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PIERRE FOODS, INC.
9990 PRINCETON ROAD
CINCINNATI, OHIO 45246
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PRELIMINARY PROXY STATEMENT
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We are providing this proxy statement and accompanying proxy card to our
shareholders in connection with the solicitation by our board of directors of
proxies to be used at the special meeting of shareholders to be held on
, 2001 at 10:00 a.m., local time, at the offices of Foley & Lardner,
150 West Jefferson Avenue, Suite 1000, Detroit, MI 48226-4416, including at any
adjournment of the special meeting. We began mailing these materials, the
accompanying letter to shareholders and the notice of the meeting to our
shareholders on or about , 2001.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
AGENCY HAS APPROVED OR DISAPPROVED THE EXCHANGE OR PASSED UPON THE FAIRNESS OR
MERITS OF THE EXCHANGE OR THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THESE DOCUMENTS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
SUMMARY TERM SHEET
The following question-and-answer summary highlights material terms of the
proposed exchange with PF Management. This summary may not contain all the
information that you should consider before voting on the exchange. You should
read the entire proxy statement and all of its appendices before voting on the
exchange.
WHAT WILL HAPPEN IN THE EXCHANGE?
If completed, the exchange will result in our shareholders unaffiliated
with PF Management:
- receiving $1.21 in cash per share for their stock, without interest,
- no longer holding any equity interest in Pierre Foods, and
- no longer participating in any earnings or losses of Pierre Foods.
The exchange will also result in Pierre Foods becoming a wholly-owned
subsidiary of PF Management. Our Chairman and Vice-Chairman, James C.
Richardson, Jr. and David R. Clark, together own 88.11% of the equity interest
in PF Management.
For more information concerning the terms and provisions of the exchange
and the exchange agreement, see "The Exchange" on page 55 and "Effects of the
Exchange" on page 54.
WHAT AM I BEING ASKED TO VOTE UPON?
You are being asked to approve the exchange, providing for the acquisition
of Pierre Foods by PF Management. PF Management is controlled by our Chairman
and Vice-Chairman. Our board of directors has approved the exchange and
recommends that you vote "FOR" approval of the exchange.
WHY ARE RICHARDSON AND CLARK ACQUIRING PIERRE FOODS?
Richardson and Clark believe that Pierre Foods suffers from:
- decreasing profitability and increasing risk in the food processing
industry generally,
- our small size,
- the lack of equity research coverage for our common stock, and
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- the historically low trading volume in our common stock.
Richardson and Clark believe these factors make it difficult and will
continue to make it difficult:
- for us to attract new investor interest,
- for us to obtain access to the capital markets, and
- for our shareholders, including themselves, to get a fair price when
selling their shares in the market.
Richardson and Clark believe that as a private company, Pierre Foods will
be better positioned for long-range planning, without the concern of short-term
impact on stock price. They also believe that reducing the expenses and
pressures of being a public company would enhance our long-term success.
Finally, they believe that the exchange offers our shareholders the opportunity
to obtain a fair value for their shares.
See "Special Factors -- Purpose and Reasons of the MBO Group for the
Exchange" on page 52.
HAS THE BOARD OF DIRECTORS RECOMMENDED THE EXCHANGE?
Yes. The board of directors and the special committee comprised of
disinterested members of the board of directors have both unanimously approved
the exchange and the exchange agreement, with Richardson and Clark abstaining.
The board voted unanimously to recommend that you vote "FOR" approval of the
exchange and the exchange agreement, again with Richardson and Clark abstaining.
See "Special Factors -- Recommendation of the Special Committee and the
Board of Directors" on page 26.
WHY IS THE BOARD OF DIRECTORS RECOMMENDING THAT I VOTE TO APPROVE THE EXCHANGE?
Our board of directors and the special committee formed by the board to
consider this transaction are recommending the exchange because they believe
that the exchange is a more desirable alternative for you than the status quo.
In reaching this conclusion, our board of directors and the special committee
considered, among other factors:
- the current lack of liquidity of your Pierre Foods investment;
- the immediate liquidity provided by the exchange at a price that the
board of directors and the special committee believe is fair;
- the fact that the exchange eliminates your risk of loss in the event our
stock price decreases more in the future; and
- the fact that we have received no superior offer for acquisition of the
company since the negotiations with PF Management were announced on March
30, 2001.
To review the reasons for the exchange and the factors considered by the special
committee and the board of directors in approving the exchange in greater
detail, see "Special Factors -- Background of the Exchange" on page 12 and
"-- Recommendation of the Special Committee and the Board of Directors" on page
26.
WHY WAS THE SPECIAL COMMITTEE FORMED AND WHO MAKES UP THAT COMMITTEE?
Our board of directors established the special committee, consisting of
Bobby G. Holman, E. Edwin Bradford and Bruce E. Meisner, three independent
directors (with no relationship to PF Management), to consider PF Management's
acquisition proposal and to negotiate the terms of the exchange agreement. The
board formed the special committee because it recognized that an exchange
transaction would present a conflict of interest for Richardson and Clark as
members of our senior management and the board of directors.
For more information concerning the special committee, see "Special
Factors -- Background of the Exchange" on page 12.
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HOW WAS THE AMOUNT OF THE EXCHANGE CONSIDERATION DETERMINED?
The $1.21 per share exchange consideration was determined as a result of
negotiations between the special committee and PF Management. For further
information concerning the negotiation of the exchange consideration, see
"Special Factors -- Background of the Exchange" on page 12.
DID THE SPECIAL COMMITTEE RECEIVE AN OPINION AS TO THE FAIRNESS OF THE EXCHANGE
CONSIDERATION?
The special committee received an opinion from its financial advisor, Grant
Thornton, that, as of the date of the exchange agreement, the $1.21 per share
you will receive in the exchange is fair to you from a financial point of view.
For more information concerning Grant Thornton's opinion, see "Opinion of Pierre
Foods' Financial Advisor" on page 33.
DID THE SPECIAL COMMITTEE RECEIVE ANY FIRM OFFERS TO ACQUIRE PIERRE FOODS AT
PRICES HIGHER THAN $1.21 PER SHARE?
After the exchange agreement was signed and announced, the special
committee received notice of the intention of a prospective bidder to commence a
tender offer for any and all shares of Pierre Foods at $1.44 per share. The
proposal was eventually withdrawn by the prospective bidder. For further
information concerning the solicitation process, see "Special
Factors -- Background of the Exchange" on page 12.
WHAT WILL I RECEIVE IN THE EXCHANGE?
As indicated above, you will be entitled to receive $1.21 in cash, without
interest, for each share of common stock that you own. For example, if you own
100 shares of common stock, upon completion of the exchange, and subject to you
properly submitting your stock certificates for cancellation, you will be
entitled to receive $121 in cash.
SHOULD I SEND MY STOCK CERTIFICATE NOW?
No. Promptly after the exchange is completed, we will send you detailed
instructions regarding the surrender of your stock certificates. You should not
send your stock certificates to Pierre Foods or to anyone else until you receive
these instructions. See "The Special Meeting -- Payment of Exchange
Consideration and Surrender of Stock Certificates" on page 9.
IF THE EXCHANGE IS COMPLETED, WHEN CAN I EXPECT TO RECEIVE THE EXCHANGE
CONSIDERATION FOR MY SHARES?
We will send payment of the exchange consideration to you as promptly as
practicable following the completion of the exchange and our receipt of your
stock certificates and other required documents. For further information
concerning procedures for delivery of your shares and receipt of the exchange
consideration, see "The Special Meeting -- Payment of Exchange Consideration and
Surrender of Stock Certificates" on page 9.
WHEN DO YOU EXPECT THE EXCHANGE TO BE COMPLETED?
If the exchange is approved by the shareholders, then we expect to complete
the exchange as soon as practicable following the special meeting.
WHAT VOTE IS REQUIRED TO APPROVE THE EXCHANGE?
The affirmative vote of the holders of 75% of the outstanding shares of
Pierre Foods common stock is required to approve the exchange. PF Management
owns approximately 62.79% of Pierre Foods' outstanding shares, which it will
vote in favor of the exchange. Pierre Foods' other directors and executive
officers, who together own approximately 0.32% of the outstanding shares, have
indicated that they also intend to vote their shares in favor of the exchange.
Therefore, if the holders of an additional 687,196, or 11.89%, of the
outstanding shares also vote in favor of the exchange, then the exchange will be
approved. See "The Special Meeting" on page 8 and "Information Regarding Pierre
Foods -- Stock Ownership" on page 67.
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WHO CAN VOTE ON THE EXCHANGE?
All shareholders of record as of the close of business on , 2001,
including PF Management and Pierre Foods' officers and directors, will be
entitled to vote at the special meeting to approve or disapprove the exchange.
See "The Special Meeting" on page 8.
WHAT RIGHTS DO I HAVE IF I OPPOSE THE EXCHANGE?
If you oppose the exchange, then you may vote against it at the special
meeting. Holders of common stock who do not vote in favor of the exchange
agreement and who comply with required procedures will have the right to dissent
and to be paid cash for the "fair value" of their shares. The procedures to be
followed by dissenting shareholders are described in "The Special
Meeting -- Dissenters' Rights of Appraisal" on page 9, and the text of the
applicable statutory provisions is set forth in Appendix D to this proxy
statement.
WHAT ARE THE TAX CONSEQUENCES OF THE EXCHANGE TO ME?
Your receipt of the exchange consideration will be a taxable transaction
for federal income tax purposes. To review the tax consequences to you in
greater detail, see "Federal Income Tax Consequences" on page 61.
WHAT DO I NEED TO DO NOW?
This proxy statement contains important information regarding the exchange
as well as information about Pierre Foods, Richardson, Clark and PF Management.
It also contains important information about what the board of directors and the
special committee considered in evaluating the exchange. We urge you to read
this proxy statement carefully, including its attachments.
WHEN IS THE SPECIAL MEETING?
The special meeting will take place on , 2001 at 10:00 a.m.,
local time, at the offices of Foley & Lardner, 150 West Jefferson Avenue, Suite
1000, Detroit, MI 48226-4416.
HOW DO I CAST MY VOTE?
Just indicate on your proxy card how you want to vote, then sign and mail
it in the enclosed envelope as soon as possible. This is important so that your
shares will be counted at the special meeting. As indicated above, approval of
the exchange and the exchange agreement requires the affirmative vote of the
holders of 75% of the outstanding shares of Pierre Foods' common stock. In the
event that no voting direction is provided on your signed proxy card, your
shares will be voted "FOR" the exchange. Failure to return a signed proxy card
or a vote to "ABSTAIN," as permitted on the proxy card, will have the same
effect as a vote "AGAINST" the exchange. If you are (or obtain a legal proxy
from) the record owner of the shares, then you may attend the special meeting
and vote your shares in person rather than vote by proxy.
IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
Your broker will vote your shares with regard to the exchange proposal only
if you provide instructions on how to vote. You should instruct your broker how
to vote your shares, following the directions your broker provides to you for
doing so. If you do not provide instructions to your broker, then your shares
will not be voted and this will have the effect of votes cast "AGAINST" the
exchange.
For further information concerning procedures for dealing with your broker
if your shares are held in "street name," see "The Special Meeting -- Required
Vote; Voting Procedures" on page 8.
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MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
Yes. You may revoke your signed proxy at any time before the vote is taken
at the special meeting by:
- submitting to the secretary of Pierre Foods a written instrument revoking
the proxy;
- submitting a signed proxy bearing a later date; or
- voting in person at the special meeting if you are (or obtain a legal
proxy from) the record owner of the shares.
See "The Special Meeting -- Voting and Revocation of Proxies" on page 9.
WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL MEETING?
We do not expect to ask you to vote on any other matters at the special
meeting. If a motion is made to take some other action, such as to adjourn the
meeting for the purpose of soliciting additional proxies, you may be asked to
vote on such action. If you vote "FOR" the transaction of other business on your
proxy card, or if no direction is made by you on the proxy card, your shares
will be voted on other matters in our discretion.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934. As a result, we file reports, proxy statements and other
information with the SEC. You can review and copy these reports, proxy
statements and other information at the public reference facilities maintained
by the SEC at 450 Fifth Street, N.W. Judiciary Plaza, Washington D.C. 20549 and
at the following Regional Offices of the SEC: 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York,
New York 10048. You can also obtain copies of these materials at prescribed
rates from the public reference section of the SEC at 450 Fifth Street, N.W.
Judiciary Plaza, Washington, D.C. 20549. You can call the SEC's Public Reference
Section at (800) SEC-0330 to obtain information. You can also access copies of
these materials at the SEC's web site on the internet at http://www.sec.gov. We
will also send you copies of these documents on request and without charge.
Pierre Foods, Richardson, Clark, James M. Templeton and PF Management have
jointly filed a Schedule 13E-3 with the SEC with respect to the exchange. This
proxy statement does not contain all of the information contained in that
Schedule 13E-3, some of which is omitted as permitted by the SEC's rules.
Statements made in this proxy statement, while complete in all material
respects, are qualified by reference to documents filed as exhibits to the
Schedule 13E-3. The Schedule 13E-3, including exhibits, is available for
inspection and copying at the SEC as described above.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you would like additional copies of this document, or if you would like
to ask any additional questions about the exchange, you should contact:
Ms. Pamela M. Witters
Pierre Foods, Inc.
9990 Princeton Road
Cincinnati, Ohio 45246
Telephone: (513) 874-8741
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THE SPECIAL MEETING
TIME, PLACE AND DATE; PROXY SOLICITATION
The special meeting will be held on , 2001 at 10:00 a.m., local
time, at the offices of Foley & Lardner, 150 West Jefferson Avenue, Suite 1000,
Detroit, MI 48226-4416. We will pay all expenses incurred in connection with
solicitation of the enclosed proxy. Our officers, directors and regular
employees may solicit proxies by telephone or in person, but they will receive
no additional compensation for doing so. We have requested brokers and nominees
who hold stock in their names to furnish this proxy material to their customers
and to request authority to execute proxies. We will reimburse brokers and
nominees for their related reasonable out-of-pocket expenses. In addition, we
have engaged Corporate Investor Communications, Inc. to solicit proxies on our
behalf, and we have agreed to pay a fee of approximately $15,000, plus expenses,
for such services. We will not solicit proxies on the Internet.
RECORD DATE AND QUORUM REQUIREMENT
Our common stock, with no par value per share, is the only outstanding
voting security of Pierre Foods. The close of business on , 2001 is
the record date for the determination of shareholders entitled to notice of, and
to vote at, the special meeting, including at any adjournment. Each holder of
record of common stock at the close of business on the record date is entitled
to one vote for each share then held on each matter submitted to a vote of
shareholders. On the record date we had 5,781,480 shares of common stock issued
and outstanding, held by 1,458 holders of record.
To conduct any business at the special meeting, holders of a majority of
the outstanding shares must be present in person or represented by proxy at the
beginning of the meeting. Proxies marked as abstentions are counted as
shareholders represented by proxy at the special meeting for purposes of this
quorum requirement.
REQUIRED VOTE; VOTING PROCEDURES
Approval of the exchange agreement, which is attached to this proxy
statement as Appendix A, will require the affirmative vote of the holders of 75%
of the outstanding shares of Pierre Foods common stock at the special meeting.
In the event that no voting direction is provided on a signed proxy card, the
shareholder's shares will be voted for the exchange. Failure to return a signed
proxy card or a vote to abstain will have the same legal effect as a vote cast
against approval.
If you hold your shares through a broker, then your broker will vote your
shares with regard to the exchange only if you provide instructions on how to
vote. You should instruct your broker how to vote your shares, following the
directions your broker provides to you for doing so. If you do not provide
instructions to your broker, then your shares will not be voted and they will
have the effect of votes "AGAINST" the exchange and the exchange agreement.
PF Management owns 3,630,212, or approximately 62.79%, of Pierre Foods'
outstanding shares, which it will vote in favor of the exchange. Pierre Foods'
other directors and executive officers, who together own 18,702 shares, or
approximately 0.32% of the outstanding shares, have indicated that they also
intend to vote their shares in favor of the exchange. Therefore, if the holders
of an additional 687,196, or 11.89%, of the outstanding shares also vote in
favor of the exchange, then the exchange will be approved.
VOTING AND REVOCATION OF PROXIES
A shareholder giving a proxy has the power to revoke it at any time before
the vote is taken at the special meeting by:
- submitting to the Secretary of Pierre Foods a written instrument revoking
the proxy;
- submitting a signed proxy bearing a later date; or
- voting in person at the special meeting if you are (or obtain a legal
proxy from) the record owner of the shares.
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Subject to revocation, all shares represented by each properly executed proxy
received by the secretary of Pierre Foods will be voted in accordance with the
instructions indicated on the proxy and, if no instructions are indicated, will
be voted to approve the exchange and the exchange agreement and on any other
matter considered at the meeting as the persons named as proxies in their
discretion decide.
The shares represented by the accompanying proxy card and entitled to vote
will be voted if the proxy card is properly signed and received by the secretary
of the company prior to the special meeting.
EFFECTIVE TIME
The exchange will be effective following shareholder approval of the
exchange agreement when articles of exchange are filed with the Secretary of
State of North Carolina. The time when the exchange becomes effective is
referred to in this proxy statement as the "effective time." Provided that the
exchange is approved by the shareholders at the special meeting, we expect to
complete the exchange and file articles of exchange as soon as practicable after
the special meeting, subject to the satisfaction or waiver of the other terms
and conditions included in the exchange agreement. See "The
Exchange -- Conditions."
PAYMENT OF EXCHANGE CONSIDERATION AND SURRENDER OF STOCK CERTIFICATES
If the exchange is completed, then we will send you detailed instructions
regarding the surrender of your stock certificates. Do not send your stock
certificates to Pierre Foods or to anyone else until you receive instructions.
We will send payment of the exchange consideration to you as promptly as
practicable following our receipt of your stock certificates and other required
documents.
DISSENTERS' RIGHTS OF APPRAISAL
If you oppose the exchange, then you may vote against it at the special
meeting. Even if you vote against the exchange, if the holders of 75% of the
outstanding shares of Pierre Foods common stock vote to approve the exchange,
then the exchange will be completed and your shares will be converted into the
right to receive $1.21 per share in cash.
Notwithstanding approval of the exchange by other shareholders, however,
under the North Carolina Business Corporation Act ("NCBCA"), holders of common
stock who do not vote in favor of the exchange and who comply with notice
requirements and other procedures have the right to dissent and be paid cash for
the "fair value" of their shares. This appraisal right is the exclusive remedy
to shareholders who object to the exchange, unless the exchange is unlawful or
fraudulent. The "fair value" of the common stock as finally determined under
such procedures may be more or less than the $1.21 exchange consideration.
Failure to follow precisely the procedures required by the NCBCA may result in
loss of dissenters' rights. The maximum number of shares held by holders who
might dissent in the exchange is one share less than 25% of all outstanding
shares, or 1,445,369 shares. If the fair value of these shares were determined
to be $1.21 per share, then the fair value of all shares held by shareholders
who may dissent is $1,748,896. PF Management may refuse to complete the exchange
if holders of more than 5% of the outstanding shares of common stock exercise
their right to dissent from the exchange. See "The Exchange -- Conditions."
The following discussion is not a complete statement of the law pertaining
to dissenters' rights under the NCBCA and is qualified in its entirety by the
full text of Chapter 55, Article 13 of the NCBCA ("Article 13"), which is
reprinted in its entirety as Appendix D to this proxy statement. You should
review Appendix D carefully.
A holder of shares of common stock wishing to exercise dissenters' rights
must:
- notify Pierre Foods in writing before the special meeting of the holder's
intent to demand payment for his or her shares; and
- not vote in favor of the exchange.
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If the exchange agreement is approved by our shareholders, then Pierre Foods
will mail a written notice to all shareholders who gave notice of their intent
to demand payment within ten days of the special meeting. The notice to
dissenters will:
- state where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
- supply a form for demanding payment; and
- set a date by which Pierre Foods must receive the payment demand, which
may not be fewer than 30 nor more than 60 days after the date on which
the notice is sent.
To exercise dissenters' rights, a shareholder who sent a dissenters' notice
before the special meeting must demand payment and deposit his or her share
certificates in accordance with the terms of the notice from Pierre Foods. A
shareholder failing to do so will not be entitled to payment for his or her
shares under Article 13. All notices, demands and other communications directed
to Pierre Foods in connection with the appraisal process should be sent to:
Pierre Foods, Inc.
9990 Princeton Road
Cincinnati, Ohio 45246
Attention: Pamela M. Witters, Secretary
As soon as the exchange is completed, or within 30 days after receipt of a
payment demand (the "First Demand") by a shareholder, Pierre Foods is required
to pay such shareholder the amount Pierre Foods estimates to be the value of the
dissenting shares, plus interest accrued to the date of payment (the "First
Dissent Payment"). Such payment will be accompanied by:
- Pierre Foods' balance sheet as of the fiscal year ended March 3, 2001, an
income statement and a statement of cash flows for that year and the
latest available interim financial statements;
- an explanation of how Pierre Foods estimated the fair value of the
shares; and
- an explanation of how the interest was calculated.
A dissenter may demand payment (the "Second Demand") of an amount in excess
of the First Dissent Payment, if:
- the dissenter believes that the amount of the First Dissent Payment is
less than the fair value of the dissenting shares, or that the interest
due is incorrectly calculated;
- Pierre Foods fails to make the First Dissent Payment; or
- Pierre Foods, having failed to complete the exchange, fails to return
deposited stock certificates to the dissenter within 60 days after the
date set for demanding payment.
A dissenter will waive the right to make a Second Demand, and will be deemed to
have withdrawn the dissent and demand for payment, unless such dissenter makes
the Second Demand in writing within 30 days after Pierre Foods (x) makes the
First Dissent Payment or (y) fails to take the actions described in the second
and third bullet points above, as the case may be.
If a Second Demand for payment remains unsettled, then a dissenting
shareholder may file a complaint with the Superior Court Division of the General
Court of Justice to determine the fair value of the shares and accrued interest.
If the dissenter does not commence a proceeding within 60 days after the earlier
to occur of the date Pierre Foods made the First Dissent Payment or the date of
the dissenter's Second Demand, then the dissenter will be deemed to have
withdrawn the dissent and Second Demand.
The court may, in its discretion, make parties to the proceeding all
dissenters whose demands remain unsettled. Each dissenter made a party to the
proceeding by the court will be entitled to judgment for the amount, if any, by
which the court finds that the fair value of his or her shares, plus interest,
exceeds the First Dissent Payment. The court may assess the costs of a
proceeding, including the compensation and expenses of
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appointed appraisers, as it finds equitable. The court may assess the fees and
expenses of counsel and experts (a) against Pierre Foods if it finds that Pierre
Foods did not substantially comply with Article 13 or (b) against either Pierre
Foods or the dissenters if the court finds that such party acted arbitrarily,
vexatiously, or not in good faith with respect to the dissenters' rights.
If you object to the exchange and wish to examine your rights further, then
you should consult your own legal counsel at your expense.
OTHER MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
Under North Carolina law, only the specific matters included in a notice of
the meeting and procedural motions regarding the conduct of the meeting may be
presented for shareholder approval at a special meeting. We do not expect to ask
you to vote on any other matters at the special meeting. Nevertheless, if a
motion is made to take some other action, including a procedural action such as
to adjourn the meeting, including an adjournment to solicit additional proxies,
you will also be asked to vote on such action at the special meeting. If you
vote "FOR" the transaction of other business on your proxy card, or if no
direction is made by you on the proxy card with respect to the transaction of
other business to come before the meeting, and you do not revoke your proxy by
the means indicated above, then we will have authority to vote your shares in
our discretion with regard to any such other motion or action that may arise.
SPECIAL FACTORS
BACKGROUND OF THE EXCHANGE
In the spring of 1999, we decided to explore the possibility of maximizing
shareholder value by selling one or both of our two core operations, consisting
of the Claremont Restaurant Group and our food processing operations, along with
our other businesses and properties. The company sought to sell one or both of
the core operations because we had come to believe that the restaurant business
and the food processing operations were incompatible. We also realized that our
debt burden had become very significant by various financial measures. Of the
two core operations, the restaurant business was judged less desirable than the
food processing business because its profit margins were lower, there was
growing competition in that segment, franchising opportunities were declining,
and significant capital would be required to open new stores which we believed
would be needed to maintain the business. We believed that we would not be able
to realize optimal value from the restaurant business if the sale of that
business were delayed. Upon consulting with financial advisors we also believed
that the merger-and-acquisition market in 1999 was favorable for a sale of our
food processing operations because of the apparent high demand for such
businesses and the favorable selling prices then being realized in other similar
transactions. We engaged First Union Securities (then known as Bowles Hollowell
Conner), a leading middle-market investment bank, to explore these possibilities
for us.
First Union Securities eventually found a buyer for the Claremont
Restaurant Group and that division was sold in October 1999, leaving us
principally with our food processing operations in Cincinnati and Claremont.
Those operations, collectively called "Pierre Foods," unexpectedly proved more
difficult to sell and in fact were not sold until PF Management agreed to buy
them in the exchange covered by this proxy statement. Our other businesses and
properties were disposed of in transactions referred to in the next paragraph.
From July through August, 1999, we sold the entire equity interest in our
country ham operation to Hoggs, LLC, majority-owned by Richardson. On September
14, 1999, we sold five former restaurant properties and one tract of vacant land
to an entity in which Templeton was then a minority investor. In October 1999,
we sold all assets related to a Bennett's Bar-B-Que restaurant to Fairgrove
Restaurants, LLC, owned in part by Richardson and Clark. For further details of
these transactions, see "Certain Relationships and Related Party Transactions."
None of Richardson, Clark or Templeton, nor any of our other affiliates,
expressed an interest in buying Pierre Foods prior to the events of 2001
described below. In the summer of 1999, in contrast, as the process of
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obtaining a firm commitment from a qualified buyer for the restaurants continued
month after month with no success, Richardson and Clark developed an interest in
bidding for the restaurants as a possible last resort.
On July 22, 1999, we signed a letter of intent with an affiliate of
Cracken, Harkey, Street & Hartnett, L.L.C., looking toward a sale of the
Claremont Restaurant Group to a Cracken Harkey affiliate, Consolidated
Restaurant Companies, Inc. A definitive purchase agreement was negotiated by the
parties but was never signed because the parties failed to reach agreement on
price. It was during the negotiations with Cracken Harkey that Richardson and
Clark began to explore the possibility of buying the restaurants themselves.
They were assisted in their consideration of this alternative by Patrick
Daugherty and his colleagues in McGuire, Woods, Battle & Boothe LLP, company
counsel. During August 1999, Richardson and Clark attempted to arrange
commercial financing for a bid to purchase the restaurants. The one other
possible buyer that was thought to be qualified and interested in the
restaurants was Carousel Capital Partners, L.P.
On September 2, 1999, in response to a request for guidance from First
Union Securities, Clark stated that it was his and Richardson's desire to
recommend to the board the sale of the restaurants to a third party at a fair
price. The reason for Richardson's and Clark's personal interest, as explained
to First Union Securities, was to serve as "a floor" for pricing the restaurants
and to thereby flush out the best possible offer from the two identified
purchaser-candidates.
Later that day, Cracken Harkey notified us through First Union Securities
that it would not be buying the restaurants. At about this time, a delegation of
our independent directors met with Hunton & Williams and engaged that law firm
to advise the board in response to a possible offer from management. The
engagement lasted but a few days as in fact a management offer was never made.
Instead, Carousel Capital made a firm offer to buy the restaurants through First
Union Securities. The board accepted that offer.
On September 10, 1999, a Carousel Capital affiliate, CRG Holdings Corp.,
signed a definitive agreement with us to purchase the Claremont Restaurant
Group. This transaction closed on October 7, 1999. Neither Carousel Capital or
CRG Holdings were then, or are now, affiliated with Pierre Foods or any of its
employees.
First Union Securities intensified its efforts to sell Pierre Foods
following the closing of the sale of the Claremont Restaurant Group. This sales
effort, which lasted several months, included preparation of a confidential
memorandum describing the Pierre Foods business, dissemination of the memorandum
to one hundred or so plausible strategic and financial buyers, further
solicitation of approximately 25 candidates and management presentations to
eight or ten interested parties.
The most interested purchaser-candidate was Castle Harlan, Inc., a New York
investment firm. We afforded Castle Harlan extensive due diligence, and we
engaged with its representatives in intensive negotiations, but as year-end
approached we had not yet settled upon an agreement as to the price for the
company. Meanwhile, our business had begun to erode because, we thought, our
management had become too engrossed in the details (especially the continuing
due diligence demands) of this possible transaction. The erosion in our business
led to an erosion in Castle Harlan's willingness to pay a price that would be
acceptable to our board. Consequently, we abandoned our attempt to sell Pierre
Foods.
In January 2001, for the reasons stated in "Purpose and Reasons of the MBO
Group for the Exchange" below, Richardson and Clark began to consider the
advisability of making an MBO offer. Our corporate and securities counsel,
Daugherty, met with Richardson, Clark and others in Hickory on January 4, 2001
and, in response to questions, provided basic information about how an MBO offer
might be organized and processed. A week later, Richardson, Clark, Daugherty and
others discussed a timeline for a going-private transaction prepared by
Daugherty at Clark's request.
When Richardson and Clark decided to pursue an MBO offer, they interviewed
Womble Carlyle Sandridge & Rice, PLLC, and, on or about January 26, 2001, they
engaged that law firm to act as counsel for a company to be formed to effectuate
the acquisition. Richardson and Clark also asked the three other shareholders of
HERTH Management, Inc. -- James M. Templeton, Gregory A. Edgell and Larry D.
Hefner -- whether they wanted to participate in the MBO. Templeton said yes.
Edgell and Hefner said no.
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On February 5, 2001, anticipating an MBO offer and the formation of a
special committee to respond to that offer, Daugherty began to contact
prospective financial advisors to determine their interest in and availability
to serve the special committee in that capacity relative to this transaction.
Our board of directors met on February 7, 2001. At the board meeting,
Richardson and Clark announced that they were prepared to organize and lead an
MBO that would result in the acquisition by their group of all or substantially
all of the stock in public hands. Clark stated that he would be acting for the
MBO team, whereas the board (excluding Richardson and Clark) would decide for
itself how to respond. The entire board (with Richardson and Clark absent from
the meeting) then met privately with Daugherty and our chief financial officer,
Pamela M. Witters. Daugherty stated that a conflict of interest had arisen
because the natural desire of the MBO team would be to acquire the entire equity
interest in the company at the lowest possible price while unaffiliated
shareholders would prefer to sell, if at all, at the highest possible price.
Reminding the directors of their fiduciary duties, Daugherty advised them to
appoint a special committee to react to the upcoming bid as it considered
appropriate, on the understanding that the special committee would ultimately
make a recommendation to the entire board. The board then acted to organize the
special committee, comprised of disinterested directors Bobby G. Holman, E.
Edwin Bradford and Bruce E. Meisner. The special committee was empowered to
consider, evaluate and negotiate the MBO offer on behalf of the board and the
shareholders of Pierre Foods other than PF Management and to make a
recommendation to the board with respect to the offer. The board did not at this
time explore alternatives to the proposed MBO because no prospective buyer had
approached the company since the termination of negotiations with Castle Harlan
at the end of 1999 and because extensive efforts had been made to attempt to
identify a potential purchaser in 1999, with no success. The directors also
inferred from the circumstances that the MBO team could and would block any
competing transaction because they then owned approximately 40% of Pierre Foods'
outstanding shares and appeared determined to purchase the company. The board
and the special committee also were aware that a competing transaction would
trigger change-of-control provisions in various agreements, resulting in the
company's insolvency.
The special committee met for the first time immediately following the
board meeting on February 7. Daugherty and Witters were present. Daugherty
reiterated that the directors were fiduciaries and remarked that the essential
role of the special committee was to assure that any transaction with the MBO
team would be fair to unaffiliated shareholders with respect to both process and
price. He advised the special committee to obtain independent legal and
financial advice, discussed the advantages and disadvantages associated with his
personal involvement in the matter and offered to introduce other corporate
counsel to the special committee should they wish to pursue that option. At the
end of the discussion the special committee elected a chairman, engaged
Daugherty's law firm as its legal counsel, heard a report from him regarding
candidates for the position of financial adviser to the special committee and
authorized him, working with special committee chairman Bobby Holman, to
continue the search for a financial adviser.
Counsel to the special committee subsequently continued initiating and
pursuing discussions with possible financial advisers. Discussions occurred on
February 9, 2001 and continued for the next two weeks, intensifying after
February 20 when a leading candidate declined the engagement due to its capacity
constraints. Counsel first made contact that same day with Grant Thornton, an
internationally recognized professional services firm that provides, among other
things, business valuations.
On February 15, 2001, PF Management Inc., a company majority-owned by
Richardson and Clark, was incorporated "for the purpose of developing a proposal
to acquire all of the outstanding shares of common stock of Pierre Foods . . .
." During the course of the ensuing negotiations with the special committee,
both counsel to PF Management and Clark negotiated on behalf of PF Management.
On February 27, 2001, the special committee received a letter from Clark,
writing on behalf of PF Management. Clark's letter indicated PF Management's
willingness to pay $1.19 per share in cash for all outstanding Pierre Foods
stock in a transaction, subject to appraisal rights, that would result in Pierre
Foods becoming a wholly-owned subsidiary of PF Management. The cash to be paid
for the shares would be obtained from loans to PF Management arranged by PF
Management shareholders and would be "fully funded" before execution of a
definitive agreement.
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On February 28, 2001, counsel for the special committee spoke with counsel
to PF Management about a possible timetable for a transaction, including the
drafting of agreements and other documents and the negotiation of terms,
particularly price. Later that day, the special committee met to consider the
indication of interest received from PF Management. Holman characterized the
offer as serious and respectful of the shareholders unaffiliated with PF
Management, adding that the special committee should rely on its financial
advisor to derive a narrow range of value for the company. The special
committee's financial advisor could be expected to refine this broad range, he
said. The special committee then heard a report from their counsel regarding his
search for a financial advisor, which had narrowed to four candidates. They
decided to engage Grant Thornton for a variety of reasons, particularly Grant
Thornton's reputation for excellence. The members also authorized Bobby Holman
to respond to PF Management with a letter soliciting drafts of legal documents.
Holman delivered a letter to Clark on March 1, 2001 commenting for the
special committee, among other things, on PF Management's indication of
interest:
"The price per share offered in your letter was the closing price of
[Pierre Foods'] stock on the Nasdaq Stock Market on the day you delivered
your letter. We will not comment on the fairness of that price now other
than to say that we consider it (and the proposed structure) respectful of
[Pierre Foods'] public shareholders. For that reason, among others, we are
willing to enter into negotiations with [you] looking toward the execution
of a definitive share exchange agreement documenting a transaction
structured along the lines you proposed. We solicit your drafts of that
agreement and of any and all ancillary documents. In providing these
drafts, understand that we consider all terms and conditions, especially
(but not only) the price per share, negotiable."
On March 2, 2001, Grant Thornton began the field work on its engagement by
touring our food processing facility in Claremont, North Carolina and
interviewing the plant's management there. As requested, our finance staff gave
Grant Thornton, among other things, detailed historical and projected financial
statements for Pierre Foods.
On March 14, 2001, Harrison Hurley and Company, financial advisors to PF
Management, telephoned counsel to the special committee to comment on the market
price of Pierre Foods common stock and the slow pace of the transaction.
Harrison Hurley's representative pointed out that the last reported trade in the
stock was at $1.00 a share, down significantly from the $1.19 offered earlier,
and that volume was reportedly very light. Noting that PF Management was not
irrevocably committed to the initially offered price, he suggested that the
special committee should engage in price negotiations soon, before PF Management
decided to decrease the offered price or withdraw its offer altogether. Counsel
to the special committee responded that the reason for the delay was that the
special committee was determined to proceed cautiously and that this meant that
the special committee would be waiting for Grant Thornton to advise it regarding
valuation and pricing before it would engage in price negotiations. Counsel to
the special committee also stated that, if PF Management would proffer a draft
of the exchange agreement, progress could perhaps be made by way of negotiating
terms other than price while Grant Thornton continued its work. Harrison Hurley
responded that a draft of the exchange agreement was expected for delivery
imminently.
Later that same day, counsel to PF Management delivered to counsel to the
special committee a draft of an exchange agreement together with a timetable of
events in furtherance and execution of the exchange. The draft of the agreement
expressly left open four issues: the date beyond which either party could
terminate the agreement unilaterally; the amount of a termination fee and
maximum expense reimbursement payable by Pierre Foods to PF Management in
certain circumstances; the maximum amount of shares permitted to dissent before
PF Management would have the right to abandon the exchange; and the price per
share of Pierre Foods common stock.
Also on March 14, 2001, Grant Thornton conducted extensive due diligence of
Pierre Foods on-site in Cincinnati. Representatives of Grant Thornton
interviewed Norbert E. Woodhams, Robert C. Naylor and Witters, toured the
company's Cincinnati facility and spoke with other company management.
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On March 15, 2001, counsel to the special committee met with
representatives of Grant Thornton at Grant Thornton's offices in Southfield,
Michigan. At that meeting, counsel to the special committee discussed the recent
history, management and governance of the company and pointed out to Grant
Thornton that there had been many related party transactions between Pierre
Foods and companies in which either or both of Clark and Richardson had an
interest, as had been and would be disclosed in Pierre Foods' periodic SEC
reports.
On March 19, 2001, Grant Thornton interviewed each of Richardson, Clark and
Witters at the company's offices in Hickory.
Also on March 19, 2001, counsel to PF Management phoned counsel to the
special committee to advise him of PF Management's offer on three points not yet
addressed: the outside termination date, proposed to be December 31, 2001; the
proposed amount of the termination fee ($1,000,000) and the maximum amount of
reimbursable expenses ($500,000); and the maximum number of dissenting shares
(5%).
Then, in the late afternoon of March 19, 2001, the special committee met in
person in Hickory with its counsel to discuss in detail the terms and conditions
of the exchange reflected in the initial draft of the exchange agreement as
supplemented orally by counsel to PF Management earlier in the day. Counsel
commented on various provisions of the draft, including the following items,
that in his view should be negotiated for the protection of unaffiliated
shareholders: Attention would need to be given to the holders of outstanding
stock options. Material private litigation against the company should be added
as a basis upon which the company could terminate the transaction. The proposed
termination fee of $1 million, plus expenses of up to $500,000, was
unjustifiably high; these amounts should be lower so as not to deter other bids.
The "market out" condition to closing should be modified to reflect the
unimportance to the company of New York Stock Exchange developments and the
historical fact that war is not detrimental to the company's business. Also,
although the special committee was not overly concerned about PF Management's
ability to obtain financing, it would be useful to see evidence of that
financing. The members of the special committee agreed with counsel's
suggestions. Counsel to the special committee was then authorized and directed
to present, to counsel for PF Management, the positions of the special committee
on all issues other than price (as to which the special committee was awaiting
guidance from Grant Thornton) and, with the guidance and concurrence of Chairman
Holman, to negotiate the best possible terms and conditions with the ultimate
objective being to present a recommended draft to the special committee for its
consideration.
On March 20, 2001, counsel to the special committee met with counsel to PF
Management to negotiate all terms and conditions of the exchange agreement other
than price. Following this session, counsel to PF Management discussed the
issues and the proposed compromises and resolutions with PF Management, then
produced and delivered to opposing counsel a new draft of the agreement.
Also on March 20, 2001, Grant Thornton made an oral report of its
preliminary valuation findings to counsel to the special committee and Witters.
Grant Thornton reported that it was using the comparable companies, comparable
transactions and discounted cash flow valuation methodologies (and provided
lists of companies and transactions, without more). Grant Thornton indicated
that a price per share between $1.23 and $1.28 would be appropriate. A price per
share as high as $1.44 was defensible, in Grant Thornton's preliminary view,
based solely on an application of its comparable companies approach and assuming
normalized expenses going forward. Without detailing its analyses, Grant
Thornton advised counsel to the special committee and Witters that the "best"
valuation approach was to consider the results of the comparable companies,
comparable transactions and discounted cash flow analyses in combination, not
the results of one analysis alone. Counsel to the special committee and Witters
concurred. Agreeing in its meeting the next day (discussed further below), the
special committee adopted this approach, which is why the outlying price of
$1.44 per share was not pressed in the ensuing price negotiations.
On March 21, 2001, counsel to the special committee met again with counsel
to PF Management to obtain PF Management's views on changes requested the day
before but not yet agreed upon as reflected in the current draft. One key
provision was the termination fee payable upon exercise of Pierre Foods'
"fiduciary out," where PF Management was willing to accept less than previously
demanded, yet still wanted a sum
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($500,000) in addition to recovery of expenses (still capped at $500,000).
Counsel also discussed among themselves appropriate provisions covering the
exercise or termination of outstanding stock options.
Later that same day, the special committee met again in person in Hickory,
with Witters participating by telephone from Cincinnati and counsel
participating by telephone from Charlotte. In this meeting, counsel related to
the special committee the preliminary valuation analyses and findings of Grant
Thornton, mentioning the range of $1.23 to $1.28 per share and the outlying, but
defensible, price of $1.44 per share. Hearing this, the special committee was of
the view that it should negotiate the best price attainable at or above $1.23
per share. Chairman Holman was tasked to do this. Holman stated that he would
discuss Grant Thornton's analyses with representatives of Grant Thornton, to
better understand the data and the financial advisor's preliminary conclusions
so as to aid him in negotiations, before negotiating the price.
Also during this meeting, counsel to the special committee reviewed in
detail with the other meeting participants the progress in negotiating and
documenting the exchange agreement as to all terms other than price. There
seemed to be no solution for resolving the outstanding stock options other than
to cancel the options. The amount of the termination fee had declined, as
requested in negotiations, but counsel thought the special committee should seek
further improvement. The special committee agreed. It was noted that the current
draft of the exchange agreement referred to a financing commitment letter.
Members of the special committee indicated an interest in seeing a copy of that
letter if and when it became available. As the discussion ended, the special
committee confirmed its counsel's authority and directive to continue
negotiating with opposing counsel, the objective being to present an agreed-upon
draft (including a price per share negotiated by Chairman Holman) to the special
committee for its consideration.
Immediately following the meeting of the special committee, its counsel
engaged counsel to PF Management in dialogue regarding open issues in the
exchange agreement. Subject to consideration of precedents, it was agreed that
the termination fee payable upon exercise of the company's "fiduciary out" would
be $100,000 plus reimbursement for actual expenses and that the termination fee
payable by reason of Pierre Foods' material breach of the exchange agreement
would be somewhat less -- $50,000 plus expenses. Counsel to PF Management agreed
that the company's bylaws require approval of the exchange by the favorable vote
of at least 75% of the outstanding shares. Both counsel noted in this regard
that, given PF Management's covenant in the draft exchange agreement to maintain
its share ownership at less than 50% before the vote, the 75% minimum would
assure that the exchange would not be approved without the approval of a
majority of the shareholders of Pierre Foods unaffiliated with PF Management.
Finally, it was agreed that Pierre Foods would use its best efforts to cause all
outstanding options to be exercised or cancelled by the time of mailing of
definitive proxy materials, failing which PF Management could abandon the
exchange.
Special committee chairman Bobby Holman, together with Witters and counsel
to the special committee, consulted with Grant Thornton on March 26, 2001, as
anticipated in the immediately preceding meeting of the special committee. The
purpose and focus of this meeting was for Grant Thornton to articulate its
valuation determinations in detail as a predicate for price negotiations to be
carried out by Holman personally. To that end, Grant Thornton provided to
Holman, Witters and counsel to the special committee a bullet-point summary of
various data sources that it had used to prepare its preliminary valuation
determinations, together with preliminary financial models that it had developed
in its analysis. Grant Thornton described the various methodologies that it had
used to value Pierre Foods. First, it had used the "comparable companies"
methodology, comparing the financial and stock market performance of Pierre
Foods and certain ratios and multiples of Pierre Foods to the financial and
stock market performance and corresponding ratios and multiples of Bridgford
Foods, Earthgrains Company, Hormel and Rymer Foods, four publicly-held companies
in the food processing industry that were considered by Grant Thornton to be
generally comparable to Pierre Foods. Second, Grant Thornton had analyzed the
proposed MBO relative to 15 recent "comparable transactions" in the food
processing industry. Grant Thornton stated that it had selected these 15
transactions because the target companies had general business, operating and
financial characteristics similar to those of Pierre Foods. Third, Grant
Thornton had utilized a "discounted cash flow" (or "income") approach to valuing
Pierre Foods, stating that, under this approach, it had performed discounted
cash flow analyses to estimate the present value of Pierre Foods under four
different scenarios. All four scenarios focused on projected income statements
and debt-free net cash flows for fiscal years 2002 through 2006.
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Grant Thornton stated that, rather than applying only one valuation method,
it was necessary to weigh the methods to obtain an appropriate valuation,
because each method is dependent on its own set of facts and circumstances and,
when considered in combination, they provide a better indication of value for
Pierre Foods' shares than any one of them does in isolation. Accordingly, Grant
Thornton assigned the comparable companies methodology a 50% weight, the
comparable transactions approach a 25% weight and the discounted cash flow
approach a 25% weight. Grant Thornton stated that, based upon its preliminary
calculations and refinements in its analysis, it had adjusted the estimated
range of fair market values for Pierre Foods downward from its earlier
indication of $1.23 to $1.28 per share to a new range of $1.14 to $1.23 per
share. This adjustment was made based on Grant Thornton's receipt after March
20, 2001 of Pierre Foods' financial information through the end of the 2001
fiscal year, which had not previously been available to Grant Thornton. The
adjustment also reflected maturation of Grant Thornton's perspective on the
appropriate weighting of the three methodologies.
Holman and Clark met in Hickory at 9:00 a.m., local time, on March 27,
2001, with counsel to the special committee, representatives of Harrison Hurley
and counsel to PF Management all participating in that meeting from various
locations by conference telephone. Holman began the meeting by acknowledging PF
Management's earlier offer of $1.19 per share and by countering that offer with
an offer of $1.30 on behalf of the special committee. The special committee's
decision to begin negotiations with an offer of $1.30, rather than $1.44, which
was then the highest price that Grant Thornton had identified as defensible, was
based on the special committee's belief that PF Management would not pay $1.44
per share and the special committee's desire to counter with an offer that it
believed would be in the range of prices that PF Management would be willing to
consider. When a representative of Harrison Hurley pointed out that the stock
was then trading on Nasdaq at less than $1.00 per share, Holman indicated that a
price between $1.19 and $1.30 could be negotiated. Clark asked for an
adjournment.
At 10:20 a.m., the meeting was reconvened among the same participants. At
Clark's request, a representative of Harrison Hurley presented his firm's
analyses of Pierre Foods' value. Harrison Hurley's balance sheet analysis
yielded a value that its representative described as immaterial. Its analysis of
cash flow in relation to companies that it considered comparable yielded a price
per share of zero. Counsel to the special committee remarked that Grant Thornton
had arrived at a valuation range higher than Harrison Hurley's indications by
considering comparable companies and comparable transactions in terms of total
invested capital to total revenues. Clark responded that he considered Grant
Thornton's approach to be typical of "dot-com" companies, not of food processing
companies. Clark noted, however, that the two financial advisors' conclusions
were broadly similar in so far as each concluded that Pierre Foods' situation
was unusual because it has continuing losses from operations and tangible assets
less than its liabilities. Each firm targeted similar food-oriented companies as
benchmarks for its comparative evaluations. Although the two firms' conclusions
vary slightly, upon evaluation of either report one might conclude that Pierre
Foods had no value due to its high leverage and lack of tangible assets.
Nevertheless, Grant Thornton and Harrison Hurley each placed a value on Pierre
Foods based upon industry trends and cash flow, for lack of any other useful
benchmarks historically relied upon in conducting valuations of companies.
Clark indicated that the buyout group put more weight on pure financial
analysis than it did on market comparables, particularly market transactions. At
this point, counsel to the special committee asked what the position of PF
Management would be with respect to a solicitation of other bids for Pierre
Foods. Clark responded that PF Management would most definitely oppose a
competing bid. (PF Management had implied opposition to a competing bid in
discussions and negotiations as early as February 7, 2001, but had not stated
its opposition plainly until now.) Clark stated that, while he thought he could
justifiably seek a decrease from PF Management's original bid of $1.19, in the
interest of proceeding with the transaction he would now bid $1.21 per share.
Following a short recess in which Holman consulted with counsel to the
special committee, at 11:10 a.m. the meeting was reconvened with the same
participants. Holman asked Clark whether there was any room for improvement in
the offered price. Clark answered that $1.21 per share was PF Management's best
and final offer. Holman then stated that this price was within a range that he
believed the special committee was prepared to accept; that he would recommend
to the special committee that it accept that price; and that he
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believed the special committee would recommend the exchange to the entire board
of directors at that price. Counsel to the special committee observed that the
termination fee and certain other terms and conditions of the exchange agreement
(other than price) remained to be negotiated to a conclusion. Counsel to PF
Management noted that Holman and Clark had only agreed upon a price subject to
the approval of all terms and conditions (including price) to be included in an
exchange agreement that would be finalized and submitted for various corporate
approvals.
On the late afternoon of March 29, 2001, Clark observed that Pierre Foods'
stock had closed at $1.63 per share on Nasdaq, up from $1.06 the day before,
apparently as the result of a news leak regarding the proposed MBO and ensuing
market speculation. On the advice of counsel to the special committee, concurred
in by counsel to PF Management, a press release was prepared and issued before
trading began the following morning. The press release stated in pertinent part
as follows:
"Pierre Foods, Inc. (NASDAQ: FOOD) today announced that it is in
advanced talks with a management group that reportedly owns 49% of the
company's outstanding common stock and seeks to purchase, for cash, all
shares owned by unaffiliated investors.
"A special committee of the company's board of directors has been
negotiating the terms of a possible transaction with the management buyout
group. . . . The price range under discussion for the stock owned by public
shareholders is significantly lower than the $1.63 price per share last
reported by the Nasdaq Stock Market yesterday. . . .
"In April, the committee and the buyout group are expected to complete
their negotiations and the committee is expected to bring this matter to
the full board. An announcement will be made of any material action taken
by the board."
So that timely disclosure of the proposed MBO would be available to
investors, we filed this press release with the SEC on Form 8-K on the same day
it was issued. The substance of the release was reported in The Wall Street
Journal the next business day -- April 2, 2001.
On April 3, 2001, counsel to PF Management delivered to the special
committee, through counsel, a revised draft of the exchange agreement said to
reflect the current state of negotiations between the parties.
On April 5, 2001, counsel to the special committee, counsel to PF
Management and Clark discussed a timetable covering, among other things, the
organization of PF Management, the consideration of the exchange by PF
Management, the special committee and the board of directors of Pierre Foods,
the execution and delivery of the exchange agreement and public announcement of
the signing of the exchange agreement. This timetable was refined in subsequent
conversations among the parties and their counsel.
On April 6, 2001, Harrison Hurley commented directly to Grant Thornton on
the transaction data utilized by Grant Thornton in its comparable transactions
analysis, Grant Thornton having provided that data to Harrison Hurley on a prior
occasion. Grant Thornton did not revise its analysis, methodologies, advice or
conclusions based on the receipt of this information.
Counsel to the special committee spoke with counsel to PF Management with
respect to the current draft of the exchange agreement on April 9, 2001. Counsel
observed that, according to the draft (and in contrast to earlier discussions
and expectations), PF Management would not represent and warrant that it could
finance the exchange. In a conversation with Clark, it was agreed that the
change regarding financing might remain in the document only if PF Management
would abandon any claim to a termination fee (in excess of its actual expenses).
Clark agreed to abandon the termination fee, provided that PF Management's
covenant to maintain its share ownership at less than 50% before the vote was
also deleted. Counsel to the special committee acknowledged that, without this
covenant, there was no assurance that approval of the transaction would require
approval by a majority of the shareholders unaffiliated with PF Management.
Counsel to the special committee advised the special committee of these
developments and consulted with Holman on April 11, 2001. It was resolved that
the special committee would not approve a sale of the company to PF Management
(or to any other buyer) until a covenant that financing would be available for
the
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exchange was included in the exchange agreement. Counsel to the special
committee delivered that message to counsel to PF Management the next day.
Also on April 11, 2001, counsel to PF Management delivered to counsel to
the special committee, for its information, a draft of an amendment to the
Schedule 13D filed with the SEC by Richardson, Clark and others, together with a
draft of a Schedule 13D to be filed with the SEC following the first acquisition
of Pierre Foods common stock by PF Management.
On April 13, 2001, a representative of PF Management telephoned counsel to
the special committee to discuss the financing issue. In that discussion, it was
agreed that, in the exchange agreement, PF Management would represent and
warrant that PF Management and its shareholders collectively have cash and
credit sufficient to pay the aggregate exchange consideration and to consummate
the transactions contemplated by the agreement. After further discussion, it was
agreed that Richardson and Clark would commit their personal resources and
credit to the exchange transaction and would therefore become parties to the
exchange agreement for that purpose. Immediately thereafter, counsel to the
special committee confirmed with Chairman Holman that this resolution would
satisfy the special committee.
On April 16, 2001, PF Management delivered to the special committee,
through counsel, another draft of the exchange agreement.
On April 17 and 18, 2001, PF Management and its counsel worked with our
management and with counsel to the special committee on the text of this proxy
statement and other SEC filings. They consulted with one another on these days,
and beyond, regarding the sequence of events pursuant to which PF Management
would acquire shares of Pierre Foods stock from Richardson, Clark and Templeton
incident to the organization of PF Management, as well as the regulatory
consequences of those transactions. Leading up to the meetings held on April 26,
2001, PF Management and its counsel also worked with our management and with
counsel to the special committee with respect to the sequencing of, the agendas
for, the presentations to be made and the resolutions to be considered at those
meetings.
On April 19, 2001, counsel to PF Management and counsel to the special
committee discussed the current draft of the exchange agreement with one
another. Counsel to the special committee noted, and opposing counsel agreed,
that the only substantive change needed in that draft was a refinement of a
Pierre Foods representation and warranty to the effect that Grant Thornton's fee
would be payable pursuant to its letter agreement dated February 27, 2001 as
amended by a letter dated April 12, 2001. The Grant Thornton engagement letter
had been amended by agreement with the special committee to include work by
Grant Thornton needed on this proxy statement. Later that day, counsel to the
special committee delivered a copy of the April 12, 2001 Grant Thornton letter
amendment to PF Management by fax.
Promptly following that discussion, PF Management delivered to the special
committee, through counsel, the final draft of the exchange agreement. In the
week leading up to the meetings of April 26, 2001, the parties and their counsel
prepared documents for filing with the SEC and the public and generally prepared
for the meetings.
On April 26, 2001, following a meeting of the shareholders of PF Management
during which the shareholders (Richardson, Clark and Templeton) approved and
adopted the exchange agreement, the special committee met in person with its
counsel in Hickory. Grant Thornton presented its final valuation analyses and
conclusions during the meeting. See "-- Opinion of Pierre Foods' Financial
Advisor." Upon request, Harrison Hurley addressed the special committee with
respect to PF Management's and its shareholders' assurances of financing.
Counsel to the special committee was present throughout the meeting.
Following a discussion by the special committee consisting essentially of
consideration of the factors mentioned under "-- Recommendation of the Special
Committee and the Board of Directors," the special committee resolved
unanimously to recommend to the entire board of directors that it approve and
adopt the exchange agreement and the exchange and that the board recommend to
the shareholders that they approve and adopt the agreement and the exchange.
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Later that same day, the board of directors met and the entire board took
up the exchange and the exchange agreement outside the presence of Richardson
and Clark. Counsel to the special committee and the board was present throughout
the meeting. Again Grant Thornton presented its final analyses and conclusions.
See "-- Opinion of Pierre Foods' Financial Advisor." Again Harrison Hurley spoke
to the directors about the assured financing.
Following a discussion by the board consisting essentially of the factors
mentioned under "-- Recommendation of the Special Committee and the Board of
Directors," the board (other than Richardson and Clark, who were not present for
any part of the discussion or the vote) resolved unanimously to approve and
adopt the exchange agreement and the exchange and recommended that the
shareholders of Pierre Foods approve and adopt the agreement and the exchange.
The exchange agreement was signed immediately following the board meeting.
We issued a press release announcing the execution of the exchange agreement
before the stock market opened for trading the next morning. In the weeks that
followed, PF Management and its counsel worked closely with us and our counsel
relative to preparing, filing and processing this proxy statement and related
documents.
On June 6, 2001, the board of directors received a letter from Equity
Acquisitions, Inc., a South Carolina corporation said to be wholly-owned by Mr.
Gregory A. Edgell, a former affiliate of Pierre Foods. See "Certain
Relationships and Related Party Transactions." In this letter, Equity
Acquisitions gave notice that it intended to commence a tender offer for all of
the outstanding common stock of Pierre Foods at a purchase price of $1.44 per
share. The tender offer would be subject to the condition that at least 75% of
Pierre Foods' outstanding shares would be tendered. Equity Acquisitions noted
that the rights agreement dated September 2, 1997 between Pierre Foods and
American Stock Transfer & Trust Company contained provisions which could prevent
the completion of its tender offer. Accordingly, Equity Acquisitions requested
that a majority of the board, pursuant to the rights agreement, determine that
Equity Acquisitions' offer represented a fair price to the shareholders and was
otherwise in the best interest of Pierre Foods and its shareholders. Equity
Acquisitions also asked the board to commit to enter into an agreement and plan
of share exchange with Equity Acquisitions on terms (other than price)
substantially identical to the terms of the exchange agreement between the
company and PF Management. Finally, the letter stated Equity Acquisitions'
belief that the change-of-control agreements presently in place with various
senior executives of Pierre Foods, including members of the management buy-out
team, were out of proportion to the value these executives had provided to
Pierre Foods. Equity Acquisitions asked that these agreements be terminated
immediately and concluded by requesting a response to its letter no later than
June 11.
As required by the terms of the exchange agreement, counsel to the special
committee delivered copies of the letter from Equity Acquisitions to
representatives of PF Management and began to discuss possible responses with
representatives of PF Management and with the one special committee member who
was available at that time. In these discussions, PF Management reiterated its
opposition to any competing bid, including this one, and questioned the legality
of Equity Acquisitions' offer. Counsel to the special committee delivered a copy
of Equity Acquisitions' letter to Grant Thornton and asked Grant Thornton to
prepare to advise the special committee from a financial point of view at a
meeting to be scheduled on short notice.
The special committee met by conference telephone with their counsel and
Witters during the morning of June 11, 2001 to consider the Equity Acquisitions
letter. The directors expressed many concerns about the proposal, all of which
were reflected in the written response authorized by the special committee and
described below. The special committee also solicited Grant Thornton's views. A
representative of Grant Thornton who was brought into the meeting remarked that
Equity Acquisitions' offer placed constraints on Pierre Foods that could not be
satisfied without rendering Pierre Foods insolvent. The Grant Thornton
representative added that nothing in the proposal dissuaded his firm from its
earlier opinion that the exchange consideration offered by PF Management was
financially fair to shareholders unaffiliated with PF Management. Following this
discussion, the Grant Thornton representative was excused from the meeting and
the special committee unanimously reaffirmed its judgment that the exchange is
fair to, and in the best interests of, the shareholders. The special committee
delegated to Bruce Meisner the task of working with counsel to the special
committee to prepare and approve a written response to Equity Acquisitions'
proposal.
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A letter signed by Meisner on behalf of the special committee and delivered
to Equity Acquisitions later that day responded to the Equity Acquisitions'
proposal as follows: The special committee identified to Equity Acquisitions
several structural problems with respect to its offer. First, the special
committee noted that the tender offer for shares of Pierre Foods would be
subject to the condition that at least 75% of all outstanding shares be
tendered. The special committee noted that this would constitute a "change of
control" under the company's indenture, entitling the holders of all senior
notes (with an aggregate face amount of $115 million) to "put" their notes to
Pierre Foods for 101% of the face amount. The special committee informed Equity
Acquisitions that Pierre Foods would not be in a position to satisfy that
obligation and that the triggering of the "put" obligation would render the
company insolvent. The special committee stated that it did not believe that the
insolvency of Pierre Foods would be in the best interest of the company and its
shareholders. The special committee also stated its belief that there was no
basis for Pierre Foods to terminate the change-of-control agreements presently
in place with senior executives and other individuals, which had been entered
into long ago and remained valid obligations of the company. Third, the special
committee noted that Equity Acquisitions had not disclosed how its tender offer
would be financed, nor had Equity Acquisitions presented any information about
the financial condition or financing capabilities of itself or its sole
shareholder, Edgell. Lastly, the special committee stated that PF Management had
confirmed since the delivery of Equity Acquisitions' letter that it would not
tender its shares to Equity Acquisitions and would vote against any shareholder
proposal to approve any agreement with Equity Acquisitions. Thus, the special
committee stated, Equity Acquisitions' minimum condition of a 75% tender could
not be satisfied. The special committee concluded the letter by stating that it
believed it was detrimental to the interest of the company and its shareholders
to agree to a transaction which could not be closed, particularly when pursuing
such a transaction would ultimately require the special committee and the
company to abandon the proposed MBO which was an achievable transaction and to
which the special committee and the company was already committed, which offered
shareholders liquidity and protected them against further share price decreases.
Notwithstanding the foregoing, the special committee welcomed any solutions that
Equity Acquisitions might have to the problems the special committee had
outlined in its letter.
On June 15, 2001, the special committee received a reply to its letter from
Equity Acquisitions containing a modified proposal. First, Equity Acquisitions
eliminated the minimum tender condition, which, considering PF Management's
opposition to the tender offer, eliminated the risk that the change-of-control
provisions of the senior notes would be triggered. Equity Acquisitions stated
that it believed the special committee could recommend that the board make a
facilitative finding under the rights agreement to the effect that Equity
Acquisitions' proposed tender offer was at a price that was fair to the
shareholders and otherwise in the best interests of the company and its
shareholders. Equity Acquisitions also stated that it believed its proposed
tender offer could be found to be a "superior proposal" (as defined in the
exchange agreement between Pierre Foods and PF Management) in comparison to the
"offer" made by PF Management. Equity Acquisitions noted that, since its
proposal did not contemplate acquiring control of Pierre Foods, PF Management's
commitment to vote against a competing transaction was no longer relevant.
Equity Acquisitions asserted that its proposed tender offer and the "offer" of
PF Management were not in conflict and could be pursued simultaneously. Equity
Acquisitions stated that it was prepared to demonstrate its ability (financial
and otherwise) to commence and complete the proposed tender offer, but that it
believed such a demonstration was premature.
Again as required by the exchange agreement, counsel to the special
committee delivered copies of the letter from Equity Acquisitions to
representatives of PF Management. Grant Thornton also was given a copy of the
letter and was asked to analyze it from a financial point of view.
On June 19, 2001, representatives of PF Management informed counsel to the
special committee that Richardson was preparing to sue Edgell and the accounting
firm in which Edgell was a partner, and outlined the nature of the claims.
On the afternoon of June 20, 2001, the special committee received from
counsel to PF Management and Richardson a copy of a letter signed by such
counsel and delivered to Edgell's accounting firm earlier in the day. The letter
asserted that Richardson had been a client of Edgell's for more than 30 years,
had been a client of the accounting firm for more than 20 years, and that,
throughout that period, Edgell had been Richardson's
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personal accountant. The letter stated that Richardson had given Edgell
extensive personal and confidential financial information. In the spring of
2001, it said, Richardson invited Edgell to join Richardson, Clark and others to
acquire all the outstanding stock of Pierre Foods, but Edgell announced that he
was not interested in owning Pierre Foods' stock. Edgell instead offered to sell
his Pierre Foods shares to Richardson, the letter said, and, on April 17, 2001,
Richardson bought Edgell's shares. The letter made the following claims:
Edgell's proposals to acquire Pierre Foods stock were not sincere, but instead
were part of a plan designed to prevent Richardson and Clark from acquiring
Pierre Foods. Edgell had used and disclosed, and was continuing to use and
disclose, Richardson's confidential personal financial information to carry out
his plan. As a fiduciary, Edgell owed Richardson the duties of utmost loyalty,
good faith, full disclosure and complete confidentiality. Edgell had violated
each of these duties by deceiving Richardson about his intentions, taking action
adverse to Richardson and using Richardson's own confidential information to
develop a competing proposal. The letter concluded by stating that Richardson
intended to file suit if Edgell did not abandon his plan to subvert PF
Management's acquisition of Pierre Foods.
On June 22, 2001, the special committee received a third letter from Equity
Acquisitions. In this letter, Equity Acquisitions stated that it had received
the letter from counsel to PF Management and Richardson summarized above. Equity
Acquisitions stated that it believed the litigation threat had no basis, but
that, considering the impact that the threat might have on Equity Acquisitions'
ability to successfully conclude its proposed tender offer, Equity Acquisitions
was withdrawing its proposal. In this letter, Equity Acquisitions ostensibly
reserved the right to reinstitute its proposal at any time.
Upon Equity Acquisitions' withdrawal of its proposal, the several members
of the special committee determined to take no further action in response to the
proposals and suggestions that had been made by Equity Acquisitions.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS
As discussed above under "-- Background of the Exchange," the special
committee and the board of directors (other than Richardson and Clark)
unanimously determined that the exchange agreement and the exchange are fair to
and in the best interests of the Pierre Foods shareholders unaffiliated with PF
Management. THE SPECIAL COMMITTEE AND THE BOARD RECOMMEND THAT YOU VOTE "FOR"
THE APPROVAL OF THE EXCHANGE AGREEMENT AND THE EXCHANGE.
The special committee and the board of directors consulted with their
financial and legal advisors, drew on their knowledge of our business,
operations, properties, assets, financial condition, operating results,
historical public share trading prices and prospects and considered the
following factors, each of which, in the opinion of the special committee and
the board, supported their determination that the exchange agreement and the
exchange are substantively fair to and in the best interests of the shareholders
unaffiliated with PF Management:
- the belief of the special committee and the board that the liquidity and
assurance against further loss afforded by the exchange was better for
the unaffiliated shareholders than continuation of the status quo. The
special committee and the board concluded that, based on Pierre Foods'
limited trading volume, the lack of institutional sponsorship and public
float, its small market capitalization and the lack of research attention
that it received from market analysts, Pierre Foods' continuing status as
a public company would limit the ability of Pierre Foods' shareholders to
obtain a fair price by selling their shares in the market. See
"-- Background of the Exchange" and "-- Projections." The special
committee and the board believed that the liquidity offered by the
exchange is an advantage of the exchange distinct from the status quo and
that liquidity in general is in the best interests of the unaffiliated
shareholders. Noting that the general trend in the market price of Pierre
Foods common stock has been downward in recent periods, the special
committee and the board observed that liquidation of the value of the
shares through the exchange will protect the unaffiliated shareholders
from further loss, and they believed that protection from further loss is
in the best interests of the unaffiliated shareholders. See "Information
Regarding Pierre Foods -- Market Prices of Common Stock; Dividends."
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- the fact that the $1.21 per share exchange consideration represented a
significant premium to the closing price of the Pierre Foods common stock
on March 27, 2001, the day that PF Management made its final
offer. Specifically, the special committee and the board recognized that
the exchange consideration was 33%, or $.30, above the $.91 per share
closing price on that day. The special committee and the board also
recognized that the exchange consideration was 37.6%, or $.73, below
$1.94, the highest market price of the Pierre Foods common stock after
the date of PF Management's final offer (shares traded at this price on
March 30), and 3.2%, or $.04, below the $1.25 market price for the stock
on April 26, the date the special committee and board approved the
transaction. The special committee and the board believed that the latter
prices were based on uninformed market speculation, however, and
concluded that they were not relevant to a fairness determination. The
exchange consideration was 1.6%, or $.02, below the $1.23 per share
closing price of the Pierre Foods common stock on July 5, 2001. See
"Information Regarding Pierre Foods -- Market Prices of Common Stock;
Dividends." The special committee and the board believed that the premium
of the exchange consideration to the market price of the stock on the day
that the exchange was "priced" indicates the substantive fairness of the
exchange because the market price at that time was not impacted by the
"noise" of the exchange, as later market prices were necessarily
impacted.
- the financial advisor's opinion to the special committee and the board to
the effect that the exchange consideration is fair to Pierre Foods'
unaffiliated shareholders from a financial point of view. The special
committee and the board believed that agreeing to, and recommending, a
price within a range considered fair from a financial point of view by an
independent valuation expert such as Grant Thornton was a particularly
strong indication of the substantive fairness of the exchange. Grant
Thornton analyzed the going-concern value of Pierre Foods using the
comparable companies, comparable transactions and discounted cash flow
methodologies. The special committee and the board concurred in Grant
Thornton's conclusion that indicia such as net book value and liquidation
value were less meaningful than the methodologies selected by Grant
Thornton because of the nature of Pierre Foods' assets and business,
because Grant Thornton concluded that net book value was below the range
of fair value determined by use of the selected methodologies and did not
reflect the going-concern value of Pierre Foods and because Grant Thornton
found no evidence of hidden assets or other factors that might lead it to
believe that a liquidation value analysis would be relevant. The special
committee did not consider Grant Thornton's initial analysis of range of
values between $1.23 and $1.28, and a price of up to $1.44 as defensible,
since this initial analysis had later been superceded by Grant Thornton.
The special committee and the board noted in particular that:
- the per-share value calculation resulting from consideration of only
Grant Thornton's comparable companies methodology or of only its
comparable transactions methodology was, in each case, in excess of the
exchange consideration, but they concluded that these methodologies
considered independently were not the best indicators of fair value for
Pierre Foods because each is dependent on its own set of facts and
circumstances such that they provide a better indication of value for
Pierre Foods' shares when considered in combination. Thus, the special
committee and the board concurred with Grant Thornton's conclusion that
the most relevant of the possible valuation methodologies was one that
averaged the per-share values produced by utilization of the comparable
companies, comparable transactions and discounted cash flow
methodologies;
- the unwillingness of the two most senior members of senior management to
remain with Pierre Foods in a transaction other than a management-led
buyout made Pierre Foods less attractive to potential purchasers because
of uncertainty as to whether Pierre Foods would be able to continue its
historical financial performance or achieve the financial results of the
projections prepared by our management with respect to Pierre Foods'
financial performance for fiscal years 2002 through 2004 without these
senior managers;
- a number of the comparable companies and comparable transactions used in
Grant Thornton's analyses were not truly comparable to Pierre Foods in
terms of size, market capitalization, financial performance or other
relevant factors, supporting Grant Thornton's conclusion that an average
of the
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per-share values produced by its three methodologies, including the
discounted cash flow methodology, was most relevant to the exchange; and
- the exchange consideration was within the range of values determined by
Grant Thornton to be fair from a financial point of view.
- the inability of any financial or strategic buyer other than PF
Management to acquire Pierre Foods without triggering insolvency. The
special committee and the board considered the fact that, because of an
indenture covenant giving the senior noteholders "put" rights upon a
change of control, the only transaction in which Pierre Foods'
shareholders unaffiliated with PF Management could be bought out is a
management buyout. Specifically, the indenture governing Pierre Foods'
senior notes entitles the holders of the notes to put their notes to
Pierre Foods for 101% of their face amount if more than 50% of the
outstanding common stock is acquired by any person other than Richardson,
Clark or James E. Harris, our former chief financial officer, and any
entity controlled by them. Triggering this put right would render Pierre
Foods insolvent. The special committee and the board determined,
therefore, that the only realistic buyer of Pierre Foods is PF Management
and that, considering the company's financial condition, it would be
better for the shareholders unaffiliated with PF Management to receive
$1.21 per share than for them to risk receiving no return of their
investment. Put another way, the directors concluded that the best price
available from the only plausible buyer of a distressed company, Pierre
Foods, was a "fair" price. It was also noted that the indenture covenant
was entered into in June 1998, long before an MBO was planned by
Richardson or Clark, and that at that time Richardson and Clark already
beneficially owned more than 36% of Pierre Foods' outstanding stock.
- the negotiations between the special committee and PF Management,
resulting in its offer price being increased from $1.19 to $1.21. The
special committee and the board considered the fact that these
negotiations were conducted over a period of more than six weeks. The
special committee and the board believed that the $1.21 exchange
consideration was the highest price that PF Management would offer. See
"-- Background of the Exchange." They believed that obtaining the highest
price that would be offered by the only plausible buyer of a distressed
company was substantively fair to, and in the best interests of, the
unaffiliated shareholders.
- the covenant of Richardson and Clark individually to pay the cash
exchange consideration from their own funds and from financing they would
arrange and personally guarantee. The special committee and the board
believed that it was better for the shareholders unaffiliated with PF
Management to receive these assurances of financing than it was for them
not to have financing assured because the assurance of financing meant
that it was more likely that the exchange would be consummated.
- the terms and conditions of the exchange agreement, particularly the
provisions giving the board the right, subject to conditions, to respond
to unsolicited inquiries, to modify or withdraw its recommendation and to
pursue a more favorable transaction with a third party. The special
committee and the board also considered the fact that the exchange
agreement provided for the payment, in such circumstances, of PF
Management's actual out-of-pocket expenses incurred in connection with
the transaction, but no more, which the special committee and the board
believed, under the circumstances, would not have an unreasonably
preclusive effect on competing offers. See "The Exchange --
Nonsolicitation Covenant" and "-- Termination Fee." The special committee
and the board realized that these provisions were of limited utility in
light of Richardson's and Clark's change-of-control agreements and the
decision by PF Management to oppose any competing transaction, yet they
also believed that it was better for shareholders unaffiliated with PF
Management to have the benefits of these provisions than it was for them
to forego the benefits because it was theoretically possible that a
bidder might be willing to pay a "blockbuster" price for the company, in
which case the special committee and the board would need flexibility to
consider and act on the competing proposal.
- the fact that between March 30, 2001, when the MBO negotiations were
publicly announced, and April 26, 2001, when the board approved the
exchange agreement, the company received no offers, inquiries or
solicitations regarding alternative transactions. See "-- Background of
the Exchange." The special committee and the board viewed the lack of
interest from other possible bidders during this
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period as confirmation of their view that PF Management was the only
plausible buyer of Pierre Foods and that it was a waste of resources to
market the company more than had been done already. See "Special
Factors -- Background of the Exchange."
- the fact that completion of the exchange pursuant to the exchange
agreement is not subject to satisfaction of any "due diligence"
condition, which would likely not be the case in any competing
transaction. The special committee and the board believed it was in the
best interests of Pierre Foods and of the shareholders unaffiliated with
PF Management to pursue a transaction with no due diligence condition
because this would save Pierre Foods from expending significant time and
personnel resources providing due diligence materials, would avoid
disruption of the company's day-to-day business activities and would
provide greater certainty of the closing of the transaction without
further negotiation of the terms of the exchange.
- the requirement that the exchange be approved by the holders of 75% of
the outstanding shares of Pierre Foods common stock. The special
committee and the board considered that this requirement would facilitate
an informed vote by the shareholders on the merits of the transaction
without requiring a tender of shares or other potentially coercive
transaction structure and would implicitly require (because PF Management
and Pierre Foods' officers and directors own less than 75% of the
outstanding shares) that at least some shareholders unaffiliated with PF
Management must vote to approve the transaction. See "The
Exchange -- Conditions." The special committee and the board believed
that a transaction requiring the approval of at least some unaffiliated
shareholders was more likely than a transaction without such a
requirement to be substantively fair to, and in the best interests of,
unaffiliated shareholders in general.
- the stated opposition of PF Management to any competing transaction,
which effectively precludes any competing transaction because of PF
Management's controlling position in Pierre Foods common stock. As the
owner of more than 60% of the outstanding shares of Pierre Foods, PF
Management has the power to defeat shareholder approval of any
alternative transaction. It was also noted that, given the change in the
financial condition of Pierre Foods and the reduced stock price, it was
not surprising that Richardson and Clark believed that they could best
protect their investment in Pierre Foods directly, rather than by selling
to a third party, and that $1.21 per share is better than the possibility
of no return of investment. The special committee and the board believed
that PF Management's exercise of its controlling position could not be
ignored in the best interests of unaffiliated shareholders because it was
a business reality.
- the fact that Richardson and Clark, together with other officers and
former officers of Pierre Foods, would be entitled to aggregate net
payments in excess of $12.5 million under their change-of-control
agreements and other similar contracts with Pierre Foods if a change of
control were to occur by reason of a transaction with a competing
bidder. The special committee and the board noted that this expense
would significantly reduce the return to shareholders unaffiliated with
PF Management in such a transaction, whereas the expense would not be
incurred in the exchange. It was also noted that Pierre Foods entered
into these agreements with Richardson and Clark in 1997 and amended them
in 1999, again, long before an MBO was planned by Richardson or Clark.
The special committee and the board believed that approving and
recommending the sale of the company to a buyer whose bid would save
$12.5 million in avoidable costs to the company was very much in the best
interests of the unaffiliated shareholders.
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In concluding that the exchange is fair to and in the best interests of the
unaffiliated shareholders, the special committee and the board of directors also
considered the following factors, each of which the special committee and the
board considered to be a negative factor:
- the fact that other offers were not solicited after PF Management's offer
was received. The special committee and the board considered that other
potential buyers had expressed an interest in acquiring the food
processing operations of Pierre Foods in 1999, noting, however, that the
company's results of operations, financial condition, cash flows from
operations and business prospects were decidedly stronger in
1999 -- reflected in much higher market prices for Pierre Foods' common
stock -- than they are in 2001. The special committee and the board also
considered that, in 1999, notwithstanding extensive marketing efforts, no
definitive agreement to sell the food processing operations was actually
reached. They also considered the fact that any acquisition of all shares
held by the public by any buyer other than a management buyout group
would be opposed by PF Management, which owns enough stock to block such
a transaction, and, even if "successful" notwithstanding PF Management's
opposition, would trigger put rights for the senior noteholders,
resulting in the company's insolvency. See "-- Background of the
Exchange."
- the fact that consummation of the exchange would preclude the
shareholders of Pierre Foods unaffiliated with PF Management from having
the opportunity to participate in the future growth prospects of Pierre
Foods. Richardson and Clark, in contrast, would have the chance to
benefit from any increases in the value of Pierre Foods following the
exchange as a result of their increased equity interest in the company
and therefore might receive the economic benefit of capital appreciation
from the transaction. See "-- Purpose and Reasons of MBO Group for the
Exchange" and "Effects of the Exchange."
- the potential conflicts of interest of Richardson and Clark resulting
from benefits that might be realized by them upon consummation of the
exchange, including, as described above, the potential economic benefit
of capital appreciation. The special committee and the board believed,
nevertheless, that the procedures that they followed in their
consideration of PF Management's MBO offer, including extensive
negotiation of the price and other terms of the exchange, addressed these
conflicts and were fair to the shareholders unaffiliated with PF
Management. See "-- Background of the Exchange" and "-- Conflicts of
Interest."
- the fact that PF Management and its shareholders have from time to time
acquired shares at prices in excess of $1.21 per share, including after
March 27, 2001, when PF Management made its final offer of $1.21, and
that the premiums paid in these acquisitions (relative to the exchange
consideration) were 73%, 561%, 520%, 1,207%, 605% and 479%. The special
committee and the board considered the fact that Pierre Foods' stock
price had dropped from a high of $10.50 in November 1999 to $0.91, the
closing price on March 27, 2001 -- the day the exchange price was
negotiated -- and concluded that those prices did not determine the
current value of Pierre Foods' shares given adverse changes in the
results of operations, financial condition and cash flows of Pierre Foods
and adverse changes in the food processing industry generally. The
special committee and the board also credited Richardson's disclosure
that he purchased or caused PF Management to purchase shares from several
shareholders at a substantial premium over the exchange price in
consideration of the long-time allegiance, association and relationship
of these selling shareholders to Richardson. In evaluating the
acquisition of shares by Richardson, the special committee and the board
recognized that Richardson had fiduciary duties as a director and officer
of Pierre Foods, but they also recognized that Richardson is a
shareholder of Pierre Foods who is entitled to protect and maximize the
value of the shares that he owns. They further recognized that Richardson
as an individual was free to pursue opportunities that the company would
not pursue, including the purchase of shares, for personal reasons, in
amounts and at prices in excess of what the company could or would
transact. See "Information Regarding PF Management -- Recent Stock
Purchases."
- the fact that Pierre Foods' common stock had recently traded in excess of
$1.21 per share. The special committee and the board believed that these
trading prices were based on uninformed market
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speculation attributable to the "noise" of the pending exchange. They noted that
the company's stock is traded sporadically, that no analysts publish research
reports on the stock and that there are frequent spikes in market prices for the
stock. The special committee and the board inferred that the public market
for the company's outstanding stock is inefficient and that quoted prices
do not indicate the fair value of the stock. For these reasons, the
discount of the $1.21 consideration price relative to several recent
trading prices for the stock did not impact the special committee and the
board's decision to approve the exchange.
- the fact that Patrick Daugherty, lead counsel to the special committee
and the board, had served extensively in the past, and would continue to
serve, as corporate and securities counsel to the company, and, as
described under "-- Background of the Exchange," had given preliminary
advice to Richardson and Clark in the summer of 1999 and in January 2001
regarding possible transactions with the company. The special committee
and the board decided to engage Daugherty's law firm notwithstanding
these circumstances, because Daugherty had established a trusting
professional relationship with them over a period of several years,
because he was a repository of significant institutional memory and
knowledge about the company, because they believed that he was not
beholden to Richardson or Clark and that he could and would advise them
and act independently of Richardson and Clark and because none of
Daugherty's colleagues at Foley & Lardner who would be assisting the
special committee and the board relative to this transaction had had any
prior professional involvement with Richardson, Clark, Templeton or the
company. For these reasons, the special committee and the board believed
that Daugherty's role in the transaction would not and did not detract
from the fairness of the exchange.
Pierre Foods did not obtain counsel or appraisal services on behalf of the
shareholders unaffiliated with PF Management, nor did it make any provisions to
grant such shareholders access to its corporate files, other than the access
available as a matter of North Carolina law.
The foregoing discussion of the information and factors considered by the
special committee and the board is not meant to be exhaustive, but includes all
material factors considered by the special committee and the board as part of
their determinations that the exchange and the exchange agreement are fair to,
and in the best interests of, Pierre Foods and the unaffiliated shareholders and
by the board as part of its recommendation that the shareholders approve and
adopt the exchange agreement. While each of the board and the special committee
adopted the analysis and conclusions of Grant Thornton as described in "Opinion
of Pierre Foods' Financial Advisor," it also considered all of the factors
listed above in making the determination that the exchange and the exchange
agreement are fair to, and in the best interests of, the unaffiliated
shareholders. The special committee and the board did not assign relative
weights or quantifiable values to those positive and negative factors. Rather,
the decisions of the special committee and the board were based on subjective
analysis by their members of those factors, including the analysis and
conclusions of Grant Thornton (based on the totality of the information
presented to and considered by it).
In addition, based on the factors described above, the board and the
special committee concluded that the exchange is procedurally fair to the
shareholders unaffiliated with PF Management. The board and the special
committee reached this conclusion notwithstanding the fact that the exchange is
not conditioned upon the approval of a majority of the unaffiliated shareholders
and the fact that an unaffiliated representative was not retained to negotiate
solely on behalf of the unaffiliated shareholders. The board and the special
committee concluded that the absence of these factors did not make the procedure
followed by the board and the special committee unfair under applicable North
Carolina law because they adopted other procedures designed to assure fairness.
These other procedures included, in particular, the establishment and operation
of a special committee staffed solely by disinterested directors to negotiate
and evaluate the terms of the exchange (including direct negotiation of the
exchange consideration by the chairman of the special committee), the engagement
of Foley & Lardner to advise the special committee regarding the legal aspects
of the transaction and the engagement of Grant Thornton to advise the special
committee regarding the financial fairness of the transaction.
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OPINION OF PIERRE FOODS' FINANCIAL ADVISOR
The special committee retained the Valuation Services Group of Grant
Thornton to act as its financial advisor and, as requested by the special
committee, (1) to analyze the proposed sale of Pierre Foods to PF Management and
(2) to render an opinion as to the fairness of such a transaction, from a
financial point of view, to Pierre Foods' shareholders unaffiliated with PF
Management. Prior to being engaged as the financial advisor to the special
committee, Grant Thornton had no prior professional relationship with Pierre
Foods, except that, in 2000, the Boston office of Grant Thornton was retained by
Harrison Hurley to perform tax consulting work, which was never completed,
relative to Pierre Foods.
At the request of the special committee, on April 26, 2001, Grant Thornton
rendered its oral opinion to the special committee and to the board to the
effect that, as of that date and subject to the assumptions made, matters
considered and limits of the review undertaken by Grant Thornton described in
its opinion, the $1.21 per share exchange consideration to be received by Pierre
Foods' shareholders (other than PF Management) pursuant to the exchange was fair
from a financial point of view to such shareholders. Grant Thornton subsequently
confirmed this opinion in writing by letter dated April 26, 2001.
The full text of Grant Thornton's written opinion is attached as Appendix B
to this proxy statement. We refer you to Grant Thornton's opinion, and you
should consider it as a part of this proxy statement since we are incorporating
it by this reference. The following description of Grant Thornton's opinion is
only a summary. You should read the full opinion for a complete understanding of
the opinion's assumptions, considerations and limitations.
Grant Thornton's opinion only advises the special committee as to the
fairness from a financial point of view of the exchange consideration. It does
not address the merits of the special committee's decision to recommend the
exchange to the board of directors or of the board's decision to adopt the
exchange agreement and recommend the agreement to shareholders. The opinion is
not a recommendation to you that you vote for or against the exchange or that
you take any other action regarding the exchange.
The special committee retained Grant Thornton on the basis of its
experience with mergers and acquisitions, financings and advising boards of
directors and shareholders regarding strategic alternatives. Grant Thornton is
regularly engaged in the valuation of businesses and their securities in
connection with mergers, acquisitions and private placements of securities.
Grant Thornton is a privately owned accounting and consulting firm which has
been in business for over 75 years.
In preparing its opinion, Grant Thornton, among other things:
- reviewed the exchange agreement among Pierre Foods, PF Management,
Richardson and Clark.
- reviewed certain of our publicly available financial statements and other
business and financial information.
- reviewed certain of our internal financial statements, financial
forecasts and other data concerning us prepared by our management,
including budgeted and projected income statements.
- met with members of our management to discuss our business, historical
and projected financial results, financial condition and business
prospects.
- reviewed the historical stock price and trading volume for our common
stock.
- compared the financial terms of the exchange with the financial terms of
acquisition and merger transactions involving companies that Grant
Thornton deemed comparable to Pierre Foods, Inc.
- prepared four discounted cash flow analyses of Pierre Foods.
- made other studies and inquiries, and took into account other matters,
that Grant Thornton believed were relevant to forming its opinion,
including an assessment of general economic and market conditions.
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Grant Thornton did not independently verify any of the information it
obtained for purposes of its opinion. Instead, Grant Thornton assumed the
accuracy and completeness of all such information. Grant Thornton relied upon
our management's assurances that information concerning our prospects, including
budgeted and projected financial results, reflected the best currently available
judgments and estimates of management as to our likely future financial
performance. As to all legal matters, Grant Thornton relied on the advice of
counsel to the special committee and assumed that the exchange will be completed
in accordance with the terms of the exchange agreement. Grant Thornton did not
make an independent evaluation or appraisal of the assets or liabilities of
Pierre Foods. Grant Thornton personnel visited both of our operating facilities
as well as corporate headquarters and were provided with third-party appraisals
of the real estate and machinery and equipment assets of Pierre Foods conducted
in June 2000. Grant Thornton's opinion is based on market, economic and other
conditions as they existed and could be evaluated at the time the opinion was
given.
No limitations were imposed by Pierre Foods, the special committee or the
board on the scope of Grant Thornton's investigation or the procedures Grant
Thornton followed in rendering its opinion.
In addressing the fairness, from a financial point of view, of the exchange
consideration to be received by the unaffiliated shareholders of Pierre Foods,
Grant Thornton considered a variety of generally recognized valuation
methodologies and utilized those it believed were most appropriate for
developing its opinion. The preparation of a fairness opinion involves the
determination of the most appropriate and relevant methods of financial analysis
and the application of those methods to the particular circumstances. Therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. In arriving at its opinion, Grant Thornton made qualitative
judgments about the relevance and significance of each valuation methodology and
factor. Such analysis resulted in the calculation of ranges of implied per-share
values for Pierre Foods common stock, including implied values that were greater
than the exchange consideration; however, Grant Thornton did not consider that
any particular implied value, whether less than or greater than the exchange
consideration, was determinative of fairness. Rather, the range of implied
values provided a range of fairness within which to evaluate the exchange.
Grant Thornton believes that its valuation methodologies provide value
indications dependent on specific facts and circumstances, a subtle change to
which could materially affect the value conclusion developed under a particular
methodology. Thus, looking at the value indication produced by any single
methodology does not provide adequate guidance as to the conclusion of value and
fairness determined by Grant Thornton. Instead, Grant Thornton believes that its
analyses must be considered as a whole and that selecting portions of its
analyses, without considering all factors and assumptions, would create an
incomplete view of the process underlying its opinion.
In performing its analyses, Grant Thornton made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Pierre Foods. The
analyses performed by Grant Thornton do not purport to be an appraisal and are
not necessarily indicative of actual values, trading values or actual future
results that might be achieved, all of which may be significantly more or less
favorable than suggested by Grant Thornton's analyses. No public company that
Grant Thornton utilized as a comparison is identical to Pierre Foods, nor are
the transactions utilized as a comparison identical to the exchange.
Accordingly, a purely mathematical analysis based on such comparable companies
or comparable business combinations is not a meaningful method of using the
relevant data. Rather, these analyses involve complex considerations and
judgments concerning differences in financial and operating characteristics and
other factors that could affect the transaction or the public share price or
other values of the companies being compared.
In connection with its analyses, Grant Thornton utilized estimates and
forecasts of our future operating results contained in or derived from budgeted
and projected income statements provided by our management. Analyses based on
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than the forecasts.
The analyses are inherently subject to uncertainty, being based on numerous
factors or events beyond the control of Pierre Foods. Therefore, future results
or actual values may be materially different from these forecasts or
assumptions.
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Grant Thornton's opinion was one of many factors taken into consideration
by the special committee in making its determination to approve the exchange
agreement. Consequently, the analyses described below should not be viewed as
determinative of the opinion of either the special committee or the board with
respect to the value of Pierre Foods or whether the special committee or the
board would have been willing to agree to different terms for the exchange.
The following is a brief summary of the material analyses performed by
Grant Thornton in connection with rendering their opinion to the special
committee and the board. The following summary includes information presented in
tabular form. In order to understand the financial analyses performed by Grant
Thornton, the tables must be read together with the accompanying text. Also, for
purposes of the financial analyses from which these per-share values were
derived, Grant Thornton assumed that we would be operated by a management team
with the perceived ability to achieve the financial results projected. Following
is a summary of the methodologies described by Grant Thornton in its
PowerPoint(R) presentations to the special committee and the full board of
directors on April 26, 2001 and which were contained in the final financial
models provided by Grant Thornton to the directors in connection with those
presentations.
Comparable Companies Analysis. Grant Thornton reviewed and compared the
financial and stock market performance of Pierre Foods and certain ratios and
multiples of Pierre Foods to the financial and stock market performance and
corresponding ratios and multiples of four publicly-held companies in the food
processing industry that were considered by Grant Thornton to be generally
comparable to Pierre Foods. The selected companies were Bridgford Foods Inc.,
Earthgrains Company, Hormel Foods Corporation and Rymer Foods Inc.
(collectively, the "Comparable Companies").
Among other analyses, Grant Thornton calculated the enterprise value (that
is, equity market value, plus debt, less cash and equivalents) as a multiple of
the latest twelve months' net sales for each of the Comparable Companies. All
multiples were calculated using closing stock prices on March 22, 2001. A
summary of the enterprise value multiples generated from this analysis is shown
in the following table:
INVESTED CAPITAL MULTIPLE BASED ON NET SALES
--------------------------------------------
Bridgford Foods Corporation............ 0.8
Earthgrains Company.................... 0.7
Hormel Foods Corporation............... 0.8
Rymer Foods Inc........................ 0.1
Industry Median........................ 0.8
Pierre Foods........................... 0.6
Grant Thornton selected the Comparable Companies because they have general
business, operating and financial characteristics generally similar to those of
Pierre Foods. Grant Thornton noted, however, that no company used in this
analysis is identical to Pierre Foods. Grant Thornton compared the financial
performance of Pierre Foods for the period ended March 3, 2001 (which were
preliminary, unaudited results provided by our management) to the Comparable
Companies' latest twelve months income statement data. In comparing the income
statement data of the Comparable Companies to Pierre Foods, Grant Thornton found
that three of the four Comparable Companies were profitable (Rymer Foods is the
only comparable company that is not profitable) while we posted a net loss.
Based on the multiples presented above, it appears that the market is willing to
pay a higher multiple for a company that is profitable than for one that is not.
In its analysis, Grant Thornton used the industry median of 0.8 as a benchmark
multiple and adjusted it downward by 20% to account for various differences
including size, growth, and geographic diversity. After adjusting the benchmark
multiple, Pierre Foods' revenue multiple was estimated at approximately 0.6. It
is purely coincidental that the adjusted revenue multiple used by Grant Thornton
is the same as Pierre Foods' revenue multiple priced by the market.
Using the adjusted revenue multiple of 0.6 presented above, Grant Thornton
calculated the implied equity value per share of Pierre Foods' common stock as
$1.45 on the basis of the revenues for the period ended March 3, 2001 and the
shares and options (which are assumed to be worthless as their exercise prices
exceed the exchange price) outstanding as of March 22, 2001.
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Comparable Transactions Analysis. Grant Thornton reviewed and compared the
publicly available financial data related to 15 business combination
transactions in the food processing industry that it felt were generally
comparable to the exchange and that disclosed financial information sufficient
to provide valuation guidance (collectively, the "Comparable Transactions"). A
list of the Comparable Transactions follows:
ACQUIROR TARGET DATE
- -------- ------ ----
Atlantic Premium Brands, Ltd. J.C. Potter Sausage Company March 20, 1998
International Home Foods Inc. Grist Mill Co. April 14, 1998
ConAgra Inc. GoodMark Foods Inc. July 31, 1998
Aurora Foods Inc. Sea Coast Foods Inc. April 6, 1999
Smithfield Foods Inc. Animex SA -- 66.6% April 12, 1999
Smithfield Foods Inc. Carrolls Foods Inc. May 7, 1999
IBP Inc. Thorn Apple Valley Inc. August 25, 1999
Sparta Foods Inc. Food Products Corp. October 13, 1999
Aurora Foods Inc. Lender's(R) Bagels November 1, 1999
ConAgra Inc. Seaboard Corp. January 3, 2000
Smithfield Foods Inc. Murphy Farms, Inc. January 5, 2000
IBP Inc. Corporate Brand Foods America February 7, 2000
Kellogg Co. Kashi Co. June 29, 2000
ConAgra Inc. International Home Foods Inc. August 24, 2000
Pilgrims Pride Corp. WLR Foods Inc. January 28, 2001
Among other analyses, Grant Thornton calculated total invested capital
relative to each of the Comparable Transaction companies' net sales. A summary
of the total invested capital multiples generated from this analysis is shown in
the following table:
TOTAL INVESTED CAPITAL MULTIPLE BASED ON NET SALES
High........................................................ 1.50
Low......................................................... 0.30
Average..................................................... 0.87
Median...................................................... 0.88
Grant Thornton chose the Comparable Transactions because the target
companies have general business, operating and financial characteristics similar
to those of Pierre Foods. Grant Thornton noted, however, that no company or
transaction used in the foregoing analysis is identical to Pierre Foods or the
exchange. After analyzing the Comparable Transactions listed above, Grant
Thornton determined that the median total invested capital to revenue multiple
of 0.88 was an appropriate benchmark to use for its analysis. The median total
invested capital to revenue multiple was adjusted downward by 20% to account for
various differences including size, growth, and geographic diversity. After
adjusting the benchmark multiple, Pierre Foods' total invested capital to
revenue multiple was estimated at approximately 0.7. This adjusted transaction
multiple was then applied to Pierre Foods' March 3, 2001 revenue information.
Once a preliminary value was established, Grant Thornton needed to adjust
for the change in control agreements in place for both Richardson and Clark. The
revised agreements provide that, if a change of control in Pierre Foods occurs,
the following benefits will be provided by Pierre Foods: three times the amount
of the annual base salary of the officer; three times the amount of the cash
bonus paid or payable to such person for the most recent fiscal year; and a
"gross-up" payment for all excise and income tax liabilities resulting from
payments under the change in control agreements. Based on these agreements, an
adjustment of approximately $11,500,000 was made. At the time of its analysis,
Grant Thornton was not aware that an additional $1 million was payable under
similar agreements to other officers and former officers of Pierre
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Foods, and accordingly did not adjust for these potential payments.
Additionally, since the Comparable Transactions' multiples are calculated on a
control basis, a 35% minority interest discount was applied to account for the
fact that only a minority interest in our common shares is subject to the
exchange.
Using the adjusted total invested capital to revenue multiple of 0.7
presented above and adjusting for the change in control agreements and minority
interest, Grant Thornton calculated the implied equity value per share of Pierre
Foods' common stock as $2.11 on the basis of the revenues for the period ended
March 3, 2001 and the shares and options (which are assumed to be worthless as
their exercise prices exceed the exchange price) outstanding as of March 22,
2001.
Discounted Cash Flow Analysis. Grant Thornton performed discounted cash
flow analyses to estimate the present value of Pierre Foods under four different
scenarios. All four scenarios focused on projected income statements and
debt-free net cash flows for fiscal years 2002 through 2006.
- Scenario 1 reflects the value of Pierre Foods based on the budgeted and
projected income statements for fiscal years 2002 through 2004 provided
by our management, extended through fiscal 2006. For purposes of the
extension, Grant Thornton assumed that:
- the net sales growth rate would be the same in 2005 and 2006 as in 2003;
- gross profit would remain stable throughout the five-year period; and
- operating profit would improve from the prior year to the next year in
each of 2005 and 2006.
- Scenario 2 incorporated the following assumptions:
- sales growth equal to management's indications as to the highest growth
rate Pierre Foods could sustain for the foreseeable future;
- gross profit levels on a percentage of sales basis equal to those in
scenario 1; and
- operating profit margins equivalent to Pierre's historical results.
- Scenario 3 assumed the following:
- sales growth at the same rate as in scenario 2;
- gross profit at the same level as scenario 2; and
- improvements in operating profit as a percentage of sales along the
lines of scenario 1.
- Scenario 4 assumed:
- revenue growth at the maximum level indicated by our management;
- gross profit margin increasing to the highest historical level achieved
by Pierre Foods; and
- operating improvement to a level equivalent to the highest of the
comparable companies analyzed in Grant Thornton's comparable company
approach.
Grant Thornton developed the various scenarios in order to determine the
range of values achievable for Pierre Foods assuming differences in operating
results from those determined by our management in their budgets and forecasts.
SCENARIO SALES GROWTH RATE GROSS MARGIN OPERATING MARGIN
- -------- ----------------- -------------- ----------------
1............................................... 5.3% to 8.5% 37.3% per year 6.3% to 7.7%
2............................................... 15% per year 37.4% per year 3.8% to 4.7%
3............................................... 15% per year 37.3% per year 6.6% to 8.9%
4............................................... 15% per year 39% per year 8.9% per year
For each of the four scenarios, the present value of Pierre Foods, the
business enterprise, as of March 3, 2001, was determined by summing the present
values of the projected debt-free net cash flows through March 3, 2006 plus the
estimated terminal value of Pierre Foods as of March 3, 2006. The terminal value
was
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calculated by increasing the debt-free net cash flow in fiscal 2006 by an
estimated sustainable long-term growth rate, then capitalizing the resulting
debt-free net cash flow at an appropriate capitalization rate. The
capitalization rate was determined by deducting the estimated sustainable
long-term growth rate from the discount rate. Debt-free net cash flow is defined
as the unleveraged cash flow after tax obligations and consideration of
adjustments for depreciation and amortization costs, capital expenditures and
additional working capital requirements.
The range of estimated values for Pierre Foods at the end of each period
was calculated by applying a discount rate of 16.0% to the annual debt-free net
cash flows and to the estimated value of Pierre Foods for the perpetual or
terminal period following 2006. Grant Thornton arrived at this discount rate by
calculating an estimated cost of capital for Pierre Foods using, among other
things, the capital asset pricing model (CAPM) to calculate the cost of equity
capital based on data obtained from recognized industry sources including
Ibbotson Associates' Stock Bonds Bills and Inflation Yearbook 2000 and the
Federal Reserve Statistical Release, and a cost of debt capital based on the
interest rate of Pierre Foods' existing debt and an estimated premium that, in
its opinion, Grant Thornton felt would need to be paid at the valuation date for
any additional debt that was issued. The capital structure utilized to determine
the overall weighted average cost of capital was based on the capital structures
of companies in Pierre Foods' industry as determined by reviewing the data for
Pierre Foods' SIC codes contained in Ibbotson Associates' Cost of Capital 2000
Yearbook.
The sum of the values thus calculated provided an indication of the range
of values of Pierre Foods' invested capital, which is synonymous with the
business enterprise. The following table presents a summary of the implied
invested capital values for Pierre Foods' based on these analyses:
SCENARIO VALUE OF INVESTED CAPITAL
- -------- -------------------------
1....................................................... $58.5 million
2....................................................... -$18.4 million
3....................................................... $19.7 million
4....................................................... $56.7 million
To determine the value of the common equity, it was necessary to deduct
from the invested capital value the value of Pierre Foods' interest-bearing
debt, which was $118.3 million as of March 3, 2001. The following table presents
a summary of the implied equity values per share of Pierre Foods' common stock
from these analyses:
VALUE OF THE
COMMON EQUITY
SCENARIO PER SHARE
- -------- -------------
1........................................................... $0.00
2........................................................... $0.00
3........................................................... $0.00
4........................................................... $0.00
Grant Thornton did not attribute any particular weight to the four
projection scenarios, noting that in each case the implied equity per-share
value was zero.
A significant consideration in the rendering of the Grant Thornton opinion
was the existence of Change of Control Agreements between Pierre Foods and both
James C. Richardson, Jr. and David R. Clark. Under the agreements Richardson and
Clark would be entitled to receive an aggregate payment in excess of $11 million
upon the occurrence of any change in control as defined in the agreements. The
significance of this fact was to increase the cost of a transaction other than
the exchange and thus to diminish the return to shareholders from any such
competing transaction. This fact caused Grant Thornton to place less reliance on
the value indication derived under the comparable transaction analysis.
Conclusion as to Range of Value. Grant Thornton considered a combination
of its comparable companies, comparable transactions and discounted cash flow
methodologies to provide the most relevant indication of value. Grant Thornton
believes that, taken individually, the methodologies provide value indications
dependent on specific facts and circumstances, a subtle change to which could
materially affect the
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value conclusion developed under a particular methodology. Such dependence has
been mitigated through an analysis of value looking at the methodologies
holistically; that is, how the various methodologies and their resulting value
indications relate to each other to provide a total value picture. Thus, looking
at the value indication of any single methodology does not provide adequate
guidance as to the conclusion of value and fairness determined by Grant
Thornton.
Therefore, Grant Thornton concluded that the appropriate range of values
for the stock of Pierre Foods was $1.18 to $1.45 per share. In order to
determine the floor of the range, Grant Thornton applied equal weight to each of
the three values calculated from the comparable companies, comparable
transactions and discounted cash flow methodologies. Grant Thornton weighed each
methodology because, individually, the methodologies are dependent on their own
sets of facts and circumstances, while looked at holistically they provide a
more reliable indication of value for Pierre Foods' shares. Grant Thornton
determined that the top end of the range of fairness was the $1.45 per share
value calculated under its guideline company methodology. The $2.11 per share
value calculated under the comparable transactions methodology was not
considered to be indicative of the ceiling of the range, as it was believed to
be the least reliable of the three methodologies employed. This diminished
reliability was due to the differences between Pierre Foods and the companies
acquired in the analyzed transactions, as well as the set of assumptions
specific to Pierre Foods that would have been necessary to support such a
transaction, including ability to pay the put premium due on Pierre Foods'
senior notes as well as the change-of-control payments.
Recent Stock Purchases. During April 2001, and prior to Grant Thornton
issuing its fairness opinion on April 26, 2001, PF Management and certain of its
affiliates acquired shares of our stock in a series of privately negotiated
transactions. These transactions were negotiated and executed with certain
executive officers, directors and affiliates of Pierre Foods and their
relatives. The transactions occurred at prices ranging from $2.09 per share to
$15.81 per share.
These purchases were consummated at the request of Richardson, motivated by
the long-time allegiance, association and relationship of the selling
shareholders to Richardson and for the purpose of consolidating and reorganizing
the ownership of Pierre Foods common stock by Richardson, Clark and Templeton
and their associates in contemplation of the possible acquisition by that group
of Pierre Foods common stock in an aggregate amount in excess of 50% of all
outstanding stock. Absent the consolidation and reorganization, Richardson,
Clark, Templeton and their associates could not acquire additional shares of
stock so as to exceed a 50% equity interest in Pierre Foods because doing so
would trigger the change-of-control provision of the senior notes indenture,
empowering the noteholders to "put" their notes to Pierre Foods at a premium to
the face amount of the notes and resulting in the financial ruin of Pierre
Foods.
The transactions involved membership interests in Columbia Hill owned by
its members (Richardson, Clark and Hefner), common stock in HERTH owned by its
shareholders (Richardson, Templeton, Edgell and Columbia Hill, LLC), Pierre
Foods common stock owned by Richardson, Clark, Templeton, Edgell, HERTH and
Columbia Hill and newly-issued shares of common stock of PF Management. The
transactions resulted in PF Management acquiring all of the shares of Pierre
Foods common stock owned by Columbia Hill, Richardson, Clark, Hefner, HERTH,
Templeton and Edgell (except for 5,000 shares held by Edgell and his wife in
their individual retirement accounts) and Richardson, Clark and Templeton being
issued all of the shares of PF Management stock. In connection with this
consolidation and reorganization, PF Management assumed indebtedness of Columbia
Hill, HERTH and Richardson, and each of Richardson, Clark and Templeton, in his
capacity as a shareholder of PF Management, guaranteed the indebtedness. See
"Information Regarding PF Management -- Recent Stock Purchases" for a list of
specific transactions.
Grant Thornton did not find these transactions to be relevant in its
analysis of the exchange transaction and the fairness of the exchange from a
financial point of view due to the fact that the purchases were negotiated away
from the public market. It is Grant Thornton's opinion that these prices are not
representative of fair market value because they were based in part on
non-business considerations and not solely on a financial analysis of Pierre's
operations. As such, Grant Thornton believes that its analyses, as outlined
herein, are more representative of the factors affecting the value of our stock
and that, therefore, its range of possible values is more representative of fair
market value than that indicated by the affiliated party transactions.
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Other Analyses Performed and Factors Considered. Grant Thornton computed
Pierre Foods' net book value as approximately $26,968,539, or $4.67 per share,
at March 3, 2001, based on preliminary, unaudited financial statements. Grant
Thornton did not consider Pierre Foods' net book value to be material for
purposes of its fairness opinion, however, because it is extremely rare for a
company's market value to be the same as its accounting book value.
Additionally, as Grant Thornton did not conduct independent appraisals of our
tangible assets, intangible assets, or liabilities, they were not able to mark
our balance sheet to market, which would be necessary to conduct an accurate
valuation of Pierre Foods under an adjusted book value or cost based
methodology. Similarly, Grant Thornton did not perform a liquidation value
analysis of Pierre Foods because it found no evidence of hidden assets or other
factors that might lead it to believe that such an analysis would be relevant
for purposes of its fairness opinion. Although a liquidation valuation is called
for under the rights agreement pursuant to which shareholders may purchase
dilutive shares in a transaction involving a sale of Pierre Foods or its assets,
the exchange agreement expressly avoids the terms of the rights agreement,
negating the necessity of a liquidation analysis under the terms of the rights
agreement.
The implied per-share values presented in these analyses did not take into
account all of the transaction expenses that are likely to be incurred in an
acquisition of Pierre Foods because the level of such expenses is subject to
considerable variation depending on the nature of the purchaser and the
structure of the transaction. Specifically, the comparable companies and the
discounted cash flow analyses did not reflect any transaction expenses. The
comparable transaction analysis implicitly reflected the transaction expenses
related to each transaction.
In its engagement letter with Grant Thornton dated February 27, 2001 and
amended April 12, 2001, Pierre Foods agreed to pay Grant Thornton an aggregate
fee of approximately $145,000 for its services in connection with the exchange.
The engagement letter also provides that Pierre Foods will reimburse Grant
Thornton for its reasonable travel, legal and other out-of-pocket expenses
incurred in connection with Grant Thornton's role thereunder and will indemnify
Grant Thornton and its affiliates from and against certain liabilities. These
liabilities include liabilities under the federal securities laws in connection
with the engagement of Grant Thornton by the special committee.
You may review and copy all materials prepared by Grant Thornton, including
its bullet point summary and preliminary financial models described under
"-- Background to the Exchange," and its PowerPoint(R) presentation, final
financial models and fairness opinion presented to the special committee and the
board at their April 26 meetings, during regular business hours at the offices
of Grant Thornton located at Two Commerce Square, 2001 Market Street, Suite
3100, Philadelphia, Pennsylvania. These materials are also filed as exhibits to
the Schedule 13E-3 covering the exchange. Finally, upon written request, we will
provide you with a copy of these materials at no cost to you. See "Available
Information" and "Information regarding Pierre Foods -- Incorporation of
Documents by Reference.
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PROJECTIONS
As discussed above, Pierre Foods prepared projections with respect to its
financial performance over a three-year period ending March 6, 2004. The
following is a summary of the projections:
PROJECTIONS
FISCAL YEAR
------------------------------
2002 2003 2004
-------- -------- --------
(IN THOUSANDS)
Revenues............................................... $222,212 $241,086 $261,844
Cost of goods sold..................................... 139,397 151,232 164,254
Gross profit........................................... 82,815 89,854 97,590
Operating expenses..................................... 68,751 74,201 79,091
Operating cash flow.................................... 8,230 7,104 9,336
Interest and other income.............................. -- -- --
Capital expenditures................................... (4,416) (4,580) (12,945)
Pierre Foods does not as a matter of course make public any projections as
to future sales, performance, earnings or other results. The management of
Pierre Foods has prepared the prospective financial information set forth above
and has included it in this proxy statement only because the information is
available to PF Management and was used by the special committee, its financial
advisor and the board of directors in evaluating the fairness of the exchange.
This prospective financial information was not prepared with a view to public
disclosure or compliance with the published guidelines of the SEC or the
guidelines established by the American Institute of Certified Public Accountants
with respect to prospective financial information. In the view of Pierre Foods'
management, however, this information was prepared on a reasonable basis,
reflects the best currently available estimates and judgments and presents, to
the best of management's knowledge and belief, the expected course of action and
the expected future financial performance of Pierre Foods. This information is
not "fact" and should not be relied upon as being necessarily indicative of
future results, and readers of this proxy statement are cautioned not to place
undue reliance on the prospective financial information. The projections are
subjective in many respects and are thus susceptible to various interpretations
and periodic revision based on actual experience and business developments. The
projections were based on a number of assumptions that are beyond the control of
Pierre Foods or PF Management or their respective financial advisors, including
economic forecasting (both general and specific to Pierre Foods' business),
which is inherently uncertain and subjective. None of Pierre Foods' or PF
Management's respective financial advisors assumes any responsibility for the
accuracy of these projections. The inclusion of projections in this proxy
statement should not be regarded as an indication that Pierre Foods, PF
Management, Grant Thornton, Harrison Hurley or any other person who received
these projections considers them an accurate prediction of future events. Pierre
Foods will update, revise or correct the information provided in this proxy
statement as and to the extent required by law.
Neither Pierre Foods' independent auditors nor any other independent
accountants have compiled, examined or performed any procedures with respect to
the prospective financial information contained herein, nor has any of them
expressed any opinion or any other form of assurance on such information or its
achievability. Neither Pierre Foods' independent auditors nor any other
independent accountants assumes responsibility for, and they disclaim any
association with, the prospective financial information.
VALUATION ANALYSIS OF PF MANAGEMENT'S FINANCIAL ADVISOR
PF Management engaged Harrison Hurley and Company as its financial adviser
with respect to the exchange. Harrison Hurley is a nationally recognized
investment banking firm. As part of its investment banking business, Harrison
Hurley is regularly engaged in the valuation of businesses and securities,
mergers, acquisitions and private placements.
As part of its engagement, Harrison Hurley was asked by PF Management to
provide it with a preliminary range of values of Pierre Foods to assist it in
determining an amount to bid for Pierre Foods and to
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assess the level of financing necessary to complete an exchange at a fair price.
In addition, during the course of negotiations with Pierre Foods, Harrison
Hurley assisted PF Management in deciding the amount it would offer. The opinion
of value developed by Harrison Hurley in the appraisal process is based upon
current financial theory and consideration of all relevant factors, including
those outlined by the Internal Revenue Service in Revenue Ruling 59-60,
1959-1C.B.237, summarized as follows:
- The nature of Pierre Foods' business and the history of the company since
its inception;
- The economic outlook in general and the outlook of the food processing
industry in particular;
- The book value of Pierre Foods' stock and the financial condition of the
business;
- The earning capacity of the company;
- The dividend paying capacity of the company;
- Whether or not Pierre Foods has goodwill or other intangible value;
- Sales of stock and the size of the block of shares to be valued; and
- The market prices of stock of other corporations engaged in the food
processing industry having their stocks actively traded in a free and open
market, either on an exchange or over the counter.
PF Management placed no limits on the scope of work proposed by Harrison
Hurley, nor did PF Management provide specific instructions to Harrison Hurley.
All relevant documentation was available for Harrison Hurley's review at all
times during this engagement.
On March 27, 2001, Harrison Hurley presented a preliminary assessment of
the value of Pierre Foods to PF Management. Harrison Hurley's report consisted
of an oral explanation by representatives of Harrison Hurley of its procedures
and methodologies. Harrison Hurley's preliminary assessment was based upon
information provided to it by PF Management. Harrison Hurley presented its final
assessment of Pierre Foods' value to PF Management on April 26, 2001. For the
reasons summarized below, Harrison Hurley concluded that the value of the shares
of Pierre Foods is negligible because the debt service obligations of the
company negate all residual stockholder value.
Set forth below is a summary of Harrison Hurley's report to PF Management.
The full text of that report has been filed with the SEC as an exhibit to the
Schedule 13E-3 covering the exchange and is incorporated into this proxy
statement by this reference. Because the following description of Harrison
Hurley's report is only a summary, you should read the full report for a
complete understanding of Harrison Hurley's assumptions, considerations and
conclusions.
Harrison Hurley tested various methodologies to determine the best means
for valuing Pierre Foods' stock, including asset valuation/tangible book value,
competitive analysis, EBITDA -- cash flow generation and comparable
transactions. Harrison Hurley determined that the most appropriate method by
which to value Pierre Foods' shares of stock is an EBITDA -- cash flow
generation methodology. The various methodologies, and Harrison Hurley's
findings, are described below.
Asset Valuation/Tangible Book Value. Harrison Hurley found that Pierre
Foods' balance sheet at December 2, 2000 showed total assets of $162.0 million
(including $71.2 million of net intangible assets), current liabilities of $13.9
million and total debt of $117.0 million (excluding stockholders equity of $28.2
million). Pierre Foods' book value per share on December 2, 2000 was $4.88,
including $12.32 per share attributable to intangible assets.
Harrison Hurley reviewed the underlying value of the intangible assets,
most of which were recorded in connection with the purchase of the Pierre Foods
division of Hudson Foods, Inc. in June 1998. According to Harrison Hurley's
review, the value of the net intangible assets on Pierre Foods' books exceeded
the carrying amounts by $48.4 million, consisting of an excess of $28.1 million
for the unallocated portion of the intangibles and an excess of $20.3 million
for trademarks. With Pierre Foods' outstanding senior debt at $117.0 million,
Harrison Hurley concluded that a liquidation of Pierre Foods' assets would
preclude any recovery for the shareholders.
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Because the application of both asset valuation and book valuation resulted
in a negative value for the shares of Pierre Foods' common stock, Harrison
Hurley abandoned both of these methodologies from further consideration for
determining an equitable pricing model for Pierre Foods in the exchange
transaction. Nevertheless, Harrison Hurley did review other public companies in
the "protein processing" segment of the food processing industry (generally
referring to beef, poultry and pork processing) to determine the relationship of
each company's book value and tangible book value to its recent stock prices.
For each competitor, the ratio of book value per share to market share price
ranged from a high of 4.11 to a low of 1.33, compared to Pierre Foods' ratio of
.23. (A perfect correlation would be 1.0.) The ratio of tangible book value per
share to market share price among competitors ranged from a high of 20.38 to a
low of 1.33, compared to Pierre Foods' ratio, which was negative (as Pierre
Foods' net tangible book value is negative).
Based on these results, Harrison Hurley concluded that market valuation of
shares in the food processing industry as a whole is not responsive to book
value considerations.
Competitive Analysis. Harrison Hurley next analyzed the recent profit and
loss statements of Pierre Foods' publicly-traded competitors to determine the
gross profit generation, operating earning structure and income of Pierre Foods'
competitors, again with the goal of determining an appropriate methodology for
valuing Pierre Foods. The competitors studied by Harrison Hurley included
ConAgra (which includes the following brands: Armour, Swift, Hunts and Healthy
Choice); Rymer Foods; Hormel (pork); Smithfield (pork); Pilgrims Pride (chicken
and turkey); and Tyson (chicken). Each of these companies is comparable to
Pierre Foods in terms of product offerings, but all are significantly larger
than Pierre Foods. The annual sales of these competitors ranged from a high of
$25 billion (ConAgra) to a low of $40 million (Rymer Foods, a troubled company
that sells proteins to the food service industry). Pierre Foods' sales of $208
million per year are substantially smaller than the sales of these competitors
(other than Rymer Foods).
Harrison Hurley analyzed the profitability of the industry competitors
relative to Pierre Foods and calculated commonly used industry multiples for
these companies based on the latest twelve months of financial statements with
respect to the following data:
- The ratios of debt to sales; debt to total capitalization; debt to
"EBITDA" (earnings before interest and income tax expenses and charges
for depreciation and amortization); debt per outstanding share; earnings
to sales; earnings per share; normalized (before reserves and unusual
charges/credits) earnings per share; EBITDA to sales; book value (total
stockholders equity) per share, and tangible book value (stockholder
value less intangibles).
- The sum of price per share multiplied by outstanding shares (market
capitalization) divided by total sales; and market capitalization divided
by EBITDA.
The foregoing analyses indicated a close correlation between the generation of
cash flow by each company and the market value of its stock, after giving
consideration to the outstanding debt obligations of the companies. Applying
this same methodology to Pierre Foods, Harrison Hurley calculated an equity
valuation per share for Pierre Foods ranging from zero to $(.147).
Harrison Hurley analyzed the cost of sales of these competitors as compared
to Pierre Foods. Depreciation and amortization expenses were excluded from this
cost study in order to fully compare "conversion costs" without regard to the
impacts of asset structure or goodwill writeoffs. During the latest reporting
period, these competitors averaged cost of sales of 81.4% of sales, while Pierre
Food's cost of sales was 63.5% of sales. Harrison Hurley then analyzed the
selling, general and administrative costs of the competition. The competition's
costs averaged 11.3% of sales for the latest period, while Pierre Foods' costs
as a percentage of sales were 28.8%. To validate the hypothesis that differing
accounting practices and classification of costs were responsible for the wide
dispersion of cost ratios, Harrison Hurley calculated total operating costs
(excluding depreciation and amortization. The average for the competitors was
92.7% of sales; Pierre Foods' total costs were 92.3% of sales; thus, Pierre
Foods is operating at a cost structure slightly favorable to the competition.
Based on this information, Harrison Hurley determined that the overall cost
impact of the HERTH management agreement is negligible to Pierre Foods' cost
structure relative to its competitors.
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Harrison Hurley also evaluated the debt structure of Pierre Foods'
competitors and compared their cash flow generation -- EBITDA -- to determine
the ability of the industry to service debt. The debt-to-equity structure of the
competition was also studied. Pierre Foods' competitors maintain debt levels
ranging from 5% to 25% of annual sales, for an average of 16.4%. This indicates
that interest payments in the industry range from .5% to 2.5% of sales,
averaging 1.6% of sales. Pierre Foods' debt level, in contrast, is 56% of its
sales, and its interest cost is 6% of sales. The ratio of debt to total
capitalization (debt plus equity) of Pierre Foods' competitors ranged from 17%
to 59%, with a simple average of 41.5% and a weighted average of 49.2%. (Rymer
Foods was excluded from this average as the company has recently undergone a
restructuring). This compares to Pierre Foods' debt to total capitalization of
80.6%. Next, Harrison Hurley calculated total debt to EBITDA of Pierre Foods'
competitors to determine the ability of the competition to service its debt.
This calculation ranged from 56% (meaning that slightly more than a half a
year's EBITDA could retire all debt, excluding interest) to 431% (meaning that 4
and 1/3 years' EBITDA would be needed to retire debt excluding interest).
Harrison Hurley determined that it would take Pierre Foods more than 7 years'
cash flow to retire its debt, excluding interest. Harrison Hurley reviewed debt
on a per-outstanding-share basis, on the assumption that the stock market would
devalue the market price of a company based on the senior obligations that the
company would need to satisfy before any consideration of the shareholders. This
issue would be present in a statutory share exchange as the acquiring company
would assume the acquired company's debt obligations. With fairly wide
dispersion, the competitors had a simple average of $6.14 per share of debt
obligation, which, on a weighted average basis, was $7.40 per share. Pierre
Foods, however, is burdened with debt obligations of $20.17 per share, more than
2.7 times the industry average -- a significant negative to stock valuation.
Thus, the market would recognize that highly debt-burdened Pierre Foods would
need to have earnings per share significantly above the industry averages in
order to satisfy its debt service costs. For instance, if interest costs
averaged 10%, then, with respect to competitors that averaged $7.40 of debt per
share, the market would devalue earnings per share by $.74 solely to account for
debt service requirements. In the case of Pierre Foods, whose debt service
requirements are $20.17 per share, the market would devalue earnings per share
by $2.02 solely to account for debt service needs. The impact of the reduced
earnings per share would be reflected in reduced stock market value. In Pierre
Foods' case, the negative earnings per share, fully burdened with the high debt
service costs, further depresses the market value.
Harrison Hurley also reviewed EBITDA ratios to operating results. With the
industry generating total EBITDA of $3.15 billion on industry sales of $42.9
billion, the industry, on average, records 7.34% EBITDA to sales. Pierre Foods
compares favorably to the industry at 7.88% EBITDA to sales, but Pierre Foods'
operations do not benefit from that cash flow as the bulk of the generated cash
is used to pay interest on Pierre Foods' outstanding debt. This negates the
ability of Pierre Foods to create a sinking fund to provide for the June 2006
retirement of the debt. The impact became clear when Harrison Hurley reviewed
the various competitors' final net income as a percentage of sales. The industry
(which, as noted above, has a cost structure slightly higher than Pierre Foods')
generated normalized return on sales (before reserve and unusual items) of
2.47%, whereas Pierre Foods' favorable operations convert to a (1.3%) return on
sales due to Pierre Foods' high interest costs.
Harrison Hurley converted the EBITDA-to-sales and earnings-to-sales
statistics to a per-share basis and compared the data to market pricing in early
March 2001. Harrison Hurley determined that EBITDA per share averaged $3.30 in
the industry (weighted by the total number of shares outstanding for all
companies, divided by total industry EBITDA), compared to $2.83 for Pierre
Foods. Normalized earnings per share averaged $1.11 for the industry, compared
to $(0.47) for Pierre Foods. Sales per share averaged $44.89 for the industry,
compared to $35.90 for Pierre Foods. Because of its lower sales-per-share
figure, Pierre Foods does not generate as much profit, or cash flow, per share,
as the industry does. Pierre Foods' sales per share are almost $9.00, or 20%,
less than the industry average.
Harrison Hurley computed price to "normalized" (i.e., before reserves and
unusual charges and credits) earnings per share, which ranged from a low of $.67
to a high of $1.37 for the industry, but was $(.47) for Pierre Foods, and a
normalized price-to-earnings ratio, for which the weighted average (weighted for
total competitive industry earnings and total competitive industry outstanding
shares) was $19.18 for the industry, yet was $(2.43) for Pierre Foods. Given
Pierre Foods' negative position, Harrison Hurley determined that
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earnings-per-share and price-to-earnings ratios would not be meaningful for
purposes of comparative valuation.
EBITDA -- Cash Flow Generation. Harrison Hurley's next analysis involved
computing EBITDA per share to recent market prices to determine if there was a
correlation between market price and cash flow generation. Each competitor's
latest reported EBITDA was increased by its market multiple to arrive at a gross
enterprise valuation, which was then adjusted downward for outstanding debt.
This net ownership value was divided by the number of shares outstanding to
arrive at a value per share. Since Harrison Hurley's study was based on
historical competitor data, the value per share was compared to each
competitor's market price approximately one week after the filing of its Annual
Report on Form 10-K -- the day with the highest trading volume, suggesting that
the new disclosures had been absorbed by the market. Harrison Hurley determined
that there is a strong correlation between this valuation method and the market
price of the stock. With the exception of Smithfield, which recorded a large
sales increase on new acquisitions, the price-to-value ratio for each competitor
of Pierre Foods was as follows: Hormel, .94; ConAgra, 1.07; Pilgrims Pride,
1.16, and Tyson, .71. (A correlation of 1.00 would indicate a direct correlation
between share price and enterprise value.) Thus, except for Rymer Foods,
Harrison Hurley found that a direct correlation exists between market pricing
and cash flow per share, with most of Pierre Foods' competitors trading at
approximately the mean average of 6.2 times cash flow or the weighted average
(competitive industry EBITDA divided by total competitive industry outstanding
shares) of 6.45 times cash flow. Pierre Foods trades at .4 times cash flow, a
fraction of its cash flow per share. Harrison Hurley inferred that the market
discounts Pierre Foods' value because the bulk of its cash flow is used to pay
interest.
Based on the industry correlation between cash flow per share to market
value per share, Harrison Hurley determined that the best method for valuing
Pierre Foods' common stock was to measure its market capitalization on an EBITDA
multiple of 6.5, adjusted by any debt assumed by PF Management in the exchange.
Pierre Foods' projected cash flow for its fiscal year ended March 2, 2002 is
$16.4 million. Multiplying $16.4 million by 6.5, Harrison Hurley calculated a
gross enterprise value of Pierre Foods of $106.6 million. This gross enterprise
value exceeds Pierre Foods' December 2, 2000 total asset valuation of $82.1
million ($52.5 million of current assets plus a fair market value of $29.6
million for fixed assets) by $24.5 million. The excess market value of $24.5
million exceeds the going concern intangible value of $22.8 million as
determined by Harrison Hurley's review of the net intangibles value, discussed
earlier.
Harrison Hurley adjusted the $106.6 million gross enterprise value downward
by $115.1 million, representing the amount of debt to be assumed by PF
Management, valued as of March 4, 2001. Thus, Harrison Hurley calculated Pierre
Foods' stock equity value at $(8.50) million, or $(0.147) per share.
Comparable Transactions. In its analysis of comparable transactions,
Harrison Hurley used the acquisition of International Home Foods (Libby,
Bumblebee, Chef Boyardee and others) by ConAgra. Harrison Hurley considered this
acquisition to be comparable to the proposed exchange principally because of the
similarity in products offered by the two companies, noting, however, that both
the acquiring company and the acquired company were significantly larger than
Pierre Foods. Harrison Hurley calculated the pending $2.9 billion acquisition
price as a multiple of its EBITDA. Harrison Hurley applied an 80% discount to
this multiple to account for the difference in size between International Home
Foods (with sales of $2.2 billion) and Pierre Foods. This analysis indicated an
equity valuation per share for Pierre Foods ranging from $0.00 to $0.62.
Conclusions. Harrison Hurley concluded that, in the protein processing
industry, there is a direct correlation between a company's ability to generate
cash net of its debt service obligations and the value that the market assigns
to the company's stock. Harrison Hurley also concluded that the value of the
shares of Pierre Foods is negligible because the debt service obligations of the
company negate all residual stockholder value. Harrison Hurley advised PF
Management to offer unaffiliated shareholders the then-current market price for
Pierre Foods common stock because that price significantly exceeded the
underlying value of the stock.
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Harrison Hurley has performed several previous assignments for Pierre Foods
from 1995 to 2000. These assignments have included strategic advisory services,
debt placement, fairness opinions and bondholder relations.
Under the term of its engagement letter with PF Management, Harrison Hurley
is entitled to a fee of $35,000, plus reimbursement of its out-of-pocket
expenses.
You may review and copy Harrison Hurley's full report during regular
business hours at its offices located at 1 Turks Head Place, Providence, Rhode
Island. The report is also filed as an exhibit to the Schedule 13E-3 covering
the exchange. Finally, upon written request, we will provide you with a copy of
the report at no cost to you. See "Available Information" and "Information
regarding Pierre Foods -- Incorporation of Documents by Reference."
CONFLICTS OF INTEREST
In considering the recommendations of the special committee and of the
board of directors with respect to the exchange, shareholders should be mindful
that James C. Richardson, Jr., Chairman of the board of directors, and David R.
Clark, Vice-Chairman, own 88.11% of the outstanding common stock of, and they
control, PF Management, which will own all of the outstanding common stock of
Pierre Foods immediately after the exchange. The special committee and the board
of directors were aware of these conflicts of interest and considered them among
other factors described under "-- Recommendation of the Special Committee and
the Board of Directors." The special committee considered PF Management's
post-exchange ownership of Pierre Foods to be a negative factor in its
determination that the exchange is fair to shareholders unaffiliated with PF
Management.
PF Management has not provided the shareholders of Pierre Foods
unaffiliated with PF Management with access to its corporate files or with
counsel or appraisal services expressly for the benefit of such shareholders at
the expense of PF Management.
PF Management expects that Mr. Templeton will join the Pierre Foods board
of directors after completion of the exchange but that the overall size of the
board will be reduced. Other than the addition of Mr. Templeton, however, PF
Management has not determined what specific changes it will make in the Pierre
Foods board after completion of the exchange.
The exchange agreement requires that Pierre Foods indemnify its current and
former directors and officers for six years after the completion of the exchange
against liabilities (including reasonable attorneys' fees) relating to actions
or omissions arising out of their being a director, officer, employee or agent
of Pierre Foods at or prior to the time the exchange is completed (including the
transactions contemplated by the exchange agreement). In addition, Pierre Foods
is obligated for a period of six years from the time the exchange is completed
to continue in effect directors' and officers' liability insurance with respect
to matters occurring prior to the time the exchange is completed.
Members of the special committee received fees for their service on that
committee of $2,500 per meeting. As the special committee has held six meetings,
each member is entitled to receive $15,000 in the aggregate for service on that
committee. In addition, each director of Pierre Foods, including each member of
the special committee, received $10,000 per meeting of the board of directors
and $5,000 per meeting of each and every other committee of the board in the
fiscal year ended March 3, 2001. Richardson, Clark and Woodhams received no fees
for their service as directors for the fiscal year ended March 3, 2001. The
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aggregate amount paid to each independent director for such service to the board
and on board committees (other than the special committee) was as follows for
the fiscal year ended March 3, 2001:
INDEPENDENT DIRECTOR AGGREGATE FEES
- -------------------- --------------
E. Edwin Bradford........................................... $65,000
Bobby G. Holman............................................. $80,000
Richard F. Howard........................................... $70,000
Lewis C. Lanier............................................. $70,000
William R. McDonald, III.................................... $80,000
Bruce Meisner............................................... $85,000
Our independent directors also own shares of our common stock. Based on
their stock ownership as of April 27, 2001 indicated below, our independent
directors will receive the following aggregate cash consideration for their
shares in the exchange, based on an exchange price of $1.21 per share:
INDEPENDENT DIRECTOR SHARES OWNED EXCHANGE CONSIDERATION
- -------------------- ------------ ----------------------
E. Edwin Bradford.................................... 3,141 $3,801
Bobby G. Holman...................................... 5,728 $6,931
Richard F. Howard.................................... -- --
Lewis C. Lanier...................................... -- --
William R. McDonald, III............................. 860 $1,041
Bruce Meisner........................................ -- --
PURPOSE AND REASONS OF THE MBO GROUP FOR THE EXCHANGE
PF Management and its shareholders, Richardson, Clark and Templeton
(collectively, the "MBO Group"), are engaging in the transactions contemplated
by the exchange agreement to acquire ownership of all of the outstanding capital
stock of Pierre Foods. The MBO Group believes that, due to decreasing
profitability and increasing risk in the food processing industry generally, our
small size and the lack of equity research coverage for our common stock
(factors they believe are in large measure beyond our control), it is and will
continue to be difficult for us to attract new investor interest and to obtain
access to the capital markets, and for our shareholders, including themselves,
to get a fair price when selling their shares in the market. In addition,
trading volume in our common stock has historically been low. For the twelve
months immediately preceding March 30, 2001, when we announced that we were in
advanced talks with PF Management looking toward the exchange, the trading
volume averaged approximately 5,816 shares a day.
While Richardson and Clark believe that these factors do and would continue
to limit the ability of our shareholders, including themselves, to receive a
fair price selling their shares in the market, they also believe that we are a
valuable company with the opportunity to increase our revenues and net income in
the future. Richardson and Clark believe that as a private company, Pierre Foods
can better position itself for long-range strategic planning, without the
concern of short-term impact on stock price. They also believe that the expenses
and pressures of being a public company are significant for a company our size
and that mitigating those expenses and pressures by eliminating some (although
not all) SEC filing requirements, particularly those pertaining to annual
reports and proxy statements, and shareholder relations expenses, would enhance
our long-term success. They believe that the exchange offers our shareholders
the opportunity to obtain a fair value for their shares. Nevertheless, the MBO
Group also recognizes that the exchange will deprive the shareholders of Pierre
Foods unaffiliated with PF Management of the opportunity to share in any future
increase to its revenues or net income. The members of the MBO Group have chosen
this time to effectuate the exchange because of their concern that the company
could become insolvent due to possible inability to service Pierre Foods'
outstanding senior notes. The members of the MBO Group recognize that they have
a higher risk tolerance than the unaffiliated shareholders and are willing to
assume the risk of greater share ownership at this time. They also believe that
the company will be able to take various actions as a private company that it
would not be able to take as a public company and will therefore have greater
flexibility in
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managing its affairs. Finally, it is at this time that the members of the MBO
Group are personally financially able to effectuate the exchange.
PF Management owns 3,630,212 shares of Pierre Foods common stock. If the
exchange is completed, then PF Management will own all of Pierre Foods'
outstanding common stock. The MBO Group believes that, if Pierre Foods is able
to successfully continue its business strategy, then the value of its ownership
interest in Pierre Foods will, over time, exceed the amount that they will have
invested through completion of the exchange.
POSITION OF THE MBO GROUP AS TO FAIRNESS OF THE EXCHANGE
The MBO Group has considered the analyses and findings of the special
committee and the board of directors (described in detail in "Special
Factors -- Recommendation of the Special Committee and the Board of Directors")
with respect to the fairness of the exchange to shareholders unaffiliated with
PF Management. As of the date of this proxy statement, the MBO Group adopted the
analyses and findings of the special committee and the board with respect to the
fairness of the exchange and believes that the exchange is both procedurally and
substantively fair to Pierre Foods' shareholders unaffiliated with PF
Management.
In adopting the analysis and findings of the special committee and the
board, the MBO Group noted that the ability of Pierre Foods to effect any
alternative transaction has been effectively precluded by the decision of their
controlled company PF Management, holder of approximately 63% of the Pierre
Foods common stock, to oppose any alternative transaction and by the refusals of
Richardson and Clark, at a minimum, to waive the benefits of their
change-of-control agreements in connection with any alternative transaction. The
MBO Group does not believe that these precluding factors adversely affected its
fairness determination or the fairness of the exchange to shareholders
unaffiliated with PF Management because, in its view, the reasons stated below
as substantiating the fairness of the exchange consideration are operative
regardless of PF Management's controlling position.
Richardson and Clark, who are Pierre Foods' two most senior executive
officers, had advised the special committee that they would not remain employees
of Pierre Foods if it became a division or portfolio investment of another
company and that, accordingly, they would not waive the benefits of their
change-of-control agreements to facilitate any transaction alternative to the
exchange. Richardson and Clark believe that they have the right (i) to choose to
leave the employment of the company, (ii) to refuse to waive their contractual
rights and (iii) to exercise (through PF Management) their shareholder rights
and that their personal decisions as to such matters do not affect the
procedural fairness of the exchange.
As members of the board of directors, Richardson and Clark abstained from
voting on approval of the exchange agreement and on the recommendation to the
shareholders that they vote to approve the agreement.
In addition to considering the analyses and findings of the special
committee and the board of directors, the MBO Group considered the report and
opinion of Harrison Hurley, its financial advisor, in its evaluation of the
fairness of the exchange to shareholders unaffiliated with PF Management.
Harrison Hurley's report included a comprehensive analysis of the operating and
financial structure of Pierre Foods compared to other publicly-held integrated
food processors. This report concluded that the common stock of Pierre Foods had
no value. In light of the recent market trading valuation, however, Harrison
Hurley recommended that an offer priced at the then-current market value of
Pierre Foods' common stock would be fair to the unaffiliated shareholders.
The MBO Group considered the following factors, each of which, in the
opinion of the MBO Group, supported the determination that the exchange
agreement and the exchange are substantively fair to and in the best interests
of the unaffiliated shareholders:
- the fact that current market prices for Pierre Foods common stock, from
the period of March 1 through March 15, 2001, ranged from a low of $.9688
per share to a high of $1.125 per share, with an average price during this
period of $1.002 per share; and
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- the fact that the historical market prices for Pierre Foods common stock,
during the period from December 1, 2000 through March 15, 2001, ranged
from a low of $.75 per share to a high of $1.25 per share, with an average
price during this period of $.852 per share.
The MBO Group considered all of the factors described above and believes
that the exchange is both procedurally and substantively fair to Pierre Foods'
shareholders unaffiliated with PF Management.
EFFECTS OF THE EXCHANGE
As a result of the exchange, the shareholders of Pierre Foods unaffiliated
with PF Management will be entitled to receive $1.21 per share of Pierre Foods
common stock. The receipt of cash pursuant to the exchange will be a taxable
transaction. See "Federal Income Tax Consequences."
As a consequence of the exchange, the shareholders of Pierre Foods other
than PF Management will not continue their equity interest in Pierre Foods as an
ongoing corporation and therefore will not share in the future earnings and
potential growth of Pierre Foods. The shareholders other than PF Management also
will not bear the risk that the value of Pierre Foods stock will decrease in the
future. Upon completion of the exchange, Pierre Foods common stock will no
longer be traded on the Nasdaq Small Cap Market, price quotations will no longer
be available and the registration of the Pierre Foods common stock under the
Securities Exchange Act of 1934 will be terminated. The termination of
registration of the common stock under the Exchange Act will make many of the
provisions of the Exchange Act, such as the short-swing profit recovery
provisions of Section 16(b) and the requirement of furnishing a proxy or
information statement in connection with shareholders' meetings, no longer
applicable. Pierre Foods will continue to file periodic reports with the SEC,
however, as required by the indenture governing our senior notes. The cost
savings to Pierre Foods as a result of this mitigation of SEC-administered
compliance obligations is estimated at approximately $250,000 per year.
PF Management will own and retain all of the outstanding common stock of
Pierre Foods upon consummation of the exchange. Investment in Pierre Foods
following the exchange will involve substantial risk resulting from the limited
liquidity of such an investment. PF Management believes, nevertheless, that, if
Pierre Foods can implement its business strategy, then the value of PF
Management's investment in Pierre Foods common stock will be much greater than
the amount of its investment made through the exchange. See "Forward-Looking
Information."
The shareholders of PF Management will share in the net book value and net
earnings of Pierre Foods based on their respective interests in PF Management.
Had the exchange been effective as of March 3, 2001, the Company's last fiscal
year-end date, respective net book value and net loss would have been shared as
follows:
PIERRE FOODS' PIERRE FOODS'
OWNERSHIP % OF NET BOOK VALUE AT NET LOSS FOR FISCAL
PF MANAGEMENT 3/3/01 2001
-------------- ------------------------ ------------------------
Richardson....................... 52.875% $14,205,820 $(2,468,219)
Clark............................ 35.250% 9,470,546 (1,645,479)
Templeton........................ 11.875% 3,190,432 (554,328)
------- ----------- -----------
Total.................. 100.000% $26,866,798 $(4,668,026)
======= =========== ===========
THE EXCHANGE
The exchange agreement provides that PF Management, a newly organized North
Carolina corporation, will become the holder of all of the outstanding shares of
our common stock pursuant to the terms and conditions of the agreement. The
exchange is a statutory share exchange, not a merger. This structure was chosen
because the company's indenture impedes a merger of the company with another
company, but does not impede a statutory share exchange with a company
controlled by Richardson or Clark.
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The exchange agreement is included in its entirety as Appendix A. The
discussion in this proxy statement of the exchange and the summary description
of the principal terms of the exchange agreement, while complete in all material
respects, is subject to and qualified in its entirety by reference to the full
text of the agreement.
ACQUISITION OF PIERRE FOODS
Upon completion of the exchange, we will be a wholly-owned subsidiary of PF
Management. We will continue to have all of the assets and liabilities we had
immediately before the exchange.
CONVERSION OF SECURITIES
At the effective time of the exchange, each share of our common stock
issued and outstanding other than shares held by PF Management, together with
the associated preferred stock purchase rights, will be exchanged for and become
the right to receive $1.21 per share, without interest, from PF Management
without further action on the part of the holder. Shares of common stock held by
PF Management at the time of the exchange will not be altered or affected in any
way by the exchange. Other than PF Management, no Pierre Foods shareholders will
be treated differently in the exchange.
On August 28, 1997, Pierre Foods declared a dividend distribution of
preferred stock purchase rights (the "rights"). Pursuant to the terms of the
rights agreement dated September 2, 1997 between Pierre Foods and American Stock
Transfer & Trust Company, the holder of a right is entitled to purchase from
Pierre Foods upon a sale of Pierre Foods or its assets 1/100 of a share of its
junior participating preferred stock, series A, or in certain circumstances, to
purchase either Pierre Foods' common stock or the common stock of an acquiring
company at one-half of its market price. Under the exchange agreement, all of
the common stock of Pierre Foods, together with the rights, other than shares
owned by PF Management, will be converted into the right to receive cash
consideration.
At the effective time, PF Management will irrevocably deposit with a bank
or trust company selected by PF Management and reasonably satisfactory to us
cash sufficient to pay the consideration for the exchanged shares. All such
funds will be held in trust for shareholders and will be disbursed to
shareholders upon surrender of the certificates representing the exchanged
shares. Any interest or income on such funds will be the property of PF
Management.
Shareholders immediately prior to the effectiveness of the exchange will
not be entitled to receive any dividends declared and payable in respect of the
exchanged shares after effectiveness of exchange.
TREATMENT OF OPTIONS
We will terminate all plans or arrangements providing for the issuance or
grant of any equity security or instruments convertible into equity securities
of our company, including the 1987 Special Stock Option Plan, the 1997 Special
Stock Option Plan and the 1997 Incentive Stock Option Plan. All options granted
under the option plans will be cancelled prior to effectiveness of the exchange.
TIME OF CLOSING
The exchange will close on the second business day after satisfaction or
waiver of the conditions to the exchange. To complete the exchange, Pierre Foods
and PF Management will file articles of share exchange with the Secretary of
State of North Carolina.
TRANSFER OF SHARES
No transfers of shares of our common stock will be made on the stock
transfer books at or after the effective time of the exchange. Certificates
representing shares of common stock presented to us after the effective time
will be cancelled and exchanged for cash.
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CONDITIONS
The obligation of Pierre Foods and PF Management to effect the exchange is
subject to the satisfaction of each of the following conditions, which may be
waived at the appropriate party's discretion, to the extent permitted by
applicable law, other than the first listed condition:
- the exchange has been approved by the holders of at least 75% of the
common stock entitled to vote;
- no law, rule, regulation, order, decree or injunction prohibits the
exchange;
- there is no pending or threatened proceeding challenging or prohibiting
the exchange or which is reasonably expected to have a material adverse
effect on one of the parties; and
- all governmental approvals of the exchange have been obtained.
Neither Pierre Foods nor PF Management is aware of any governmental
consent, approval or notice required for the exchange.
Our obligation to effect the exchange is subject to the satisfaction of the
following conditions, unless waived by us:
- PF Management's representations and warranties in the exchange agreement
are accurate as of the closing; and
- PF Management has performed its obligations under the exchange agreement.
The obligations of PF Management to effect the exchange are subject to the
satisfaction of each of the following conditions, unless waived by PF
Management:
- our representations and warranties in the exchange agreement are accurate
as of the closing;
- we have performed our obligations under the exchange agreement;
- dissenter's rights are not exercised by holders of more than 5% of our
outstanding common stock;
- no material adverse change in our business has occurred;
- there is no general suspension of trading securities on the Nasdaq Stock
Market or declaration of a banking moratorium;
- there is no action pending or threatened which could limit the ability of
PF Management to exercise full rights of ownership of shares acquired in
the exchange or require PF Management to divest shares acquired in the
exchange; and
- PF Management has obtained financing satisfactory to it in its discretion
to pay the exchange consideration and expenses of the exchange.
If and to the extent that a material condition to the exchange is waived by
Pierre Foods or PF Management, we will notify you and resolicit your votes in
the manner and to the extent required by law. After approval of the exchange
agreement by our shareholders, no condition may be waived that reduces the
amount or changes the form of the cash exchange consideration to be received by
our shareholders, or that would adversely affect our shareholders, unless a
waiver of such condition is approved by the shareholders.
FINANCING OF THE EXCHANGE
Unless waived by PF Management, obtaining financing to pay the exchange
consideration is a condition which must be satisfied in order to complete the
exchange. We estimate that, in addition to amounts already paid for fees and
expenses, a total of approximately $2.7 million will be required to complete the
exchange, consisting of approximately $2.6 million as exchange consideration and
less than $100,000 for fees and expenses related to the transaction. On July 6,
2001, to finance the exchange, PF Management and Clark had funds on deposit in
excess of $2.7 million and had undertaken in writing to notify the special
committee before any such funds were transferred. Accordingly, we believe that
the financing condition has been satisfied.
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All or substantially all of the funds used to finance the exchange will
have been borrowed by PF Management from individuals known to Richardson and
Clark. (Of the slightly more than $2.7 million on deposit at July 6, 2001,
approximately $430,000 was deposited by Clark, who expects to withdraw his funds
if and when PF Management has replaced them with loan proceeds.) The loans to PF
Management are and will be evidenced by promissory notes. The minimum face
amount of each note is $250,000 and the aggregate principal amount of the notes
will not exceed $3 million; each note is to have a term of five years, subject
to prepayment at the option of PF Management at any time and subject to
prepayment at the option of the holder on March 31, 2004; no note will bear
interest at a rate of more than 15% per annum or will pay interest more often
than quarterly; and each note will be guaranteed by Richardson and Clark. PF
Management has made no specific plans or arrangement to repay these loans.
REPRESENTATIONS AND WARRANTIES
We have made customary representations and warranties in the exchange
agreement regarding, among other things, authorization of the exchange
agreement, our operations and our financial matters.
PF Management has made customary representations and warranties in the
exchange agreement regarding, among other things, its organization and
authorization of the exchange.
The representations and warranties of the parties in the exchange agreement
will expire upon completion of the exchange, and none of the parties or their
respective officers, directors or shareholders will have any liability with
respect to these representations or warranties after the completion of the
exchange.
COVENANTS
In the exchange agreement, we have agreed that prior to completion of the
exchange, unless otherwise agreed to in writing by PF Management or as otherwise
contemplated by the exchange agreement, we and each of our subsidiaries will
conduct business substantially consistent with past practice and will not:
- issue equity securities or instruments convertible into equity
securities;
- make a distribution or disposition of our assets, capital or surplus
(except in the ordinary course of business);
- take any action which would impair our assets; or
- take any action which would cause our representations and warranties to
be untrue.
Each party also has agreed to provide prompt notice to the other upon
obtaining knowledge of:
- any event which would likely cause any representation or warranty made by
it to be untrue prior to closing; and
- any notice from a third party that the consent of such third party may be
required to effect the exchange.
In addition, PF Management agreed that, prior to the completion of the
exchange, it would not do or fail to do, or cause any person to do or fail to
do, any act that would cause us to breach any of our representations and
warranties.
NONSOLICITATION COVENANT
Under the terms of the exchange agreement, we have agreed not to permit any
of our subsidiaries, directors, officers, agents, advisors or representatives to
solicit, initiate, facilitate or encourage any inquiries or proposals with
respect to alternative business combinations. However, we may provide
information and enter into discussions in response to an unsolicited proposal if
our board of directors, upon recommendation of the special committee and upon
advice of counsel and financial advisors, determines that such action is in the
best interest of shareholders and is required by its fiduciary duties. We are
obligated to inform PF Management immediately of any alternative business
proposals.
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INDEMNIFICATION AND INSURANCE
The exchange agreement provides that for six years after the closing of the
exchange our current and former directors and officers (including the members of
the special committee) and any of our subsidiaries (i) will be indemnified by
us, to the fullest extent permitted by applicable law, against any losses,
claims, damages, liabilities, costs or expenses arising from his or her service
as an officer, director or employee prior to and at the completion of the
exchange, and (ii) will be advanced expenses (including attorneys' fees)
incurred in defense of any action or suit. In addition, we are required to
maintain in effect, for a period of six years after the closing of the exchange,
directors' and officers' liability insurance of at least the same amounts and
comparable coverage as currently in effect.
EXPENSES
The parties have agreed to pay their own costs and expenses in connection
with the exchange. We will bear the costs and expenses incurred in printing,
filing with the SEC and mailing to shareholders this proxy statement and other
materials in connection with the special meeting.
TERMINATION, AMENDMENT AND WAIVER
At any time before completion of the exchange, the exchange agreement may
be terminated by the mutual consent of Pierre Foods and PF Management.
Either party may terminate the exchange agreement prior to completion of
the exchange by written notice to the other party:
- if the exchange has not been completed by September 30, 2001, but the
party seeking to terminate for this reason must not be in breach of its
obligations under the exchange agreement; or
- if completion of the exchange is prohibited by a court or governmental
entity.
In addition, PF Management may terminate the exchange agreement prior to
effectiveness of the exchange by written notice to us if:
- there has occurred, and PF Management has notified us of, a material
breach by us of any representation, warranty, covenant or agreement in
the exchange agreement;
- our board of directors or special committee withdraws, modifies or
changes its recommendation to the shareholders to approve the exchange,
or recommends any other proposal to the shareholders; or
- we have received a proposal for an alternative business combination and
do not reject it within 10 business days.
We may terminate the exchange agreement prior to effectiveness of the
exchange by written notice to PF Management if:
- there has occurred, and we have notified PF Management of, a material
breach by PF Management of any representation, warranty, covenant or
agreement in the exchange agreement; or
- the board of directors has determined in good faith that a failure to
terminate the exchange agreement and enter into an alternative
transaction would constitute a breach of its fiduciary duty.
Subject to applicable law, the exchange agreement may be modified or
amended, and provisions waived, by written agreement of the parties. After
approval of the exchange agreement by our shareholders, however, no amendment or
waiver of a provision may be made which reduces the amount or changes the form
of the exchange consideration to be received by the shareholders, or that would
adversely affect the shareholders, unless such amendment or waiver is approved
by the shareholders. With respect to any decision regarding a material
modification, amendment or waiver of the exchange agreement, our board of
directors, in the exercise of its fiduciary duty and in accordance with
applicable law, will determine whether resolicitation of the shareholders is
required.
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TERMINATION FEE
In the event that the exchange agreement is terminated by:
- by us due to receipt of a proposal for an alternative transaction which
is superior to the exchange;
- by PF Management due to our board of directors' withdrawal of its
recommendation to shareholders, our board of directors' recommendation of
an alternative proposal to shareholders, or receipt of an alternative
proposal which is not rejected by our board; or
- by PF Management due to our breach of a representation, warranty,
covenant, or agreement in the exchange agreement and within two months
after such termination we receive a proposal for an alternative
transaction, which results in a definitive agreement as to such
transaction within 12 months of the termination;
then we are required to promptly reimburse PF Management for its actual
out-of-pocket fees and expenses in connection with the exchange.
REGULATORY APPROVALS
We are not aware of any governmental license or regulatory permit that is
material to our business and that is likely to be adversely affected by the
exchange or of any approval or other action by a state, federal or foreign
governmental agency that is required to effect the exchange.
ACCOUNTING TREATMENT
PF Management will account for the exchange as a purchase business
combination.
FEES AND EXPENSES
Whether or not the exchange is consummated, Pierre Foods will pay the
following fees and expenses in connection with the exchange and related
transactions:
EXPENSE OR FEE ESTIMATED AMOUNT
- -------------- ----------------
Financial advisory fees and expenses...................... $150,000
Legal fees................................................ $200,000
Accounting fees........................................... $ 50,000
Printing and mailing expenses............................. $100,000
Solicitation expenses..................................... $ 15,000
SEC filing fees........................................... $ 521
Miscellaneous............................................. $ 9,479
--------
Total........................................... $525,000
========
Except for the SEC filing fee, all of these fees are estimated.
For a description of Pierre Foods' obligation, even in some cases if the
exchange is not consummated, to pay or reimburse PF Management for expenses
incurred by PF Management in connection with the exchange, see "The
Exchange -- Expenses" and "-- Termination Fee." See "Special Factors -- Opinion
of Pierre Foods' Financial Advisor" for a description of the fees to be paid to
Grant Thornton in connection with its engagement. For a description of fees paid
to the members of the special committee, see "Special Factors -- Conflicts of
Interest."
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations relevant to the exchange that are generally applicable to holders
of Pierre Foods common stock. This discussion is based on currently existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing and
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proposed Treasury Regulations thereunder and current administrative rulings and
court decisions, all of which are subject to change. Any such change, which may
or may not be retroactive, could alter the tax consequences to the holders of
Pierre Foods common stock as described in this proxy statement. Special tax
consequences not described below may be applicable to particular classes of
taxpayers, including insurance companies, financial institutions,
broker-dealers, persons who are not citizens or residents of the United States
or who are foreign corporations, foreign partnerships, other foreign entities or
foreign estates or trusts as to the United States and holders who acquired their
stock through the exercise of an employee stock option or otherwise as
compensation.
The receipt of the $1.21 per share cash exchange consideration in the
exchange by holders of Pierre Foods common stock will be a taxable transaction
for federal income tax purposes. Each holder's gain or loss per share will be
equal to the difference between $1.21 and the holder's basis per share in the
common stock. This gain or loss generally will be a capital gain or loss. In the
case of domestic individuals, trusts and estates, most of this capital gain will
be subject to a maximum federal income tax rate of 20 percent for shares of
common stock held for more than 12 months prior to the date of disposition. For
domestic corporations, capital gains are taxed at the rate generally applicable
to the corporation for the current taxable year. For shares held less than 12
months the gain or loss will be a short-term capital gain or loss. As a general
rule, short-term capital gains are taxed at ordinary income rates.
A holder of Pierre Foods common stock may be subject to backup withholding
at the rate of 31% with respect to the exchange consideration received, unless
the holder (a) is a corporation or comes within other exempt categories and,
when required, demonstrates this fact or (b) provides a correct taxpayer
identification number ("TIN"), certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the back-up
withholdings rules. To prevent the possibility of backup federal income tax
withholding on payments made to certain holders with respect to shares of common
stock under the exchange, each holder must provide the disbursing agent with his
or her correct TIN by completing a Form W-9 or Substitute Form W-9. A holder of
Pierre Foods common stock who does not provide Pierre Foods with his or her
correct TIN may be subject to penalties imposed by the Internal Revenue Service
(the "IRS"), as well as backup withholding. Any amount withheld under these
rules may be credited against the holder's federal income tax liability. Pierre
Foods (or its agent) will report to the holders of common stock and the IRS the
amount of any "reportable payments," as defined in Section 3406 of the Code, and
the amount of tax, if any, that is withheld.
Completion of the exchange would not result in any taxable income, gain,
loss or deduction to Pierre Foods, PF Management, Richardson, Clark or
Templeton. Upon completion of the exchange, Pierre Foods will undergo an
"ownership change" within the meaning of Section 382 of the Code and, as a
consequence, its net operating losses will be subject to an annual limitation
upon their use. Specifically, this annual limitation will be an amount equal to
the "long term tax exempt rate" as defined in Section 382 multiplied by the fair
market value of Pierre Foods' common stock immediately prior to the exchange.
For the month of July 2001, the long term tax-exempt rate is 5.01%. As of March
3, 2001, Pierre Foods' federal income tax net operating loss carryforward was
$4.2 million.
THE FOREGOING TAX DISCUSSION IS BASED UPON PRESENT LAW. EACH HOLDER OF
COMMON STOCK IS URGED TO CONSULT THE HOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC
TAX CONSEQUENCES OF THE EXCHANGE TO THE HOLDER, INCLUDING THE APPLICATION AND
EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECT OF
CHANGES IN SUCH TAX LAWS.
INFORMATION REGARDING PIERRE FOODS
We engage in one line of business -- food processing. We own and operate
food processing facilities in Cincinnati, Ohio and Claremont, North Carolina. We
are a leading manufacturer of fully-cooked branded and private-label protein and
bakery products, and we believe that we are the largest integrated producer of
microwaveable sandwiches. We provide specialty beef, poultry and pork products
formed and portioned to meet specific customer requirements. We sell primarily
to the foodservice market and serve leading national
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restaurant chains, a majority of primary and secondary schools, vending,
convenience store and other niche markets.
Pierre Foods, Inc. was organized as a North Carolina corporation in 1970.
Our principal executive offices are located at 9990 Princeton Road, Cincinnati,
Ohio 45246. Our telephone number there is (513) 874-8741.
We have attached a copy of our annual report on Form 10-K for the fiscal
year ended March 3, 2001 as Appendix C to this proxy statement. This document
contains more detailed information about us.
INCORPORATION OF DOCUMENTS BY REFERENCE
We are incorporating by reference our annual report on Form 10-K for the
fiscal year ended March 3, 2001 filed with the SEC and attached as Appendix C to
this proxy statement.
In addition, we are incorporating by reference all documents we file in
response to the requirements of Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this proxy statement and before the date of the
special meeting. Accordingly, those documents will be considered a part of this
proxy statement from the date they are filed.
If you would like copies of the documents we file after the date of this
proxy statement, please contact Pamela M. Witters at Pierre Foods, Inc., 9990
Princeton Road, Cincinnati, Ohio 45246 or by telephone at (513) 874-8741. You
may also review our filings with the SEC as described under "Available
Information."
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MANAGEMENT
The following table sets forth information about the directors and
executive officers of Pierre Foods:
NAME, BUSINESS ADDRESS PRINCIPAL EMPLOYMENT; FIVE-YEAR
AND PHONE NUMBER EMPLOYMENT HISTORY; OTHER DIRECTORSHIPS
- ---------------------- ------------------------------------------------------------
James C. Richardson, Jr Director of Pierre Foods since 1987, and Chairman of the
P.O. Box 3967 board of directors since December 16, 1999. From 1993 until
Hickory, NC 28603 then he served as Chief Executive Officer of Pierre Foods.
(828) 304-2304 From 1996 until becoming Chairman, he served as Vice
Chairman. Mr. Richardson has served Pierre Foods as an
executive officer since 1987, including Executive Vice
President from 1989 to 1993 and President from 1993 to 1996.
David R. Clark Director of Pierre Foods since 1996 and Vice Chairman since
P.O. Box 3967 1999. He joined Pierre Foods as its President and Chief
Hickory, NC 28603 Operating Officer in 1996 and held those positions until he
(828) 304-2307 became Vice Chairman. From 1994 to 1996, he served as
Executive Vice President and Chief Operating Officer of Bank
of Granite, located in Granite Falls, North Carolina.
E. Edwin Bradford Director of Pierre Foods since 1993. In 1977, he founded
P.O. Box 3081 Bradford Communications, Inc., a Hickory, North Carolina
Hickory, NC 18603 marketing and advertising firm. During fiscal 2001, Mr.
(828) 322-9023 Bradford served as a member of the sensitive transactions
and special committees of the board of directors. He
continues to serve on both committees.
Bobby G. Holman Director of Pierre Foods since 1994. He served as Pierre
4090 Golf Drive Foods' Chief Financial Officer and Treasurer from 1994 until
Conover, NC 28613 his retirement in 1997. During fiscal 2001, Mr. Holman was a
(828) 459-7277 member of the audit and special committees of the board of
directors. He continues to serve on and chairs both
committees.
Richard F. Howard Director of Pierre Foods since 1987. He served as Chairman
5982 Hwy. 150 East of the board of directors from 1993 until Mr. Richardson
Denver, NC 28037 became Chairman in 1999. Mr. Howard served as Executive Vice
(704) 483-3463 President of Pierre Foods from 1989 to 1993 and as Chief
Financial Officer and Treasurer from 1989 to 1994. During
fiscal 2001, Mr. Howard was a member of the executive
compensation committee of the board of directors, and
continues to serve on that committee.
Lewis C. Lanier Director of Pierre Foods since 1988. He is a partner in the
P.O. Box 518 Orangeburg, South Carolina, law firm of Lanier & Knight,
160 Centre Street, NE LLC. Until he co- founded that firm in August 1999, he had
Orangeburg, SC 29115 been a member of the Orangeburg law firm of Horger, Horger,
(803) 268-9800 Lanier & Knight, L.L.P., since joining the firm's
predecessor in 1985. During fiscal 2001, Mr. Lanier served
on the executive compensation and sensitive transactions
committees of the board of directors. He continues to serve
on both committees and chairs the executive compensation
committee.
William R. McDonald III Director of Pierre Foods since 1991. From 1989 until his
1257 25th Street Pl., SE retirement in 1999, he was Branch Manager of American
Hickory, NC 28602 Pharmaceutical Services, a subsidiary of Mariner Post-Acute
(828) 328-5936 Network, or its predecessors. American Pharmaceutical
Services provides pharmaceutical needs and prescription
services to nursing homes. Mr. McDonald serves as Mayor of
the City of Hickory, North Carolina, an elective office he
has held since 1981. During fiscal 2001, he served on the
audit and sensitive transactions committees of the board of
directors. He continues to serve on both committees and
chairs the sensitive transactions committee.
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NAME, BUSINESS ADDRESS PRINCIPAL EMPLOYMENT; FIVE-YEAR
AND PHONE NUMBER EMPLOYMENT HISTORY; OTHER DIRECTORSHIPS
- ---------------------- ------------------------------------------------------------
Bruce E. Meisner Director of Pierre Foods since February 3, 2000. Mr. Meisner
1316 2nd Street NE, Suite is the proprietor of Bruce E. Meisner Appraisal Company in
No. 8 Hickory, North Carolina, a company providing real estate
Hickory, NC 28601 appraisal services. During fiscal 2001, Mr. Meisner served
(828) 324-4100 on the audit, executive compensation and special committees.
He continues to serve on those committees.
Norbert E. Woodhams Director of Pierre Foods since 1998 and President and Chief
9990 Princeton Road Executive Officer since December 16, 1999. Immediately prior
Cincinnati, OH 45248 to his election to those offices, Mr. Woodhams was President
(800) 543-1604 of Pierre Foods, LLC, Pierre Foods' operating subsidiary,
having served in that position since Pierre Foods'
acquisition of Pierre Cincinnati in June 1998. From 1994 to
1998, he served as President of Hudson Specialty Foods, a
food processing division of Hudson.
Pamela M. Witters Pierre Foods' Chief Financial Officer since December 16,
9990 Princeton Road 1999. Ms. Witters served as Pierre Foods' Vice President of
Cincinnati, OH 45246 Finance from 1998 to 1999. From 1994 to 1998, she worked
(800) 543-1604 with Deloitte & Touche LLP in Hickory, North Carolina.
None of the directors or executive officers of Pierre Foods has, during the
last five years, been convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors), or been a party to a civil proceeding of a
judicial or administrative body of competent jurisdiction and as a result of
such proceeding was or is subject to a judgment, decree or final order enjoining
future violations of, or prohibiting activities subject to, federal or state
securities laws or finding any violation of such laws. Each of the directors and
executive officers of Pierre Foods is a citizen of the United States.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents our selected historical financial data and
other operating information for the five fiscal years ended March 3, 2001, which
are derived from our audited consolidated financial statements. The consolidated
financial statements for such five fiscal years have been audited by Deloitte &
Touche LLP, independent auditors. The data is qualified by reference to, and
should be read in conjunction with, our audited consolidated financial
statements, related notes and other financial information included in our annual
report on Form 10-K for the fiscal year ended March 3, 2001. Our Form 10-K
accompanies this proxy statement, and the financial statements included in those
reports are incorporated into this proxy statement by reference.
FISCAL YEARS ENDED
------------------------------------------------------------
MARCH 3, MARCH 4, MARCH 6, FEBRUARY 27, FEBRUARY 28,
2001 2000 1999 1998 1997
-------- -------- -------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues........................... $211,040 $185,598 $156,842 $66,245 $58,615
Cost of goods sold................. 133,740 116,025 101,413 59,153 53,821
Selling, general and
administrative.................. 62,962 65,319 40,003 10,356 7,630
Loss on sale of Mom 'n' Pop's
Country Ham, LLC................ -- 2,857 -- -- --
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FISCAL YEARS ENDED
------------------------------------------------------------
MARCH 3, MARCH 4, MARCH 6, FEBRUARY 27, FEBRUARY 28,
2001 2000 1999 1998 1997
-------- -------- -------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net (gain) loss on disposition of
property, plant and equipment...... 27 (22) 1,004 (640) (346)
Depreciation and amortization...... 6,238 5,662 4,902 1,615 1,401
-------- -------- -------- ------- -------
Operating income (loss)............ 8,073 (4,243) 9,520 (4,239) (3,891)
Interest expense................... 13,334 14,986 12,332 1,762 1,868
Other income, net.................. 281 169 409 204 61
Income tax benefit................. 767 4,825 613 1,926 2,262
-------- -------- -------- ------- -------
Loss from continuing operations.... (4,213) (14,235) (1,790) (3,871) (3,436)
Income from discontinued
operations...................... -- 2,828 4,285 6,121 5,461
Gain on disposal of discontinued
operations...................... -- 6,802 -- -- --
Extraordinary item(1).............. (455) (52) (64) -- 415
-------- -------- -------- ------- -------
Net income (loss).................. $ (4,668) $ (4,657) $ 2,431 $ 2,250 $ 2,440
======== ======== ======== ======= =======
NET INCOME (LOSS) PER SHARE -- BASIC
AND DILUTED:
Loss from continuing operations.... $ (0.73) $ (2.45) $ (0.30) $ (0.68) $ (0.67)
Income from discontinued
operations...................... -- 0.49 0.72 1.08 1.07
Gain on disposal of discontinued
operations...................... -- 1.17 -- -- --
Extraordinary item................. (0.08) (0.01) (0.01) -- 0.08
-------- -------- -------- ------- -------
Net income (loss).......... $ (0.81) $ (0.80) $ 0.41 $ 0.40 $ 0.48
======== ======== ======== ======= =======
OTHER DATA:
Capital expenditures............... $ 2,764 $ 5,488 $ 15,479 $13,252 $ 9,702
Ratio of earnings to fixed
charges......................... 0.64 (0.27) 0.79 (2.22) (2.04)
BALANCE SHEET DATA:
Working capital (deficit).......... $ 36,120 $ 36,403 $ 27,126 $ (497) $ 2,114
Total assets....................... 160,308 164,727 216,989 71,656 59,571
Total debt......................... 115,165 115,479 146,940 20,918 18,208
Shareholders' equity............... 26,867 31,533 41,152 39,227 31,348
Book value per share............... 4.65 5.45 7.09 6.65 5.88
- ---------------
(1) Reflects an extraordinary loss from early extinguishment of debt in the
amount of $455 in fiscal 2001, $52 in fiscal 2000 and $64 in fiscal 1999,
and an extraordinary gain from early extinguishment of debt in the amount of
$415 in fiscal 1997.
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STOCK OWNERSHIP
The following table shows, as of April 27, 2001, except as otherwise
indicated, the holdings of Pierre Foods common stock by (1) any entity or person
known to us to be the beneficial owner of more than five percent of the
outstanding shares, (2) each director and each executive officer and (3) by all
directors and executive officers as a group.
NUMBER OF SHARES PERCENT OF
OF COMMON STOCK OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP COMMON STOCK(1)
- ------------------------------------ -------------------- ------------------
PF Management, Inc.(2).................................... 3,630,212 62.8
361 Second Street, N.W
Hickory, NC 28601
James C. Richardson, Jr.(3)............................... 3,630,212 62.8
P.O. Box 3967
Hickory, NC 28603
David R. Clark(3)......................................... 3,630,212 62.8
P.O. Box 3967
Hickory, NC 28603
James M. Templeton(3)..................................... 3,630,212 62.8
P.O. Box 1295
Claremont, NC 28610
Dimensional Fund Advisors Inc.(4)......................... 493,375 8.5
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Norbert E. Woodhams....................................... 7,627 *
9990 Princeton Road
Cincinnati, OH 45248
Bobby G. Holman........................................... 5,728 *
4090 Golf Drive
Conover, NC 28613
E. Edwin Bradford(5)...................................... 3,141 *
P.O. Box 3081
Hickory, NC 28603
Pamela M. Witters......................................... 1,346 *
9990 Princeton Road
Cincinnati, OH 45246
William R. McDonald III(6)................................ 860 *
1257 25th Street Pl., SE
Hickory, NC 28602
Richard F. Howard......................................... -- --
5982 Hwy. 150 East
Denver, NC 28037
Lewis C. Lanier........................................... -- --
P.O. Box 518
160 Centre Street, NE
Orangeburg, SC 29115
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NUMBER OF SHARES PERCENT OF
OF COMMON STOCK OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP COMMON STOCK(1)
- ------------------------------------ -------------------- ------------------
Bruce E. Meisner.......................................... -- --
1316 2nd Street NE, Suite No. 8
Hickory, NC 28601
All directors and executive officers as a group (10
persons)................................................ 3,648,914 63.11%
- ---------------
* Less than one percent.
(1) The actual number of shares outstanding at April 27, 2001 was 5,781,480.
Each percentage has been calculated on the basis of such number. In
addition, there were 5,000 shares subject to outstanding call options
exercisable not later than May 4, 2001. Shares subject to such options have
not been considered outstanding for the purpose of computing the percentage
of outstanding shares owned by the person who holds such options. Each of
these options will be cancelled as a condition of the exchange.
(2) All of the shares owned of record by PF Management are also deemed to be
beneficially owned by Richardson and Clark in their capacity as directors.
Richardson, Clark and Templeton are also shareholders of PF Management.
Templeton disclaims beneficial ownership of the Pierre Foods shares owned by
PF Management. Templeton has agreed with PF Management, Richardson and Clark
(a) to vote his PF Management shares in the manner directed by Richardson
and Clark and (b) to give Richardson and Clark sole voting and investment
power over the Pierre Foods shares owned by PF Management.
(3) Consists of 3,630,212 shares deemed to be owned beneficially through PF
Management.
(4) The information provided for Dimensional Fund Advisors Inc. ("Dimensional")
was obtained from a Schedule 13G dated February 6, 2001, filed with the SEC
by Dimensional. According to the filing, Dimensional is a registered
investment advisor with voting and/or investment power over the shares
disclosed as beneficially owned by it. The filing states that the shares are
actually owned by investment companies, trusts and accounts advised by
Dimensional and that Dimensional disclaims beneficial ownership of the
shares.
(5) Includes 1,200 shares deemed to be owned beneficially through an individual
retirement account.
(6) Consists of 860 shares owned of record by this shareholder's spouse.
In addition to Richardson and Clark (acting through PF Management), all of
our directors and executive officers, who together own 18,702, or 0.32%, of the
outstanding shares, have indicated to us that they intend to vote their shares
in favor of the exchange. Each of these directors and officers intend to do so
because they believe that the $1.21 per share consideration to be paid to
shareholders in the exchange is fair based on the analysis of the board of
directors, the special committee and its financial advisor described earlier in
this proxy statement.
MARKET PRICES OF COMMON STOCK; DIVIDENDS
Pierre Foods common stock is traded on the Nasdaq Small Cap Market (symbol:
FOOD). The following table sets forth the high and low sales prices per share
for each quarterly period for the two most recent fiscal years and for the
current fiscal year to date.
FISCAL YEARS ENDED OR ENDING
----------------------------------------------------
MARCH 4, 2000 MARCH 3, 2001 MARCH 2, 2002*
---------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
------- ------ ------ ------ ------ ------
First Quarter................................. $ 6.938 $5.125 $4.813 $2.375 $1.937 $0.906
Second Quarter................................ 9.875 6.750 3.094 1.75 $ 1.39 $ 1.19
Third Quarter................................. 10.500 6.688 2.50 1.125 -- --
Fourth Quarter................................ 6.375 3.000 1.25 0.75 -- --
- ---------------
* Through July 5, 2001.
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The book value of a share of Pierre Foods common stock as of March 3, 2001
was $4.65 and the tangible book value of a share on that date was $(8.00).
On , 2001, the last day prior to the printing of
this proxy statement on which Pierre Foods common stock was traded, the closing
price per share of such stock as reported by Nasdaq was $ . On that
date, 5,781,480 shares of common stock were issued and outstanding.
We are prohibited from paying cash dividends on our common stock by the
terms of the indenture governing our senior notes and by our credit agreement
with Fleet Capital Corporation.
INFORMATION REGARDING PF MANAGEMENT
PF Management is a recently incorporated North Carolina corporation
organized for the purpose of effecting the exchange. Its principal executive
offices are located at 361 Second Street, NW, Hickory, North Carolina 28603. Its
telephone number is (828) 324-7474. James C. Richardson, Jr. and David R. Clark
are directors and executive officers of PF Management and James M. Templeton is
a director of PF Management. They own the outstanding common stock of PF
Management in these proportions: Richardson, 52.9%, Clark, 35.2% and Templeton,
11.9%. Messrs. Richardson and Clark are directors and executive officers of
Pierre Foods.
PF Management is not required to file reports with the SEC under Section
13(a), 13(c), 14 or 15(d) of the Exchange Act.
RECENT STOCK PURCHASES
Richardson, Clark and their affiliates contributed 3,037,285 Pierre Foods
shares to PF Management in exchange for shares of PF Management. Many of these
shares of stock had debt associated with them which had previously been the debt
of HERTH, and, with the restructuring of HERTH and the contribution of these
shares to PF Management (see "Opinion of Pierre Foods' Financial
Advisor -- Recent Stock Purchases"), PF Management assumed debt in the aggregate
amount of approximately $16 million, which was guaranteed by the shareholders of
PF Management. 2,556,534 of these shares are pledged to secure part of this
debt.
On April 17, 2001, PF Management purchased an aggregate of 592,927 shares
of Pierre Foods stock in private transactions, at prices representing a
substantial premium over the price to be paid in the exchange. As stated in the
Schedule 13D filed with the SEC by the MBO Group on April 27, 2001, Richardson
caused PF Management to purchase these shares, and Richardson made the purchases
described below, in consideration of the long time allegiance, association and
relationship of the selling shareholders to Mr. Richardson. As stated in the
Schedule 13D, in the opinion of Richardson and PF Management, these purchase
prices substantially exceed the fair value of the shares of common stock
acquired. The shares purchased by PF Management included shares purchased from
the following persons who were executive officers, directors or affiliates of
Pierre Foods at the time of the purchase, each payable in notes of PF
Management:
SHARES PRICE PER SHARE
------ ---------------
James M. Templeton.......................................... 64,280 $2.09
Larry D. Hefner............................................. 30,000 $8.00
Richard F. Howard........................................... 12,569 $7.50
The shares contributed to Pierre Foods by Richardson included shares
purchased by Richardson from the following persons who were executive officers,
directors or affiliates of Pierre Foods at the time of the purchase:
SHARES PRICE PER SHARE DATE OF PURCHASE
------- --------------- -----------------
Gregory A. Edgell............................ 363,414 $15.81 April 17, 2001
Charles F. Connor, Jr........................ 715,163 $ 8.53 February 1, 2000
L. Dent Miller............................... 521,421 $ 7.00 January 31, 2000
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The following table sets forth the amount of Pierre Foods common stock
purchased by PF Management, Richardson, Clark and Templeton during the prior two
years, the range of prices paid per share and the average purchase price per
share paid during each quarterly period presented. The purchases summarized
below include the purchases from affiliates described above as well as
non-affiliate and open market transactions. We have not presented quarterly
periods in which no purchases were made.
NUMBER OF SHARES RANGE OF PRICES AVERAGE PRICE
---------------- --------------- -------------
FISCAL YEAR ENDED MARCH 4, 2000
Fourth Quarter..................................... 1,476,606 $4.31 - $8.53 $7.60
FISCAL YEAR ENDED MARCH 3, 2001
First Quarter...................................... 307 $5.84 $5.84
Second Quarter..................................... 92 $5.84 $5.84
FISCAL YEAR ENDING MARCH 2, 2002
First Quarter...................................... 1,034,563 $2.09 - $15.81 $9.93
MANAGEMENT
The following table sets forth information about the directors, executive
officers and shareholders of PF Management:
PRINCIPAL EMPLOYMENT; FIVE-YEAR
NAME AND BUSINESS ADDRESS EMPLOYMENT HISTORY; OTHER DIRECTORSHIPS
- ------------------------- ------------------------------------------------------------
James C. Richardson, Jr. Director and executive officer of Pierre Foods since 1987,
P.O. Box 3967 including Chairman since 1999, Chief Executive Officer from
Hickory, NC 28603 1993 to 1996, Vice Chairman and President from 1993 to 1996
(828) 304-2304 and Vice President from 1989 to 1993.
David R. Clark Director since 1996 and Vice Chairman since 1999 of Pierre
P.O. Box 3967 Foods and President and Chief Operating Officer from 1996
Hickory, NC 28603 until 1999; Executive Vice President and Chief Operating
(828) 304-2307 Officer of Bank of Granite, P.O. Box 128, Granite Falls,
North Carolina 28630, from 1994 to 1996; for 13 years before
that, various executive capacities with BB&T, a commercial
bank and trust company, 200 West Second Street,
Winston-Salem, North Carolina 27101, including President of
BB&T of South Carolina during 1993 and 1994.
James M. Templeton Management consultant since October 1999; Senior Vice
3445 East Main Street President of Real Estate of Claremont Restaurant Group, 3437
Claremont, NC 28610 East Main Street, Claremont, North Carolina 28610, from
(828) 459-2111 December 1987 to September 1999.
None of the directors, executive officers or shareholders of PF Management
has during the last five years been convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors), or been a party to a
civil proceeding of a judicial or administrative body of competent jurisdiction
and as a result of such proceeding was or is subject to a judgment, decree or
final order enjoining future violations of, or prohibiting activities subject
to, federal or state securities laws or finding any violation of such laws. Each
of the directors and executive officers of PF Management is a citizen of the
United States.
All information contained in this proxy statement concerning PF Management
is based upon statements and representations made by its representatives to our
representatives.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
HERTH Management, Inc. provides management services to Pierre Foods,
including strategic planning and the direction of strategic initiatives,
including the identification and pursuit of mergers, acquisitions, other
investment opportunities (both within and without Pierre Foods' industry) and
divestitures; management of Pierre Foods' relationships with investment bankers,
securities broker-dealers, significant shareholders,
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noteholders, banks, lawyers and accountants; facilitating meetings of the board
of directors; and general oversight of Pierre Foods' performance. HERTH provides
the full-time services of Richardson and Clark to Pierre Foods. In exchange for
these services, HERTH is entitled to $1,500,000 per year pursuant to a
management services agreement, which expires in March 2002. Prior to April 17,
2001, the shareholders of HERTH included Richardson (22.0%), Templeton (11.0%)
and Columbia Hill, LLC (45.0%), whose equity owners included Clark (45.0%) and
Richardson (40.0%). Pierre Foods paid HERTH $2,550,000 in fiscal 2001,
consisting of $1,300,000 under the HERTH management agreement and an additional
$1,250,000 as bonuses paid to Richardson. Pierre Foods paid $3,241,270 in fiscal
2000, consisting of $1,300,000 under the HERTH management agreement and an
additional $1,941,270 as bonuses paid to Richardson. The HERTH management
agreement provides for $200,000 of Clark's salary to be paid for by HERTH. In
fiscal 2001 and 2000, Pierre Foods paid such amount directly to Clark and
reduced the $1,500,000 owed to HERTH under the HERTH management agreement by
$200,000 in each year. As of April 17, 2001, HERTH was owned only by Richardson
and Gregory A. Edgell, a former affiliate of Pierre Foods. As of April 25, 2001,
the HERTH management agreement was assigned to PF Management.
Columbia Hill Management, Inc., owned 50% each by Richardson and Clark,
provides accounting, tax and administrative services to Pierre Foods, as well as
professional services for the management of special projects. During fiscal
2001, Columbia Hill Management also provided consulting services for development
of new food service programs, and consulting services for assessment and
development of alternative warehousing and distribution programs. Fees paid for
these services were approximately $860,000 in fiscal 2001.
On September 13, 1999, Pierre Foods, Claremont Restaurant Group, HERTH and
Templeton entered into a severance, consulting and noncompete agreement pursuant
to which Templeton agreed to provide consulting services to Claremont for a term
of five years, beginning on the date of disposition of Pierre Foods' membership
interest in Claremont. Templeton also agreed not to compete with Claremont
during the five-year term. On such date, Pierre Foods paid Templeton a lump sum
payment of $315,000 plus a "gross up" amount equal to all income and excise tax
liabilities related to such payment, and an additional amount of $34,437
representing future premium payments on a life insurance policy insuring
Templeton. The payment of $315,000 to Templeton represented (a) $236,538 for his
agreement not to compete with Claremont, (b) $70,961 for the consulting services
to be provided, and (c) a severance amount of $7,501.
During fiscal 2001 and 2000, Columbia Hill, LLC owed Pierre Foods as much
as $705,493 pursuant to a promissory note payable on demand and bearing interest
at the prime rate. Columbia is owned in part by Richardson and Clark, who have
unconditionally guaranteed repayment of the note. In April 2001, the note was
assumed by PF Management.
Atlantic Cold Storage of Mocksville, LLC, owned one-third each by
Richardson and Clark, plans to construct and finance a public cold storage
warehouse which would lease space to Pierre Foods as well as to others. The
proposed agreement with Pierre Foods is for 10 years and a minimum of 4,000
pallet positions to be leased as of April 1, 2001 or the first date the facility
is operational. Pierre Foods also agreed to pay $250,000 for specialized
construction costs. On November 7, 2000, a fairness opinion was obtained which
stated that the proposed lease is no less favorable to Pierre Foods than those
that could be obtained in an arm's-length transaction with a non-affiliated
person, and that the transaction is fair to Pierre Foods. During fiscal 2001,
Pierre Foods paid $250,000 to Atlantic Cold Storage for the specialized
construction costs.
On September 14, 1999, Pierre Foods sold five former restaurant properties
and one tract of vacant land, with a combined book value of $2,433,482, to an
entity in which Templeton was then a minority investor, for a total cash
purchase price of $938,585. This transaction was completed under an agreement
entered into earlier during fiscal 2000 and was contingent upon the sale of the
Claremont Restaurant Group. Under the terms of the initial agreement, all
non-operating restaurant properties, consisting of seven former restaurant
locations and three tracts of undeveloped land with a total book value of
$3,620,842, were offered for sale at an aggregate price of $2,635,000. The
agreement further specified that the cash proceeds from the sale of any of these
properties to third parties prior to the sale of Claremont would reduce the
purchase price of the remaining pool of properties on a dollar-for-dollar basis,
subject to the sale of Claremont. Prior to the sale,
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four of the properties, with a book value totaling $1,187,359, were sold to
unrelated third parties for cash totaling $1,557,065.
On December 16, 1999, the board of directors approved a loan to Richardson
in an amount up to $8.5 million for the purpose of enabling Richardson to
purchase shares of Pierre Foods' common stock owned by certain shareholders. The
terms of the loan provide that outstanding amounts will bear a simple interest
rate of 8 1/2%, with principal and interest due three years from the date of the
loan. At the end of fiscal 2000, disbursements under the loan totaled $5
million.
On July 1, 1999, Pierre Foods' subsidiary, Pierre Foods, LLC sold a 1%
membership interest in Mom 'n' Pop's Country Ham, LLC, Pierre Foods' country ham
operation, to Richardson for $9,950. In August 1999, effective as of July 2,
1999, Pierre Foods conveyed its 99% membership interest in Mom 'n' Pop's to
Hoggs, LLC in exchange for a promissory note in the principal amount of $985,050
due December 31, 1999. As security, each of the members of Hoggs, LLC pledged
his or her membership interest in Hoggs to Pierre Foods. Richardson holds a 55%
membership interest in Hoggs. In addition, Pierre Foods provided a revolving
line of credit of $500,000 to Hoggs for working capital. As of the end of fiscal
2000, Hoggs paid the promissory note and the line of credit in full.
In October 1999, Fresh Foods Sales, LLC, a wholly-owned subsidiary of
Pierre Foods, sold all assets related to its Bennett's Bar-B-Que restaurant
located in Conover, North Carolina, to Fairgrove Restaurants, LLC. Fairgrove
purchased the assets for approximately $1.1 million in cash and assumed certain
related liabilities. Richardson and Clark each hold a 17.5% membership interest
in Fairgrove.
Columbia Hill Land Company, LLC, owned 50% by each of Richardson and Clark,
leases office space to Pierre Foods in Hickory, North Carolina, pursuant to a
ten-year lease that commenced in September 1998. Rents paid under the lease were
approximately $103,000 in each of fiscal 2001 and 2000.
All material transactions with affiliates of Pierre Foods are first
reviewed by the sensitive transactions committee of the board, which is composed
of three independent directors. Upon recommendation of this committee, such
transactions are then presented to the entire board, where they must be approved
by a majority of the independent directors.
For information on recent stock purchases by the MBO Group, including
purchases from affiliates, see "Information Regarding PF Management."
INDEPENDENT AUDITORS
The consolidated balance sheets as of March 3, 2001 and March 4, 2000, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three fiscal years in the period ended March 3, 2001,
included in our annual report on Form 10-K attached as Appendix C to this proxy
statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report. A representative of Deloitte & Touche LLP will be at the
special meeting to answer appropriate questions from shareholders and will have
the opportunity to make a statement if so desired.
SHAREHOLDER PROPOSALS
Our annual meeting of shareholders is normally held in July of each year.
In April 2001, in light of PF Management's proposal to acquire Pierre Foods in
the exchange, we postponed indefinitely the next annual meeting of shareholders.
If the proposal to approve the exchange is not approved at the special meeting,
then the annual meeting of shareholders will be held as soon as practicable
thereafter. Shareholder proposals intended to be presented at the next annual
meeting were required to be submitted to Pierre Foods by February 28, 2001 to be
included in our proxy statement and form of proxy for the next annual meeting.
If a proposal is submitted after that date, proxies will have the authority to
vote in their discretion on the proposal.
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OTHER MATTERS
We know of no other business to be presented at the special meeting. If
other matters do properly come before the special meeting, or before any
adjournment or adjournments of the special meeting, then the individuals named
in the proxy will have the discretion to vote on these other matters according
to their best judgment unless the authority to do so is withheld as marked by a
shareholder on the proxy.
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APPENDIX A
AGREEMENT AND PLAN OF SHARE EXCHANGE
AMONG PIERRE FOODS, INC., PF MANAGEMENT, INC.
JAMES C. RICHARDSON, JR. AND DAVID R. CLARK
61
PAGE
----
ARTICLE 1 TERMS AND CONDITIONS OF THE EXCHANGE..............
1.1 The Exchange.........................................
1.2 Payment of Cash and Surrender of Share
Certificates...........................................
1.3 Effects of the Exchange..............................
1.4 Closing..............................................
1.5 Stock Options and Employee Benefit Plans.............
ARTICLE 2 GENERAL CONDITIONS AND AGREEMENTS.................
2.1 Effective Time.......................................
2.2 Termination..........................................
2.3 Effect of Termination................................
2.4 Conduct of the Participating Corporations prior to
the Effective Time.....................................
2.5 Conditions to the Exchange...........................
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.....
3.1 Due Authorization....................................
3.2 Consents and Approvals; No Violation.................
3.3 SEC Reports..........................................
3.4 Litigation...........................................
3.5 Rights Agreement; Anti-Takeover Laws.................
3.6 Fairness Opinion.....................................
3.7 Board Action.........................................
3.8 Absence of Certain Changes...........................
3.9 Proxy Statement and Transaction Statement
Information............................................
3.10 Stock Options........................................
3.11 Brokers..............................................
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE ACQUIROR....
4.1 Organization, Standing and Qualification.............
4.2 Authority for this Agreement.........................
4.3 Consents and Approvals; No Violation.................
4.4 Financing............................................
4.5 Litigation...........................................
4.6 Brokers..............................................
4.7 Proxy Statement and Transaction Statement
Information............................................
ARTICLE 5 ADDITIONAL AGREEMENTS.............................
5.1 Indemnification; Directors and Officers Liability
Insurance..............................................
5.2 Shareholder Approval; Proxy Statement................
5.3 Fees and Expenses....................................
5.4 Reasonable Efforts...................................
5.5 Public Announcements; Certain Notices................
5.6 Exemption from Liability Under Section 16(b).........
ARTICLE 6 NOTICES...........................................
ARTICLE 7 MISCELLANEOUS.....................................
7.1 Governing Law........................................
7.2 Binding Agreement....................................
7.3 Counterpart Originals................................
7.4 Entire Agreement.....................................
7.5 Amendments...........................................
7.6 Definitions..........................................
ANNEX A
Articles of Share Exchange between PF Management, Inc. and A-1
Pierre Foods, Inc.........................................
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AGREEMENT AND PLAN OF SHARE EXCHANGE
THIS AGREEMENT AND PLAN OF SHARE EXCHANGE (this "Agreement" or the
"Exchange Agreement") is made and entered into as of April 26, 2001, among
Pierre Foods, Inc., a North Carolina corporation (the "Company"), and PF
Management, Inc., a North Carolina corporation (the "Acquiror" and, together
with the Company, the "Participating Corporations"), and James C. Richardson,
Jr. and David R. Clark, who are the principal shareholders of the Acquiror (the
"Principal Shareholders"), pursuant to Section 55-11-02 of the North Carolina
Business Corporation Act (the "Act").
STATEMENT OF PURPOSE
The respective Boards of Directors of the Participating Corporations have
approved the acquisition of the Company by the Acquiror pursuant to a statutory
share exchange in accordance with the provisions of Section 55-11-02 of the Act
(the "Exchange"). In the Exchange, all of the outstanding shares of common
stock, no par value per share, of the Company (the "Common Stock"), together
with the associated preferred stock purchase rights (the "Rights") issued
pursuant to the Rights Agreement, as defined below (the shares of Common Stock
and associated Rights being referred to herein as "Shares"), other than the
Shares already owned by the Acquiror, would, on the terms and subject to the
conditions set forth in this Agreement, be converted into the right to receive
$1.21 per Share.
The Board of Directors of the Company, other than James C. Richardson, Jr.
and David R. Clark (the "Board"), has unanimously adopted resolutions approving
this Agreement and the Exchange. The Board determined that the Exchange is fair
to and in the best interests of the holders of Shares, other than the Acquiror,
and unanimously recommended that the Company's shareholders approve and adopt
this Agreement, including the Plan of Share Exchange set forth in the Articles
of Share Exchange, the form of which is Annex A to this Agreement (the "Plan").
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreement herein contained, the parties agree as follows:
ARTICLE 1
TERMS AND CONDITIONS OF THE EXCHANGE
1.1 The Exchange. The Acquiror will become the holder of all of the
outstanding Shares pursuant to the terms and conditions of this Agreement and
the Plan. At the Effective Time (as defined in Section 2.1 below), and subject
to the conditions set forth in this Agreement, the shares of the Participating
Corporations shall be exchanged as follows:
(a) Acquiror. The outstanding shares of capital stock of the Acquiror
will not be exchanged, altered or affected in any manner as a result of the
share exchange to be effected pursuant to the Plan and will remain
outstanding as shares of the Acquiror.
(b) The Company. At the Effective Time, each of the outstanding
Shares of the Company except those already owned by the Acquiror (the
"Exchange Shares") will, by virtue of the share exchange provided for by
the Plan and without any further action on the part of the holder thereof,
be exchanged for, and become the right to receive from the Acquiror, $1.21
in cash (the "Exchange Price") upon surrender to the Acquiror (or an agent
of the Acquiror designated as provided in Section 1.2 hereof) of the
certificate or certificates representing such Exchange Shares, as provided
in Section 1.2 hereof, and each of the Exchange Shares shall be cancelled.
No interest shall be payable with respect to payment of such cash amount on
surrender of outstanding certificates. No holder of any Exchange Shares (or
any certificate representing such Exchange Share or Shares) immediately
prior to the Effective Time shall be entitled to receive any dividend
declared and payable in respect of such Exchange Shares after the Effective
Time, any such dividend being the property of the Acquiror. The stock
transfer ledger of the Company shall be closed in respect of the Exchange
Shares from and after the Effective Time.
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1.2 Payment of Cash and Surrender of Share Certificates.
(a) At the Effective Time, the Acquiror shall irrevocably deposit or
cause to be deposited with a bank or trust company to be designated by the
Acquiror and reasonably satisfactory to the Company, which is organized and
doing business under the laws of the United States or any state thereof and
has a combined capital and surplus of at least $100 million, as paying
agent for the holders of the Exchange Shares, cash in the aggregate amount
required to effect the conversion of the Exchange Shares into the
consideration to be paid to the shareholders of the Company as provided in
Section 1.1(b) (the "Aggregate Exchange Consideration"). Pending
distribution pursuant to this Agreement, the Aggregate Exchange
Consideration shall be held in trust for the benefit of the holders of the
Exchange Shares and the funds shall not be used for any other purposes, and
the Acquiror and the Company may direct the paying agent to invest such
cash, provided that such investments (i) shall be obligations of or
guaranteed by the United States of America, commercial paper obligations
receiving the highest rating from either Moody's Investor Services, Inc. or
Standard & Poor's Corporation, or certificates of deposit, bank repurchase
agreements or bankers acceptances of domestic and commercial banks with
capital exceeding $250 million or money market funds which are invested
solely in such permitted investments and (ii) shall have maturities that
will not prevent or delay payments to be made pursuant to this Agreement.
Any interest and other income resulting from such investments shall be paid
to the Acquiror.
(b) After the Effective Time, each holder, other than the Acquiror, of
an outstanding certificate or certificates representing Exchange Shares
shall surrender the same to the Acquiror in accordance with the
instructions contained in a form of letter of transmittal. The letter of
transmittal and certificate(s) shall be delivered to the bank, trust
company or other party designated by the Acquiror as paying agent for the
exchange of Exchange Shares for cash as provided herein. Upon such
surrender, each such holder shall receive cash in an amount equal to the
Exchange Price for each Exchange Share represented by a certificate so
surrendered. Until so surrendered, each outstanding certificate that prior
to the Effective Time represented one or more Exchange Shares shall be
deemed for all purposes to evidence only the ownership of the
non-transferable right to receive the cash to be exchanged for each
Exchange Share represented by such certificate. With respect to any
certificate for Exchange Shares that has been lost or destroyed, the
Acquiror shall pay the holder thereof the consideration attributable to
such certificate upon receipt of (i) evidence of ownership of such Exchange
Shares reasonably satisfactory to the Acquiror, and (ii) an indemnity bond
posted by such holder in such amount as the Acquiror may reasonably
require.
(c) If any cash deposited with the paying agent for purposes of
payment in exchange for the Exchange Shares remains unclaimed following the
expiration of six months after the Effective Time, such cash shall be
delivered to the Acquiror by the paying agent, and thereafter the paying
agent shall not be liable to any persons claiming any amount of such cash,
and any future surrender and exchange shall be effected directly with the
Acquiror (subject to applicable abandoned property, escheat and similar
laws). No interest shall accrue or be payable with respect to any amount
which any such holder shall be so entitled to receive.
(d) None of the Acquiror, the Company or the paying agent shall be
liable to any person in respect of any unsurrendered Exchange Shares (or
dividends or distributions in respect thereto) or cash delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
1.3 Effects of the Exchange. The Exchange shall transpire pursuant to the
provisions of and with the effect provided in the Act. The Exchange is a
statutory share exchange and not a merger.
1.4 Closing. The closing of the Exchange (the "Closing") shall take place
at the offices of Womble Carlyle Sandridge & Rice, PLLC, 3300 One First Union
Center, 301 South College Street, Charlotte, North Carolina 28202-6025, at 10:00
a.m., local time, on the second business day after the day on which the last of
the conditions set forth in Section 2.5 of this Agreement shall have been
fulfilled or waived or at such other time and place as the Participating
Corporations shall agree.
1.5 Stock Options and Employee Benefit Plans. The Company shall (a)
terminate the 1997 Special Stock Option Plan, the 1997 Incentive Stock Option
Plan and the 1987 Special Stock Option Plan (the
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"Stock Option Plans"), and shall terminate or amend any other plan or
arrangement providing for the issuance or grant of any other interest in respect
of the capital stock of the Company, prior to the Effective Time, so that no
such interest shall remain outstanding after the Effective Time, (b) grant no
further options under the Stock Option Plans and (c) take all necessary actions
prior to the Effective Time, including obtaining required consents, such that
all outstanding options under the Stock Option Plans shall be cancelled prior to
the Effective Time, provided that the exercise prices of all such options are
above the Exchange Price.
ARTICLE 2
GENERAL CONDITIONS AND AGREEMENTS
2.1 Effective Time. As used in the Plan, the term "Effective Time" means
the time at which Articles of Share Exchange, substantially in the form attached
to this Agreement as Annex A, shall have been filed with the Secretary of State
of North Carolina in accordance with Section 55-11-05 of the Act or such later
date set forth in the Articles of Share Exchange.
2.2 Termination. This Agreement may be terminated and the transactions
contemplated by this Agreement may be abandoned at any time prior to the Closing
(whether before or after the approval of this Agreement by the shareholders of
the Company) as follows:
(a) By mutual written agreement of the Participating Corporations; or
(b) (i) By either the Company or the Acquiror if the Exchange shall
not have been consummated by September 30, 2001; provided, that neither of
the parties shall be entitled to terminate this Agreement pursuant to this
Section 2.2(b)(i) if, at the time of such proposed termination, it is in
material breach of its representations and warranties, covenants or other
agreements under this Agreement; or
(ii) By the Company if, prior to the Effective Time, there has
occurred, and the Company has notified the Acquiror of the occurrence
of, a material breach by the Acquiror of any representation, warranty,
covenant or agreement set forth herein and such breach is not cured
within 30 days after notice; provided, that if such breach is not
reasonably capable of being cured within such 30 day period, the Company
may terminate this Agreement at any time after it has given the Acquiror
notice of such breach; and provided further, that the Company shall not
be entitled to terminate this Agreement pursuant to this Section
2.2(b)(ii) if it is in material breach of its representations and
warranties, covenants or other agreements under this Agreement; or
(c) (i) By either the Acquiror or the Company if a federal, state or
local court, commission, governmental body, regulatory or administrative
agency, authority or tribunal (a "Governmental Entity") shall have issued
an order, decree or filing or taken any other action, in each case
permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement; or
(ii) By the Acquiror if, prior to the Effective Time, there has
occurred, and the Acquiror has notified the Company of the occurrence
of, a material breach by the Company of any representation, warranty,
covenant or agreement set forth herein and such breach is not cured
within 30 days after notice; provided, that if such breach is not
reasonably capable of being cured within such 30 day period, the
Acquiror may terminate this Agreement at any time after it has given the
Company notice of such breach; and provided further, that the Acquiror
shall not be entitled to terminate this Agreement pursuant to this
Section 2.2(c)(ii) if it is in material breach of its representations
and warranties, covenant or other agreement under this Agreement.
(d) By the Company for the purpose of allowing the Company to enter
into one or more related agreements in accordance with Section 2.4 with
respect to a Superior Proposal (as defined below) if the Board, based on
the recommendations of the special committee of the Board established to
review and consider the proposal to effect the Exchange contemplated by
this Agreement (the "Special Committee"), after receiving advice from
counsel to the Special Committee, has determined in good faith that a
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failure to terminate this Agreement and enter into an agreement to effect
the Superior Proposal would constitute a breach of its fiduciary duties;
provided, that:
(i) the Company has complied with all provisions of Section 2.4(d);
(ii) the Acquiror does not make, within three business days after
receipt of the Company's written notification of its intention to enter
into a binding agreement for a Superior Proposal, an offer to enter into
an amendment to this Agreement containing terms such that the Board,
based on the recommendation of the Special Committee after receiving
advice from its financial advisors, determines in good faith that this
Agreement as so amended is at least as favorable, from a financial point
of view, to the shareholders of the Company (other than the Acquiror) as
the Superior Proposal;
(iii) the Company pays the Acquiror's Expenses (as defined below)
in accordance with Section 2.3(b) hereof; and
(iv) substantially contemporaneously with such termination, the
Company enters into a definitive agreement to effect the Superior
Proposal.
(e) By the Acquiror, at any time prior to the approval of the Exchange
by the shareholders of the Company, if:
(i) the Board, or the Special Committee, shall have withdrawn,
modified, or changed its recommendation in respect of this Agreement in
a manner adverse to the Acquiror or resolved to do so;
(ii) the Board, or the Special Committee, shall have recommended
any proposal other than by the Acquiror in respect of an Acquisition
Transaction (as defined below) or resolved to do so; or
(iii) the Company has received a proposal regarding an Acquisition
Transaction and the Company shall not have rejected such proposal within
10 business days after its receipt or, if sooner, the date its existence
first becomes publicly disclosed.
(f) By the Company if there shall have been threatened, instituted or
pending any action or proceeding by any Governmental Entity, or by any
other Person, domestic or foreign, before any court of competent
jurisdiction or Governmental Entity, which could reasonably be expected to
make illegal, materially impede or otherwise directly or indirectly
prohibit or materially restrain the Exchange or seek to obtain material
damages in connection therewith.
2.3 Effect of Termination.
(a) In the event of a party's termination of this Agreement as
provided in Section 2.2 hereof, written notice thereof shall promptly be
given to the other party specifying the provision hereof pursuant to which
such termination is made, and, subject to Section 2.3(b) hereof, this
Agreement shall become null and void and there shall be no liability on the
part of the Acquiror or the Company; provided, that nothing herein shall
relieve any party from liability for any breach of this Agreement.
(b) If:
(i) the Acquiror shall have terminated this Agreement pursuant to
Section 2.2(e);
(ii) the Acquiror shall have terminated this Agreement pursuant to
Section 2.2(c)(ii) and following the date hereof and either prior to
such termination or within two months after such termination, (A) the
Company shall have received a proposal with respect to an Acquisition
Transaction that the Company has not rejected prior to such termination,
and (B) within 12 months after the date of such termination, the Company
shall enter into a definitive agreement with respect to such Acquisition
Transaction; or
(iii) the Company shall have terminated this Agreement pursuant to
Section 2.2(d);
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then the Company shall pay to the Acquiror an amount equal to the
Acquiror's actual and documented out-of-pocket expenses incurred or paid by
the Acquiror in connection with the Exchange, this Agreement and the
consummation of the transactions contemplated hereby ("Expenses"), which
amounts shall be payable by wire transfer to such account as the Acquiror
may designate in writing to the Company. The Company shall pay such
Expenses within two business days after the Acquiror has provided the
Company with documentation of the Expenses and a written request for
payment, provided there has occurred (A) a termination pursuant to Section
2.2(d) or Section 2.2(e) or (B) an Acquisition Transaction under the
circumstances described in Section 2.3(b)(ii).
2.4 Conduct of the Participating Corporations prior to the Effective Time.
(a) Until the completion of the Exchange, the Company shall continue
to conduct its business without material change and it shall not, without
the consent of the Acquiror, (i) issue any equity security or instrument
convertible into any equity security, (ii) make any distribution or other
disposition of its assets, capital or surplus except in the ordinary course
of business, (iii) take any action which would impair its assets, or (iv)
take any action that would cause its representations and warranties to be
untrue in any material respect at the Effective Time. Subject to the
conditions set forth in this Agreement, prior to the Effective Time, each
of the Participating Corporations shall promptly take all such actions as
shall be necessary or appropriate in order to effect the Exchange in
accordance with the terms and conditions of the Plan, including, but not
limited to, complying with the conditions set forth in Section 2.5(b).
(b) During the period beginning on the date of this Agreement and
ending at the Effective Time, the Company shall, and shall cause each of
its subsidiaries to, upon reasonable notice, afford the Acquiror and its
counsel, accountants, financing sources, consultants and other authorized
representatives reasonable access during normal business hours to the
employees, properties, books and records and accountants of the Company and
its subsidiaries. The Company shall furnish promptly to the Acquiror (i) a
copy of each report, schedule or other document filed by it or any of its
subsidiaries during such period pursuant to federal or state securities
laws and (ii) all other information concerning its or its subsidiaries'
business, properties and personnel as the Acquiror shall from time to time
reasonably request.
(c) Subject to Section 5.5(a), each party hereto shall, and shall
cause each of its directors, officers, attorneys and advisors to, maintain
the confidentiality of all information obtained hereunder which is not
otherwise publicly disclosed by the other party, such undertakings with
respect to confidentiality to survive any termination of this Agreement. In
the event of the termination of this Agreement, each party shall return to
the other party upon request all confidential information previously
furnished in connection with the transactions contemplated by this
Agreement.
(d) The Company shall, and shall cause its subsidiaries and each of
their directors, officers, employees, agents, advisors and representatives
to, immediately cease any discussions or negotiations with third parties
with respect to any Acquisition Transaction. Prior to the Effective Time,
the Company agrees that it shall not, and shall not authorize or permit any
of its subsidiaries or any of their directors, officers, agents, advisors
or representatives to, directly or indirectly:
(i) Solicit, initiate, facilitate or encourage (including without
limitation by furnishing information to a third party or by taking any
action which would make the Rights Agreement dated as of September 2,
1997 between the Company and American Stock Transfer & Trust Company, as
Rights Agent (the "Rights Agreement"), inapplicable to any Acquisition
Transaction (other than the Exchange)) any inquiries or the making of
any proposal with respect to any tender offer or exchange offer
involving the Company or any proposal with respect to any merger,
consolidation, statutory share exchange or other business combination
involving the Company or any subsidiary of the Company, the acquisition
of all or any significant part of the assets of the Company or any
subsidiary of the Company or more than 10% of any class of the capital
stock of the Company or any subsidiary of the Company (each, an
"Acquisition Transaction");
(ii) Except for agreements with respect to a Superior Proposal
entered into in accordance with Section 2.2(d) and except for
confidentiality agreements entered into in connection with actions
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permitted in accordance with Section 2.4(d)(iii), enter into any
agreement, arrangement or understanding with respect to any Acquisition
Transaction or enter into any agreement, arrangement or understanding
requiring it to abandon, terminate or fail to consummate the Exchange or
any other transaction contemplated by this Agreement; or
(iii) Negotiate, explore or otherwise engage in discussions with
any individual or any partnership, joint venture, corporation, trust,
limited liability company or any other entity or any unincorporated
organization or group (a "Person"), other than the Acquiror and its
representatives, with respect to any Acquisition Transaction, or any
inquiry that may reasonably be expected to lead to a proposal for an
Acquisition Transaction; provided, that the Company may (A) participate
in discussions with or request clarifications from or furnish
information (pursuant to a confidentiality agreement with terms not more
favorable to such third party than as set forth in Section 2.4(c)) to
any third party which makes an unsolicited written proposal to effect an
Acquisition Transaction that did not result from the breach of this
Section 2.4 and subject to compliance with its obligations under Section
2.4(d), in each case solely for the purpose of obtaining information
reasonably necessary to ascertain whether such Acquisition Transaction
is, or could reasonably likely lead to, a Superior Proposal, and (B) in
response to an unsolicited written proposal from a third party making a
Superior Proposal that did not result from the breach of this Section
2.4 and subject to compliance with its obligations under Section 2.4(d),
furnish information (pursuant to a confidentiality agreement with terms
not more favorable to such third party than as set forth in Section
2.4(c)) to and engage in discussions and negotiations with such third
party, but only, in the case of clause (A) and clause (B), if the Board,
based on the recommendation of the Special Committee after receiving
written advice from its financial advisors and after receiving advice
from outside counsel to the Special Committee, determines in good faith
that taking such action is in the best interests of the Company and its
shareholders other than the Acquiror and such action is required by its
fiduciary duties under applicable law.
(iv) Without limiting the foregoing, it is agreed that any
violation of the restrictions set forth in this Section 2.4(d) by any
director, officer, employee, agent, advisor or representative of the
Company, whether or not such Person is purporting to act on behalf of
the Company, shall constitute a breach of this Section 2.4(d) by the
Company.
(e) The Company agrees to advise the Acquiror in writing within 24
hours after the receipt thereof of the existence of:
(i) Any inquiries, proposals or requests for information received
by the Company or any of its directors, officers, agents, advisors or
representatives (other than James C. Richardson, Jr. or David R. Clark),
or by the financial and legal advisors to the Special Committee, from a
Person (other than the Acquiror and its representatives) with respect to
an Acquisition Transaction; and
(ii) The content of any such inquiries, proposals or requests,
including the identity of such third party and the terms of any
financing arrangement or commitment in connection with such Acquisition
Transaction;
and shall update the Acquiror on an ongoing basis or upon the Acquiror's
reasonable request on the status thereof. The Company shall simultaneously
provide to the Acquiror any non-public information concerning the Company
provided to any other Person or group in connection with any Acquisition
Transaction which was not previously provided to the Acquiror.
(f) As used herein, "Superior Proposal" means a written and
unsolicited proposal or offer made by any Person (other than the Acquiror)
to acquire all or substantially all of the capital stock of the Company
pursuant to a tender offer, exchange offer, merger, statutory share
exchange or other business combination or to purchase all or substantially
all of the assets of the Company on terms that, as determined in good faith
by the Board, based on the recommendation of the Special Committee after
receiving written advice of its financial advisors, are more favorable from
a financial point of view to the
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Company and its shareholders, other than the Acquiror, than the
transactions contemplated hereby and any alternative proposed by the
Acquiror.
2.5 Conditions to the Exchange.
(a) The obligations of the Participating Corporations and the
Principal Shareholders to consummate the Exchange pursuant to the Plan
shall be conditioned upon the satisfaction of the following conditions:
(i) The Plan shall have been approved at the meeting of
shareholders of the Company held for such purpose (the "Shareholder
Meeting"), or any adjournment thereof, by the vote of the holders of 75%
of the Common Stock outstanding and entitled to vote thereon.
(ii) All filings, registrations, notices, consents, approvals,
authorizations, certificates, orders and permits with respect to the
exchange of the Exchange Shares pursuant to and in accordance with the
provisions of the Plan required from any Governmental Entity having or
asserting jurisdiction over the Participating Corporations shall have
been made or obtained and be in full force and effect on a basis
reasonably satisfactory to the Participating Corporations.
(iii) No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any law, rule, regulation, executive
order, decree or injunction which prohibits or has the effect of
prohibiting the consummation of the Exchange; provided, that the party
asserting this condition shall have used its reasonable best efforts to
have any such order, decree or injunction vacated.
(iv) There shall not have been threatened, instituted or pending
any action or proceeding by any Governmental Entity, or by any other
Person, domestic or foreign, before any court of competent jurisdiction
or Governmental Entity, which could reasonably be expected to: (i) make
illegal, materially impede or otherwise directly or indirectly prohibit
or materially restrain the Exchange or seek to obtain material damages
in connection therewith, (ii) prohibit or materially limit the ownership
or operation by the Acquiror of all or any material portion of the
business or assets of the Company and its subsidiaries taken as a whole
or compel the Acquiror to dispose of or hold separately all or any
material portion of the business or assets of the Acquiror or the
Company and its subsidiaries taken as a whole, or seek to impose any
material limitation on the ability of the Acquiror to conduct its
business or own such assets, or (iii) have a material adverse effect on
the business of the Acquiror or the Company and its subsidiaries taken
as a whole (hereinafter as applied to the Company, a "Material Adverse
Effect").
(v) Each of the Participating Corporations shall have received from
the other Participating Corporation such certificate or certificates as
shall reasonably be requested to evidence satisfaction of the conditions
set forth in this Section 2.5.
(b) The obligations of the Acquiror and the Principal Shareholders to
consummate the Exchange shall be conditioned on the satisfaction of the
following conditions:
(i) The representations and warranties of the Company made in this
Agreement shall be true and correct in all material respects at, and at
all times prior to, the Effective Time, and the Company shall have fully
performed in all material respects its covenants and obligations under
this Agreement at or prior to the Effective Time.
(ii) The holders of no more than 5% of the Common Stock shall have
given written notice of their intent to demand payment for their Shares
and shall not have voted for the Exchange, pursuant to Article 13 of the
Act.
(iii) There shall not have occurred any event, change, circumstance
or occurrence that has had or that would reasonably be expected to have
a Material Adverse Effect on the Company or any of its subsidiaries
taken as a whole.
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(iv) There shall not have occurred and be continuing (A) any
general suspension of, or limitation on prices for, trading in
securities through the Nasdaq Stock Market or (B) a declaration of a
banking moratorium or any suspension of payments in respect of banks in
the United States.
(v) There shall not have been threatened, instituted or pending any
action or proceeding by any Governmental Entity, or by any other Person,
domestic or foreign, before any court of competent jurisdiction or
Governmental Entity, which could reasonably be expected to (i) impose
limitations on the ability of the Acquiror effectively to exercise full
rights of ownership of the Shares owned by it, including, without
limitation, the right to vote such Shares on all matters properly
presented to the Company's shareholders or (ii) require divestiture by
the Acquiror of any Shares.
(vi) The Acquiror shall have obtained financing necessary to
satisfy its obligations to pay the Exchange Price and the Expenses on
terms and conditions satisfactory to the Acquiror in its sole discretion
(it being understood that this condition shall not apply to the
Principal Shareholders).
(c) The obligations of the Company to consummate the Exchange shall be
conditioned on the representations and warranties of the Acquiror made in
this Agreement being true and correct in all material respects at, and at
all times prior to, the Effective Time, and the Acquiror having fully
performed in all material respects its covenants and obligations under this
Agreement at or prior to the Effective Time.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.1 Due Authorization. The Company has the requisite corporate power and
authority to execute and deliver this Agreement and, following compliance with
Section 2.5(a)(i), to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement by the Company (through
the Chairman of the Special Committee) and the consummation by the Company of
the transactions contemplated by this Agreement have been duly and validly
authorized by the Board and no other corporate proceeding on the part of the
Company is necessary to authorize this Agreement or to consummate the
transactions so contemplated, other than the approval and adoption of this
Agreement by the holders of 75% of the Shares outstanding. This Agreement has
been duly and validly executed and delivered by the Company and constitutes a
valid and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency and similar laws affecting creditors' rights generally
and subject to general principles of equity (whether considered in a proceeding
in equity or at law).
3.2 Consents and Approvals; No Violation. Neither the execution and
delivery of this Agreement by the Company nor the consummation of the
transactions contemplated by this Agreement will (a) conflict with or result in
a breach of any provision of the articles of incorporation or bylaws of the
Company; (b) require any consent, approval, authorization or permit of, or
filing with or notification to, any Governmental Entity, except pursuant to the
Exchange Act; (c) result in a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms of any obligation to which
the Company is a party or by which any of its assets may be bound, except for
such defaults (or rights of termination, cancellation or acceleration) as to
which requisite waivers or consents have been obtained or that would not
materially and adversely affect the ability of the Company to consummate the
transactions contemplated by this Agreement; or (d) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Company or any
of its assets, except for violations that would not materially and adversely
affect the ability of the Company to consummate the transactions contemplated by
this Agreement.
3.3 SEC Reports. The Company has filed with the Securities and Exchange
Commission (the "SEC") all forms, reports and documents required to be filed by
it pursuant to applicable law since January 1, 1998 (the "SEC Reports"), all of
which have complied as of their respective filing dates in all material respects
with all applicable requirements of the Securities Exchange Act of 1934 (the
"Exchange Act") and the rules and regulations of the SEC promulgated under the
Exchange Act. None of the SEC Reports, including,
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without limitation, any financial statements or schedules included or
incorporated by reference in the SEC Reports, at the time filed, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated or incorporated by reference therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
3.4 Litigation. There is no claim, action, proceeding or governmental
investigation pending or, to the knowledge of the Company, threatened against
the Company or any of its subsidiaries before any court or other Governmental
Entity that, individually or in the aggregate, could be reasonably expected to
(i) have a Material Adverse Effect or (ii) result in a material amendment or
termination of the Plan or prevent, enjoin, materially alter the terms of or
materially delay the Exchange.
3.5 Rights Agreement; Anti-Takeover Laws. The Rights Agreement is not
applicable to this Agreement or to the transactions contemplated by this
Agreement. Neither the North Carolina Shareholder Protection Act nor the North
Carolina Control Share Acquisition Act is applicable to the Company. The only
vote of shareholders of the Company required to approve and adopt this Agreement
is the affirmative vote of the holders of at least 75% of the outstanding
Shares.
3.6 Fairness Opinion. Grant Thornton LLP, the independent financial
advisor to the Special Committee, has delivered to the Special Committee and the
Board its written opinion that the Exchange Price is fair, from a financial
point of view, to the Company and its subsidiaries and the holders of the Shares
other than the Acquiror. At the date of this Agreement, such opinion has not
been withdrawn or modified. A true and complete copy of such opinion has been
delivered to the Acquiror.
3.7 Board Action. The Special Committee, at a meeting duly called and
held, has unanimously (i) determined that the Exchange is fair to and in the
best interests of the Company and its subsidiaries and the holders of the Shares
other than the Acquiror and (ii) submitted to the Board its recommendation that
the Board approve and adopt this Agreement and the Plan and that the Board
recommend that the shareholders of the Company approve and adopt this Agreement
and the Plan. The Board, at a meeting duly called and held, has unanimously
(exclusive of directors who abstained from voting because of their relationship
with the Acquiror) (i) determined that the Exchange is fair to and in the best
interests of the holders of the Shares other than the Acquiror, (ii) approved
and adopted this Agreement and the Plan and (iii) recommended that the
shareholders of the Company approve and adopt this Agreement and the Plan. The
Company has been advised by its directors and executive officers that each of
them intends to vote all of his or her Shares in favor of approval and adoption
of this Agreement and the Plan.
3.8 Absence of Certain Changes. Since March 4, 2000, except as
contemplated by this Agreement or disclosed in any SEC Report filed since the
Company's Annual Report on Form 10-K for the year ended March 4, 2000 and prior
to the date of this Agreement, there has not been (i) any change in the
business, operations, properties, condition (financial or otherwise), assets or
liabilities (including, without limitation, contingent liabilities) of the
Company and its subsidiaries having individually or in the aggregate a Material
Adverse Effect, (ii) any damage, destruction or loss (whether or not covered by
insurance) with respect to any property or asset of the Company or any of its
subsidiaries having, individually or in the aggregate, a Material Adverse
Effect, (iii) any change by the Company in its accounting methods, principles or
practices not mandated by the Financial Accounting Standards Board, the American
Institute of Certified Public Accountants or the SEC, or (iv) any declaration,
setting aside or payment of any dividend or distribution in respect of any
capital stock of the Company or any redemption, purchase or other acquisition of
any of its securities.
3.9 Proxy Statement and Transaction Statement Information. The proxy
statement to be sent to the shareholders of the Company in connection with the
Shareholder Meeting (as amended or supplemented, the "Proxy Statement") will
comply in all material respects with the requirements of the Exchange Act and,
on the date filed with the SEC, on the date first published, sent or given to
the Company's shareholders, and on the date of the Shareholder Meeting, will not
contain any untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading, except that no representation is made by the Company with respect to
the information supplied by the Acquiror in writing expressly for inclusion in
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the Proxy Statement. The written information supplied or to be supplied by the
Company, expressly for inclusion or incorporation by reference in the
Transaction Statement will not, on the date filed with the SEC, the date first
published, sent or given to the Company's shareholders, and at the time of the
Shareholder Meeting, contain any untrue statement of material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements made therein, in light of the circumstances under which they
were made, not misleading.
3.10 Stock Options. The exercise price of each outstanding option under
the Stock Option Plans is above the Exchange Price.
3.11 Brokers. No broker, finder or other investment banker is entitled to
receive any brokerage, finder's or other fee or commission in connection with
this Agreement or the transactions contemplated by this Agreement based upon
agreements made by or on behalf of the Company, except that Grant Thornton LLP
was retained by, and acted as financial advisor to, the Special Committee. Grant
Thornton LLP's fee for its financial advisory services is set forth in letter
agreements between Grant Thornton LLP and the Special Committee, dated February
27 and April 11, 2001, copies of which have been supplied to the Acquiror.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE ACQUIROR
4.1 Organization, Standing and Qualification. The Acquiror is duly
organized, validly existing and in good standing under the laws of the State of
North Carolina and has the corporate power to own all of its properties and
assets and to carry on its business as it is now being conducted.
4.2 Authority for this Agreement. The Acquiror has full corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated by this Agreement. The execution and delivery of this
Agreement by the Acquiror and the consummation by the Acquiror of the
transactions contemplated by this Agreement have been duly and validly
authorized by the board of directors of the Acquiror and no other corporate
proceeding on the part of the Acquiror is necessary to authorize this Agreement
or to consummate the transactions contemplated by this Agreement. This Agreement
has been duly and validly executed and delivered by the Acquiror and constitutes
a valid and binding agreement of the Acquiror, enforceable against the Acquiror
in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency and similar laws affecting creditors rights
generally and subject to general principles of equity (whether considered in a
proceeding in equity or at law).
4.3 Consents and Approvals; No Violation. Neither the execution and
delivery of this Agreement by the Acquiror nor the consummation of the
transactions contemplated by this Agreement will (a) conflict with or result in
a breach of any provision of the articles of incorporation or bylaws of the
Acquiror; (b) require any consent, approval, authorization or permit of, or
filing with or notification to, any Governmental Entity, except pursuant to the
Exchange Act; (c) result in a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms of any obligation to which
the Acquiror is a party or by which any of its assets may be bound, except for
such defaults (or rights of termination, cancellation or acceleration) as to
which requisite waivers or consents have been obtained or that would not
materially and adversely affect the ability of the Acquiror to consummate the
transactions contemplated by this Agreement; or (d) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Acquiror or
any of its assets, except for violations that would not materially and adversely
affect the ability of the Acquiror to consummate the transactions contemplated
by this Agreement.
4.4 Financing. The Principal Shareholders have the ability to fund the
Acquiror's obligations under this Agreement to pay the Exchange Price and the
Expenses by contributing to the Acquiror their own assets and arranging for the
Acquiror to obtain financing, which financing may be personally guaranteed by
the Principal Shareholders, and they hereby covenant to make available to the
Acquiror their assets and access to financing for such purposes. The Principal
Shareholders are parties to this Agreement solely for the purpose of jointly and
severally making the representation, warranty and covenant contained in the
foregoing sentence.
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4.5 Litigation. There is no claim, action, proceeding or governmental
investigation pending, or to the knowledge of the Acquiror, threatened against
the Acquiror that, individually or in the aggregate, has materially and
adversely affected or could reasonably be expected to materially and adversely
affect the ability of the Acquiror to consummate the transactions contemplated
by this Agreement or that in any manner seeks to enjoin the Exchange.
4.6 Brokers. No broker, finder or other investment banker is entitled to
any brokerage, finder's or other similar fee or commission in connection with
this Agreement or the transactions contemplated by this Agreement based upon
agreements made by or on behalf of the Acquiror or its shareholders, except that
HHCO Limited was retained by, and acted as financial advisor to, the Acquiror.
HHCO Limited 's fee for its financial advising services is set forth in a letter
agreement between HHCO Limited and the Acquiror, dated February 12, 2001, a copy
of which has been supplied to the Company.
4.7 Proxy Statement and Transaction Statement Information. The written
information supplied or to be supplied by the Acquiror expressly for inclusion
or incorporation by reference in the Proxy Statement and the Transaction
Statement will not, on the date filed with the SEC, the date first published,
sent or given to the Company's shareholders, and at the time of the Shareholder
Meeting, contain any untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading.
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 Indemnification; Directors and Officers Liability Insurance.
(a) Until the sixth anniversary of the Effective Time, the Company
shall indemnify each of its officers, directors or employees (the
"Indemnified Parties") against all losses, claims, damages, liabilities,
costs or expenses arising from his service as an officer, director or
employee or prior to and including the Effective Time, and shall provide
for the advancement of expenses incurred in defense of any action or suit,
to the fullest extent required pursuant to the Company's articles of
incorporation and bylaws as each is in effect on the date of this
Agreement. If any claim is made against any of the Indemnified Parties on
or prior to the sixth anniversary of the Effective Time arising from his
service as an officer, director or employee at or prior to the Effective
Time, the provisions of this Section 5.1 shall continue in effect until the
final disposition of all such claims.
(b) Unless otherwise agreed to by the Acquiror, until the sixth
anniversary of the Effective Time, the Company shall maintain or cause to
be maintained in effect, at no expense to the beneficiaries thereof,
directors' and officers' liability protection with respect to matters
occurring at or prior to the Effective Time, providing the same coverage
with respect to the Company's current officers and directors as in effect
on the date of this Agreement.
(c) In the event the Company (i) consolidates with or merges into or
effects any other business combination with any other Person and shall not
be the continuing, surviving or controlling entity of such consolidation,
merger or combination or (ii) transfers all or substantially all of its
properties and assets to any Person, then and in each such case proper
provisions shall be made so that the successors and assigns of the Company
shall assume the obligations of the Company in this Section 5.1.
(d) Each of the Indemnified Parties is an intended beneficiary of the
provisions of this Section 5.1 and shall have the right to enforce such
provisions individually on his or her own behalf.
5.2 Shareholder Approval; Proxy Statement.
(a) The Company shall call the Shareholder Meeting for the purpose of
voting on the Exchange and shall take all action necessary or advisable in
its reasonable judgment to obtain shareholder approval of the Exchange. The
Shareholder Meeting shall be held as soon as practicable following
clearance of the Proxy Statement by the SEC as provided in Section 5.2(b),
and the Company will, through its Board,
11
73
subject to this Agreement, recommend to its shareholders the approval of
the Exchange. Subject to Sections 2.2(d) and 2.4(d), the Company agrees
that it shall include in the Proxy Statement the recommendation of its
Board to the shareholders of the Company to approve and adopt this
Agreement and approve the Exchange.
(b) The Company will, as soon as practicable following the date of
this Agreement, prepare and file with the SEC a preliminary Proxy Statement
and will use its reasonable best efforts to respond to any comments of the
SEC and to cause the Proxy Statement to be cleared by the SEC. The Company
and the Acquiror will, as soon as practicable following the date of this
Agreement, jointly prepare and file a Transaction Statement on Schedule
13E-3 (the "Transaction Statement") and will use their reasonable best
efforts to respond to any comments of the SEC and to cause the Transaction
Statement to be cleared by the SEC. The Company shall give the Acquiror and
its counsel the opportunity to review the preliminary Proxy Statement prior
to its being filed with the SEC and all amendment and supplements to the
Proxy Statement, responses to requests for additional information and
replies to comments prior to their being filed with, or sent to, the SEC.
As promptly as practicable after the Proxy Statement and the Transaction
Statement have been cleared by the SEC, the Company shall mail the Proxy
Statement to the shareholders of the Company. If at any time prior to the
approval of this Agreement by the Company's shareholders there shall occur
any event that should be set forth in an amendment or supplement to the
Proxy Statement or Transaction Statement, the Company will prepare and mail
to its shareholders such an amendment or supplement. The Company shall not
use any material in connection with the Shareholder Meeting without the
Acquiror's prior approval.
(c) The Company shall use its commercially reasonable efforts to
obtain the necessary approvals by its shareholders of the Exchange, this
Agreement and the transactions contemplated hereby.
(d) The Acquiror agrees to cause all Shares owned by the Acquiror to
be voted in favor of the approval of the Exchange.
5.3 Fees and Expenses. Whether or not the Exchange is consummated, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such costs
and expenses, except as expressly set forth in this Agreement.
5.4 Reasonable Efforts. On the terms and subject to the conditions set
forth in this Agreement, each of the parties agrees to use its commercially
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, and to assist and cooperate with the other parties in doing,
all things necessary, proper or advisable to consummate and make effective, in
the most expeditious manner practicable, the Exchange, and the other
transactions contemplated by this Agreement, including (a) obtaining all
necessary actions or non-actions, waivers, consents and approvals from
Governmental Entities and the making of all necessary registrations and filings
and the taking of all reasonable steps as may be necessary to obtain an approval
or waiver from or to avoid an action or proceeding by any Governmental Entity,
(b) obtaining all necessary consents, approvals or waivers from third parties,
(c) defending any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement or the consummation of the
transactions contemplated hereby, including seeking to have any stay or
temporary restraining order entered by any court or other Governmental Entity
vacated or reversed, and (d) executing and delivering any additional instruments
necessary to consummate the transactions contemplated by this Agreement.
Notwithstanding the foregoing, no loan agreement or contract for borrowed money
shall be repaid except as currently required by its terms, in whole or in part,
and no contract shall be amended to increase the amount payable thereunder or
otherwise to be more burdensome to the Company or any of its subsidiaries in
order to attain any such consent, approval or authorization without the prior
written consent of the Acquiror.
5.5 Public Announcements; Certain Notices.
(a) The Acquiror and the Company will consult with each other before
issuing any press release or otherwise making any public statements with
respect to the transactions contemplated by this Agreement, and shall not
issue any such press release or make any such public statement prior to
such consultation, except as may be required by applicable law or
regulation or by obligations pursuant to any
12
74
listing agreement with any national securities exchange or The Nasdaq Stock
Market so long as it has used reasonable best efforts to consult with the
other party prior to issuing such press release or making such public
disclosure.
(b) The Company shall give prompt notice to the Acquiror, and the
Acquiror shall give prompt notice to the Company, of the occurrence, or
failure to occur, of any event, which occurrence or failure to occur would
likely cause any representation or warranty made by it contained in the
Agreement to be untrue in any material respect at any time from the date of
this Agreement to the Closing. Each of the Company and the Acquiror shall
give prompt notice to the other party of any notice or other communication
from any third party alleging that the consent of such third party is or
may be required in connection with the transactions contemplated by this
Agreement.
5.6 Exemption from Liability Under Section 16(b). The Board, or a
committee of non-employee directors thereof (as such term is defined for
purposes of Rule 16b-3(d) under the Exchange Act), shall prior to the Effective
Time adopt a resolution providing that, to the extent the Exchange is deemed for
purposes of Section 16 of the Exchange Act to constitute a purchase of Shares by
the Acquiror and by its controlling shareholders who also are officers and
directors of the Company, such purchases (including the specific changes in such
officers' and directors' beneficial ownership of the Company's Common Stock
resulting from the Exchange) are approved by such Board or by such committee
thereof and are intended to be exempt from liability pursuant to Section 16(b)
of the Exchange Act.
ARTICLE 6
NOTICES
All notices and other communications hereunder shall be in writing and
shall be deemed given when delivered personally or via courier service or when
received if mailed by registered mail, return receipt requested to the parties
at the addresses indicated below:
To the Acquiror: PF Management, Inc.
361 Second Street NW
Hickory, NC 28601
Attn: David R. Clark, President
Copy to: Womble Carlyle Sandridge & Rice, PLLC
3300 One First Union Center
301 South College Street
Charlotte, NC 28202-6025
Attn: Garza Baldwin, III
To the Company: Special Committee of the Board of Directors
Pierre Foods, Inc.
361 Second Street, NW
Hickory, NC 28601
Attn: Bobby G. Holman, Chairman
Copy to: Foley & Lardner
150 West Jefferson
Suite 1000
Detroit, MI 48226-4416
Attn: Patrick Daugherty
13
75
ARTICLE 7
MISCELLANEOUS
7.1 Governing Law. This Agreement shall be interpreted, construed and
enforced under and in accordance with the laws of the State of North Carolina.
7.2 Binding Agreement. This Agreement shall be binding on and shall inure
to the benefit of the parties to this Agreement. Obligations undertaken by the
parties may not be assigned or delegated without the written consent of the
other party hereto and, except as provided in Section 5.1(d), nothing herein
shall be construed to create any rights enforceable by any other Person.
7.3 Counterpart Originals. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, as
long as one or more counterparts shall have been signed by each of the parties
and delivered to the other.
7.4 Entire Agreement. This Agreement embodies the entire agreement and
understanding between the parties, superseding all prior agreements and
understandings between them relating to the subject matter of this Agreement.
7.5 Amendments. This Agreement may be amended only by the written
agreement of both parties hereto; provided, at the request of the Acquiror prior
to the approval of this Agreement by the shareholders of the Company, the
Company shall enter into an amendment to this Agreement that provides for the
acquisition of the Company by the Acquiror in a multi-step transaction that
involves a tender offer for all the outstanding Shares at a price equal to the
Exchange Price, followed by a statutory share exchange in which the Shares of
non-tendering shareholders would be converted into the right to receive the
Exchange Price. After the approval of this Agreement by the shareholders of the
Company, no amendment may be made which reduces the amount or changes the form
of consideration to be received in the Exchange or otherwise changes or effects
any change that would adversely affect the holders of the Shares without the
further approval of the shareholders of the Company.
7.6 Definitions.
TERM DEFINED IN SECTION
- ---- ------------------
Act...................................... Introduction
Aggregate Exchange Consideration......... Section 1.2(a)
Agreement................................ Introduction
Acquiror................................. Introduction
Acquisition Transaction.................. Section 2.4(d)(i)
Board.................................... Statement of Purpose
Closing.................................. Section 1.4
Common Stock............................. Statement of Purpose
Company.................................. Introduction
Exchange................................. Statement of Purpose
Exchange Act............................. Section 3.3
Exchange Agreement....................... Introduction
Exchange Price........................... Section 1.1(b)
Exchange Shares.......................... Section 1.1(b)
Effective Time........................... Section 2.1
Expenses................................. Section 2.3(b)
Governmental Entity...................... Section 2.2(c)(i)
Indemnified Parties...................... Section 5.1(a)
Material Adverse Effect.................. Section 2.5(a)(iv)
Participating Corporations............... Introduction
Person................................... Section 2.4(d)(iii)
Plan..................................... Statement of Purpose
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76
TERM DEFINED IN SECTION
- ---- ------------------
Principal Shareholders................... Introduction
Proxy Statement.......................... Section 3.9
Rights................................... Statement of Purpose
Rights Agreement......................... Section 2.4(d)(i)
SEC...................................... Section 3.3
SEC Reports.............................. Section 3.3
Shareholder Meeting...................... Section 2.5(a)(i)
Shares................................... Statement of Purpose
Special Committee........................ Section 2.2(d)
Stock Option Plans....................... Section 1.5
Stock Purchase Plan...................... Section 1.5
Superior Proposal........................ Section 2.4(f)
Transaction Statement.................... Section 5.2(b)
[The remainder of this page is intentionally blank.]
15
77
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers thereunto duly authorized as of the
dates indicated below.
PIERRE FOODS, INC.
By: /s/ BOBBY G. HOLMAN
------------------------------------
Bobby G. Holman
Chairman of the Special Committee of
the
Board of Directors
PF MANAGEMENT, INC.
By: /s/ DAVID R. CLARK
------------------------------------
David R. Clark
President
/s/ JAMES C. RICHARDSON, JR.
--------------------------------------
James C. Richardson, Jr.
(Solely for the purpose of Sections
4.4 and 2.5)
/s/ DAVID R. CLARK
--------------------------------------
David R. Clark
(Solely for the purpose of Sections
4.4 and 2.5)
16
78
ANNEX A
ARTICLES OF SHARE EXCHANGE
BETWEEN
PF MANAGEMENT, INC.
AND
PIERRE FOODS, INC.
Pursuant to Section 55-11-05 of the General Statutes of North Carolina, PF
Management, Inc., a corporation organized under the laws of the State of North
Carolina, hereby submits these Articles of Share Exchange for the purpose of
acquiring all of the outstanding shares of common stock, no par value, of Pierre
Foods, Inc., a corporation organized under the law of the State of North
Carolina.
I. The Plan of Share Exchange that was duly adopted by the board of
directors of each of the corporations participating in the exchange and that was
approved by the shareholders of Pierre Foods, Inc. in the manner prescribed by
Chapter 55 of the General Statutes of North Carolina is as follows:
PLAN OF SHARE EXCHANGE
A. CORPORATIONS PARTICIPATING IN SHARE EXCHANGE.
PF Management, Inc. (the "Acquiror") will acquire all of the
outstanding shares of Pierre Foods, Inc. (the "Company") pursuant to the
terms and conditions of this Plan.
B. EXCHANGE OF SHARES.
At the effective time of the share exchange (the "Effective Time"),
the shares of the corporations participating in the share exchange shall be
exchanged as follows:
1. Acquiror. The outstanding shares of the Acquiror will not be
exchanged or altered in any manner as a result of the share exchange and
will remain outstanding as shares of the Acquiror.
2. The Company. Each outstanding share of the Company, except those
already owned by the Acquiror, will be exchanged for and become the
right to receive from the Acquiror $1.21 in cash per share and each such
share shall be cancelled.
3. Surrender of Share Certificates. Each holder of a certificate
representing shares of the Company to be exchanged under this Plan will
be entitled, upon presentation and surrender to the Acquiror of such
certificate, to receive in exchange therefor the consideration described
in paragraph 2 of this Plan. Until so surrendered, each outstanding
certificate that prior to the Effective Time represented shares of the
Company will be deemed for all purposes to evidence ownership of the
consideration to be issued for such shares.
C. ABANDONMENT.
After the approval of this Plan by the shareholders of the Company,
and at any time prior to the exchange becoming effective, the board of
directors of the Acquiror may, in its discretion, abandon the share
exchange.
A-1
79
II. Approval by the shareholders of the undersigned Acquiror was not
required.
III. The share exchange will become effective upon filing by the Secretary
of State of North Carolina.
This the day of , 2001.
PF MANAGEMENT, INC.
By:
------------------------------------
David R. Clark
President
A-2
80
APPENDIX B
FAIRNESS OPINION
REGARDING THE PROPOSED
EXCHANGE OF SHARES
OF
PIERRE FOODS, INC.
CINCINNATI, OHIO
WITH
PF MANAGEMENT, INC.
AS OF
APRIL 26, 2001
GRANT THORNTON LLP
VALUATION SERVICES GROUP
81
[GRANT THORNTON LOGO]
ACCOUNTANTS AND
MANAGEMENT CONSULTANTS
Grant Thornton LLP
The US Member Firm of
Grant Thornton International
April 26, 2001
The Special Committee of the Board of Directors
Pierre Foods, Inc.
361 Second Street, NW
Hickory, NC 28601
Gentlemen:
You have engaged Grant Thornton, LLP to advise you as to the fairness to holders
of the common stock (the "Shareholders") of Pierre Foods, Inc. ("PFI" or the
"Company"), from a financial point of view, of the consideration to be received
by the Shareholders pursuant to the terms and conditions of the Agreement and
Plan of Share Exchange, dated April 26, 2001 ("Agreement"), by and among Pierre
Foods, Inc. and PF Management, Inc. ("PFM" and/or "Acquiror") and James C.
Richardson, Jr. and David R. Clark. PFM was established by certain members of
the PFI management team to affect the share exchange as outlined in the
Agreement.
The Agreement provides for the exchange of all of the outstanding shares
("Shares") of Pierre Foods, Inc. as well as the associated preferred stock
purchase rights issued pursuant to the Rights Agreement dated September 2, 1997
("Rights"), excluding those Shares and Rights owned by the Acquiror, for a right
to receive from the Acquiror $1.21 per share in cash upon surrender of the
certificate or certificates representing the Shares being exchanged (the
"Transaction"). PFM will, upon completion of the exchange of shares, become the
holder of all of the shares outstanding of Pierre Foods, Inc. Approval by
holders of 75% of PFI's common stock outstanding and entitled to vote is
necessary for the Agreement to be ratified.
For purposes of the opinion expressed herein, we have:
- Interviewed key PFI management personnel, including the President & CEO,
Chief Financial Officer and Senior Vice President of Sales & Marketing.
- Interviewed the Chairman of the Special Committee of the Board of
Directors of PFI.
- Interviewed the Chairman and Vice Chairman of the Board of PFI who are
also key
Suite 3100
Two Commerce Square
2001 Market Street
Philadelphia, PA 19103-7080
215.561.4200 Tel
215.561.1066 Fax
82
SPECIAL COMMITTEE OF
THE BOARD OF DIRECTORS
APRIL 26, 2001
PAGE 2
management personnel of the Acquiror.
- Conducted site visits at PFI's Claremont, North Carolina and Cincinnati
Ohio facilities, which included random interviews personnel at each
facility.
- Reviewed the April 26, 2001 Agreement and Plan of Share Exchange Between
Pierre Foods, Inc. and PF Management, Inc and James C. Richardson, Jr.
and David R. Clark.
- Reviewed audited financial data for PFI for the fiscal years 1996
through 2000; unaudited internal financial statements for the fiscal
year ended March 3, 2001.
- Reviewed PFI's SEC Form 10-K filings filed May 30, 2000, June 8, 1999,
May 28, 1998, May 27, 1997; Form 10-K/A filed June 29, 1999; and Form
10-K405 filed May 23, 1996.
- Reviewed PFI's SEC Form 10-Qs filed January 16, 2001 and January 18,
2000.
- Reviewed PFI's SEC Form 8-Ks filed June 24, 1998, May 12, 1998, April
28, 1998, November 25, 1997, October 3, 1997, September 5, 1997 and
January 29, 1997.
- Reviewed PFI's Reporting Package for Fiscal Year End March 3, 2001.
- Reviewed the Indenture dated July 6, 1998 representing the Senior Notes
due 2006.
- Reviewed the Loan and Security Agreement dated May 2000 representing the
$25 million revolving credit facility with Fleet Capital Corporation.
- Reviewed the Pierre Foods Confidential Information Memorandum issued by
Harrison Hurley & Company in 2000.
- Reviewed the Minutes of Board of Directors' meetings held April 27,
2000, July 27, 2000, October 26, 2000, November 15, 2000, December 5,
2000 and February 7, 2001.
- Reviewed the Minutes of Executive Compensation Committee meetings held
December 16, 1999, April 27, 2000, July 27, 2000, December 1, 2000 and
February 7, 2001.
- Reviewed the Minutes of Audit Committee meetings held February 3, 2000,
April 27, 2000, July 13, 2000, October 10, 2000, November 15, 2000 and
January 12, 2001.
- Reviewed the Minutes of the Sensitive Transactions Committee meeting
held November 15, 2000.
- Reviewed the Articles of Merger of Pierre Foods LLC and Pierre Leasing
LLC with Fresh Foods, Inc. dated January 10, 2000.
- Reviewed the Amended and Restated Management Services Agreement between
Fresh Foods, Inc. (predecessor to PFI) and HERTH Management, Inc. dated
December 17, 1999.
- Reviewed the Change of Control Agreement dated July 6, 1999 between
James C. Richardson and Fresh Foods, Inc.
- Reviewed the Change of Control Agreement dated July 6, 1999 between
David R. Clark and Fresh Foods, Inc.
- Reviewed the Promissory Note dated January 31, 2000 between James C.
Richardson, borrower, and Fresh Foods, Inc., lender.
- Reviewed Cushman and Wakefield appraisal report dated June 16, 2000 for
PFI's Cincinnati real estate; Cushman and Wakefield appraisal report
dated June 28, 2000 for PFI's.
83
SPECIAL COMMITTEE OF
THE BOARD OF DIRECTORS
APRIL 26, 2001
PAGE 3
- Claremont real estate; and Loeb Equipment and Appraisal Company
appraisal report for PFI's equipment located in both the Cincinnati and
Claremont facilities.
- Reviewed Company prepared budgets and forecasts for fiscal years 2001 to
2004 and constructed financial and operating projections for PFI for the
five (5) fiscal years ending on or about March 1, 2002 through 2006.
- Reviewed certain publicly available data, analyses, and studies related
to the bakery market, the restaurant industry, the general food industry
and the food processing industry, along with general economic
conditions.
- Compared the financial performance of PFI with the financial performance
of certain publicly traded companies that we deemed to be comparable to
PFI.
- Reviewed the financial terms, to the extent publicly available, of
certain acquisition and merger transactions involving companies that we
deemed to be comparable to PFI.
Performed such other analyses and considered such other factors as we have
deemed appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. In addition, we have assumed and relied upon, without independent
verification, the accuracy and completeness of the oral representations made by
management and by others.
Our opinion is necessarily based on economic, market, and other conditions as in
effect on, and the information made available to us as of the date of this
opinion. We have assumed that all aspects of the Transaction are in compliance
with and legal under applicable law.
Our opinion expressed herein is provided for the information of the Special
Committee of the Board of Directors of Pierre Foods, Inc. in their evaluation of
the proposed transaction. We understand that this opinion letter will be
included in the relevant proxy statement to be filed by the Company regarding
the Transaction and that a description of the services provided by Grant
Thornton in rendering this opinion will also be included in the proxy statement.
Based upon and subject to the foregoing, we are of the opinion that, as of the
date hereof, the $1.21 per share exchange consideration to be received by the
Shareholders, other than the Acquiror, and the terms and conditions of the
Transaction are fair to the Company, the subject Shareholders and the Company's
subsidiaries from a financial point of view.
Sincerely,
GRANT THORNTON LLP
84
APPENDIX C
PIERRE FOODS' ANNUAL REPORT ON FORM 10-K, AS AMENDED AND RESTATED
C-1
85
APPENDIX D
ARTICLE 13
DISSENTERS' RIGHTS
PART 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
sec. 55-13-01. Definitions.
In this Article:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under G.S. 55-13-02 and who exercises that right when and
in the manner required by G.S. 55-13-20 through 55-13-28.
(3) "Fair value", with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would
be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable
under all the circumstances, giving due consideration to the rate currently
paid by the corporation on its principal bank loans, if any, but not less
than the rate provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on file
with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder. (1925, c. 77, sec. 1; 1943, c. 270; G.S., sec. 55-167; 1955,
c. 1371, sec. 1; 1969, c. 751, sec. 39; 1973, c. 469, sec.sec. 36, 37;
1989, c. 265, sec. 1.)
sec. 55-13-02. Right to dissent.
(a) In addition to any rights granted under Article 9, a shareholder is
entitled to dissent from, and obtain payment of the fair value of his or her
shares in the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation (other
than a parent corporation in a merger whose shares are not affected under
G.S. 55-11-04) is a party unless (i) approval by the shareholders of that
corporation is not required under G.S. 55-11-03(g) or (ii) such shares are
then redeemable by the corporation at a price not greater than the cash to
be received in exchange for such shares;
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, unless such
shares are then redeemable by the corporation at a price not greater than
the cash to be received in exchange for such shares;
(3) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than as permitted by G.S.
55-12-01, including a sale in dissolution, but not including a sale
pursuant to court order or a sale pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed in
cash to the shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it (i)
alters or abolishes a preferential right of the shares; (ii) creates,
alters, or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase, of
the shares; (iii) alters or abolishes a preemptive right of the
D-1
86
holder of the shares to acquire shares or other securities; (iv) excludes
or limits the right of the shares to vote on any matter, or to cumulate
votes; (v) reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired
for cash under G.S. 55-6-04; or (vi) changes the corporation into a
nonprofit corporation or cooperative organization; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his or her
shares under this Article may not challenge the corporate action creating his or
her entitlement, including without limitation a merger solely or partly in
exchange for cash or other property, unless the action is unlawful or fraudulent
with respect to the shareholder or the corporation.
(c) Notwithstanding any other provision of this Article, there shall be no
right of shareholders to dissent from, or obtain payment of the fair value of
the shares in the event of, the corporate actions set forth in subdivisions (1),
(2), or (3) of subsection (a) of this section if the affected shares are any
class or series which, at the record date fixed to determine the shareholders
entitled to receive notice of and to vote at the meeting at which the plan of
merger or share exchange or the sale or exchange of property is to be acted on,
were (i) listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc., or (ii) held by at least 2,000 record
shareholders. This subsection does not apply in cases in which either:
(1) The articles of incorporation, bylaws, or a resolution of the
board of directors of the corporation issuing the shares provide otherwise;
or
(2) In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share exchange
to accept for the shares anything except:
a. Cash;
b. Shares, or shares and cash in lieu of fractional shares of the
surviving or acquiring corporation, or of any other corporation which,
at the record date fixed to determine the shareholders entitled to
receive notice of and vote at the meeting at which the plan of merger or
share exchange is to be acted on, were either listed subject to notice
of issuance on a national securities exchange or designated as a
national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc., or held by at
least 2,000 record shareholders; or
c. A combination of cash and shares as set forth in
sub-subdivisions a. and b. of this subdivision. (1925, c. 77, sec. 1; c.
235; 1929, c. 269; 1939, c. 279; 1943, c. 270; G.S., sec.sec. 55-26,
55-167; 1955, c. 1371, sec. 1; 1959, c. 1316, sec.sec. 30, 31; 1969, c.
751, sec.sec. 36, 39; 1973, c. 469, sec.sec. 36, 37; c. 476, sec. 193;
1989, c. 265, sec. 1; 1989 (Reg. Sess., 1990), c. 1024, sec. 12.18;
1991, c. 645, sec. 12; 1997-202, sec. 1; 1999-141, sec. 1.)
sec. 55-13-03. Dissent by nominees and beneficial owners.
(a) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his or her name only if he or she dissents with respect
to all shares beneficially owned by any one person and notifies the corporation
in writing of the name and address of each person on whose behalf he or she
asserts dissenters' rights. The rights of a partial dissenter under this
subsection are determined as if the shares as to which he or she dissents and
his or her other shares were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on his or her behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
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(2) He does so with respect to all shares of which he or she is the
beneficial shareholder. (1925, c. 77, sec. 1; 1943, c. 270; G.S.,
sec. 55-167; 1955, c. 1371, sec. 1; 1969, c. 751, sec. 39; 1973, c. 469,
sec.sec. 36, 37; 1989, c. 265, sec. 1.)
PART 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
sec. 55-13-20. Notice of dissenters' rights.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this Article and be accompanied by a copy of this Article.
(b) If corporate action creating dissenters' rights under G.S. 55-13-02 is
taken without a vote of shareholders, the corporation shall no later than 10
days thereafter notify in writing all shareholders entitled to assert
dissenters' rights that the action was taken and send them the dissenters'
notice described in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this section,
such failure shall not invalidate any corporate action taken; but any
shareholder may recover from the corporation any damage which he or she suffered
from such failure in a civil action brought in his or her own name within three
years after the taking of the corporate action creating dissenters' rights under
G.S. 55-13-02 unless he or she voted for such corporate action. (1925, c. 77,
sec. 1, c. 235; 1929, c. 269; 1939, c. 5, c. 279; 1943, c. 270; G.S.,
sec.sec. 55-26, 55-165, 55-167; 1955, c. 1371, sec. 1; 1969, c. 751, sec. 39;
1973, c. 469, sec.sec. 36, 37; 1989, c. 265. sec. 1.)
sec. 55-13-21. Notice of intent to demand payment.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights:
(1) Must give to the corporation, and the corporation must actually
receive, before the vote is taken written notice of his or her intent to
demand payment for his or her shares if the proposed action is effectuated;
and
(2) Must not vote his or her shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for his or her shares under this Article. (1925, c.
77, sec. 1; 1943, c. 270; G.S., sec. 55-167; 1955, c. 1371, sec. 1; 1969, c.
751, sec. 39; 1973, c. 469, sec.sec. 36, 37; 1989, c. 265, sec. 1.)
sec. 55-13-22. Dissenters' notice.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is authorized at a shareholders' meeting, the corporation shall mail by
registered or certified mail, return receipt requested, a written dissenters'
notice to all shareholders who satisfied the requirements of G.S. 55-13-21.
(b) The dissenters' notice must be sent no later than 10 days after
shareholder approval, or if no shareholder approval is required, after the
approval of the board of directors, of the corporate action creating dissenters'
rights under G.S. 55-13-02, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than 30 nor more than 60 days after the
date the subsection (a) notice is mailed; and
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(5) Be accompanied by a copy of this Article. (1925, c. 77, sec. 1;
1943, c. 270; G.S., sec. 55-167; 1955, c. 1371, sec. 1; 1969, c. 751,
sec. 39; 1973, c. 469, sec.sec. 36, 37; 1989, c. 265, sec. 1; 1997-485,
sec. 4.)
sec. 55-13-23. Duty to demand payment.
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22 must
demand payment and deposit his or her share certificates in accordance with the
terms of the notice.
(b) The shareholder who demands payment and deposits his or her share
certificates under subsection (a) retains all other rights of a shareholder
until these rights are cancelled or modified by the taking of the proposed
corporate action.
(c) A shareholder who does not demand payment or deposit his or her share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his or her shares under this Article. (1925, c. 77,
sec. 1; 1943, c. 270; G.S., sec. 55-167; 1955, c. 1371, sec. 1; 1969, c. 751,
sec. 39; 1973, c. 469, sec.sec. 36, 37; 1989, c. 265, sec. 1.)
sec. 55-13-24. Share restrictions.
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under G.S. 55-13-26.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
(1925, c. 77, sec. 1; 1943, c. 270; G.S., sec. 55-167; 1955, c. 1371, sec. 1;
1969, c. 751, sec. 39; 1973, c. 469, sec.sec. 36, 37; 1989, c. 265, sec. 1.)
sec. 55-13-25. Payment.
(a) As soon as the proposed corporate action is taken, or within 30 days
after receipt of a payment demand, the corporation shall pay each dissenter who
complied with G.S. 55-13-23 the amount the corporation estimates to be the fair
value of his or her shares, plus interest accrued to the date of payment.
(b) The payment shall be accompanied by:
(1) The corporation's most recent available balance sheet as of the
end of a fiscal year ending not more than 16 months before the date of
payment, an income statement for that year, a statement of cash flows for
that year, and the latest available interim financial statements, if any;
(2) An explanation of how the corporation estimated the fair value of
the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under G.S.
55-13-28; and
(5) A copy of this Article. (1925, c. 77, sec. 1; 1943, c. 270; G.S.,
sec. 55-167; 1955, c. 1371, sec. 1; 1969, c. 751, sec. 39; 1973, c. 469,
sec.sec. 36, 37; 1989, c. 265, sec. 1; c. 770, sec. 69; 1997-202, sec. 2.)
sec. 55-13-26. Failure to take action.
(a) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under G.S. 55-13-22 and repeat the payment demand procedure.
(1925, c. 77, sec. 1; 1943, c. 270; G.S., sec. 55-167; 1955, c. 1371, sec. 1;
1969, c. 751, sec. 39; 1973, c. 469, sec.sec. 36, 37; 1989, c. 265, sec. 1.)
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sec. 55-13-28. Procedure if shareholder dissatisfied with corporation's payment
or failure to perform.
(a) A dissenter may notify the corporation in writing of his or her own
estimate of the fair value of his or her shares and amount of interest due, and
demand payment of the amount in excess of the payment by the corporation under
G.S. 55-13-25 for the fair value of his or her shares and interest due, if:
(1) The dissenter believes that the amount paid under G.S. 55-13-25 is
less than the fair value of his or her shares or that the interest due is
incorrectly calculated;
(2) The corporation fails to make payment under G.S. 55-13-25; or
(3) The corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
(b) A dissenter waives his or her right to demand payment under this
section unless he or she notifies the corporation of his or her demand in
writing (i) under subdivision (a)(1) within 30 days after the corporation made
payment for his or her shares or (ii) under subdivisions (a)(2) and (a)(3)
within 30 days after the corporation has failed to perform timely. A dissenter
who fails to notify the corporation of his or her demand under subsection (a)
within such 30-day period shall be deemed to have withdrawn his or her dissent
and demand for payment. (1925, c. 77, sec. 1; 1943, c. 270; G.S., sec. 55-167;
1955, c. 1371, sec. 1; 1969, c. 751, sec. 39; 1973, c. 469, sec.sec. 36, 37;
1989, c. 265, sec. 1; 1997-202, sec. 3.)
PART 3. JUDICIAL APPRAISAL OF SHARES
sec. 55-13-30. Court action.
(a) (SEE EDITOR'S NOTE) If a demand for payment under G.S. 55-13-28 remains
unsettled, the dissenter may commence a proceeding within 60 days after the
earlier of (i) the date payment is made under G.S. 55-13-25, or (ii) the date of
the dissenter's payment demand under G.S. 55-13-28 by filing a complaint with
the Superior Court Division of the General Court of Justice to determine the
fair value of the shares and accrued interest. A dissenter who takes no action
within the 60-day period shall be deemed to have withdrawn his or her dissent
and demand for payment.
(a1) Repealed by Session Laws 1997-202, sec. 4.
(b) Reserved for future codification purposes.
(c) The court shall have the discretion to make all dissenters (whether or
not residents of this State) whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties must be served
with a copy of the complaint. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the superior court in which the proceeding is
commenced under subsection (a) is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The parties are entitled to
the same discovery rights as parties in other civil proceedings. The proceeding
shall be tried as in other civil actions. However, in a proceeding by a
dissenter in a corporation that was a public corporation immediately prior to
consummation of the corporate action giving rise to the right of dissent under
G.S. 55-13-02, there is no right to a trial by jury.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of his or her
shares, plus interest, exceeds the amount paid by the corporation. (1925, c. 77,
sec. 1; 1943, c. 270; G.S., sec. 55-167; 1955, c. 1371, sec. 1; 1969, c. 751,
sec. 39; 1973, c. 469, sec.sec. 36, 37; 1989, c. 265, sec. 1; 1997-202, sec. 4;
1997-485, sec.sec. 5, 5.1.)
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sec. 55-13-31. Court costs and counsel fees.
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, and shall assess
the costs as it finds equitable.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of G.S. 55-13-20 through 55-13-28; or
(2) Against either the corporation or a dissenter, in favor of either
or any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this Article.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited. (1925, c. 77, sec. 1; 1943, c. 270; G.S.,
sec. 55-167; 1955, c. 1371, sec. 1; 1969, c. 751, sec. 39; 1973, c. 469,
sec.sec. 36, 37; 1989, c. 265, sec. 1.)
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