --------
Balance at June 29, 1996 17,682 61,407 2,974 94,629 159,010
Net loss (32,183) (32,183)
Cash dividends declared-$0.12 per share (2,078) (2,078)
Stock dividend 85 976 (990) (14)
Other common stock issued 161 1,823 1,823
Common stock repurchased (Note 8) (1,331) - -
-------- -------- -------- -------- --------
Balance at June 28, 1997 16,597 64,206 2,974 59,378 126,558
Net loss (25,354) (25,354)
Stock dividend 102 958 (958) -
Other common stock issued 147 2,710 2,710
Common stock repurchased (Note 8) (446) (23) (23)
-------- -------- -------- -------- --------
Balance at June 27, 1998 16,400 $67,851 $2,974 $33,066 $103,891
======== ======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
3
</TABLE>
<PAGE>
<TABLE>
WLR Foods, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Dollars in thousands
Fiscal years ended June 27, 1998, June 28, 1997 1998 1997 1996
and June 29, 1996
----------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss ($25,354) ($32,183) ($4,686)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 28,321 28,088 28,243
Loss on sales of property, plant and equipment 916 772 67
Deferred income taxes (14,974) (14,060) 2,339
Other, net (592) 326 420
Change in operating assets and liabilities net of
acquired businesses:
(Increase) decrease in accounts receivable 5 7,470 (16,583)
(Increase) decrease in inventories 37,520 6,395 (43,233)
(Increase) decrease in other current assets 3,996 8,209 (11,766)
(Increase) decrease in long term assets 815 (677) 819
Increase (decrease) in accounts payable (6,263) 3,016 3,298
Increase in accrued expenses and other 5,675 2,917 1,656
-------- -------- --------
Net cash provided by (used in ) operating activities 30,065 10,273 (39,426)
Cash Flows from Investing Activities:
Additions to property, plant and equipment (22,149) (11,245) (18,771)
Acquisition of businesses (650) (200) (10,565)
Proceeds from sales of property, plant and equipment 1,706 424 833
-------- -------- --------
Net cash used in investing activities (21,093) (11,021) (28,503)
Cash Flows from Financing Activities:
Proceeds from issuance of revolver debt and long-term
debt 41,485 74,031 40,000
Payments on revolver and long-term debt (35,234) (29,093) (8,016)
Financing costs paid (5,401) - -
Notes payable to banks (4,031) (26,745) 30,776
Issuance of common stock 892 1,235 1,376
Repurchase of common stock (4,438) (13,312) (2,819)
Increase (decrease) in excess checks over bank balances (2,193) (2,670) 10,840
Dividends paid - (3,139) (4,210)
-------- -------- --------
Net cash provided by (used in) financing activities (8,920) 307 67,947
Increase (decrease) in cash and cash equivalents 52 (441) 18
Cash and cash equivalents at beginning of fiscal year 283 724 706
-------- -------- --------
Cash and cash equivalents at end of fiscal year $335 $283 $724
======== ======== ========
Supplemental cash flow information:
Cash paid (received) for:
Interest $15,365 $12,297 $8,906
Income taxes (3,139) (10,608) 3,213
======== ======== ========
4
</TABLE>
<PAGE>
WLR Foods, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Continued
Non-cash financing activities:
In fiscal 1998:
The Company issued 102,296 shares of stock in lieu of a cash dividend in the
first quarter. The Company issued 889,898 stock warrants in the third quarter
relating to the debt refinancing; of these 266,969 were immediately exercisable
and were recorded at a value of $1,695,256. (Note 5)
In fiscal 1997:
The Company issued 85,519 shares of stock in lieu of a cash dividend in the
fourth quarter.
In fiscal 1996:
The Company issued 456,936 shares of WLR Foods, Inc. common stock valued at
$6.0 million for the acquisition of New Hope Feeds, Inc. and a related company.
(Note 2)
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
WLR Foods, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies and Other Information
Organization
WLR Foods, Inc. and Subsidiaries (WLR Foods or the Company) are
primarily engaged in fully integrated turkey and chicken production,
processing, further processing and marketing. The Company's
operations are predominantly located in the mid-Atlantic region of the
United States. WLR Foods sells products through a variety of selected
national and international retail, food service and institutional
markets.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to June 30.
Fiscal years 1998, 1997 and 1996 ended on June 27, June 28 and June
29, respectively, and included 52 weeks in each year.
Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the
accounts of WLR Foods and all of its wholly-owned and majority-owned
subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company
considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Inventories
Inventories of feed, grain, eggs, packaging supplies, processed
poultry and meat products are stated at the lower of cost or market as
determined by the first-in, first-out valuation method. Live poultry
and breeder flocks consist of poultry raised for slaughter and
breeders. Poultry raised for slaughter are stated at the lower of
average cost or market. Breeders are stated at average cost less
accumulated amortization. The cost of breeders are accumulated
during their development stage and then amortized into the cost of the
eggs produced over the egg production cycle of the breeders.
The Company has four methods of purchasing grain: cash purchasing,
forward pricing, grain options, and hedging with futures contracts.
Each purchasing method creates varying degrees of risk for WLR Foods.
The Company uses futures contracts and forward purchases to hedge the
risk of fluctuating grain prices. The gains or losses from hedging
transactions become part of the cost of the related inventory items
and are expensed during the time period for which the hedge was
intended.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
computed using the straight-line method over the useful lives of the
respective assets. In general, the estimated useful lives for
computing depreciation are: 15 to 20 years for buildings; 3 to 8 years
for machinery and equipment; and 3 to 5 years for transportation
equipment. The costs of maintenance and repairs are charged to
operations, while costs associated with renewals, improvements, and
major replacements are capitalized.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
6
<PAGE>
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income for the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
Financial Instruments
The estimated fair value of financial instruments has been determined
by the Company using available market information. Except for
financial instruments used for hedging and debt instruments (Notes 3
and 5), the carrying amounts of all financial instruments approximate
their fair values due to their short maturities.
Accounting Changes
In fiscal year 1998, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 128, "Earnings Per Share," which
supersedes APB Opinion No. 15. This statement serves to simplify the
computation of earnings per share and requires restatement of all
prior periods presented in conformity with the statement.
Stock-Based Compensation
In fiscal year 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation". As permitted under SFAS No. 123, the Company continues
to account for employee stock option plans using the intrinsic value
method of accounting (Note 9).
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires the Company to
make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those
estimates.
2. Business Acquisitions
The transaction discussed here has been accounted for as a purchase,
and, accordingly, the consolidated financial statements herein include
the net assets acquired at fair value and the results of operations of
the acquired business from the date of acquisition. On September 29,
1995, the Company acquired substantially all of the assets of New Hope
Feeds, Inc. and an affiliated company for $10.6 million in cash,
including costs, and $6.0 million in stock. The assets included a new
chicken processing facility, a feed mill, a hatchery, and related
operating equipment. The transaction was recorded as follows:
Dollars in thousands
- - --------------------
Inventories $ 2,864
other current assets 283
Property, plant and equipment 12,900
Other assets 2,537
-------
Total assets acquired 18,584
Cash paid (including costs) 10,565
Issuance of common stock 6,028
-------
Total liabilities assumed $ 1,991
=======
7
<PAGE>
3. Inventories
A summary of inventories at June 27, 1998 and June 28, 1997 follows:
Dollars in thousands 1998 1997
------- --------
Live poultry and breeder flocks $58,947 $74,984
Processed poultry and meat products 38,837 53,981
Packaging supplies, parts and other 15,879 17,188
Feed, grain and eggs 14,368 19,398
-------- --------
Total inventories $128,031 $165,551
======== ========
The notional amount of grain futures contracts at June 27, 1998 and
June 28, 1997 was $2.9 million and $21.2 million, respectively. The
fair value of all derivative instruments used in hedging at June 27,
1998 and June 28, 1997 was $2.9 million and $19.3 million,
respectively.
4. Property, Plant and Equipment
WLR Foods investment in property, plant and equipment at June 27, 1998
and June 28, 1997 was as follows:
Dollars in thousands 1998 1997
------- --------
Land and improvements $ 22,133 $ 22,161
Buildings and improvements 123,620 119,190
Machinery and equipment 186,528 179,243
Transportation equipment 27,424 26,720
Construction in progress 5,054 2,443
-------- --------
364,759 349,757
Less accumulated depreciation 211,057 190,331
-------- --------
Property, plant and equipment, net $153,702 $159,426
======== ========
The Company capitalized interest costs with respect to certain major
construction projects of $91,000 in fiscal year 1996. The Company did
not have any capitalized interest costs in fiscal years 1998 or 1997.
5. Long-Term Debt and Bank Revolving Credits
Long-term debt and other credit facilities at June 27, 1998 and June
28, 1997 consisted of the following obligations:
Dollars in thousands 1998 1997
------ ------
Fixed Rate Notes:
9.41% Senior Unsecured Notes $ - $ 18,000
7.47% Senior Unsecured Notes - 22,000
8
<PAGE>
Variable Rate Notes:
Secured Bank Term Note due 2000 110,000 -
Senior Secured Notes 42,040 -
Revolving Credit Notes:
Unsecured Bank Revolving Credit Note
due 1998 - 4,031
Unsecured Bank Revolving Credit Note
due 2000 - 145,000
Secured Bank Revolving Credit Note
due 2000 40,825 -
Unamortized debt discount (5,003) -
Other Notes:
Notes with various terms and rates 4,815 6,431
------- -------
Total debt 192,677 195,462
Less debt reclassed as current due to
the Company failing to meet certain
covenants - 182,000
Less revolving debt maturing in less
than 1 year - 4,031
Less current maturities of long term
debt 3,452 4,391
------- --------
Long-term debt and revolving debt,
excluding current maturities $189,225 $ 5,040
======== ========
The Company refinanced its fixed rate Senior Unsecured Notes and
variable rate Unsecured Credit Notes as of February 25, 1998. The new
facility is a $110 million term loan, $42 million in senior secured
notes, and a $105 million line of credit. The three facilities have
an initial maturity of January 1, 2000, which may be extended by the
Company for another year under certain circumstances. The debt is
secured by essentially all of the Company's assets with interest on
approximately half of the revolver and the term loan based on prime
plus 225 basis points. The remaining amount of the outstanding
revolver is priced according to the London Inter-Bank Offering rate
plus 300 basis points or prime plus 175 basis points. In conjunction
with the debt modification, the Company issued warrants to purchase
889,898 shares of its common stock at $0.01 per share. The warrants
may be reduced if the debt is paid off by certain dates prior to
maturity. Warrants totaling 266,969 were immediately exercisable and
resulted in the recording of additional debt discount of $1.7 million.
If the debt is not refinanced by August 31, 1998, and January 31,
1999, 20% and 50% of the remaining warrants become exercisable,
respectively. The Company also incurred approximately $5 million of
fees and costs to the lenders in conjunction with the refinancing
which are being amortized as additional interest costs over the term
of the debt. In addition, the Company expensed approximately $1.1
million of legal, consulting and appraisal costs incurred in the
refinancing. The carrying value of all debt approximates fair value
at June 27, 1998, based on quoted market prices for similar issues.
In connection with the refinancing, the Company entered into interest
rate swap and cap agreements. These agreements may allow the Company
to reduce the impact of interest rate changes and lower its financing
costs. The variable to fixed interest rate swap agreement has a
notional value of $50 million, and fixes the Company's variable
interest rate at 6.26% through January 4, 2000. The notional amount
of the interest rate cap at the balance sheet date is $75 million, and
the cap rate is 6.5%. At June 27, 1998, the fair value of both
contracts was not significantly different than the notional value.
The interest rate differential on the interest rate swap is recognized
as an adjustment of interest expense or income over the term of the
9
<PAGE>
agreement. The premiums paid/received for the interest rate cap
agreement are included in other assets/liabilities and are amortized
to interest expense over the terms of the agreement.
The Company's credit agreement with its lenders contain restrictive
covenants. As of June 27, 1998, the Company was in compliance with
all covenants.
Required annual principal repayments of long-term debt and revolving
credits with original maturities of greater than one year are as
follows:
Dollars in thousands
Fiscal 1999 3,452
Fiscal 2000 191,314
Fiscal 2001 978
Fiscal 2002 894
Fiscal 2003 657
6. Employee Benefits
The Company maintains a Profit Sharing and Salary Savings Plan that is
available to substantially all employees who meet certain age and
service requirements. Most participants may elect to make
contributions of up to 15% of their salary. For each employee dollar
contributed (limited to the first 4% of an employee's compensation),
the Company is required to contribute a matching amount of 50 cents.
The Company can also make additional contributions at its discretion.
WLR Foods total contributions under this plan were approximately $1.6
million, $1.6 million and $1.7 million, for fiscal 1998, 1997 and
1996, respectively.
7. Income Taxes
The provision for income taxes from continuing operations was as
follows for fiscal years 1998, 1997 and 1996:
Dollars in thousands 1998 1997 1996
------ ------ ------
Current:
Federal $ - $ (4,120) $ (4,092)
State 166 (199) (965)
-------- -------- -------
166 (4,319) (5,057)
Deferred:
Federal (14,625) (13,242) 213
State (1,893) (2,016) 463
-------- -------- -------
(16,518) (15,258) 676
-------- -------- --------
Total tax benefit $(16,352) $(19,577) $ (4,381)
======== ======== ========
The provision for income taxes for continuing operations differs from
the amounts resulting from applying the federal statutory tax rates
(35%) to earnings for fiscal years 1998, 1997 and 1996 as follows:
Dollars in thousands 1998 1997 1996
------ ------ ------
Taxes computed using federal
statutory tax rates $(15,574) $(18,948) $(4,153)
10
<PAGE>
State income taxes,
net of federal tax effect (1,123) (1,440) (326)
Other, net 345 811 98
-------- -------- --------
Total tax benefit $(16,352) $(19,577) $(4,381)
======== ======== ========
Effective tax rate 36.7% 36.2% 36.9%
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at June
27, 1998 and June 28, 1997 are listed below:
1998 1997
Dollars in thousands ------ ------
Deferred tax liabilities:
Inventories, principally due to
the accounting for live inventories
on the farm price method for tax
purposes $(15,230) $(18,525)
Plant and equipment, principally due
to differences in depreciation and
capitalized interest (6,386) (7,718)
Investments in subsidiary companies,
principally due to undistributed net
income of the subsidiary - (406)
Other (369) (17)
-------- --------
Gross deferred tax liabilities (21,985) (26,666)
Deferred tax assets:
Net operating loss carryforwards $20,150 $10,000
Insurance accruals, principally due
to timing of payments versus the
recording of expenses 2,944 2,763
Deferred compensation, principally
due to accrual for financial reporting
purposes 1,062 1,008
Tax credits 2,861 3,079
Financing costs, principally due to
accrual for financial reporting purposes 310 -
Compensated absences, principally due
to accrual for financial reporting
purposes 1,107 1,053
Accounts receivable, principally due to
allowance for doubtful accounts 591 605
Other 571 795
-------- --------
Gross deferred tax assets 29,596 19,303
-------- ---------
Net deferred tax asset (liability) $7,611 $(7,363)
======== ========
In assessing the recoverability of deferred tax assets, management
considers whether it is reasonably probable that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent on the generation
of future taxable income, during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based on the
future expectation of taxable income and reversal of deferred tax
11
<PAGE>
liabilities, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences as
reflected at June 27, 1998 and June 28, 1997.
8. Shareholders' Equity and Common Stock Subject to Repurchase
In February 1994, the Board of Directors approved the adoption of the
Shareholder Protection Rights Plan (the Plan) wherein one right
attaches to and trades with each share of common stock. Each right
entitles the registered holder to purchase from the Company at an
exercise price of $45.33, the number of shares of common stock or
participating preferred stock having a market value of twice the
exercise price. Such participating preferred stock is designed to
have economic and voting terms similar to those of one share of common
stock. Rights will separate from the common stock and become
exercisable following the earlier of 1) the date a person or group
acquires 15% or more of the outstanding stock, or 2) the tenth
business day (or such later date the Board may decide) after any
person commences a tender offer that would result in such person or
group holding a total of 15% or more of the common stock.
Additionally, in either case, rights owned by the acquiring person or
group would automatically become void.
If a person acquires between 15% and 50% of the outstanding common
stock, the Board may, in lieu of allowing rights to be exercised,
require each outstanding right to be exchanged for one share of common
stock or participating preferred stock. A provision in the Plan
allows for rights holders to acquire stock of the acquiring person or
group, in the event a change in control of the Company has occurred.
The rights are redeemable by the Company at $0.01 per right prior to
becoming exercisable and expire 10 years from issuance. WLR Foods has
100,000,000 shares of common stock authorized, with 16,399,511
outstanding on June 27, 1998 and 16,597,114 outstanding on June 28,
1997. Additionally, there are 50,000,000 shares of preferred stock
authorized with none outstanding as of June 27, 1998 or June 28, 1997.
The Common Stock Subject to Repurchase arose due to WLR Foods
commitment to repurchase the shares held by a trustee on behalf of
Cuddy Farms, Inc. In January 1997, the Company entered into an
agreement to repurchase the 1,774,999 shares (approximately 10% of the
outstanding shares of its common stock) from Cuddy Farms, Inc. at $10
per share, in a private transaction. Fifty percent of the shares were
repurchased in January 1997, 25% were repurchased in March 1997, and
the final 25% were repurchased early in fiscal year 1998.
9. Stock Option and Stock Purchase Plans
Stock Option Plans
WLR Foods Stock Option Plan was adopted by the Board of Directors in
accordance with the Long-Term Incentive Plan which was ratified by the
shareholders of the Company on November 1, 1988. The Plan provides
for the granting of incentive or non-qualified common stock options.
The option price under the Plan shall not be less than the fair market
value of the common shares as of the date of the grant. The options
vest after three years, with one-third vesting each year after the
date of grant. The options are exercisable at varying dates not to
exceed 10 years from the date of grant.
The changes in the outstanding common shares under option for fiscal
1998, 1997 and 1996 are listed below:
Common shares Weighted Average
under option Exercise Price
12
<PAGE>
------------- ----------------
Outstanding at July 1, 1995 768,250 14.71
Canceled or expired (110,120) 13.59
Exercised (148,255) 11.92
Granted in fiscal year 1996 190,500 14.13
-------
Outstanding at June 29, 1996 700,375 15.08
Canceled or expired (168,459) 12.12
Granted in fiscal 1997 178,750 8.31
-------
Outstanding at June 28, 1997 710,666 13.85
Canceled or expired (226,041) 14.29
Granted in fiscal 1998 158,750 6.88
-------
Outstanding at June 27, 1998 643,375 11.98
=======
There were 343,374, 385,247, and 376,333 shares exercisable under
option with weighted average exercise prices of $15.08, $16.21 and
$14.99 at fiscal 1998, 1997 and 1996, respectively. The following
table summarizes information about stock options outstanding as of
June 27, 1998:
Stock Options Stock Options
Outstanding: Exercisable:
- - ---------------------------------------------------------------------
Weighted Average
Remaining Contractual
Exercise Price Shares Life (Years) Shares
- - -------------- ------ --------------------- ------
$6.875 158,750 7.9 -
8.310 143,750 6.6 47,914
14.125 136,250 5.2 90,835
14.666 21,750 2.0 21,750
15.000 96,250 5.5 96,250
20.000 86,625 0.9 86,625
- - ------------- ------- -------
Total 643,375 343,374
============= ======= =======
Accounting for Stock Option Plans
The Company has elected to account for its employee stock option plans
using the intrinsic value method of accounting. Accordingly, no
compensation cost has been recognized in the accompanying financial
statements because the exercise price of the stock options equals the
market price of the underlying stock on the date of grant.
Pro forma information regarding net loss and net loss per share is
required by SFAS No. 123. Assuming the Company accounted for its
employee stock options using the fair value method, the Company's net
loss and net loss per share would approximate the pro forma amounts
indicated below:
Fiscal years ended
Dollars in thousands June 27, 1998 June 28, 1997
- - -------------------- ------------- -------------
Net loss
As Reported $(28,212) $(34,608)
Pro Forma $(28,537) $(34,823)
Net loss per common share
As Reported, basic and diluted $ (1.72) $ (1.99)
13
<PAGE>
Pro Forma, basic and diluted $ (1.74) $ (2.00)
Note: The pro forma disclosures shown may not be representative of the
effects on reported net income in future years.
The fair value of each stock option grant used to compute pro forma
net income and net income per share disclosures is estimated at the
time of the grant using the Black-Scholes option-pricing model. The
weighted-average assumptions used in the model are as follows:
1998 1997
------ ------
Expected dividend yield 0.0% 1.1%
Expected volatility 31% 43%
Risk-free interest rate 5.7% 6.8%
Expected term (in years) 10 10
Using these assumptions in the Black-Scholes model, the weighted
average fair value of options granted was $0.6 million in 1998 and
1997.
On October 29, 1994, the shareholders of WLR Foods approved the
Poultry Producer Stock Purchase Plan and amended and restated the
Employee Stock Purchase Plan. These plans allow contract producers
and employees to purchase stock at a 10% discount from the market
price. All shares must be held in the plans for a period of two years.
Upon termination of employment or contract, participants are
terminated from the respective plans.
10. Leases
WLR Foods has entered into various operating lease agreements for
machinery and equipment. The leases are noncancelable and expire on
various dates through 2005. Total rent expense was approximately $5.1
million, $5.7 million, and $3.5 million for fiscal 1998, 1997 and
1996, respectively. The following schedule presents the future
minimum rental payments required under the operating leases that have
initial or remaining noncancelable lease terms in excess of one year
as of June 27, 1998:
Fiscal 1999 $2,624
Fiscal 2000 1,933
Fiscal 2001 1,441
Fiscal 2002 913
Fiscal 2003 462
Fiscal 2004 and thereafter 272
------
Total minimum lease payments $7,645
======
11. Related Party Transactions
Certain directors of WLR Foods are contract growers of live poultry
for the Company. In addition, a WLR Foods director is a
director/officer of a company which supplies fuel and related products
to certain locations of the Company. A second director provided
consulting services to WLR Foods during fiscal years 1997 and 1996.
As a result of an August 1994 acquisition, Cuddy Farms, Inc. (as an
affiliate of Cuddy International) was a related party through fiscal
year 1997. The transactions included poultry purchases and feed sales
14
<PAGE>
to Cuddy Farms at pricing formulas established when the acquisition
was completed.
Transactions with these related parties during the past three fiscal
years are as follows :
Purchases from Sales to
Dollars in thousands related parties related parties
- - -------------------- --------------- ---------------
Fiscal 1998 $ 1,381 $ -
Fiscal 1997 23,381 8,998
Fiscal 1996 25,433 10,237
In management's opinion, all related party transactions are conducted
under normal business conditions, with no preferential treatment given
to related parties.
12. Earnings Per Share
The following is a reconciliation between the calculation of basic and
diluted net loss per share:
Dollars in thousands June 27, 1998 June 28, 1997 June 29, 1996
- - -------------------- ------------- ------------- -------------
Numerator:
Basic and diluted net
loss per common share
numerator, continuing
operations $(28,212) $(34,608) $(7,515)
Denominator:
Weighted average common
shares outstanding 16,315 17,378 17,716
Effect of outstanding stock
warrants 88 - -
-------- -------- --------
Basic and diluted weighted
average common shares
outstanding 16,403 17,378 17,716
======== ======== ========
Basic and diluted loss per
share, continuing
operations $(1.72) $(1.99) $(0.42)
======== ======== ========
Options to purchase 643,375, 710,666 and 700,375 of common stock, at
prices between $6.88 and $20.00, $8.31 and $20.00, and $11.92 and
$20.00 per share were outstanding in 1998, 1997, and 1996,
respectively, but were not included in the computation of diluted
earnings per share because the effect of including these options would
have been anti-dilutive.
13. Discontinued Operations
During fiscal year 1998, the Company's Board of Directors adopted a
plan to discontinue operations of its subsidiary, Cassco Ice & Cold
Storage. The transaction involved the sale of the division and was
completed in July 1998. Net proceeds of approximately $54 million
were received in a stock transaction, resulting in a gain of
approximately $27 million($17 million after-tax). The gain will be
reflected in the results of operations for the quarter ended September
26, 1998. Accordingly, the operating results of the Cassco Ice
15
<PAGE>
operations have been segregated from continuing operations and
reported as a separate line item on the statement of operations.
The Company has restated its prior year financial statements to
present the operating results of Cascco Ice as a discontinued
operation. Operating results and net assets from discontinued
operations are as follows:
Dollars in thousands 1998 1997 1996
- - -------------------- ------- ------- -------
Net sales $22,063 $19,186 $19,374
Income before tax 4,529 3,742 4,600
Income tax expense 1,671 1,317 1,771
------- ------- -------
Net income $2,858 $2,425 $2,829
======= ======= =======
Net Assets of Discontinued Operations
Dollars in thousands 1998 1997
- - ------------------------------------- ------- -------
Current assets $ 9,065 $ 5,940
Property, plant and equipment, net 22,840 23,853
Other assets 398 399
Current liabilities (4,124) (4,007)
Other liabilities (3,573) (4,206)
------- -------
Net assets of discontinued operations $24,606 $21,979
======= =======
14. Subsequent Event
On August 14, 1998, the Company completed the sale of its Goldsboro,
North Carolina chicken complex. Net proceeds of approximately $37
million were received in exchange for assets totaling approximately
$29 million. The gain of approximately $8 million($5 million
after-tax) will be included in the results of operations for the
quarter ended September 26, 1998.
15. Selected Quarterly Financial Data(Unaudited)
The unaudited summary of quarterly results of continuing operations
for fiscal 1998 and 1997 follows:
Dollars in thousands except
per share data
Fiscal year ended June 27, 1998 First Second Third Fourth
- - ------------------------------- ----- ------ ----- ------
Net sales $242,541 $247,683 $212,487 $243,256
Operating income (loss) (6,209) (7,627) (11,359) 3,130
Net loss from continuing
operations (6,435) (8,089) (11,117) (2,571)
Per share data:
Net loss per common share,
continuing operations $ (0.40) $(0.50) $(0.68) $(0.15)
Cash dividends declared per
common share $ - $ - $ - $ -
Stock dividend declared per
common share(in shares) - - - -
Market price(bid) - high 10.00 10.25 8.63 7.38
- low 8.13 8.38 5.19 5.56
16
<PAGE>
Fiscal year ended June 28, 1997 First Second Third Fourth
- - ------------------------------- ----- ------ ----- ------
Net sales $264,595 $261,223 $219,661 $249,112
Operating loss (12,039) (6,448) (11,938) (12,701)
Net loss from continuing
operations (9,543) (5,452) (9,540) (10,073)
Per share data:
Net loss per common share,
continuing operations $(0.54) $(0.30) $(0.55) $(0.61)
Cash dividends declared per
common share $ - $ 0.12 $ - $ -
Stock dividend declared per
common share(in shares) - - 0.00525 0.00640
Market price(bid) - high 13.50 13.50 12.88 10.13
- low 11.13 11.38 9.50 8.13
Per share calculations are based on each stand alone period presented;
therefore, the annual per share results may not be the sum of the four
quarters.
17
<PAGE>
Exhibit 13.4
Independent Auditors' Report
The Board of Directors and Shareholders
WLR Foods, Inc:
We have audited the accompanying consolidated balance sheets
of WLR Foods, Inc. and subsidiaries as of June 27, 1998 and June
28, 1997 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the fiscal years
in the three-year period ended June 27, 1998. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of WLR Foods, Inc. and subsidiaries as of June 27, 1998
and June 28, 1997 and the results of their operations and their
cash flows for each of the fiscal years in the three-year period
ended June 27, 1998, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Richmond, Virginia
August 18, 1998
1
<PAGE>
Exhibit 21
Subsidiary State of Incorporation
Wampler Foods, Inc. Virginia
P.O. Box 7275
Broadway, Virginia 22815
1
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
WLR Foods, Inc.:
We consent to incorporation by reference in the registration
statements on Form S-8 (No.33-27037, No. 33-63364 and No. 33-55649),
on Form S-3 (No. 33-56775) and on Form S-3(D) (No. 33-54692) of WLR
Foods, Inc. of our reports dated August 18, 1998, relating to the
consolidated balance sheets of WLR Foods, Inc. and subsidiaries as of
June 27, 1998 and June 28, 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each
of the fiscal years in the three-year period ended June 27, 1998, and
the related schedule, which reports appear or are incorporated by
reference in the June 27, 1998 annual report on Form 10-K of WLR
Foods, Inc.
/s/ KPMG Peat Marwick LLP
Richmond, Virginia
September 25, 1998
1
<PAGE>
Exhibit 24.1
SPECIAL POWER OF ATTORNEY
Each of the undersigned officers and directors of WLR Foods,
Inc. (WLR Foods), a Virginia corporation, appoints James L. Keeler and
Dale S. Lam, or either of them (with full power to each of them to act
alone) as his or her attorneys-in-fact and agents for him or her in
such capacity either as an officer or director, or both, of WLR Foods,
and authorizes such persons on behalf of WLR Foods, to sign and file
any and all WLR Foods' registration statements, reports, schedules and
other filings, and all amendments thereto, required or permitted to be
filed under federal or state securities laws, including without
limitation Forms 3, 4 and 5, registration statements, Form 10-K annual
reports, Form 10-Q quarterly reports and Form 8-K current reports,
with all exhibits and any and all documents required to be filed with
respect thereto, with the Securities and Exchange Commission, National
Association of Securities Dealers, and any regulatory authority for
any U.S. state or territory, and each of us hereby ratifies and confirms
all that our attorneys-in-fact and agents or each of them may lawfully
do or cause to be done by virtue hereof.
WITNESS the following signatures and seals.
_8/24/98_ _/s/ Jane T. Brookshire_________ (SEAL)
Date Jane T. Brookshire
_8/24/98_ _/s/ George E. Bryan____________ (SEAL)
Date George E. Bryan
_8/24/98_ _/s/ Charles L. Campbell________ (SEAL)
Date Charles L. Campbell
_8/24/98_ _/s/ Stephen W. Custer__________ (SEAL)
Date Stephen W. Custer
_8/24/98_ _/s/ Calvin G. Germroth_________ (SEAL)
Date Calvin G. Germroth
_8/24/98_ _/s/ William H. Groseclose, Jr._ (SEAL)
Date William H. Groseclose, Jr.
_8/24/98_ _/s/ J. Craig Hott______________ (SEAL)
Date J. Craig Hott
<PAGE>
_8/24/98_ _/s/ Herman D. Mason____________ (SEAL)
Date Herman D. Mason
_8/24/98_ _/s/ Charles W. Wampler, Jr.____ (SEAL)
Date Charles W. Wampler, Jr.
_8/24/98_ _/s/ William D. Wampler_________ (SEAL)<PAGE>
Date William D. Wampler
_8/24/98_ _/s/ James L. Keeler____________ (SEAL)
Date James L. Keeler
_8/24/98_ _/s/ Ruth J. Mack_______________ (SEAL)
Date Ruth J. Mack
_8/24/98_ _/s/ Ronald E. Morris___________ (SEAL)
Date Ronald E. Morris
_8/24/98_ _/s/ Dale S. Lam________________ (SEAL)
Date Dale S. Lam
_9/01/98_ _/s/ Katherine K. Clark_________ (SEAL)
Date Katherine K. Clark
_8/24/98_ _/s/ Walter F. Shafer, III______ (SEAL)
Date Walter F. Shafer, III
<PAGE>
Exhibit 24.2
SPECIAL POWER OF ATTORNEY
The undersigned director of WLR Foods, Inc., a Virginia
corporation (WLR Foods), appoints James L. Keeler, Dale S. Lam and
Elizabeth A. McLean, any of whom may act (with full power to each of
them to act alone) as his attorney-in-fact and agent for him in his
capacity as a director of WLR Foods, and authorizes such persons, on
behalf of WLR Foods or on his behalf individually, to sign and file
any and all WLR Foods' Forms 3, 4 and 5, or any other reports that may
be required pursuant to Section 16 of the Securities Act of 1934, with
the Securities and Exchange Commission, National Association of
Securities Dealers, and any regulatory authority for any U.S. state or
territory, and he hereby ratifies and confirms that his attorneys-in-
fact and agents may lawfully do or cause to be done by virtue hereof.
WITNESS the following signature and seal.
9/25/98 _/s/ Keith E. Alessi_______ (SEAL)
Date Keith E. Alessi
<PAGE>
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