the winer family trust, et al. v. michael queen, et al. 03...

CHIMICLES & TIKELLIS LLPSteven A. SchwartzPa. I.D. No. 50579Kimberly M. DonaldsonPa. I.D. No. 84116One Haverford Centre 361 West Lancaster AvenueHaverford, PA 19041Telephone: (610) 642-8500Facsimile (610) 649-3633

LIONEL Z. GLANCYMICHAEL GOLDBERGGLANCY & BINKOW LLP1801 Avenue of the Stars, Suite 311Los Angeles, California 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160

Attorneys for Lead Plaintiff The Winer Family Trust

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF PENNSYLVANIA

THE WINER FAMILY TRUST, IndividuallyAnd On Behalf of All Others SimilarlySituated, Plaintiffs,

v.

MICHAEL QUEEN, THOMAS MCGREAL,JOSEPH W. LUTER, IV, MICHAEL H.COLE, SMITHFIELD FOODS, INC.,SHOWCASE FOODS, INC. and PENNEXXFOODS, INC.,

Defendants.

No. 2:03-cv-04318-JP

AMENDED CLASS ACTION COMPLAINT

FOR VIOLATIONS OF FEDERALSECURITIES LAWS BREACH OFFIDUCIARY DUTY AND AIDING ANDABETTING BREACH OF FIDUCIARYDUTY

JURY TRIAL DEMANDED

Lead Plaintiff Winer Family Trust, by its attorneys, for its Amended Class Action

Complaint, alleges the following upon personal knowledge as to itself and its own acts, and upon

Case 2:03-cv-04318-JP Document 28-1 Filed 12/22/2003 of 96

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information and belief based upon the investigation of plaintiff’s attorneys as to all other matters.

The investigation of counsel includes, but is not limited to, the thorough review and analysis of

public statements, publicly filed documents of Pennexx Foods, Inc. (“Pennexx” or the

"Company”) and Smithfield Foods, Inc. (“Smithfield Foods” or “Smithfield”), press releases,

news articles, the review and analysis of accounting rules and related literature, deposition

transcripts, affidavits/declarations and related exhibits in various litigations of Michael Queen,

Joseph Luter III, Joseph L. Beltrami (Pennexx CFO), Donald C. Countryman, Jeffrey Muchow,

Richard Conway, John Ward (former Pennexx CFO), Ellis Shore (Pennexx Consultant) and

Joseph W. Luter IV, pleadings related to Pennexx’s litigation with its former landlord (In re:

Asousa Partnership, E.D. Pa. Bankruptcy Case No. 01-12295 DWS, Adversary No. 01-974),

litigation between Pennexx and Smithfield in this Court (Smithfield Foods Inc. v. Pennexx Foods

Inc., E.D. Pa. No. 03-cv-3155), litigation between Pennexx and its former CFO (George B.

Pearcy v. Pennexx Foods., Inc. et al., No. 02-23465, CCP Montgomery County, Pa.), litigation

between Pennexx and its former consultant Robert W. Mathews (Mathews v. Pinnacle Foods,

No. 3:01-cv-2295 (PCD), D.Conn.) and pleadings filed in this Court by Defendants Pennexx and

Smithfield, including Pennexx’s Cross-Claim dated December 3, 2003 and Smithfield’s Motion

to Enforce the Court’s Stipulated Order and related Motion to Sever. Plaintiff believes that

further substantial evidentiary support will exist for the allegations set forth below after a

reasonable opportunity for discovery.


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SUMMARY OF ACTION

1. This is a class action alleging violations of federal securities law and state law

claims for willful and malicious breaches of fiduciary duties and aiding and abetting breaches of

fiduciary duties on behalf of two classes of public investors:

(a) The Securities Law Class (against Pennexx, Smithfield and the Individual

Defendants) -- public investors who purchased the securities of Pennexx Foods, Inc.

during the period from February 8, 2002 through June 12, 2003 (the "Securities Law

Class Period"); and

(b) The Fiduciary Duty Class (against Smithfield and Michael Queen in his

capacity as an officer of Pennexx-- public investors who currently own securities of

Pennexx Foods, Inc.

Plaintiff complains of a malicious and willful fraudulent scheme and deceptive course of

business that injured these public investors who purchased and/or held Pennexx stock during the

Class Periods.

2. Pennexx (formerly Pinnacle Foods, Inc.) is a Pennsylvania corporation that

provides “case-ready” meat – prepackaged and labeled meat products ready for retailers’ store

shelves without further processing or packaging – to customers in the Northeastern United

States. The Company cuts, packages, processes and delivers case-ready beef, pork, lamb and

veal.

3. In June 2001, Smithfield Foods, a world-wide producer and distributor of pork

and processed meat products, began a malicious and willful campaign to freeze out Pennexx’s

minority shareholders, acquiring a 50% interest in Pennexx in a deal that included, among other

things, Smithfield purchasing 13,003,494 shares of the Company’s common stock and extending


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a $30 million revolving line of credit to Pennexx. The revolving line of credit was secured by a

lien that was coercively amended by Smithfield in December 2002 to include all of Pennexx's

assets including after-acquired inventory and accounts receivable (the “Credit Agreement”).

Additionally, Smithfield placed two of its executive officers on the Pennexx Board of Directors

(the “Pennexx Board”): Joseph W. Luter, IV, executive vice president of Smithfield Packing

Company (and son of Smithfield Foods’ Chairman and Chief Executive Officer Joseph W. Luter,

III) and Michael H. Cole, associate general counsel of Smithfield.

4. The acquisition of Pennexx, and Smithfield’s subsequent willful and malicious

freeze out of Pennexx shareholders, provided two important elements to Smithfield’s strategy for

“conversion from a commodity-based company to a global food company”: (1) an entry for the

Virginia-based Smithfield into the “critical” Northeastern markets served by Pennexx, and (2)

the addition of beef, lamb and veal processing capabilities and expertise.

SUMMARY OF THE SECURITIES LAW VIOLATIONS

5. Throughout the Securities Law Class Period, Defendants artificially inflated the

price of Pennexx stock by disseminating public statements which omitted material facts

necessary to make the statements contained therein not false or misleading concerning the

Company’s financial performance, business operations and prospects. Defendants accomplished

this scheme by issuing public statements that omitted material facts concerning, among other

things: (i) the Company’s severe liquidity problems; (ii) Pennexx’s acquisition of a new facility

in Philadelphia (the “Tabor Facility”), the adequacy of that facility, and problems with the Tabor

Facility’s renovation and equipment; (iii) the denigration of the relationship between Pennexx

and Smithfield, including the resultant conflicts; (iv) Smithfield’s total domination and control

over Pennexx and the Tabor Facility, and the Company’s utter inability to monitor Smithfield’s


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conduct and protect Pennexx’s interests from Smithfield’s deliberate course of conduct to

undermine Pennexx’s ability to continue as a going concern; (v) Pennexx’s actual prospects for

growth and increased market penetration; (vi) the effect of Pennexx’s limited processing and

distribution capabilities on the Company’s ability to take advantage of increased demand and

expansion in the case-ready meat industry; (vi) that Pennexx’s former CFO was instructed by

Defendants to materially understate Pennexx’s second quarter 2002 financial losses which

Pennexx would have to report to the SEC, and that the CFO was subsequently fired when he

refused to do so; (vi) that Pennexx nonetheless materially understated its reported losses for

second quarter 2002 despite the former CFO’s protests, which were made known to the Pennexx

board of directors, including the Smithfield officers who served on the Pennexx Board

(defendants Joseph W. Luter IV and Michael Cole); (vii) Pennexx’s imminent default under the

Credit Agreement with Smithfield; and (vi) that due to a Court order requiring Pennexx to vacate

the premises of its former Pottstown, Pennsylvania, meat-processing facility, Pennexx had to

prematurely occupy its new Tabor Facility though the Tabor Facility was nowhere close to being

completed and under circumstances that interfered with Pennexx’s ability to transition into the

Tabor Facility and operate and manage its business in the manner which Pennexx had claimed it

would be able to when it moved into the Tabor Facility .

6. Additionally, Pennexx’s quarterly and annual earnings reports, filed with the SEC

on Forms 10-Q and 10-K, respectively, also omitted material facts as they: (i) repeated the

misleading financial results published in the Company press releases described herein; (ii)

omitted material facts concerning the true state of the Tabor Facility renovations, the ability of

Pennexx to transition into the Tabor Facility, and the equipment and the operational problems at

the facility; (iii) overstated the Company’s business prospects; (iv) omitted Smithfield’s total


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domination and control over Pennexx and the Tabor Facility and Pennexx’s utter inability to

monitor Smithfield’s conduct and protect Pennexx’s interests from Smithfield’s deliberate

malicious and willful course of conduct designed to undermine Pennexx’s ability to continue as a

going concern; (v) omitted material facts regarding the denigration of the relationship between

Pennexx and Smithfield, including the resultant conflicts and (vi) downplayed, among other

things, the Company’s severe liquidity problems during the periods being reported.

7. Defendant Smithfield Foods owned 50 percent of Pennexx’s stock, placed two

Smithfield executives on the Pennexx Board, participated substantially in Pennexx’s operations

and business, and was thus a controlling person of Pennexx. Even though Smithfield totally

dominated and controlled Pennexx, was timely provided with monthly reports reflecting

complete disclosure of Pennexx’s operations and financial condition -- and, in fact, exercised its

control to approve, write and rewrite the content of press releases and other disclosures (and/or

prevent such disclosures) made in Pennexx’s name -- Smithfield similarly failed to disclose

material facts to the investing community throughout the Securities Law Class Period.

SUMMARY OF BREACH OF FIDUCIARY DUTY CLAIMS

8. Defendant Smithfield, as a controlling or majority shareholder, primary lender

and supplier, dominated Pennexx and its officers and directors and therefore owed fiduciary

duties to Pennexx shareholders. Frustrated in its attempts to purchase Pennexx outright in order

to gain a foothold in the case-ready meat market, Smithfield implemented a willful and malicious

scheme to undermine Pennexx’s ability to operate as a going concern so that Smithfield could

acquire Pennexx’s assets and business opportunities on the cheap and without regard to

shareholder rights. Under the guise of serving as a “partner” cooperating in a “joint venture”

with Pennexx, Smithfield succeeded in its plan to undermine and take-over Pennexx by, inter


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alia: (i) coercively using its position as majority shareholder and primary lender and supplier of

Pennexx to dominate and control Pennexx and its operations and to drive up Pennexx’s costs and

interfere with its ability to run its business by deliberately delaying and misdesigning Pennexx’s

new Tabor Facility so that Pennexx’s transition to that facility was an utter failure; (ii) charging

Pennexx excessive prices for supplies at prices even higher than those Smithfield charged to

unaffiliated purchasers; (iii) deliberately overstating the amounts of product purchased by

Pennexx while at the same time willfully and maliciously preventing Pennexx from timely

ascertaining whether it was being shorted (by installing non-functioning scales and other

necessary equipment at the new Tabor Facility and refusing Pennexx’s requests to install state-

of-the-art scales as promised); (iv) using proprietary information from Pennexx to undermine

and misappropriate Pennexx’s contracts with its largest customer, Pathmark, and to undermine

and misappropriate other business opportunities of Pennexx; and, ultimately; (v) when the

Pennexx-Smithfield relationship deteriorated beyond repair, willfully and maliciously refusing

Pennexx’s offer and undermining its ability to pay off its debt to Smithfield, in order to prevent a

competitor — Swift — from acquiring Pennexx so Smithfield could acquire all of Pennexx’s

assets and business opportunities on the cheap, freezing out Pennexx’s minority shareholders.

Through its willful and malicious actions, Smithfield, acting solely in its best interests, to the

detriment of the non-controlling/minority shareholders of Pennexx, acted in contravention of its

fiduciary duties owed to the Pennexx shareholders.

9. Smithfield was aided and abetted in this scheme by Smithfield officers it placed

on the Pennexx Board, Defendants Joseph W. Luter, IV and Michael H. Cole.

10. In addition, Defendant Queen, in his capacity as an officer of Pennexx

(President), owed fiduciary duties to the Fiduciary Duty Class. Defendant Queen breached those


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fiduciary duties, in his capacity as President of Pennexx, by entering into a Forbearance and

Peaceful Possession Agreement with Smithfield dated May 29, 2003 (“Forbearance Agreement”)

that provided for a broad and general release of Smithfield from liability for claims against it by

Pennexx individually, and purportedly provided a release of claims against Smithfield possessed

by Pennexx’s stockholders. In contravention of his fiduciary duties as a Pennexx officer, Queen

purported to cause Pennexx’s shareholders -- who were not even a party to the Forbearance

Agreement, and thus cannot be bound by it -- to be stripped of their legal rights without their

knowledge or consent and without authority to do so.

JURISDICTION AND VENUE

11. The claims asserted arise under §§10(b) and 20(a) of the Securities

Exchange Act of 1934 (the “Exchange Act” or the "1934 Act"). Jurisdiction is conferred by §27

of the 1934 Act. Venue is proper pursuant to §27 of the 1934 Act as defendant and/or the

individual defendants conduct business in and the wrongful conduct took place in this District.

This Court has supplemental and ancillary jurisdiction over Plaintiff’s state law breach of

fiduciary duty claims and Plaintiff’s state law aiding and abetting breach of fiduciary duty

claims.

THE PARTIES

Plaintiff

12. Plaintiff The Winer Family Trust purchased Pennexx publicly traded securities as

detailed in the attached Certification and was damaged thereby. Winer Family Trust continues

to hold shares of Pennexx stock. By order dated November 7, 2003, The Winer Family Trust

was appointed Lead Plaintiff and its counsel, Chimicles & Tikellis LLP and Glancy & Binkow

LLP, were appointed Co-Lead Counsel, pursuant to 15 U.S.C. § 78u-4(a)(3)(B).


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Defendants

Pennexx Defendants

13. Defendant Pennexx Foods, Inc. (“Pennexx”) is a corporation organized under the

laws of Pennsylvania with its principal place of business located at 5501 Tabor Avenue,

Philadelphia, Pennsylvania 19120. Pennexx was established in 1999, and until February 8, 2002,

operated under the name Pinnacle Foods, Inc. Pennexx provides case-ready meat products to

customers in the Northeastern United States. Pennexx currently has no assets and is not

operating as a business.

14. Defendant Michael Queen (“Defendant Queen” or “Queen”) has been President

of Pennexx since 2000 and has served as a director of Pennexx since July 20, 1999. Defendant

Queen was President, CEO and a director of Pennexx during the Class Periods and at times

relevant hereto.

15. Defendant Thomas McGreal (“Defendant McGreal” or “McGreal”) was Vice–

President and Secretary of Pennexx since 1999 and was elected to the Pennexx Board after the

Smithfield acquisition and the concomitant expansion of the Pennexx Board from two to five

members. Defendant McGreal was Vice-President, Secretary and a director of Pennexx during

the Class Period and at times relevant hereto.

16. Defendants Pennexx, Queen and McGreal are referred to herein as the “Pennexx

Defendants”

Smithfield Defendants

17. Defendant Smithfield Foods is a Virginia corporation that produces, processes

and markets a variety of fresh pork and processed meat products, with operations in the United

States and throughout the world. Smithfield Foods’ corporate headquarters are located at 200


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Commerce Street, Smithfield, Virginia 23430. As the majority and controlling shareholder and

owner of 13,003,494 shares of Pennexx’s common stock, by virtue of its appointment of two of

its employees to serve on the Pennexx Board, its role as Pennexx’s primary lender and supplier,

and its substantial involvement, influence and control over Pennexx’s business and operations,

Smithfield was at times relevant hereto a controlling person and controlling shareholder of

Pennexx.

18. Defendant Joseph W. Luter, IV, (“Defendant Luter IV” or “Luter IV”) was at

times relevant hereto a director of Pennexx who was elected to Pennexx’s Board in concert with

the Smithfield financing package and the concomitant expansion of the Pennexx Board from two

to five members. Between 1997 and 1999, Luter IV served as Smithfield Packing Company

Incorporated’s (“SPC”) Vice President of Fresh Pork Sales. Between 1999 and 2000, Luter IV

served as SPC’s Vice President of Sales and Marketing, Fresh, Processed and International, and

since 2000 Defendant Luter IV has served as SPC’s Senior Vice President, Sales and Marketing.

By virtue of his position as a Director of Pennexx, Luter IV was under a continuing duty to

direct and control the operations of Pennexx, to exercise due care and diligence in those

operations, and to oversee and review all corporate operations, including the filing of documents

with the SEC and the making of public statements. Defendant Luter IV is the son of Smithfield

Foods’ President and CEO, Joseph W. Luter III (“Luter III”).

19. Defendant Michael H. Cole was at times relevant hereto a Director of Pennexx,

elected to Pennexx’s Board on June 27, 2001 in concert with the Pennexx/Smithfield Transaction

and the concomitant expansion of the Board from two to five members. During the Class Period,

Defendant Cole served as Associate General Counsel of Smithfield Foods and became the

Corporate Secretary of Smithfield during 1999. By virtue of his position as a Director of


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Pennexx, Defendant Cole was under a continuing duty to direct and control the operations of

Pennexx, to exercise due care and diligence in those operations, and to oversee and review all

corporate operations, including the filing of documents with the SEC and the making of public

statements.

20. Defendant Showcase Foods, Inc. (“Defendant Showcase Foods” or “Showcase

Foods”) is a subsidiary of Smithfield. Showcase Foods was formed by Smithfield in June 2003

as part of Smithfield’s Beef segment. Smithfield is currently operating Pennexx’s assets and

business under the name Showcase Foods, Inc.

21. Defendants Smithfield, Luter IV, Cole and Showcase Foods are referred to herein

as the “Smithfield Defendants.”

22. Defendants Queen, McGreal, Luter IV and Cole are sometimes referred to herein

as the "Individual Defendants."

23. As officers, directors and/or controlling persons of Pennexx, a publicly-held

company whose common stock is registered with the SEC under the Exchange Act of 1934 and

traded on the OTC Bulletin Board, Smithfield and the Individual Defendants had a duty to

promptly disseminate accurate and truthful information with respect to the Company's

operations, finances, financial conditions and present and future business prospects, to correct

any previously issued statement from any source that had become untrue, and to disclose any

trends that would materially affect earnings and the present and future operating results of

Pennexx, so that the market price of the Company's publicly traded securities would be based

upon truthful and accurate information.


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24. During the Securities Law Class Period, Defendants Smithfield, Pennexx and the

Individual Defendants were privy to confidential and proprietary information concerning

Pennexx, its operations, finances, financial condition, products and present and future business

prospects. Because of their possession of such information, Defendants Smithfield and Pennexx

and the Individual Defendants knew or, with deliberate recklessness, disregarded that the adverse

facts specified herein had not been disclosed to and were being concealed from the public.

Because of their Pennexx Board membership and executive and managerial positions with

Pennexx, Smithfield and the Individual Defendants had access to adverse material non-public

information about Pennexx's operations, finances, financial condition, products, inventories and

present and future business prospects. They had such access via internal corporate documents,

conversations and connections with other corporate officers and employees, attendance at

management and Pennexx Board meetings and committees thereof, and via reports and other

information provided to them in connection therewith. Because of their possession of such

information, Smithfield and the Individual Defendants knew or, with deliberate recklessness,

disregarded the fact that the adverse facts specified herein had not been disclosed to and were

being concealed from the public.

25. Smithfield and the Individual Defendants, because of their stock ownership and/or

positions of control and authority as officers and directors of the Company, were able to and did

control the contents of the various quarterly reports, SEC filings and press releases.

26. Smithfield and the Individual Defendants were provided with copies of Pennexx's

management reports, press releases and SEC filings. Armed with, and in control of such

information, Smithfield and the Individual Defendants granted interviews to newspaper

reporters. The newspaper articles based on those interviews, as well as the Company's other


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publicly disseminated information are alleged herein to have been materially misleading to the

investing public. Significantly, with respect to Pennexx press releases and SEC filings,

Smithfield and the Individual Defendants had the ability and opportunity to write them, edit

them, prevent their dissemination in the first place or to cause them to be corrected shortly after

their dissemination. As a result, Smithfield and the Individual Defendants were responsible for

the accuracy of the public reports and releases detailed herein as "group published" information,

and are therefore responsible and liable for the representations contained therein.

27. As Joseph R. Beltrami, who served as Chief Financial Officer of Pennexx from

September 2002, set forth in a sworn declaration made in connection with the action styled

Smithfield Foods, Inc. v. Pennexx Foods, Inc., No. 03-03155, E.D. Pa. (“Beltrami Declaration”):

(a) Pennexx provided Smithfield with detailed reports and information

pursuant to the terms of the Pennexx/Smithfield Transaction (defined below), and

provided supplemental reports, information and analyses to Smithfield, including, but not

limited to, quarterly financial information, monthly borrowing base certificates, annual

operating budgets, monthly financial statements including monthly comparisons of actual

operating results to budget, inventory analysis including frozen inventory analysis,

capital expenditure tracking and analysis and other miscellaneous reports “to ensure that

Smithfield had complete disclosure of the Company’s operations and financial

condition.”

(b) Smithfield’s auditors were also granted complete access to Pennexx’s

financial books and records in October 2002.

28. Smithfield’s auditors also had access to Pennexx’s books and records earlier in

2002 and, along with the Smithfield Defendants, were fully advised that Defendants pressured


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had Pennexx CFO George Pearcy to materially understate Pennexx’s losses for the second

quarter of 2002, and that Pennexx’s press release regarding Mr. Pearcy’s departure

misrepresented that he had left for personal reasons and failed to disclose that he had left

Pennexx due to his serious dispute with Pennexx and the Individual Defendants.

29. Each of the Defendants is liable as a direct participant with respect to the wrongs

complained of herein. In addition, each of Smithfield and the Individual Defendants, by reason

of their stock ownership and/or status as officers and directors of Pennexx were a "controlling

person" within the meaning of Section 20 of the Exchange Act and had the power and influence

to cause Pennexx to engage in the unlawful conduct complained of herein. Because of their

positions of control, Smithfield and the Individual Defendants were able to and did, directly or

indirectly, control the conduct of Pennexx's business, the information contained in its filings with

the SEC, and the public statements about its business.

30. During the Securities Law Class Period, Defendants, individually and in concert,

directly and indirectly, engaged and participated in a continuous course of conduct to

misrepresent the results of Pennexx's operations, and to conceal and omit adverse material

information regarding the finances, financial condition, and results of operations of Pennexx, and

the Tabor Facility, as specified herein. Defendants employed devices, schemes, and artifices to

defraud, and engaged in acts, practices, and a course of conduct, as herein alleged, in an effort to

increase and maintain an artificially high market price for Pennexx common stock. These

activities included the formulating, making, and/or participating in the making of untrue

statements of material facts, and the omission to state material facts necessary in order to make

the statements made, in light of the circumstances under which they were made, not misleading.


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Such activities operated as a fraud or deceit upon Plaintiffs and the other members of the

Securities Law Class.

31. With respect to the Breach of Fiduciary Duty Claims, Defendant Queen, as an

officer (President) of Pennexx, breached his fiduciary duties owed to the Pennexx shareholders,

the Fiduciary Duty Class. Defendant Queen breached those fiduciary duties in his capacity as

President of Pennexx, by entering into the Forbearance Agreement with Smithfield that

purportedly provided for a broad and general release of Smithfield from any claims possessed

not only by Pennexx individually but also purportedly by Pennexx’s stockholders. In

contravention of its fiduciary duties, and without authority to do so, Queen purported to cause

the Pennexx shareholders, who were not even a party to the Forbearance Agreement, and thus

cannot be bound by it, to be stripped of their legal rights without knowledge or consent.

32. At all times relevant to the Breach of Fiduciary Duty Claims, Smithfield, as a

controlling and majority shareholder and primary lender and supplier of Pennexx, breached its

duties owed to Pennexx shareholders, the Fiduciary Duty Class. Smithfield’s wrongful,

malicious and willful course of conduct consisted of it wrongly undermining and subsequently

wresting control of Pennexx, using its power and positions for its own benefit and personal

advantage, to the detriment of the minority shareholders, resulting in a worthless investment in a

defunct, shell corporation whose assets and business opportunities have all been seized by

Smithfield. Smithfield operated Pennexx to benefit itself to the detriment and expense of the

shareholders.

33. Smithfield and its subsidiary Showcase Foods, Inc. as successors to Pennexx’s

business, product lines and assets are liable for the acts of Pennexx complained of herein.

Smithfield took control over all of Pennexx’s assets and transferred them to the Smithfield


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Foods-owned Showcase, ending Pennexx’s ability to continue its operations. Smithfield has

continued to manufacture Pennexx’s products, held itself out to the customers as a continuation

of Pennexx and enjoyed the goodwill created by Pennexx’s business. Smithfield has continued

Pennexx’s business with substantial continuity in, at the least, its product line, customers and

employees. As a result of Smithfield’s seizing of Pennexx’s assets, Pennexx was left as no more

than a corporate shell, virtually destroying the Classes’ remedies against Pennexx. Accordingly,

Smithfield and Showcase should be held liable as the successor corporation for the acts of

Pennexx complained of herein.

CLASS ACTION ALLEGATIONS

34. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal

Rules of Civil Procedure on behalf of two classes:

(a) the Securities Law Class -- all persons who purchased Pennexx publicly traded

securities on the open market during the Securities Law Class Period; and

(b) the Fiduciary Duty Class -- all current holders of Pennexx.

(Collectively referred to as “Classes”). Excluded from the Classes are Defendants and their

affiliates.

35. The members of the Classes are so numerous that joinder of all members is

impracticable. The disposition of their claims in a class action will provide substantial benefits to

the parties and the Court.

36. There is a well-defined community of interest in the questions of law and fact

involved in this case. Questions of law and fact are common to the members of Classes which

predominate over questions which may affect individual Class members.


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(a) As to the Securities Law Class, these include:

(i) Whether the 1934 Act was violated by defendants;

(ii) Whether defendants omitted and/or misrepresented material facts;

(iii) Whether defendants' statements omitted material facts necessary to

make the statements made, in light of the circumstances under

which they were made, not misleading; and

(iv) Whether defendants knew or recklessly disregarded that their

statements were false and misleading.

(b) As to the Breach of Fiduciary Duty Class, these include:

(i) Whether Smithfield breached its fiduciary duties by implementing

a scheme to operate and manipulate the business and operations of

Pennexx solely for its benefit and to the detriment of the non-

controlling shareholders;

(ii) Whether Smithfield breached its fiduciary duties by implementing

a scheme to operate and manipulate the business and operations of

Pennexx solely to take control of Pennexx’s business and assets in

a manner that enabled Smithfield to disregard the Pennexx

shareholders’ rights as shareholders; and

(iii) Whether Defendants Queen and Smithfield breached their

fiduciary

duties owed to the Pennexx shareholders by entering into a

Forbearance Agreement that purported to provide for a broad and


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general release of Smithfield by Pennexx shareholders, purporting

to strip them of their legal rights without prior disclosure, consent

or ratification.

SUBSTANTIVE ALLEGATIONS

Background

37. Pennexx is a corporation organized under the laws of Pennsylvania, with its

principal place of business located at 5501 Tabor Avenue, Philadelphia, Pennsylvania 19120.

Pennexx provided case-ready beef, pork, lamb and veal products to customers in the

Northeastern United States. From its formation in 1999 until February 8, 2002, Pennexx operated

under the name Pinnacle Foods, Inc.

38. Smithfield is the largest hog and pork processor in the world, conducting its

business through four reporting segments: pork, beef, international and the hog production

group, each comprising a number of subsidiaries.

First Partnership Between Pennexx and Smithfield

39. According to Pennexx’s Cross-Claim filed in this Action on December 5, 2003

(“Pennexx Cross-Claim”), and a sworn declaration of Defendant Queen made in connection with

the action styled Smithfield Foods, Inc. v. Pennexx Foods, Inc., No. 03-03155, E.D. Pa. (the

“Queen Declaration”), Smithfield’s and Pennexx’s relationship began in August 2000:

a. In August 2000, Smithfield contracted with Pennexx to help Smithfield

supply Wal-Mart with case-ready pork.

b. Under the agreement with Smithfield, Pennexx prepared and delivered

Smithfield’s branded case-ready pork to a Wal-Mart distribution facility

located in New York.


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40. Pricing and profitability in the meat processing business are managed through

production yields. The “production yield” is the final amount of meat produced for retail sale

after processing the original cut of meat. According to the Pennexx Cross-Claim and Queen

Declaration, the Wal-Mart arrangement with Smithfield was unprofitable for Pennexx because

the Smithfield pork product was injected with water which was lost during processing and

therefore caused low production yields on the pork product. This critical fact, which

foreshadowed Smithfield’s future conduct and the effect on Pennexx, was known to Defendants

but not disclosed to the investing public.

41. In January 2001, according to the Pennexx Cross-Claim and Queen Declaration,

Pennexx began servicing only its own customers and stopped servicing Wal-Mart on behalf of

Smithfield.

The Pennexx/Smithfield Transactions

42. The case-ready meat market, emerging at this time in the meat packing industry,

specifically in the pork-packing and beef-packing industries, was a final component of

integration for Smithfield.

43. In Smithfield’s 2001 Annual Report, Luter III, the Chairman and Chief Executive

Officer of Smithfield, touted the successful completion of his strategy of vertical integration in

the pork packing industry -- of controlling pork from the genetic code to retailers’ meat cases.

The 2001 Annual Report at 7 states:

Today, Smithfield Foods produces 12 million hogs and processes 20 millionannually, making it the world’s largest vertically integrated pork processor.Through its hog raising and pork processing subsidiaries, the company canexercise complete control over its products--from their genetic lines andnutritional regimen to how they are processed, packaged and delivered tocustomers.


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44. The 2001 Annual Report at page 3 (emphasis added) further set forth that:

We see tremendous opportunities for case-ready growth in the NortheasternUnited States. This belief drove our recently completed acquisition of MoyerPacking Company, a beef operation, as well as a joint venture with PinnacleFoods [Pennexx], a company focused on case-ready products. Both are based inNortheastern Pennsylvania and have strong distribution networks that will helpaccelerate our case-ready efforts in the region.

45. This statement by Smithfield was misleading in that it failed to disclose the true

nature of Smithfield’s intent with respect to the “joint venture” relationship with Pennexx and

the true nature of the “opportunities” Smithfield saw—i.e. the opportunity to undermine,

eliminate, and take-over Pennexx on the cheap.

46. According to the Pennexx Cross-Claim and Queen Declaration, Pennexx was

important to Smithfield because Pennexx would allow Smithfield to: (1) gain leverage over its

competitors in the case-ready meat market, (2) increase the distribution of its branded pork in the

New Jersey and New York markets, and (3) supply Smithfield’s Wal-Mart customers with case-

ready beef and pork in the Northeast market.

47. Pennexx was approached in early 2001, by two competitors of Smithfield, with

inquiries about purchasing all of the outstanding capital stock of Pennexx.

48. At approximately the same time, Smithfield also inquired with Pennexx about

purchasing all the outstanding capital stock of Pennexx, but Pennexx rebuffed the inquiries.

49. Smithfield then began an alternate strategy of “joint venturing” with Pennexx.

50. In March 2001, Luter III visited Pennexx’s Pottstown plant and was guided on a

tour of the plant by Defendant Queen. During the visit, Luter III stated that the Pottstown plant

was inadequate from a food safety standpoint. Accordingly, as declared by Defendant Queen,


21

Smithfield agreed to purchase a new plant and equipment so that Pennexx and Smithfield could

meet their mutual obligations under the Wal-Mart commitment.

51. That same day, Luter III met with Defendant Queen and Ellis M. Shore (“Shore”)

(a Pennexx consultant) and negotiated the basic terms of the Pennexx/Smithfield Transactions.

According to the Pennexx Cross-Claim:

a. Most of the negotiations occurred between Luter III and Shore.

b. At the time, Pennexx’s stock was trading at approximately $1.50 per

share.

In exchange for providing a credit facility to Pennexx, Smithfield was

permitted to purchase 50% of Pennexx’s outstanding common stock at a

discounted price.

c. Pennexx wanted the price to be at $1.00 per share, but Luter III insisted on

paying approximately $.50 per share. At approximately $.50 per share,

Smithfield could purchase 50% of Pennexx’s outstanding stock for only

$6 million, instead of paying $12 million at $1.00 per share.

52. On April 25, 2001, defendant Smithfield issued a press release announcing the

planned acquisition of a 50% stake in Pennexx (the “Pennexx/Smithfield Transactions”). The

press release (emphasis added) stated in part:

Smithfield Foods' Stake in Pinnacle Foods Grows Northeastern Case-ReadyBusiness SMITHFIELD, Va., April 25 /PRNewswire/ -- Smithfield Foods, Inc. (NYSE:SFD) today announced another transaction to build its case-ready meat businessin the Northeast United States.


22

By acquiring a stake in Pinnacle Foods, Inc. (OTC: PFOD), a provider ofcase-ready meat (pork, beef, lamb and veal) to retail supermarkets in theNortheast, Smithfield is taking advantage of the synergies initially created by therecently-announced agreement to purchase Moyer Packing Company last week.The combined distribution capabilities of the three companies will accelerateSmithfield's efforts in the critical Northeast market. With square footage at apremium, the company believes that supermarkets in New York and throughoutthe Northeast are prime candidates for case-ready meat products.

With expected sales of about $30 million for 2001, Pinnacle hasheadquarters and meat packing facilities in Pottstown, Pa.

The leader in the case-ready market, Smithfield Foods sold about 75million pounds of case-ready pork to food retailers in fiscal 2001, more than threetimes the volume of the prior year.

Smithfield Foods signed an agreement in principle to acquire up to 13.5million shares, or 50 percent of the outstanding common shares of PinnacleFoods, for a total purchase price of $6 million. The agreement also calls forSmithfield Foods to provide a $30 million revolving line of credit to Pinnacle forworking capital and other purposes.

Over the last 25 years Smithfield Foods has delivered a 27 percent averageannual compounded rate of return to shareholders. With annual sales of $5.2billion, the company is the leading processor and marketer of fresh pork andprocessed meats in the United States, as well as the largest producer of hogs. Formore information, please visit www.smithfieldfoods.com .

53. That statement by Smithfield was materially misleading because it failed to

disclose that the “synergies” created by Smithfield acquiring Moyer Packing, investing in and

becoming Pennexx’s primary lender and supplier was that Smithfield would gain the opportunity

to have Moyer overcharge Pennexx for supplies, while at the same time shorting Pennexx on

those supplies by depriving Pennexx of having appropriate scales to monitor the quantity of

those supplies, all part of Smithfield’s willful and malicious scheme as described herein.

54. The May 2001 issue of Meat & Poultry magazine, published prior to completion

of the Pennexx/Smithfield Transactions, recounted an interview of Luter III during the Goldman

Sachs Food, Beverage and Tobacco Conference held May 9, 2001, in New York. The article


23

explained that Smithfield had decided to acquire 50 percent of Pennexx’s outstanding stock and

quoted Luter III as stating that:

a. “We bought them to use our product exclusively, and to give us a jump

start for case-ready in the whole Northeast. They wanted a partner and we

were willing to do it.”

b. “Sooner or later they will be looking for an exit strategy.”

c. “We are the only meatpacker with a processed meat business…It will take

12 years (for anyone else) to catch up to us. And that’s assuming we sit

still. I assure you, that won’t happen.”

55. Those comments by Luter III demonstrate Smithfield’s intentions (and thus the

scienter of Smithfield concerning their nondisclosures of same) with respect to its involvement

with Pennexx all along—to willfully and maliciously bring Pennexx to its knees and take over

Pennexx’s business. As before, Smithfield failed to disclose that its meaning of the word

“partner” was actually a targeted, helpless, dependent prey.

56. Approximately four weeks later, an article profiling Smithfield appeared in the

June 20, 2001, issue of The National PROVISIONER, a trade publication for the meat, poultry

and prepared-foods processing industry. The article described how “Smithfield Foods has

latched onto case-ready in a big way in line with its new growth strategy,” and noted that “case-

ready products represent a key piece in the distribution program of Smithfield Foods conversion

from a commodity-based company to a global food company. ...” The National PROVISIONER

article also described Smithfield Foods’ acquisition of Pennexx as providing an entry into the

Northeastern supermarkets carrying Pennexx’s case-ready pork, beef, lamb and veal.


24

57. On June 27, 2001, Smithfield and Pennexx executed an agreement whereby

Smithfield purchased a $6 million equity share in Pennexx; Pennexx issued 13,003,494 shares to

Smithfield at a discounted price of approximately $.48 per share for a total of 50% of the then

outstanding shares in the Company ( the “Pennexx/Smithfield Transactions”). As part of the

Pennexx/Smithfield Transactions:

a. Smithfield agreed to provide a credit facility to Pennexx to fund its

operations (the “Credit Agreement”). The amount available to be

borrowed under the Credit Agreement was based on a formula of accounts

receivable and inventory, but could not exceed $30 million.

b. Smithfield nominated Defendant Luter IV, the son of Smithfield’s CEO

and executive vice president of Smithfield, and Defendant Cole, associate

general counsel of Smithfield, to serve as directors on Pennexx’s Board,

and they each became Pennexx directors.

c. Pennexx serviced Smithfield’s branded pork to the New York and

Northeast U.S. market for which Smithfield had placed a $20 million

advertising plan for introducing its branded pork into the New York

market.

58. On June 28, 2001, Smithfield issued a press release announcing that it had

completed the acquisition of a 50% stake in Pennexx. The acquisition of Pennexx provided two

important elements to Smithfield Foods’ strategy for “conversion from a commodity-based

company to a global food company”: (1) an entry for the Virginia-based Smithfield into the

“critical” Northeastern markets served by Pennexx, and (2) the addition of beef, lamb and veal

expertise and processing capabilities. The June 28, 2001, press release stated in part:


25

This is Smithfield Foods' second transaction in the last week to accelerate its case-readybusiness in the Northeast. Smithfield will combine its distribution capabilities withPinnacle and recently-acquired Moyer Packing Company to offer better service and agreater variety of pre-priced, pre-packaged case-ready products to food retailers. Pinnacle produces pork, beef, lamb and veal; Moyer is a beef processor. Pinnacle andMoyer are based in Pennsylvania.

Pinnacle expects sales of about $60 million this year. The agreement also calls forSmithfield Foods to provide a $30 million revolving line of credit to Pinnacle forworking capital and other purposes.

A leader in the case-ready market, Smithfield Foods sold about 75 million pounds ofcase-ready pork to food retailers in fiscal 2001, more than three times the volume of theprior year.

59. This statement by Smithfield was misleading in that it failed to disclose that the

phrase “combine its distribution capabilities with Pinnacle and recently-acquired Moyer Packing

Company to offer better service” actually meant provide Smithfield the opportunity to have

Moyer overcharge Pennexx for supplies while at the same time shorting Pennexx on those

supplies by depriving Pennexx of having appropriate scales to monitor the quantity of those

supplies.

60. On July 9, 2001, Pennexx filed a Form 10SB12G Registration Statement with the

SEC. The Registration Statement described the acquisition of the 50% interest in Pennexx by

Smithfield, and acknowledged that Pennexx (then still known as Pinnacle) needed substantial

additional capital to maintain liquidity. Under a section titled “Smithfield Transactions,” the

Registration Statement, in pertinent part, stated the following:

Pinnacle believes it enjoys a strategic advantage as a result of its experience during thepast two years and its geographical location. Seeking to exploit these perceived strategicadvantages, Pinnacle's business has grown each quarter since its inception. Because of aliquidity crunch, Pinnacle needed a significant amount of capital to finance the growthalready experienced and to continue this growth. To meet this need, managementconsidered the possibility of a strategic relationship with a large meat productioncompany. After identifying Smithfield Foods, Inc. as the most appropriate equity partnerand having Smithfield execute a Confidentiality Agreement, the Company began


26

negotiating the outline, amount and nature of a potential equity investment by Smithfieldin Pinnacle.

61. On November 19, 2001, Pennexx filed with the SEC a Form 10QSB (hereinafter,

“10-Q”) quarterly report for the period ended September 30, 2001. The 10-Q acknowledged the

Company’s unprofitable history, but failed to fully disclose that the Company was still struggling

to maintain liquidity, and blamed recent losses on “operational changes and processes which

have now been overcome”:

The Company has lost money continually since inception; however, the loss inSeptember, 2001 was significantly lower than the losses in both July and Augustof 2001. The principal reason for the magnitude of the loss in July and August isthe Company's agreement to adopt a branded program for one of its majorcustomers that resulted in significant operational changes and processes whichhave now been overcome.

***

62. Indeed, this statement in the November 19, 2001, 10-Q misleadingly portrays the

basis for the losses as “operational changes and processes which have now been overcome”

without explaining that it was, in fact, Smithfield Foods’ branded case-ready pork, provided to

Pennexx for supplying to Wal-Mart -- one of Pennexx’s major customers -- that was injected

with water which was lost during the processing, and therefore caused low production yields on

the pork product.

63. Also in the November 19, 2001, 10-Q, in a section titled “Liquidity and Capital

Resources,” Pennexx represented the Pennexx/Smithfield Transactions as having solved, at least,

Pennexx’s short-term liquidity problems, stating in pertinent part:

Until the closing of the Smithfield Transactions in June 2001, the Company had beenchronically undercapitalized. ...

By completing the Smithfield Transactions, the Company addressed its liquidity problemin two ways. First, the Company's immediate need for capital was addressed by the $6


27

million purchase price paid by Smithfield for its equity stake in the Company. Second,the Company received a $30 million line of credit through Smithfield on terms that theCompany had not been able to obtain before establishing the relationship withSmithfield. ... The Smithfield Transactions should allow the Company to meet its capitalneeds for sufficient capital in the immediate future. Management is cautiously optimisticthat operations will improve in the future; however, if they do not, there is no assurancethat the Pennexx/Smithfield Transactions will provide sufficient capital for the Companyto operate successfully on a long-term basis.

Expansion of Smithfield and Pennexx’s Business

64. In January of 2002, according to the Pennexx Cross-Claim and Queen

Declaration, Pennexx, Smithfield and Pathmark (a large supermarket chain in the Northeast

region of the United States) gathered for a sales meeting during which Pathmark informed

Pennexx and Smithfield that it was planning to implement a full line case ready program, and

sought the commitment of Smithfield and Pennexx to implement the program, which

commitment Pathmark received and for which Smithfield committed to fund the expansion and

automation needed by Pennexx in order to meet the Pathmark commitment.

DEFENDANTS’ FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD

I. Misrepresentations Concerning Pennexx’s Move to the OTC

65. On February 8, 2002, Pennexx issued a press release announcing that the

Company was changing its name from Pinnacle Foods, Inc. to Pennexx Foods, Inc. The press

release quoted defendant Queen, who comments at length about the Company’s positive business

prospects. Additionally, the press release credited the Pennexx/Smithfield Transactions – and

Smithfield Foods’ “$36 million commitment” – as the catalyst for the Company’s move to the

OTC Bulletin Board. The press release stated in part:

Pennexx Foods, Inc. (OTC Bulletin Board: PFOD) today announced that its commonstock is now listed for trading on the OTC Bulletin Board.


28

The company also announced that it has changed its name to Pennexx Foods, Inc. fromPinnacle Foods, Inc. and that its common stock will continue to trade under the stocksymbol PFOD.

Michael Queen, president and CEO of Pennexx said, "Trading our common stock on theOTC Bulletin Board is a significant milestone for Pennexx and enables us to reach abroader investor audience. It was made possible by the registration of the common stockunder the Securities Exchange Act of 1934. This registration resulted, in turn, from the$36 million commitment that Smithfield Foods, Inc., the leading processor and marketerof fresh pork and processed meats in the U.S., made to our company in June 2001."

Pennexx commenced operations in 1999, as the company recognized the opportunity tostake out a first-to-market position in the emerging market category for case-ready meat.Since then, the company has refined the operations, expanded its facilities, built acustomer base and established a position as a leading provider of case-ready meat toretail supermarkets in the northeastern U.S.

"Case-ready" refers to meat products that can be taken out of a box and put directly into aretailer's meat case without any further processing or packaging. For the consumer, case-ready meat enhances food safety, provides leak-proof packaging and a greater variety ofmeat in stock because the packaging offers longer shelf life.

Pennexx Foods cuts, packages, processes and delivers case-ready beef, pork, lamb andveal and the business is largely regulated by the United States Department of Agriculture("USDA"). At its facilities, Pennexx can achieve the trimming, cutting, wrapping,labeling, and pricing of a retail product with extended shelf life that cannot be achieved atthe store level. The company uses modified atmosphere packaging ("MAP"), whichrefers to the use of deep barrier foam and plastic trays to house the meat, and the processof heat sealing the lid tightly, evacuating the atmosphere in the package, and replacing itwith a non-chemical mixture that includes oxygen and carbon dioxide.

Mr. Queen continued, "Case-ready meat is rapidly becoming an attractive economicalternative to store processed meat for supermarket retailers as it enables stores togenerate higher net profit. This growing demand has fueled our company's growth: forthe full fiscal year 2001, we expect to report revenue in excess of $40 million, more thanthree times our revenue in 2000. We intend to aggressively expand the business byextending customer store penetration, acquiring new customers and introducing newproducts while maintaining our superior customer service. Having proven our businessmodel and with the market for case-ready meat still in its infancy, we are confident thatour prospects for growth in 2002 are excellent," concluded Mr. Queen. (Emphasisadded.)

66. Investors reacted highly favorably to the news stated in the February 8, 2002,

press release, including “growing demand” for case-ready meat, the Company’s purportedly


29

“excellent” business prospects and Smithfield Foods’ “$36 million commitment” – an amount

that should eliminate any liquidity issues for several years, based on the Company’s historicals.

By the close of trading on that day, Pennexx stock had shot upward more than twenty-six percent

(26%) as a result of this news.

67. The February 8, 2002, statement was misleading in that it failed to disclose that,

as verified in the Queen Declaration ¶¶4-5, Pennexx’s prior relationship with Smithfield (in

2000) ended in disaster when Smithfield provided pork product (for the critical Wal-Mart

account) that was injected with water that was lost during processing, making the arrangement

profitable for Smithfield but unprofitable for Pennexx. That undisclosed fact foreshadowed the

type of “commitment” Smithfield had made with respect to the Pennexx/Pennexx/Smithfield

Transaction.

Misrepresentations Concerning The Tabor Avenue Facility

68. In February 2002, Pennexx, facilitated by Defendants’ approval and consistent

with Luter III’s instructions, entered into an agreement to purchase a 145,000 square-foot food

facility on ten acres of land located at 5501 Tabor Avenue in Philadelphia, Pennsylvania (the

“Tabor Facility”).

69. With Smithfield’s “commitment,” encouragement, direction, supervision,

approval and funding, Pennexx proceeded to establish a new plant that would be necessary to

service Pathmark and the Northeast U.S. market with case-ready meat.

70. On February 20, 2002, Pennexx issued a press release announcing that the

Company, then-operating in Pottstown, Pennsylvania, had agreed to purchase a new production

facility in Philadelphia, the Tabor Facility. In the press release, defendant Queen touted the

Company’s improved prospects as a result of the move from its Pottstown plant, and stated that


30

the new facility would “optimiz[e] our growth and profit opportunities” with the potential for

“exponential growth in our business." The press release (emphasis added) stated as follows:

Pennexx Foods, Inc. (OTC Bulletin Board: PFOD) today announced that it has enteredinto an agreement to purchase a 145,000 square foot facility on 10 acres of land inPhiladelphia, Pennsylvania. The company anticipates that the transaction will closewithin the next 30 days.

The facility was formerly used as a meat processing plant and was approved by theUSDA. The company expects to make modest improvements in the facility to satisfy itsspecifications and management plans to move into the space immediately.

"We have been searching for a larger facility to accommodate the escalating demand ofour case-ready business for some time now, having reached our anticipated capacity atour current facilities in the fourth quarter of 2001. The new facility will substantiallyincrease Pennexx's case-ready production capabilities and begin to fulfill existingbusiness demand," said Michael Queen, president and CEO of Pennexx. "It is perfectlysuited to our needs, as it is strategically located in the central Northeast corridor andclose to our customers. Since the new facility requires minimal improvement, we will beable to renovate and automate quickly and plan to be operational in this pristine facilityby the second quarter of 2002.

"We are on track with our growth plans. In fact, we are expecting to report revenue forfiscal 2001 of over $40 million, representing an increase in excess of 200% over the$13.5million in revenues we reported in 2000. We plan to announce fiscal 2001 financialresults by the end of March."

Mr. Queen continued, "This new facility gives us the means to ramp up production ofhigher margin, value-added product lines, optimizing our growth and profit opportunities.With the automation processes we will have in place, we intend to become an industryleader in the emerging market category for case-ready meat in the northeast and realizeexponential growth in our business."

71. This statement, according to the Pennexx Cross-Claim and the Queen deposition

and declaration, was knowingly false and misleading in that it failed to disclose:

(i) that rather than requiring “minimal” improvements in order to meet


31

Pennexx’s needs, the Tabor Facility required a significant design and construction

overhaul (over $18 million) requiring a minimum of five months conducted by a

skilled engineer;

(ii) that the Tabor Facility was not going to be designed to meet Pennexx’s

“specifications” -- instead Smithfield would have total control over the funding

and engineering overhaul of the Tabor facility, leaving Pennexx at Smithfield’s

mercy and subject to being undermined by Smithfield having the Tabor Facility

constructed to satisfy Smithfield’s specifications and current and future needs,

rather than Pennexx’s;

(iii) that the engineer (Robert McClain), chosen unilaterally by Smithfield, was

unqualified and had no prior experience in the design or construction of a meat

processing plant, and that this was Robert McClain’s first significant project as a

Smithfield engineer;

(iv) that Smithfield’s total control over the Tabor facility was reflected in the

fact that Smithfield’s engineer hired all of the subcontractors and told them not to

take any direction from Pennexx employees; and

(v) that Smithfield’s engineer and his staff wrote all the specifications for the

equipment, engineered the plant, obtained all the bids, and placed all the orders

for the Facility.

Nor did Defendants disclose that Pennexx’s prior relationship with Smithfield was unprofitable

because Smithfield had provided Pennexx with water-bloated ham.


32

72. On March 28, 2002, according to the Pennexx cross-claim, the Pennexx Board of

Directors and the Individual Defendants met at the Tabor Facility. The Individual Defendants,

Pennexx directors and Luter III were provided a walking tour of the building guided by

Defendant Queen during which Queen reviewed with the Pennexx directors the proposed

improvements to the building and the equipment lines under consideration, to which Luter III

stated that Pennexx should spend whatever was necessary to make the plant a high-quality

operation.

73. The extent, required expense and critical nature of the required improvements

were never disclosed to Pennexx shareholders or the investing public. Nor was the need to

spend over-budget. Nor was Smithfield’s total control over the Tabor Facility and it’s design

and construction.

74. Approximately six weeks later, on April 1, 2002, Pennexx issued a press release

announcing the Company’s financial results for fourth-quarter and full-year 2001. The press

release quoted defendant Queen, who commented positively about the Company’s prospects and

“an escalating market demand for case-ready meat.” The press release stated in pertinent part:

Pennexx Foods, Inc. (OTC Bulletin Board: PNNX), a leading provider of case-readymeat to retail supermarkets in the Northeast, today reported financial results for thefourth quarter and fiscal year ended December 31, 2001. Revenue for the fourth quarterreached $11.4 million, a 50% increase over the $7.6 million reported for the same quarterlast year.

Earnings (loss) before interest, taxes, depreciation and amortization (EBITDA) was $0.3million for the fourth quarter of 2001 compared to ($2.5) million for the same period lastyear. Net income for the fourth quarter was $0.01 million compared to a net loss of $2.7million for the same quarter last year.

Revenue for the twelve months ended December 31, 2001 was $42.3 million compared torevenue of $13.6 million for the same period last year. Earnings (loss) before interest,taxes, depreciation and amortization (EBITDA) was ($1.9) million compared to ($4.3)


33

million for the same period last year. Net loss in fiscal 2001 was $2.7 million, or $0.14per share, compared with $5.0 million, or $0.52 per share, for fiscal 2000.

"Fourth quarter was the culmination of a transitional year for Pennexx during which weexperienced tremendous growth due to an escalating market demand for case-readymeat," said Michael Queen, president and CEO of Pennexx. "The primary success of thefourth quarter reflected an increase in volume of products handled as well as a favorableproduct mix of higher margin, whole muscle products such as lamb and veal. Along witha solid revenue increase, we realized improved yield and labor efficiency, which resultedin our profit in the fourth quarter." (Emphasis added.)

Queen continued, "We are currently operating at full capacity at the Pottstown facility,which represents increased volume from the fourth quarter of 2001. To be able toaccommodate future growth, we are acquiring a new plant in Philadelphia. When thatnew facility is operational, we expect that the company will be able to processsignificantly higher volumes of meat. From that time onward, as a result of the increasedvolumes, we expect that revenues and results from operations will compare favorably tothe revenues and results of operations for the same periods in prior years."

75. The April 1, 2002, press release repeated the financial results stated in the

Company’s Form 10KSB (hereinafter, “10-K”) Annual Report for 2001, filed March 29, 2002,

with the SEC. The 10-K was signed by defendants Queen and McGreal, among others.

76. Smithfield provided Pennexx a $2 million advance loan through its existing

Credit Agreement with Pennexx to complete the purchase of the Tabor Facility.

77. On April 3, 2002, Pennexx issued a press release announcing that the Company

had closed the acquisition of the new production facility in Philadelphia. The press release

quoted defendant Queen, who again touted the Company’s prospects as a result of the move and

“increasing demand for Pennexx’s case-ready business.” The press release stated in part:

Pennexx Foods, Inc. (OTC Bulletin Board: PNNX), a leading provider of case-readymeat to retail supermarkets in the Northeast, announced that the company has closed onthe acquisition of its new 145,000 square foot facility located on Tabor Avenue inPhiladelphia.

Michael Queen, president and CEO of Pennexx said, "Our move to the new facility is amajor milestone for the company. When operational, the new plant will substantiallyincrease our production capabilities and accommodate the increasing demand for


34

Pennexx's case-ready business. Furthermore, we hope to use the new facility to ramp upour production of higher margin, value-added product lines, so that we can optimize ouropportunities and achieve additional growth." (Emphasis added.)

Mr. Queen added, "After having increased volume from the fourth quarter of 2001, whenwe achieved revenue of $11.4 million, we reached full capacity at our 40,000 square footPottstown facility in the first quarter of 2002. Although the new plant is nearly four timesas large as our Pottstown facility, we expect to achieve higher revenues per square foot ofproduction space in Philadelphia through improved automation and product mix. If weachieve these goals, we expect to end 2002 with a significantly increased annualized rateof revenue as we enter 2003."

78. Contrary to Defendants’ claims regarding the Tabor Facility in the February and

March public filings and press releases, including statements that the Tabor Facility was

“perfectly suited” for its operations and would need only “minimal improvement” and “modest

improvement” to meet escalating demand, Defendants planned a large and complex renovation

to the Tabor Facility. Defendants’ description of the suitability of the Tabor Facility for the

Company’s operations omitted material information concerning the large and complex

renovation that the Tabor Facility was to undergo. Pennexx ultimately admitted the start-up and

transition problems associated with the Tabor Facility significantly contributed to the

Company’s financial problems. As Defendants subsequently acknowledged, problems with

starting and transitioning operations in the Tabor Facility were a primary factor in the

Company’s default under the Credit Agreement with Smithfield. Defendants never disclosed

during the Class Period that Smithfield had total control with respect to the complex renovation,

the inexperience and lack of qualification of Smithfield’s hand-picked engineer, and the

numerous and repeated disagreements between Smithfield and Pennexx regarding the renovation

of the Tabor Facility or Smithfield’s continual acts designed to frustrate the construction,

suitability and efficiency of the Tabor Facility and thus Pennexx’s ability to effectively transition

and operate from the Tabor Facility.


35

79. According to the Pennexx Cross-Claim and Queen Declaration, on April 16-17,

2002, there was a meeting of Smithfield subsidiaries’ presidents during which Smithfield

expressed second thoughts about expanding its joint venture with Pennexx because Smithfield

had lost nearly fifty percent (50%) of its Wal-Mart business, and therefore, Smithfield was able

to completely service its Wal-Mart business from its own case-ready plant in Virginia, i.e.,

without any support from Pennexx. Defendants did not disclose these facts. Defendant Queen

requested that Luter III tour the Tabor Facility, which tour Luter III took approximately two

weeks later and then decided to proceed with the expansion of the joint venture with Pennexx.

A. Misrepresentations Concerning Renovations to the Tabor Facility

80. The renovations to the Tabor Facility began in May 2002 and were scheduled to

be completed by September 15, 2002, with the initial move in to begin in August 2002.

81. Smithfield implanted its own management staff to perform the engineering,

design, contractor selection and supervision for the renovation of the Tabor Facility:

(a) A Smithfield engineer, Robert McClain, was appointed by Smithfield to

be the project manager, despite the fact that he had no prior experience in the design or

construction of a meat processing plant. Moreover, this was McClain’s first significant

project as a Smithfield engineer.

(b) McClain, Luter III and Defendants Luter IV, Cole and Smithfield hired the

subcontractors on the project, instructed them not to take any direction from Pennexx

employees and wrote the specifications for the equipment, engineered the plant, obtained

bids for all the equipment and placed the orders.

(c) Defendants established a capital budget of $18,000,000 to complete the

Tabor Facility, which was ultimately overrun by more than $2 million. As set forth in the


36

Queen Declaration, corners were cut on the implementation of the final portions of the

work, implementation of final portions of the work was increasingly delayed, equipment

orders were cancelled, all, among other things, resulted in significant flaws in the design

and construction of the renovations at the Tabor Facility.

(d) Smithfield refused Pennexx’s repeated requests to put adequate scales and

other equipment in the Facility, even though in its prior relationship with Pennexx

Smithfield had provided Pennexx with water-bloated ham, thereby depriving Pennexx of

the ability to monitor supplies provided by Smithfield or its production yields.

82. On May 15, 2002, Pennexx issued a press release announcing the Company’s

first-quarter 2002 financial results. The press release continued to include positive comments by

Defendants and Defendant Queen about the Company’s prospects as a result of the acquisition

and future move to the Tabor Facility, omitting any disclosures concerning the delay in

Pennexx’s move into the Tabor Facility, and stated in pertinent part, (emphasis added):

Pennexx Foods, Inc. (OTC Bulletin Board: PNNX), a leading provider of case-readymeat to retail supermarkets in the Northeast, today reported financial results for the firstquarter ended March 31, 2002.

Revenue for the first quarter reached $10.9 million, a 36% increase over the $8.0 millionreported for the same quarter last year. Earnings (loss) before interest, taxes, depreciationand amortization (EBITDA) was $0.2 million for the first quarter of 2002 compared to($0.2) million for the same period last year. Net income for the first quarter was $7,450,or $0.00 per share, compared to a net loss of $404.8 thousand, or $0.03 per share for thesame quarter last year.

"During the first quarter of 2002, we operated at maximum capacity, posting solid year-over-year revenue growth. This was our second consecutive quarter of positive EBITDAand net income, demonstrating the viability of our business model," said Michael Queen,president and CEO of Pennexx. "In the first quarter, we also began renovation at our newPhiladelphia facility and expect to begin installation of state-of-the-art automationequipment in the current quarter."


37

Mr. Queen concluded, "We continue to expect that the new plant, which is nearly fourtimes as large as our Pottstown facility, will substantially increase our present capacity,dramatically improve our operating efficiencies and service our growing customer base.In addition, the new facility will enable us to accommodate demand from these customerswho are realizing the benefits of our full complement of case-ready meats. However,during the second and third quarters of 2002, we expect to incur some additionalexpenses resulting from the transition from the Pottstown plant to the Tabor Avenueplant. Once we complete the consolidation into the new facility, we expect to be inproduction by the end of third quarter 2002."

***

83. Also on May 15, 2002, Pennexx filed with the SEC a 10-Q for first-quarter 2002.

It was signed by defendant Queen and included the following statement.

In the opinion of the Company, all adjustments, including normal recurring adjustments,necessary to present fairly the financial position of the Company as of March 31, 2002and the results of its operations and cash flows for the three month period then endedhave been included. The results of operations for the interim period are not necessarilyindicative of the results for the year.

84. A similar statement was included in all subsequent 10-Qs filed by Pennexx. In the

May 15, 2002, 10-Q, Pennexx repeated the financial results reported in the May 15 press release.

85. On May 22, 2002, Defendants, responding to a report on “Dateline NBC,” touted

the Company’s prospects and repeated the financial results included in Pennexx’s press releases

and SEC filings, in a publicly disseminated press release which stated in part:

Pennexx Foods, Inc. (OTC Bulletin Board: PNNX), a leading provider of case-readymeat to retail supermarkets in the Northeast, ("the company") today announced that itscase-ready program supports food safety issues not covered in the Dateline NBC segmentthat aired on Tuesday, May 21st. The segment focused on grocery store chains''backroom' meat departments.

"Case-ready" refers to meat products that can be taken out of a box and put directly into aretailer's meat case without any further processing or packaging. For the consumer, case-ready meat enhances food safety, provides leak-proof packaging and a greater variety ofmeat in stock because the packaging offers longer shelf life. Pennexx Foods cuts,


38

packages, processes and delivers case-ready beef, pork, lamb and veal and the UnitedStates Department of Agriculture ("USDA") inspects the manufacturing process.

The use of Modified atmosphere packaging ("MAP") in case-ready meats creates acontrolled product that is safer for consumers. MAP is the use of deep barrier foam andplastic trays to house the meat and the process of heat sealing the lid tightly, evacuatingthe atmosphere in the package, and replacing it with a non-chemical mixture that includesoxygen and CO2. MAP technology naturally extends shelf life, a benefit to the consumerand the retailer.

Pennexx commenced operations in 1999, as the company recognized the opportunity tostake out a first-to-market position in the emerging market category for case-ready meat.Since then, to meet increased demand and accommodate future growth, the company haspurchased and plans to open a 145,000 square foot state-of-the-art facility on 10 acres inPhiladelphia in the third quarter of this year. Currently all product is processed at afacility in Pottstown, Pennsylvania. Once operational, this new facility will be able toprocess significantly higher volumes of meat. (Emphasis added.)

Mr. Queen [Pennexx president and CEO] continued, "Case-ready was born out of marketdemand. We are committed to meeting the needs of the market and to the education andadoption of MAP case-ready because of the benefits it brings to the consumer and theretailer. As retailers begin to realize the substantial increase in net profitability case readygenerates, Pennexx will service a burgeoning need by increasing store penetration,acquiring new customers and introducing new products to fuel the company's and theindustry's future growth."

On May 15, 2002, Pennexx reported revenue for the first quarter reached $10.9 million, a36% increase over the $8.0 million reported for the same quarter last year. Earnings(loss) before interest, taxes, depreciation and amortization (EBITDA) was $0.2 millionfor the first quarter of 2002 compared to ($0.2) million for the same period last year. Netincome for the first quarter was $7,450, or $0.00 per share, compared to a net loss of$404.8 thousand, or $0.03 per share for the same quarter last year.

***

86. Defendants’ response to the “Dateline NBC” report was greeted positively by the

market. This public statement omitted material information concerning the Tabor Facility and the

fact that delays in completion and costs overruns in the Tabor Facility project resulted in a

severe liquidity crisis for Pennexx, as set forth in the Queen Declaration. Defendants’ statements

concerning the Company’s favorable prospects and the purchase of a new, “state-of-the-art”


39

facility specifically to meet “increased demand and accommodate future growth” raised the price

of Pennexx stock more than ten percent (10%) by the end of trading on May 22, 2002, the same

day that Pennexx disseminated the press release.

87. These May 2002 statements were misleading because they failed to disclose that

the Tabor Facility would not be “state-of-the-art,” , would not improve “operating efficiencies”

(indeed, Pennexx would have no ability to monitor operating efficiencies because Smithfield

refused to put in scales and other monitoring equipment) and that Smithfield exercised total

control over the massive reconstruction of the Tabor Facility and was using an unqualified

engineer to undermine the design and construction of the Facility.

B. Omissions Concerning Pennexx’s Move to the Tabor Facility

88. On June 21, 2002, the Court in Pennexx’s litigation with the Pottstown landlord,

Asousa Partnership, issued an order requiring Pennexx to vacate the Pottstown plant.

89. With knowledge of the Court’s order, Smithfield assured Pennexx that it could

move into the Philadelphia building without delaying the renovation of the plant, according to

the Pennexx Cross-Claim. Pennexx initially occupied 75,000 of the 145,000 square feet of the

Philadelphia plant with a plan to completely occupy the renovated plant and begin production

using the state-of-the-art automation in mid-September 2002, which is the date that Smithfield

had agreed to deliver the plant to Pennexx.

90. On July 11, 2002, Pennexx issued a press release announcing that the Company

had completed the move from its Pottstown plant to a new meat-processing facility in

Philadelphia. Although detailing the purported shortcomings of the Pottstown facility, the press

release omitted, as the Queen Declaration confirms, that “The Company’s financial performance

deteriorated when, due to a dispute with the Pottstown landlord, it was forced to move into the


40

Facility prior to its completion.” In light of this, Defendants omitted material facts concerning

the driving force behind the premature move to the Tabor Facility, instead publicly disclosing

only that: “We are on schedule to install our new customized automation equipment and to

complete renovations of the unoccupied part of the facility by the end of October.” The press

release stated in part:

Pennexx Foods, Inc.(OTC Bulletin Board: PNNX), a leading provider of case-ready meatto retail supermarkets in the Northeast, announced today the completion of its move intoits recently acquired 145,000 square foot facility located in Philadelphia.

The company has closed its Pottstown operations and moved all of its processingequipment into the new plant.

The Pottstown plant grew increasingly inadequate for the company's needs because of thecompany's growth, because of the size and other limitations of the building, and becauseof the landlord's failure to make certain required improvements. These inadequacies ledthe company to purchase the Philadelphia facility in April of this year. Moreover, thecompany's claim that the landlord failed to make required improvements to the Pottstownproperty led to claims and counterclaims in lease litigation, which has been pending foralmost two years. In late June 2002 the judge in the lease litigation issued an orderrequiring the company to vacate the Pottstown plant.

"With demand for our case-ready products expanding, we anticipated the need toexpedite access to the new facility. Before reaching a point where our commitments toour customers suffered, we decided to accelerate our relocation timetable from August toearly July," said Mike Queen, president and CEO of Pennexx. "At this point, havingtransferred and installed existing processing machinery and relocated nearly all of ouremployees, we will initially be occupying 75,000 square feet of the new facility." (Emphasis added.)

Mr. Queen concluded, "We are on schedule to install our new customized automationequipment and to complete renovations of the unoccupied part of the facility by the endof October. Once the consolidation into our new facility is complete, we anticipate thecombination of the larger space and new state-of-the-art equipment will improveproduction flow, reduce our labor costs and improve overall yields. Consequently, weexpect to be in a leadership position to meet the growing demand of case-ready meatfrom our retail customers in the northeast."

91. Defendants also failed to disclose that because Pennexx had to prematurely vacate

the Pottstown plant; Pennexx was forced to prematurely occupy its new Tabor Facility at a time


41

when the Tabor Facility was nowhere close to completion and under circumstances that

prevented Pennexx from being able to transition into the Tabor Facility and operate and manage

its business in the manner it touted it would be able to do so when it moved into the Tabor

Facility or to effect the undisclosed significant renovations in a timely, efficient and effective

manner. Furthermore, Defendants disseminated these public statements which omitted material

information, disclosing that (as set forth in the Queen Declaration) the “delays in completion and

costs overruns . . . resulted in a severe liquidity crisis for the Company.” The allegations of

Pennexx’s Cross-Claim and testimony in Queen’s depositions and declaration belie the notion

that Pennexx was “on schedule” with renovations to the Tabor Facility. They also belie the

notion that “state-of-the-art” equipment would improve production flow and improve overall

yields. In fact, the Facility did not have scales and other equipment to monitor yields, and the

Facility was among the least efficient and poorly designed and engineered layouts according to

the Declaration of Pennexx COO Jeffrey Muchow.


42

Defendants Pressured Pennexx’s New CFO to Under-report Losses

92. On or about May 6, 2002, George B. Pearcy (“Pearcy”) was hired by Pennexx to

serve as Chief Financial Officer of Pennexx. As the CFO of Pennexx, Pearcy was required and

expected to attest to the quarterly reports filed by Pennexx with the Securities Exchange

Commission (“SEC”).

93. Approximately three months later, on August 14, 2002, Pennexx issued a press

release announcing that Joseph Beltrami was appointed as the new chief financial officer,

replacing former CFO George Pearcy who left Pennexx purportedly for “personal reasons.”

94. In fact, the August 14, 2002, press release failed to disclose that CFO George

Pearcy left Pennexx over a dispute with Pennexx, its officers and directors. According to the

verified wrongful termination lawsuit filed by Pearcy in January 2003 in the Court of Common

Pleas of Montgomery County Pennsylvania, Pennexx and Individual Defendants Queen and

McGreal pressured Pearcy to under-report the Company’s losses for second quarter 2002 to the

SEC:

(a) On numerous occasions, Pearcy was informed by Defendant Queen and

other Pennexx officers or management, including Pennexx Chief

Operating Officer Dennis Bland and Individual Defendant McGreal, that

he was permitted to report losses in the range of $800,000 to $1.2 million,

but in no event was he to show losses in excess of $1.2 million.

(b) In anticipation of the filing of Pennexx’s 10-Q on August 14, 2002, on


43

August 8, 2002, Pennexx held a meeting during which Pearcy gave his

financial determinations and that he intended to disclose that Pennexx had

suffered losses of $2.5 million during the quarter being reported.

(c) Upon hearing this, Defendant Queen left the meeting, refusing to accept

the $2.5 million loss.

(d) Pearcy subsequently contacted a Director of Pennexx, a Smithfield

appointed director, and requested a meeting with Pennexx’s Audit

Committee.

(e) On August 12, 2002, Pearcy met with Defendants Queen, Pennexx COO

Dennis Bland and McGreal and gave them his work papers for the 10-Q.

Pearcy was handed a two-page letter which purported to terminate Pearcy

for incompetence.

(f) On August 13, 2002, Pearcy met with a Pennexx Director and the ad hoc

audit committee of Pennexx and told them that the preliminary financial

results showed a quarterly loss of approximately $2.5 million and that he

had been directed by management to report a loss of no more than

$800,000 to $1.2 million.

95. Mr. Pearcy’s allegations were so serious that Defendants caused both Pennexx’s

outside auditor (Kronick Kalada Berdy & Co., P.C.) and Smithfield’s outside auditors (Ernst and

Young) to review them. None of the true facts and circumstances of Pearcy’s departure,

including that there was even a dispute, were timely disclosed by Defendants. Defendants

waited almost eight months -- until Pennexx filed its 2002 Report on Form 10-K with the SEC

on April 1, 2003 -- to disclose the fact of this dispute and any details regarding the dispute.


44

Defendants’ deliberate delay, despite being personally involved in the dispute, spending

significant resources related to investigating the dispute, and getting sued by Pearcy,

demonstrate Defendants acted recklessly and with scienter in utter disregard of their disclosure

obligations pursuant to the federal securities laws.

96. Additionally, at this time, Defendants knew of Pennexx’s operational problems.

According to the Pennexx Cross-Claim, in mid-August 2002 Defendant Queen identified in a

confidential letter dated August 21, 2002 to Defendant Luter IV, Pennexx’s operational problems

and opportunities and proprietary information about Pennexx’s existing and potential customers.

According to the Pennexx Cross-Claim, after receiving this proprietary information, Defendant

Luter IV never followed up in assisting Pennexx with the operational issues. None of the

operational problems were disclosed to Pennexx shareholders or the investing public, again

reflecting Defendants’ scienter and reckless disregard of their disclosure obligations pursuant to

the federal securities laws. Simply put, Defendants repeatedly made contemporaneous

statements and expressed disputes to each other about problems with the Tabor Facility and the

Smithfield/Pennexx relationship that were not disclosed and materially inconsistent with their

disclosures to the investing public.

97. On August 20, 2002, defendants announced Pennexx’s third-quarter 2002 results

in a publicly disseminated press release which stated in part (emphasis added):

Pennexx Foods, Inc. (OTC Bulletin Board: PNNX), a leading provider of case-readymeat to retail supermarkets in the Northeast, today reported financial results for thesecond quarter ended June 30, 2002. Revenue for the second quarter reached $13.6million, a 25% increase over the $10.9 million reported for the same quarter last year.

Loss before interest, taxes, depreciation and amortization (EBITDA) was $2.0 million forthe second quarter of 2002 compared to a loss of $0.8 million for the same period lastyear. The company reported a net loss for the second quarter of $2.2 million, or $0.08 per


45

share, compared to a net loss of $1 million, or $0.07 per share, for the same quarter lastyear.

Revenue for the six months ended June 30, 2002 was $24.5 million compared to revenueof $19.0 million for the same period last year. Loss before interest, taxes, depreciationand amortization (EBITDA) for the first six months of 2002 was $1.7 million comparedto a loss of $1.0 million for the same period last year. The company reported a net loss of$2.2 million, or $0.08 per share, compared with a net loss of $1.4 million, or $0.11 pershare, for the same period last year.

"The second quarter presented the management team with both challenges andopportunities," said Mike Queen, president and CEO of Pennexx Foods. "We expeditedthe move to our new 145,000-square foot facility even as demand exceeded our capacityat the Pottstown facility. To the entire organization's credit, the transfer of existingprocessing machinery and employees was seamless. In addition, we were fortunate tohave access to the production capabilities of our partners at Smithfield Foods to satisfysome of the demand for pork products while we fulfilled orders for red-meat productsfrom our customers. We are deeply appreciative of their support and dedication to ourvision this quarter."

"As expected, these operational challenges led to a spike in operating expenses for thesecond quarter," added Queen. "Since moving into the new facility, we have madeexcellent progress toward completing renovations and have begun installing thecustomized automation equipment required for Pennexx to solidify its leadership positionin the case-ready meat revolution. We remain on schedule to complete the consolidationof the new facility by the end of October."

***

98. It was materially false and misleading for Defendants to cause Pennexx to report a

net loss for second-quarter 2002 of only $2.2 million when Pearcy had calculated a second

quarter net loss of $2.5 million and when such losses actually exceed such amount, as evidenced

in a September 25, 2002 letter to Queen from Smithfield, in which C. Larry Pope (President and

Chief Operating Officer of Smithfield) stated that “[a]fter the close of business last Friday,

September 20, you advised Smithfield that during July and August [Pennexx] experienced

previously undisclosed losses in excess of $1.5 million.”


46

99. These public statements emphasized above were materially misleading in that

they omitted material information known to the Defendants about the facts underlying the Tabor

Facility renovations, Pennexx’s operational problems, the relationship between Defendants

Pennexx and Smithfield, the delay in the completion of the Tabor Facility renovations and

equipment design and installation, the significant problems with the Tabor Facility and the

understated losses reported by Pennexx.

100. The August 20, 2002, press release repeated the financial results stated in the

Company’s 10-Q for second-quarter 2002, filed the previous day, August 19, 2002 and signed by

defendant Queen.

101. Defendants’ public statements--touting the “seamless” transition to the Tabor

Facility, the “excellent progress of the renovations,” that Pennexx “remain[s] on schedule” with

constructing the Tabor Facility, and Pennexx’s purported “appreciati[on]” of the “production

capabilities…support and dedication” of its purported “partner” Smithfield -- stand in stark

contrast to the true facts as they existed in the Fall of 2002. As Defendant Queen set forth in his

Declaration (emphasis added):

(a) Delays in completion and cost overruns . . . resulted in a severe liquidity

crisis for the Company.


47

(b) “Recognizing the Company was undercapitalized, management requested

in the early Fall of 2002 that Smithfield waive a looming covenant default.

Smithfield not only refused to do so, it told the Company it would insist

on “strict compliance” with all loan terms.

(c) At a board meeting of the Company in September 2002, Defendants Luter

and Cole voted against a motion allowing the Company to raise equity

capital to avoid the looming default.

(d) Smithfield’s hand-picked engineer Robert McClain, who had no prior

experience in the construction or design of a beef facility, made it clear to Queen that

Smithfield would totally control the construction of the new facility, including the

specifications for the plant, engineering issues, communications with subcontractors, and

due to cost overruns, McClain began to “cut corners on the implementation of the project

plans,” “increasingly delayed implementation of the final portions of the work,” and

“cancelled an equipment order,” resulting in “significant flaws in the design and

construction of the beef grinding process.”

102. Public statements made during this time omit this material information

concerning Pennexx’s undercapitalization, Pennexx’s operational problems, the looming

covenant defaults and the “severe liquidity crisis.” These omissions were made with scienter.

As reflected in Pennexx’s Cross-Claim, in mid-August 2002 Queen had several discussions with

Defendant Luter IV and C. Larry Pope, (COO of Smithfield), about Pennexx’s financial losses

and Queen’s concern that Pennexx could potentially violate its net worth covenant under the

Credit Agreement with Smithfield


48

103. In September 2002 Pennexx held a marathon four-day Board meeting. According

to the Pennexx Cross-Claim, the original minutes of the meeting were very detailed and reflected

the antagonistic relationship between Pennexx and Smithfield and Smithfield’s conflicting

loyalties as Pennexx Board members and Smithfield officers. Accordingly, Defendants Luter IV

and Cole had Smithfield lawyers revise the minutes and delete many statements reflecting these

facts, which were not disclosed to the investing public. Pennexx admitted in its Cross-Claim

that it agreed to the materially inaccurate revised minutes based on Smithfield’s threat to refuse

to sign an amendment to the Credit agreement unless the parties agreed to the revised, inaccurate

minutes. This conduct reflects the reckless disregard for the truth and scienter on behalf of all

Defendants.

104. On September 25, 2002, approximately two months after moving into the new

facility, Pennexx issued the following press release, which stated in pertinent part:

Pennexx Foods, Inc. (OTC Bulletin Board: PNNX), a leading provider of case-readymeat to retail supermarkets in the Northeast, announced today that the costs of vacatingits former plant in Pottstown, Pennsylvania and of opening its new plant in Philadelphiawill contribute to a loss in the quarter annual period ending September 30, 2002.

Michael D. Queen, President of the Company said, "Because of the magnitude of themove, we estimate that the Company's net loss for July 2002 approximated $1.2 million,and that the net loss for August 2002 approximated $0.3 million. Additional expensesrelated to the relocation, including installation and training costs, will also weigh on theresults of operation for September and October, and possibly, later into the fall."

The Company's July results included a non-cash write-off of approximately $200,000 inimprovements at the Pottstown plant, and an estimated loss of contribution of between$500,000 and $600,000 due to the temporary subcontracting of pork production toSmithfield Foods, Inc. during the move. The Company's accounting policy is to expenseall moving related expenses. This policy has increased the size of the losses as comparedto the amounts which would have been reported if certain of such costs had beencapitalized.

The Company's Board of Directors is considering the raising of additional equity toimprove its balance sheet through an additional equity contribution from Smithfield


49

Foods, Inc. or other third parties. Such an equity infusion would not only improve theCompany's liquidity which has deteriorated due to the losses, but would also providesome additional protection against a potential default under the Company's CreditAgreement (with Smithfield Foods, Inc.), which requires the Company to maintainpositive shareholders' equity. (The Company estimates that shareholders' equity atAugust 31, 2002 was $250,000.) Of course, there is no assurance that such equity will beavailable on terms acceptable to the Company.

Mr. Queen reported that the Philadelphia facility's conversion to new automated,state-of-the-art equipment would be completed within the next 90 days. "From that pointforward," said Mr. Queen, "we expect Company efficiencies to increase substantially andreturn the Company to profitability."

105. The contents of the press release were dictated by Smithfield (through its board

representative Cole).

106. After approximately eight months of Defendants’ positive statements touting

increasing demand for case-ready products, Pennexx’s business prospects and the Tabor Facility

investors reacted negatively to this surprising news, causing Pennexx stock to drop 10.64 % by

the close of trading on September 25, 2002, the day the press release was issued.

107. Despite this significant drop, the price of Pennexx’s stock was still materially

inflated, as the September 25 announcement still failed to disclose the true state of facts as set

forth above, particularly that the Tabor Facility did not have “state-of-the-art equipment” that

could increase “efficiencies” or even have scales or monitoring equipment to ascertain whether

there were efficiencies which there were not. It also failed to disclose that, according to the

Queen Declaration, Smithfield had advised Pennexx it would insist on “strict compliance” with

all loan terms even though at that time Pennexx was “undercapitalized” and in a “severe liquidity

crisis” due to “[d]elays in completion and cost overruns” of the Tabor Facility.

108. After a September 2002 Board meeting, Pennexx continued to seek a waiver from

Smithfield of the potential net worth covenant default resulting from the losses. Smithfield


50

eventually agreed to provide a temporary waiver. In a memo from Smithfield President and COO

Pope, responding to a draft of a press release concerning the waiver provided to Smithfield by

Pennexx, Pope advised that Pennexx should “limit the conversation to discussing Smithfield’s

waiver without a great deal of other information.” Thus, according to the Queen deposition,

consistent with prior practice the wording of an October 4, 2002, press release (see ¶110, below)

was drafted by Pope and Smithfield. Like Smithfield’s total control over the construction of the

Tabor Facility, Smithfield’s ability to dictate terms of Pennexx press releases is reflective of the

control Smithfield exerted over all aspects of Pennexx throughout the Class Period.

109. In a September 25, 2002 letter from Pope to Defendant Queen, Smithfield

outlined no less than six potential events of default under the Credit Agreement, which

consequently Smithfield noted, entitled it to foreclose on the collateral – i.e., Pennexx’s assets.

In this letter, Pope also noted “extraordinary losses are continuing”; there “appears to be a

significant degradation in [Pennexx’s] financial position, results of operations and prospects”;

and “notwithstanding any previous waivers, indulgences, or forbearance extended by Smithfield

to Borrower under the Loan Documents, formal or otherwise, from and after the end of the

Forbearance Period, Smithfield will demand strict compliance by Borrower with all terms of the

Loan Documents.”

110. On October 4, 2002, Pennexx issued a press release concerning the Company’s

compliance problems with its Credit Agreement with Smithfield. The press release stated that

the Company had received a waiver under the agreement, but again, in stark contrast to the

statement in Smithfield’s September 25, 2002 letter, the press release omitted the magnitude of

Pennexx’s liquidity crisis, its ability to continue as a growing concern, operational problems,

degradation in prospects and the problems with the Tabor Facility; thus, the press release grossly


51

failed to disclose and misled the investing public concerning the relationship between Smithfield

and Pennexx. The press release stated as follows:

Pennexx Foods, Inc. (OTC Bulletin Board:PNNX), a leading provider of case-ready meatto retail supermarkets in the Northeast, announced today that it has reached an agreementwith Smithfield Foods, Inc. for an unconditional waiver through October 30, 2002 relatedto a net-worth covenant under the company's credit agreement signed in May 2001between Smithfield Foods, Inc. and Pennexx Foods.

“We are reviewing all of our options to raise additional equity, which we believe wouldgive us the financial flexibility to capitalize on our case-ready initiatives," said MichaelD. Queen, president of Pennexx Foods.

"We continue to work closely with our strategic partner, Smithfield Foods, to solve ourshort-term financial issues and they are cooperating fully with us in this endeavor."

111. According to the Pennexx Cross-Claim, the October 4, 2002, press release was

drafted by Pope and Smithfield, who deliberately instructed the Pennexx Defendants to omit

material information from the release about the Pennexx-Smithfield relationship. Pope wrote to

the Pennexx Defendants: “I believe you should limit the conversation to discussing Smithfield’s

waiver without a great deal of other information.” The Pennexx Defendants followed Pope’s

instructions. Moreover, the characterization of Smithfield as a “strategic partner” was

inconsistent with the Pennexx Defendants’ stated views of the antagonistic relationship between

Smithfield and Pennexx at the time.

112. During the balance of 2002, while suffering through a “severe liquidity crisis,”

Pennexx sought to raise additional capital. As set forth in Pennexx’s Cross-Claim, Pennexx was

unable to secure additional capital contributions from Smithfield, who stood in a position of

lender, controlling shareholder with two representatives on Pennexx’s board, majority vendor,

party to joint business arrangements and who controlled the Tabor Facility renovations. Instead,

over Smithfield’s objections, raised specifically in a November 6, 2002, letter from Defendant


52

Cole to Defendant Queen noting “in light of such waivers, Joe Luter, IV and I believe it would

be highly inappropriate for Pennexx to go forward with any sale of common stock.” Pennexx

raised additional capital in November 2002 through the sale of $2 million of its common stock at

$1 per share to various investors. Additionally, Pennexx sold in December 2002 approximately

$11.9 million of equipment to Commerce Commercial Leasing LLC and leased it back pursuant

to an Operating Lease, resulting in the retiring of Smithfield debt. Further, in connection with

this transaction, Smithfield executed a guaranty of the Commerce operating lease.

113. Pennexx also obtained a second waiver from Smithfield through November 5,

2002.

On November 14, 2002, Pennexx filed a 10-QSB with the SEC, in which it reported:

The Credit Agreement between the Company and Smithfield Foods, Inc. requires,among other things, that the Company maintain positive shareholders’ equitydetermined in accordance with generally accepted accounting principles (the “NetWorth Covenant”). At September 30, 2002, the Company’s shareholders’ equitywas not positive; however, Smithfield waived any defaults relating to compliancewith the Net Worth Covenant to and including November 5, 2002, althoughSmithfield advised the Company that, in the future, it would insist on strictcompliance with the terms of the Credit Agreement. In effect, the Company wasgiven thirty-six days in which to cure what would otherwise have been a default.

To avoid such a default, the Company raised $2.0 million by the sale of shares ofcommon stock in a private placement of securities. . .

By virtue of having raised this equity capital on or before the expiration of theSmithfield waiver, the Company avoided a non-waived Event of Default underthe Credit Agreement at November 6, 2002. If the Company were to have netlosses subsequent to September 30, 2002 in an amount which exceeded $1.5million (representing the difference between the equity raised in the privateplacement and the aggregate shareholders’ deficit at September 30, 2002), theCompany would again be in violation of the Net Worth Covenant. Managementbelieves that the net losses incurred by the Company in the three months endedSeptember 30, 2002 were primarily related to the move from Pottstown toPhiladelphia and the installation of automated processing equipment inPhiladelphia. Because the equipment installation will not be complete until


53

approximately December 15, 2002, Management expects continuing losses intothe fourth quarter of 2002.

114. Again, compared to what Defendants knew at this time, the November 14, 2002

10-Q misleadingly portrays and omits material facts concerning Pennexx’s continuing

“extraordinary losses” and the “significant degradation in [Pennexx’s] financial position.”

115. According to the Pennexx Cross-Claim, during the last quarter of 2002,

Defendants were $2 million over budget on the Tabor Facility. Rather than seek approval from

his superiors at Smithfield to increase the capital required, McClain – Smithfield’s handpicked

engineer -- instructed Pennexx management to surrender $2 million in funds previously

approved for equipment purchases deemed by Smithfield as necessary for production. Pennexx

was instructed to reapply for approval of the equipment. When Pennexx followed the

instructions and reapplied for the equipment funding, the majority of the funding was never re-

approved.

116. Additionally, design flaws in the Tabor Facility and the equipment resulted in for

Pennexx’s inability to operate efficiently:

(a) Smithfield, through its engineer Robert McClain, made the unilateral

decision to deviate from the original plans for the beef grinding operation.

Instead, a smaller and productively inefficient operation that was sub-

standard for any ground meat production was used.


54

(b) Smithfield directed that Pennexx should not grind raw trim (the more

profitable grinding process), and would instead grind chubs (a coarse, pre-

ground and less profitable product) to be purchased from Smithfield’s

subsidiary -- Moyer Packing.

(c) At the same time, Smithfield decided and informed Pennexx that it did not

want Pennexx to compete with its subsidiary, Moyer Packing, which was in

the raw trim grinding business at that time.

(d) As expected by Queen, Pennexx subsequently received complaints from

customers that the ground meat from the chubs did not have adequate shelf

life, and in November 2002 Pennexx notified Smithfield that it would only

grind trim.

(e) After the change, however, Pennexx continued to struggle with and

sustain

losses from the mis-designed grinding operation created by Smithfield.

117. Pennexx, in its November 14, 2002, 10-Q ascribed losses it was experiencing as

“primarily related to the move from Pottstown to Philadelphia and the installation of automated

processing equipment in Philadelphia. Because the equipment installation will not be complete

until approximately December 15, 2002, Management expects continuing losses into the fourth

quarter of 2002.”

118. These statements omitted material facts, known to all Defendants when these

public statements were made, concerning the number of waivers obtained from Smithfield and


55

the true state of the Tabor Facility and that the Philadelphia plant was mis-designed and

belatedly delivered. As Defendant Queen testified at his October 2, 2003 deposition in the

Pottstown landlord action, In re: Asousa Partnership, E.D. Pa. Bankruptcy Case No. 01-12295

DWS, Adversary No. 01-974:

(a) The installation was not merely incomplete, but rather, in late November

2002, “we were running -- still running without equipment and very inefficient. We

didn’t get the equipment in till December or, I’m sorry, the latter part of November that

would have helped us get to where we needed get. And that’s when all the money–

money needs came, because we didn’t get it done in time.”

(b) The fact that the Company had not received the equipment was material

because the grinding and software systems at the factory ultimately proved to be poorly

designed and Smithfield failed to remedy them -- despite repeated complaints by

Pennexx -- until Smithfield seized the factory. The defects in the grinding system led to

“purge and leakage and yield loss. And our business was growing in grinding, we needed

that repaired right away, and we couldn’t get them to react to that.”

119. Construction at the Tabor Facility was substantially completed in January 2003;

however, as set forth in the Pennexx Cross-Claim and Queen Declaration, Pennexx was

experiencing serious operating difficulties caused by flaws in the design and construction of the

project.

120. On January 24, 2003, Defendants Luter and Cole resigned from the board of

directors of Pennexx.

121. On January 30, 2003, Pennexx issued a press release, announcing that it raised

$3.5 million of a board-approved $5 million private placement, in which Defendant Queen stated


56

(emphasis added): “Having recently completed the installation of automated processing lines

and renovation of our new state-of-the-art facilities, we welcome having the additional flexibility

to fund our aggressive growth plans.” This press release was devoid of any mention of any

operation or equipment problems at the Tabor Facility and the severe liquidity crisis and

Pennexx’s antagonistic relationship with Smithfield. Indeed, the press release failed to even

disclose the resignations of Luter IV and Cole. Moreover, the press release was contrary to and

failed to disclose the truth as admitted in Pennexx’s Cross-Claim, that “[w]hen Pennexx

attempted to begin full production in January 2003,” the real time production and inventory data

system that was “vital to Pennexx’s business model” had “ failed to work.” Again, defendants’

scienter with respect to their material non-disclosures is reflected by evidence of their knowledge

of these material non-disclosures in their pleadings, deposition testimony and declarations.

122. On February 12, 2003, Pennexx issued a press release concerning the appointment

of John Kelley to the Pennexx Board, in which Pennexx finally disclosed the resignation of Cole

and Defendant Luter IV from the Pennexx Board of directors and in which Defendant Queen

personally thanked Cole and Defendant Luter IV for “helping to guide Pennexx through its start-

up phase of business . . . during this period we have significantly increased our capacity to meet

the rapidly-growing demand for case-ready meat, fine tuned our business model and production

processes and laid the groundwork for sustained leadership and growth ...” The release failed to

disclose the nature and extent of Pennexx’s antagonistic relationship with Smithfield, the

deficiencies of the Tabor Facility caused by Smithfield, Smithfield’s total control over the

Facility construction, and Smithfield’s conduct designed to undermine Pennexx’s ability to

continue as a going concern.


57

123. On February 18, 2003, Defendants issued a press release over Business Wire,

responding to a February 15, 2003, New York Times article about the case-ready meat industry,

dated. Defendants’ press release, in contrast to the positive comments made by defendant Queen

about Pennexx’s prospects, omits material facts concerning the true state of the Tabor Facility,

that the Tabor Facility was mis-designed and belatedly delivered, the magnitude of Pennexx’s

liquidity crisis, Pennexx’s ability to continue as a growing concern, Pennexx’s operational

problems and the status of the relationship between Smithfield and Pennexx. The press release

stated:

Pennexx Foods, Inc. Comments on the New York Times "Here's the Beef. So, Where'sthe Butcher" Article

PHILADELPHIA--(BUSINESS WIRE)--Feb. 18, 2003 - Pennexx Foods, Inc. (OTCBulletin Board: PNNX - News), a leading provider of case-ready meat to retailsupermarkets in the Northeast, commented on the February 15th article in The New YorkTimes entitled, "Here's the Beef. So, Where's the Butcher?".

The article featured Pennexx in an examination of the rapidly-growing popularity ofcase-ready meat in the Northeast, quoted Mike Queen, Pennexx president and chiefexecutive officer, and cited two of Pennexx' customers, Pathmark and Wakefern FoodCorporation (a cooperative that runs Shop-Rite supermarkets), both of which are foodretailing innovators.

Case ready meat refers to meat products that are delivered to the supermarket alreadytrimmed, cut, packaged and labeled in compliance with USDA regulations. For theconsumer, case-ready meat enhances food safety relative to store-cut meat, which is notsubject to government regulation, and provides leak-proof packaging.

"We are thrilled to have gained recognition of our pioneering role in the case-ready meatrevolution in such a widely-read and thought-leading publication as The New YorkTimes," said Mike Queen, president and chief executive officer. "The article talks abouthow case-ready meat is gaining ground with the involvement of industry giant Wal-MartStores, and reports that brand-name retailers Albertson's, Kroger's and The Great Atlanticand Pacific Tea Company are exploring the case-ready meat alternative."

Pennexx expects to report financial results for the fourth quarter and fiscal year endedDecember 31, 2002 by March 31, 2003. In that report, management expects to reportrevenue for fiscal 2002 between $52 and $54 million. Management also continues to


58

expect to probably more than double revenue in fiscal 2003 relative to 2002. Thesefigures represent a slight clarification to the figures reported in the article.

124. Investors again responded favorably to this press release by Defendants.

Defendants’ February 18, 2003, press release – claiming, among other things, “escalating”

demand, expanded capacity at the Company’s new processing plant and Pennexx’s purported

ability to “capitalize on the inexorable transition to case-ready meat” – sent Pennexx stock up

more than six percent (6%) over the previous day’s close.

125. Despite the fact that Pennexx was experiencing severe business problems, had

material problems with the Tabor Facility, was not in compliance with the Credit Agreement and

had already received waivers from Smithfield in relation to a net-worth covenant under the

Credit agreement and was, in fact, in danger of default, the January 30, February 12 and

February 18, 2003, press releases painted misleading pictures of the state of Pennexx’s business

and the actual events occurring behind the Tabor Facility’s closed doors.

126. These press releases, like their predecessor press releases and SEC filings,

omitted material facts about the problems with the Tabor Facility and conflicts in the relationship

between Smithfield and Pennexx. These material facts were necessary to make the following

statements contained therein not misleading, including:

(i) the touting of the newly renovated and equipped state-of-the-art Tabor Facility,

which would purportedly solve all of Pennexx’s liquidity problems in the long-

term;

(ii) praise and appreciation for Cole and Defendant and Luter IV’s stints as

directors of Pennexx;


59

(iii) future “double revenues”; and

(iv) Pennexx’s ability to expand its production capacity in the Tabor Facility.

127. According to the Beltrami Declaration, no later than March 7, 2003, Pennexx

determined that the cost of meat as a percentage of sales was 77.6%, far more than the 65%

figure in the budget, a primary cause of Pennexx’s loss in excess of budget of approximately

$400,000 for February 2003. The percentage was 75.1% for March and rose to 82.8% for April

2003, causing losses in excess of budget of $ 1.3 million and $ 1.05 million for those months.

The inefficiency of the Tabor Facility and its effect on Pennexx’s operations, results and

prospects was not timely disclosed by Defendants.

128. On March 31, 2003, defendants continued to omit material information and thus

mislead investors in a press release announcing Pennexx’s fourth-quarter 2002 financial results.

The press release misleadingly described 2002 as “a remarkable year of change and progress,”

and touted that “We now have the operational, financial and management building blocks in

place to realize the benefits of our leadership position.” The reality was to the contrary. This

public announcement omits disclosure about the Company’s serious operation problems at the

Tabor Facility, the “severe liquidity crisis” and that Pennexx was in danger of default under the

Credit Agreement. The press release stated in part as follows:

Pennexx Foods, Inc. (OTC Bulletin Board: PNNX), a leading provider of case-readymeat to retail supermarkets in the Northeast, today reported financial results for thefourth quarter and fiscal year ended December 31, 2002.

Revenue for the fourth quarter was $11.1 million, approximately equal to the $11.4million reported for the same quarter last year. Loss before interest, taxes, depreciationand amortization (EBITDA) was $3.8 million compared to EBITDA of $0.3 million forthe fourth quarter of 2001. The company reported a GAAP net loss for the fourth quarterof 2002 of $4.4 million, or $0.16 per share, compared to GAAP net income of $0.01million, or $0.00 per share, for the same quarter last year.


60

Revenue for the twelve months ended December 31, 2002 was $48.7 million, an increaseof 14.9% over the $42.4 million reported for the same period last year. Loss beforeinterest, taxes, depreciation and amortization (EBITDA) was $7.6 million compared to aloss of $1.9 million for the same period last year. GAAP loss in fiscal 2002 was $8.8million, or $0.34 per share, compared to a GAAP net loss of $2.7 million, or $0.14 pershare, for fiscal 2001.

"Pennexx is now in a position to aggressively drive volume growth, as we near thecompletion of our new state-of-the-art production facility. This new facility beganconstruction in the first quarter of 2002 and has approximately 10 times more productioncapacity than our Pottstown, PA plant," said Mike Queen, president and chief executiveofficer. "Due to the start-up expenses and unabsorbed overhead associated with therelocation to this new facility and subsequent installation and training costs, we posted anet loss for the three consecutive quarters involving the relocation."

Recent Highlights

Pennexx:

Moved its operations to a 145,000 square-foot facility in Philadelphia, PA, havingreached full capacity at the 40,000 square-foot Pottstown, PA facility in the first quarterof 2002. Installed automated processing lines and state-of-the-art equipment, completedover 95% of the renovations of the facility, began training employees on the newequipment, and fine-tuned the production processes.

Strengthened the balance sheet by raising a total of $7.0 million in equity through privateplacements, including $2.0 million in November 2002 and followed by an additional $5.0million private placement that was completed on February 28, 2003. Enhanced the seniormanagement team with the appointment of Joseph Beltrami as chief financial officer.

"2002 was a remarkable year of change and progress at Pennexx," said Queen. "Wemoved into a new facility with about four-times as much production space than ourprevious plant while continuing to meet the ever-growing demand for case-ready meat;we substantially completed the renovations at the new facility, and we brought in a newfinance executive to ensure that we have the appropriate financial controls and systems inplace to support rapid growth; and we enhanced our capitalization to support ouraggressive growth plans," added Queen. (Emphasis added.)

"We now have the operational, financial and management building blocks in place torealize the benefits of our leadership position as the retail supermarket industry movesforward in its transition to case-ready meat," continued Queen. "Our performance in 2002only hints at the potential for accelerated growth that lies ahead at Pennexx.

"Assuming capitalization is adequate in 2003, we plan to double revenue by extendingcustomer store penetration, acquiring new customers and expanding our product offering.


61

With the expanded capacity, faster throughput and greater production efficiencies at ournew facility, we can now expect to realize the benefits of our scalable business model,first by turning profitable and then by driving margin expansion through volume gains.We're clearly at an inflection point, given the positive momentum in the industry's rapidtransition to case-ready meat and our capacity to take the company to the next stage ofgrowth," concluded Queen.

***

129. These statements regarding Pennexx’s production ability in the Tabor Facility,

that Pennexx had the “appropriate financial controls,” and the “operation, financial and

management building blocks to realize the benefits of our leadership position” were false and

misleading, and omitted material facts concerning the then-known operational problems with the

Tabor Facility. The notions that Pennexx had achieved “greater production efficiencies” is flatly

contradicted by the Beltrami Declaration, and the notion that Pennexx “expect[s] to realize the

benefits of our scalable business model” is not only contradicted by that Declaration, but

demonstrably false since Smithfield had refused –over Pennexx’s and Queen’s objections—to

put in scales and other equipment so Pennexx could not even determine (on a timely, automated

basis) its production yields, efficiencies, or whether or not it was on track with budgeted

projections.

Smithfield Undermined Pennexx’s Operations By Failing To Remedy Design And Engineering Flaws At The Tabor Facility

130. According to the Queen Declaration and the Pennexx Cross-Claim, Pennexx

began full production in January 2003; key equipment failed to work and the renovations to the

Tabor Facility were structurally inadequate:

(a) The real time production and inventory data system (modified and

installed by Defendants as directed by Smithfield) failed to work. This system was vital

to Pennexx’s business model because it was to allow Pennexx to manage its production


62

yield -- the method by which pricing and profitability are managed in the meat processing

business. Rather than having real time information on meat yields that was critical to

Pennexx’s realization of operating efficiencies, Pennexx had to manage by manual

calculation of monthly summary data.

(b) Smithfield had directed that two scales from the old Pottstown plant be

used in the new system rather than buying the new scales specified by the system

manufacturer. The old scales were unable to properly interface with the real-time

software -- rendering the entire automated system useless. The problem with the scales

could have been rectified by purchasing and installing the manufacturer designated scales

for a mere $20,000. The Smithfield Credit Agreement, however, required that Pennexx

obtain approval from Smithfield for any capital expenditure above $100,000 in any one

year. Pennexx had already exceeded that limit through its $18 million capital

improvement program. Pennexx repeatedly sought approval from Smithfield between

January 2003 and May, 2003, to purchase the proper scales. Although Smithfield agreed

on the need for the scales, and although Pennexx made repeated requests, the Company’s

requests were never approved.

(c) During the construction of the facility, a subcontractor expressly warned

Defendants and Smithfield engineer McClain that pipes in the ceiling, which previously

had carried steam, should be insulated or heated in order to carry water. The pipes were

not insulated or heated. On January 28, 2003, the water pipe system at the Tabor Facility

failed when the pipes froze and burst causing the ceiling in the raw material room to

collapse.


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131. In March 2003, Pennexx hired Donald C. Countryman as Vice President of

Quality Control, who has 33 years of experience in the food industry with extensive experience

in quality assurance and meat processing operations. Countryman easily recognized the well-

known reasons for the poor operating results that Pennexx was experiencing:

(a) Countryman found three principal design and engineering flaws with the

Philadelphia plant: (1) the beef grinding lines had been improperly designed and

engineered; (2) the yield program software created by Smithfield for the purpose of

producing real-time yield data was flawed and failed to work; and, (3) the case sealing

and weighing systems were improperly designed and the case sealing system was

inadequate for the needs of the plant.

(b) Approximately twenty of the problems caused direct losses,

regulatory problems or significant production inefficiencies for Pennexx.

(c) Smithfield’s representatives acknowledged the problems existed, but

refused to correct them.

(d) By April 2003, the yield problem had grown to a total of more than $1

million in losses.

In stark contrast to Defendants positive statements about the Tabor Facility, Countryman

confirmed that the “number and severity of the design flaws…made it virtually impossible for

the Company [Pennexx] to achieve profitability without substantial rework of the plant.”

132. Similarly, Pennexx Chief Operating Officer Jeffrey Muchow (who assumed that

position in April 2003 and prior to that served as a consultant to Pennexx), testified in a

declaration that in “early 2003” he recognized that “the design [of the Tabor Facility] was

improper to achieve efficient results or product yields,” and that “Based on my 21 years of


64

experience in meat processing, I believe that the Company’s beef grinding lines is among the

least efficient and poorly designed and engineered lay-outs I have ever seen. As a result, I

advised the Company that it would be difficult to achieve profitable results without substantial

redesign and investment in additional equipment.” None of these facts were timely disclosed by

Defendants, despite Defendants’ admitted knowledge of those true facts, thereby demonstrating

Defendants’ reckless disregard of their disclosure obligations pursuant to the federal securities

laws and their scienter. Moreover, these true facts were discovered and known to all defendants

long before early 2003.

133. According to the Queen Declaration and Pennexx’s Cross-Claim, on April 17,

2003, Queen, John Kelley (the new Pennexx Director) and Joseph Beltrami (Pennexx’s Chief

Financial Officer) met with Pope at Smithfield’s offices in Smithfield, Virginia to discuss the

problems with the design and construction of the Tabor Facility:

(a) John Kelley explained that Pennexx needed to raise $4-5 million in equity

and hoped that Smithfield would contribute $2 million. Pope agreed to fix all the

problems with the Tabor Facility (including purchase of the $20,000 scales), and to

provide Pennexx a $2 million bond with no interest or principal for two years to enable

Pennexx to raise additional equity.

(b) On April 24, 2003, Pope informed Queen that he had conferred with Luter

III and that Smithfield, contrary to Pope’s promise of the prior week, would not fix the

problems with the facility and would not provide the $2 million bond.

134. In addition, according to the Pennexx Cross-Claim, Pennexx discovered during a

manual production audit (necessitated by the absence of real time yield information) that its

supplier of beef -- Moyer Packing, a subsidiary of Smithfield -- had been delivering to Pennexx


65

less beef than what was being invoiced. In addition, Smithfield, through its Moyer Packing

subsidiary, charged Pennexx more per pound for beef than Moyer Packing was charging its other

customers (who were not affiliated with Smithfield like Pennexx and therefore, if anything,

should have been charged a higher price). Defendants failed to disclose the conduct of its

“strategic partner,” even though this conduct (and the consequences thereof) mirrored

Smithfield’s conduct prior to the class period in supplying Pennexx with water-bloated ham.

135. The delays in the Defendants’ delivery of the plant and the operating

inefficiencies at the Tabor Facility exacerbated Pennexx’s severe liquidity crisis.

136. In a May 2, 2003 Letter from Smithfield to Defendant Queen, Pope noted that “it

appears that your actual loss for the first quarter exceeded $3.1, compared to a budgeted loss of

$1.3 million.”

137. In addition, in the same May 2, 2003 letter, Smithfield noted “We urge you to

give careful considerations, with your counsel, to Pennexx’s public disclosure obligations, and

the individual liability that may flow from a failure to make required disclosure. Frankly, we

were dismayed by the absence of detailed disclosure regarding Pennexx’s looming liquidity

crisis in your most recent earnings release and 10-K.”

138. A letter dated May 7, 2003 from Smithfield to Defendant Queen similarly notes,

“we again urge you to have careful consideration, with your counsel, to Pennexx’s public

disclosure obligations, and the individual liability that may flow from a failure to make required

disclosure.”

139. In a letter dated May 14, 2003 from Smithfield to Defendant Queen, Smithfield

sets forth:


66

Finally, we must question the adequacy and accuracy of your public disclosureregarding this serious matter. For example, you press release of May 8th statesonly that Smithfield “believes” that Pennexx is in default under the CreditAgreement (while, Mr. Beltrami has, in fact, acknowledged the existence of thespecified Events of Default), and neglects to disclose that Smithfield has (i)declared the outstanding principal amount of the Loans and other Obligations dueand payable, (ii) demanded immediate payment of all such amounts and (iii)terminated the Commitment. I must again urge you to give careful considerationto Pennexx’s public disclosure obligations, and the individual liability that mayflow from a failure to provide adequate and accurate disclosure.

140. Neither Pennexx nor Smithfield made any corrective disclosures.

141. On May 19, 2003, Smithfield’s counsel wrote a letter to the court in the Replevin

Action that a Pennexx employee warned Smithfield, against the instructions of his superiors, that

Smithfield should send its auditors to Pennexx’s plant because of inappropriate conduct

occurring there. This letter demonstrates the magnitude of Smithfield’s access to information

about the circumstances at Pennexx and is reflective of the Pennexx Defendants’ scienter with

respect to their conduct.

142. That Smithfield was quite proficient in identifying Pennexx’s disclosure

deficiencies and demanding fuller disclosures during May 2003 (as Smithfield was nearing its

goal of bringing Pennexx to its knees so Smithfield could take over Pennexx’s assets and

business opportunities) demonstrates that Smithfield’s prior conduct in both directing and

acquiescing in Pennexx’s prior material misleading and omissive disclosures was done

recklessly and with scienter.

143. Defendants knew or recklessly disregarded that during the Securities Law Class

Period Defendants’ public statements, press releases and SEC filings as described herein omitted

material facts and were materially false and misleading because, among other things, they failed

to disclose and/or misstated:


67

(a) as verified in the Queen Declaration ¶¶4-5, Pennexx’s prior relationship

with Smithfield (in 2000) ended in disaster when Smithfield provided pork product (for

the critical Wal-Mart account) that was injected with water that was lost during

processing, making the arrangement profitable for Smithfield but unprofitable for

Pennexx;

(b) that as set forth in the Queen Declaration, as of the summer of 2002, the

“delays in completion and costs overruns . . . [of the Tabor Facility] resulted in a severe

liquidity crisis for the Company;”

(c) that no later than the fall of 2002 Queen knew that due to cost overruns,

McClain began to “cut corners on the implementation of the project plans,” “increasingly

delayed implementation of the final portions of the work,” and “cancelled an equipment

order,” resulting in “significant flaws in the design and construction of the beef grinding

process;”

(d) that, according to the Queen Declaration, Smithfield had advised Pennexx

it would insist on “strict compliance” with all loan terms even though at that time

Pennexx was “undercapitalized” and in a “severe liquidity crisis” due to “[d]elays in

completion and cost overruns” of the Tabor Facility;

(e) that, as reflected in a September 25, 2002 letter from Smithfield’s COO

Larry Pope to Queen, Pennexx’s “extraordinary losses are continuing,” and that there was

“a significant degradation in [Pennexx’s] financial position, results of operations and

prospects,” and that Smithfield nonetheless instructed Pennexx to limit and delete this

critical information from Pennexx’s October 4, 2002 press release, which was drafted by

Smithfield;


68

(f) that no later than early 2003 Pennexx had determined that the “number

and severity of the design flaws…made it virtually impossible for [Pennexx] to achieve

profitability without substantial rework of the plant” and that that “the design [of the

Tabor Facility] was improper to achieve efficient results or product yields,” and that the

Tabor Facility’s “beef grinding lines [were] among the least efficient and poorly designed

and engineered lay-outs” in the business;

(g) that Pennexx’s losses for the first quarter of 2003 were $ 3.1 million

compared to a budgeted loss of $ 1.3 million and that Pennexx’s 2002 Report on Form

10-K and related disclosures failed to disclose Pennexx’s “looming liquidity crisis”

despite written warnings from Smithfield to do so;

(h) the nature and extent of the Company’s severe liquidity problems and

continual struggle to maintain liquidity;

(i) the Company’s prospects for growth and increased market demand;

(j) the timing, delay and quality of the renovations and equipment installation

at Tabor Facility;

(k) the denigration of the relationship between Pennexx and Smithfield and

the resultant conflicts;

(l) Smithfield’s control of Pennexx’s business and the Tabor Facility;

(m) the conflicts of interest among Smithfield as a member of Pennexx’s board

of directors, a controlling shareholder and creditor, and Pennexx and its officers, and the

Class.

(n) that Pennexx’s limited distribution capabilities negatively affected the

Company’s ability to take advantage of expansion in the case-ready meat industry;


69

(o) that the Company’s former CFO had left the Company, not for personal

reasons as claimed, but rather because of a dispute concerning the Company’s reporting

of losses for second quarter 2002 to the SEC;

(p) the under-reporting of the Company’s losses for second quarter 2002 to

the SEC;

(q) Pennexx’s imminent default under the Credit Agreement

(r) the extent, magnitude and consequences of Pennexx’s defaulting under the

terms of the revolving Credit Agreement with Smithfield;

(s) that the court order to vacate its Pottstown facility resulted in a premature

move to the Tabor Facility before the Tabor Facility (or Pennexx) was ready for that

move, thereby causing significant transitional problems and construction problems at the

Tabor Facility;

(t) that the Company was in a severe liquidity crisis and in default under the

terms of the Smithfield Foods Credit Agreement, an event that would allow Smithfield to

seize the collateral for the loan, including all of Pennexx’s tangible property, effectively

terminating the business.

(u) that the Tabor Facility was not “state-of-the-art” and that rather than

requiring “minimal” improvements in order to meet Pennexx’s needs, the Tabor Facility

required a significant design and construction overhaul (over $18 million) requiring a

minimum of five months conducted by a skilled engineer;

(v) that the Tabor Facility was not going to be designed to meet Pennexx’s

“specifications” -- instead Smithfield would have total control over the funding and

engineering overhaul of the Tabor facility, leaving Pennexx at Smithfield’s mercy and


70

subject to being undermined by Smithfield having the Tabor Facility constructed to

satisfy Smithfield’s specifications and current and future needs, rather than Pennexx’s;

and

(w) that Smithfield intended to undermine Pennexx by, inter alia,

misdesigning and delaying construction of the Tabor Facility, including refusing to put in

scales and other equipment, delaying implementation of the final stages of work,

canceling equipment orders, and cutting corners on project plans, and constructing the

Facility in a manner to permit Smithfield’s subsidiaries to overcharge Pennexx for

product and once Pennexx recognized Smithfield’s true intentions, interfering with

Pennexx’s ability to raise capital and bring in investors to remove Smithfield as

Pennexx’s dominant shareholder and primary lender and supplier.

THE TRUTH IS REVEALED

144. On May 8, 2003, Defendants revealed some—but not all--of the truth about the

Company’s severe liquidity crisis and insufficient demand in a press release announcing the

Company’s first-quarter 2003 financial results. The press release shocked the market by

disclosing that Smithfield Foods had declared Pennexx to be in default under the Credit

Agreement, an event that would allow Smithfield to seize and sell the collateral for the loan,

including all of Pennexx’s tangible property, effectively terminating the business. Ultimately,

despite Defendants’ repeated claims about the “seamless” transition to the “state-of-the-art”

Tabor Facility (which was purportedly “perfectly suited” to Pennexx’s needs and required

“minimal” and “modest” renovations) and the Company’s ability to utilize capitalize on

increasing market demand, especially with the new Tabor Facility, Pennexx was actually in a

severe liquidity crisis; the market demand never materialized, and the Tabor Facility, which


71

Defendants unwaveringly claimed would enable Pennexx to become an industry leader, was

blamed as a primary factor in the Company’s default. The press release stated as follows:

Pennexx Foods, Inc. Announces First Quarter Results and That Lender ClaimsDefault under Credit Agreement PHILADELPHIA--(BUSINESS WIRE)--May 8, 2003--Pennexx Foods, Inc.(OTC BB:PNNX), a leading provider of case-ready meat to retail supermarkets inthe Northeast, today reported financial results for the first quarter ended March31, 2003.

Pennexx also announced that its lender, Smithfield Foods, Inc., has sent Pennexxa notice of default under the Credit Agreement between the two parties.

Revenues for the three months ended March 31, 2003 were $12.8 millioncompared to $10.9 million in the comparable period of 2002, an increase of $1.9million or 17.4%. The Company had a net loss of $3.1 million in the three monthsended March 31, 2003 compared to net income of $0.007 million in thecomparable period of 2002. Management attributes the magnitude of the lossprimarily to extremely poor yields on meat products due to the start-up of the newplant, and to a material increase in Indirect and General and Administrativeexpenses, offset in part by labor efficiencies due to the usage of the automatedequipment. As a result of the first quarter loss and continuing losses subsequent tothe end of the quarter, the Company has virtually depleted its cash resources.

By letter received by Pennexx on May 8, 2003, Smithfield advised the Company thatSmithfield believed Pennexx to be in default of several provisions of the CreditAgreement and that Smithfield intended to exercise its remedies thereunder.

The Company has opened a dialogue with potential investors and the Board of Directorsof Pennexx is meeting to consider the Company's options.

***

145. Investor reaction to the news of Pennexx’s financial problems and its shocking

default under the Company’s Credit Agreement with Smithfield was sharply negative. By the

close of trading on May 8, 2003, Pennexx’s stock price had plunged more than fourteen percent

(14%) from the previous day’s close as a result of this news.


72

146. Furthermore, according to the Queen Declaration and the Pennexx Cross-Claim, on May

13, 2003, Pennexx entered an arrangement with White Rose Food whereby White Rose agreed to take

over the meat purchasing and inventory and receivable ownership of Pennexx. White Rose would

purchase meat and contract Pennexx to fabricate it to Pennexx customers’ specifications. Pennexx

would deliver the finished product to its customers and charge White Rose a fee. Pennexx was then paid

by White Rose after it collected the receivables from Pennexx’s customers. Smithfield -- through its

Moyer Packing subsidiary -- refused to ship meat to Pennexx on a White Rose purchase order unless

White Rose wired payment for the shipment in advance. This requirement was wholly unreasonable, as

at the time, White Rose was already a customer of Smithfield, and Smithfield had not required

prepayment on any other White Rose orders. On one occasion, Moyer refused to deliver a meat

shipment to Pennexx unless White Rose paid for the shipment in advance. The truck was ordered to sit

at Pennexx’s loading dock all day until it eventually left without being unloaded, which resulted in

overtime costs and additional expenses and Pennexx being unable to fulfill its customers’ orders that

day.

147. On May 15, 2003, Pennexx issued the following press release concerning the default,

though still noting that the company is discussing financial alternatives that would “enable the Company

to obtain a Smithfield forbearance”:

. . . Smithfield Foods, Inc., has advised the Company of its intention to sell thecollateral for its loan on May 30, 2003 unless Smithfield receives immediatepayment of all amounts due under the loan (approximately $11.5 million plussatisfaction of the Smithfield guaranty of the operating lease for approximately$11.9 million) or unless the parties reach another mutually satisfactory resolutionof the matter.

The Company is discussing financial alternatives with potential investors whichwould enable the Company to obtain a Smithfield forbearance agreement, oralternatively, to repay the Smithfield obligations in full. Although certaininvestors have expressed preliminary interest in making such an investment, there


73

is no assurance that the Company will succeed in this effort. Any such investmentmay be dilutive to existing shareholders.

* * * *

The Company is past due by 15 days on an interest payment due to Smithfield andalso failed to make a required prepayment of the excess loan advance created as aresult of reductions in the Company’s eligible inventory and eligible accountsreceivable. The Company is also in default on the net worth covenant under theSmithfield credit agreement. The sale of the collateral, if it should occur, would,in effect, terminate the Company’s business.

The Company also failed to pay its monthly operating lease payment toCommerce, which was due on May 1, 2003 in the amount of approximately$151,000.

148. As a result of this shocking news contained in the May 15, 2003 press release, by

the close of trading that day Pennexx stock dropped more than thirty-two percent (32%).


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Replevin Action

149. On May 19, 2003, Smithfield commenced a replevin action against Pennexx in

the U.S. District Court for the Eastern District of Pennsylvania, Civil Action No. 03-3155.

150. Also on May 19, 2003, Smithfield commenced an action against Pennexx’s

mortgaged property in the Court of Common Pleas of Philadelphia County, May Term 2003,

Action No. 2218.

151. On May 20, 2003, Pennexx announced in a press release:

. . . that its lender, Smithfield Foods, Inc., had entered a judgment by confessionagainst the Company in the Court of Common Pleas of Philadelphia County,Pennsylvania with respect to the Company’s plant. Under the rules of Court, theCompany has until June 18, 2003 to interpose a defense and to seek to open thejudgment or alternatively, to repay the Smithfield loan in full. If the Companyfails to make such payment or to open the judgment, Smithfield will be able topromptly thereafter to complete foreclosure of the plant.

The Company also announced that Smithfield had simultaneously filed an actionin the United States District Court for the Eastern District of Pennsylvania toseize tangible personal property of the Company. . . . Because the Company’stangible personal property is essential to the Company’s continuing operations, ifSmithfield were to prevail in its request for immediate possession of thiscollateral, the Company would be unable to remain in operation.

The Company has engaged an investment banker, Morgan Joseph & Co., Inc., andis in discussions with potential investors who have expressed interest in makingan investment in the Company sufficient to repay the Smithfield loan; however,no one thus far has committed to do so, and there is no assurance that theCompany will succeed in this effort.

152. On or about May 21, 2003 according to the Pennexx Cross-Claim, Smithfield,

solicited the case-ready pork business of Pathmark -- Pennexx’s largest customer --by offering to

significantly undercut the prices which Pennexx was charging to Pathmark.

153. On May 21, 2003, the federal court had a hearing on Smithfield’s replevin action

against Pennexx. During the hearing, in attendance were Pope and Richard J.M. Poulson,


75

Executive Vice President of Smithfield and Senior Advisor to the Chairman of Smithfield (Luter

III). During the hearing, Poulson adamantly rejected any discussion of settlement and insisted

on Smithfield’s right to receive the property and to proceed with a sale of the property.

154. On May 22, 2003, following an emergency hearing in the Replevin Action, the

District Court entered an Order directing the Clerk of Court to issue a Writ of Seizure directing

the U.S. Marshall to seize all tangible property located at the Tabor Facility.

155. Smithfield then offered Pennexx the opportunity to enter into a Forbearance

Agreement under very onerous terms -- the most offensive of which, sought a release from any

legal claims that Pennexx’s shareholders had against Smithfield.

156. At the same time, Lampe Conway and another investor agreed to provide

Pennexx with the $13 million in funds needed to fully pay off Smithfield during the forbearance

period:

(a) The investors agreed to fund a $13 million debt and warrant investment to

repay Smithfield’s funded debt plus additional amounts.

(b) Commerce Commercial also agreed to allow Pennexx to make a $151,000

payment to bring the equipment lease current, which meant that it would no longer be

necessary to pay Smithfield the $11.9 million for its guaranty of the lease.

(c) Pennexx’s default with Smithfield would be cured, and Pennexx would

have time to find a substitute guarantor for the Commerce Commercial lease.

(d) Pennexx’s newly engaged investment banker, Morgan Joseph & Co., Inc.,

also would have time to raise $10 million -- $5 million for past due operating payables,

$2 million for additional necessary equipment and $3 million in working capital.


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(e) Pennexx negotiated a preliminary letter of intent with Beef Products, Inc.

to replace Smithfield on its guaranty of the Commercial Operating lease, and Swift

Brands, Inc. also delivered a preliminary letter of intent to replace Smithfield on the

guaranty;

(f) The Pennsylvania Anti-Hostile Takeover law, however, became a problem

for the Lampe Conway investors. The law mandated that the group of “White Knight”

investors must be considered as one, and therefore, their ownership would have been in

excess of the 20% limit under the law.

(g) For any future issue requiring shareholder vote, Smithfield would be

entitled to vote its entire 40.1%, while the new investors would be limited to 20% voting

rights.

(h) Any options to address these and other impediments required the

cooperation of Smithfield as a shareholder, and an extension of time from Smithfield.

(i) Smithfield was unwilling to sell its Pennexx stock, and made its position

clear to Pennexx and to Swift, apparently choosing to bankrupt Pennexx and take over its

assets instead of getting repaid on its outstanding loans and receiving compensation for

its stock, which is now worthless (but for the fact Smithfield, in essence, now owns the

entire Company).

157. On May 29, 2003, Pennexx entered into a Forbearance Agreement with

Smithfield, under the terms of which, Pennexx was required: (1) to pay Smithfield $13 million

by June 9, 2003; (2) to provide Smithfield a release of its guaranty on the Commerce

Commercial lease by June 18, 2003; and, (3) to provide for itself and its shareholders and


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affiliates a release of Smithfield from all obligations and liabilities other than those set forth in

the Forbearance Agreement.

158. In exchange, Smithfield was required: (1) to forebear from exercising any of its

rights or remedies until June 18, 2003 provided that Pennexx did not default on the terms of the

Forbearance Agreement, and (2) not to take any action to prevent or make more difficult the

redomestication and recapitalization of Pennexx.

159. The Securities Law Class Period ends on June 12, 2003, when Pennexx filed a

form 8-K with the SEC stating that Smithfield had seized all of the personal property assets of

Pennexx and sold them to a corporation owned or controlled by Smithfield Foods. The Form 8-

K stated that “Pennexx owns no remaining tangible personal property and is unable to continue

its business” as a result of the defaults pursuant to which “Pennexx issued a deed in lieu of

foreclosure to the [Tabor Facility]” and Smithfield “sold substantially all of the personal

property assets of Pennexx” to a corporation owned or controlled by Smithfield. By the close of

trading that day, Pennexx stock dropped more than fourteen percent (14%) as a result of this

shocking news.

Smithfield is Liable as the Successor to Pennexx’s Business

160. Thus, approximately two years after Smithfield had purchased 50% percent of Pennexx

and less than one year after Pennexx’s highly touted move to a new facility, Smithfield took control over

all the Company’s assets and transferred them to a Smithfield Foods-owned corporation, ending

Pennexx’s ability to continue its operations. Pennexx’s Form 8-K stated as follows:

As a result of defaults under the Credit Agreement dated June 27, 2001,between Smithfield Foods, Inc. ("Smithfield") and Pennexx Foods, Inc.("Pennexx"), on June 11, 2003, Pennexx executed a deed in lieu of foreclosure tothe Pennexx plant located at 5501 Tabor Avenue, Philadelphia, PA. At the requestof Smithfield, the deed was delivered to a Delaware corporation owned or


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controlled by Smithfield.

In addition, Smithfield has advised Pennexx that Smithfield has soldsubstantially all of the personal property assets of Pennexx in a private saleto such Delaware corporation.

As a result of these transfers, Pennexx owns no remaining tangiblepersonal property and is unable to continue its business.

161. Smithfield’s 10-Q for the period ended July 27, 2003, filed on September 10,

2003 summarizes these events as follows:

In May of fiscal 2004, the Company notified Pennexx Foods, Inc. (Pennexx), a41% owned case-ready meat provider, that it was in default under a $30.0 millionline of credit agreement. At that time, the Company terminated its commitment tomake further loans under the credit agreement and demanded repayment of $11.9million, the amount outstanding. In June of fiscal 2004, the Company tookpossession of Pennexx’s assets due to Pennexx’s inability to pay amounts owed tothe Company under the credit agreement. The Company also assumed $12.1million of Pennexx equipment lease obligations. The Company is evaluating thevalue of the underlying assets securing this credit agreement and operating theseassumed assets under the name Showcase Foods, Inc. as part of the Beef segment. The Company believes that the value of these assets will approximate the amountof the outstanding receivable under the credit agreement.

162. Similarly, Smithfield’s 10-K for Fiscal Year ended April 27, 2003, filed on July

23, 2003, notes that in June 2003, Smithfield formed Showcase Foods, Inc. and, under a security

interest, took possession of substantially all of the assets of Pennexx.

163. Thus, after taking possession of Pennexx’s Philadelphia plant, Smithfield did not

sell it. Rather, Smithfield began operating the plant through a new Smithfield entity called

Showcase.

164. In taking over the Pennexx operation, Smithfield kept the same union, the same

employees, the same phone lines, the same customers, and tried to keep the same management.

165. All of Pennexx’s assets, receivables, money and funds were taken by Smithfield.

166. The Tabor Facility and the new and old equipment was taken over by Smithfield.


79

167. As Queen, who remained at the Tabor Facility for two weeks after Smithfield

took over, testified during his deposition:

(a) the Tabor Facility was operating and producing meat products. On the day

that Smithfield took over, business continued as normal;

(b) There was an agreement that Smithfield made with Pennexx’s largest

customer whereby there would be no disruption in service;

(c) Smithfield continued to do business with all of Pennexx’s customers.

(d) Smithfield kept and continued to pay certain vendors, including the phone

company, electric company and insurance policies;

(e) Smithfield kept substantially all of the Pennexx employees. Pennexx

operated a “union plant,” with approximately 200 union employees. Smithfield met with

the president of the union, negotiated a contract and took over Pennexx’s existing union

contract with very few changes, keeping the rates and all senior employees. Substantially

all of the union employees who were previously with Pennexx went to work for

Smithfield.

(f) Pennexx Officer Bland remained with Smithfield; and

(g) Smithfield continued to use Pennexx’s United States Department of

Agriculture license, an inspection legend number.

SCIENTER ALLEGATIONS

168. As alleged herein, Defendants acted with scienter in that Defendants knew that

the public documents and statements issued or disseminated in the name of the Company omitted

material facts and were materially false and misleading; knew that such statements or documents

would be issued or disseminated to the investing public; and knowingly and substantially


80

participated or acquiesced in the issuance or dissemination of such statements or documents as

primary violations of the federal securities laws.

169. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of

information reflecting the true facts regarding Pennexx, their control over, and/or receipt and/or

modification of allegedly materially misleading misstatements and/or their associations with the

Company which made them privy to confidential proprietary information concerning Pennexx,

participated in the fraudulent scheme alleged herein.

170. Indeed, Queen’s scienter and his understanding that he was subject to liability for

violation of the federal securities laws is further reflected by the fact that at his deposition he

testified his “biggest concern was to make sure that [Smithfield] paid the D and O [Directors and

Officers] insurance.”

171. Defendants publicly disseminated statements to the investing public are

contradicted by their contemporaneous statements/conduct/beliefs as reflected in Defendants’

own depositions, declarations, letters, and pleadings as set forth in detail herein.

Applicability Of Presumption Of Reliance: Fraud-On-The-Market Doctrine

172. At all relevant times, the market for Pennexx securities was an efficient market

for the following reasons, among others:

(a) Pennexx’s stock met the requirements for listing, and was listed and

actively traded on a highly efficient and automated market;

(b) As a regulated issuer, Pennexx filed periodic public reports with the SEC;

(c) Pennexx regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations of press releases


81

on the Pennexx website, national circuits of major newswire services and through other wide-

ranging public disclosures, such as communications with the financial press and other similar

reporting services; and

(d) Pennexx was followed by securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain

customers of their respective brokerage firms. Each of these reports was publicly available and

entered the public marketplace.

173. Pennexx’s stock was traded on an open market in which a large number of

persons buy and sell. In a February 8, 2002 Pennexx press release, Defendant Queen was quoted

as stating “Trading our common stock on the OTC Bulletin board is a significant milestone for

Pennexx and enable us to reach a broader investor audience.”

174. Pennexx’s stock was traded on a developed and efficient market with relatively

high level of activity and frequency, for which trading information, including price and volume,

is widely available, and which rapidly reflects new information in price.

(a) According to the OTC Bulletin Board website,

(http://www.otcbb.com/aboutOTCBB/overview.stm#abouthistory, December 14, 2003),

the OTC Bulletin board (“OTCBB”) provides access to more than 3,600 securities,

includes more than 330 participating Market Makers, electronically transmits real-time

quote, price and volume information in domestic securities, foreign securities and ADRs,

and displays indications of interest and prior-day trading activity in DPPs.

(b) The following OTCBB data is disseminated through market data vendor

terminals and Web sites for display to customers worldwide: a) dynamic last-sale and

volume information for domestic securities, foreign securities and ADRs; b) end-of-day


http://www.otcbb.com/aboutOTCBB/overview.stm#abouthistory

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high, low, close, and volume on DPPs; c) bids, offers, and indications of interest

displayed by specific Market Makers; d) inside quotes for domestic securities, foreign

securities and ADRs when available; e) indicative quotes for DPPs; and f) Market

Makers' telephone numbers.

175. Pennexx’s average weekly trading volume during the Class Period creates a

presumption of an efficient market.

176. There was a cause and effect relationship between unexpected corporate events

and/or financial releases and an immediate response in Pennexx’s stock price:

(a) Investors reacted highly favorably to the news stated in the February 8,

2002, press release, including the news about a “growing demand” for case-ready meat,

the Company’s purportedly “excellent” business prospects and Smithfield Foods’ “$36

million commitment” – an amount that should eliminate any liquidity issues for several

years, based on the Company’s historicals. By the close of trading on that day, Pennexx

stock had shot upward more than twenty-six percent (26%) as a result of this news.

(b) Pennexx’s response to the “Dateline NBC” report, which included false

and misleading statements, was greeted positively by the market. Defendants’ statements

concerning the Company’s favorable prospects and the purchase of a new, “state-of-the-

art” facility specifically to meet “increased demand and accommodate future growth”

raised the price of Pennexx stock more than ten percent (10%) by the end of trading on

May 22, 2002, the same day that Pennexx disseminated the press release.

(c) Defendants’ February 18, 2003, press release--claiming, among other

things, “escalating” demand, expanded capacity at the Company’s new processing plant


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and Pennexx’s purported ability to “capitalize on the inexorable transition to case-ready

meat” – sent Pennexx stock up more than six percent (6%) over the previous day’s close.

(d) Investor reaction to the news of Pennexx’s financial problems and its

shocking default under the Company’s Credit Agreement with Smithfield was sharply

negative on the day of the announcement, May 8, 2003. By the close of trading on May

8, 2003, Pennexx’s stock price had plunged more than fourteen percent (14%) from the

previous day’s close as a result of this news.

(e) As a result of this news contained in Pennexx’s May 15, 2003 press

release concerning the defaults, by the close of trading that day Pennexx stock dropped

approximately thirty-two percent (32%) as a result of this news.

177. Based on the foregoing, the market for Pennexx’s securities promptly digested

current information regarding Pennexx from all publicly available sources and reflected such

information in Pennexx’s stock price. Under these circumstances, all purchasers of Pennexx

securities during the Class Period suffered similar injury through their purchase of Pennexx

securities at artificially inflated prices and a presumption of reliance applies.

NO SAFE HARBOR

178. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many of the specific statements pleaded herein were not identified as "forward-looking

statements" when made. To the extent there were any forward-looking statements, there were no

meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the purportedly forward-looking statements. Alternatively, to the

extent that the statutory safe harbor does apply to any forward-looking statements pleaded


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herein, defendants are liable for those false forward-looking statements because, as reflected in

the pleadings, depositions, declarations and correspondence of Defendants (and their agents or

employees) at the time each of those forward-looking statements was made, the particular

speaker knew that the particular forward-looking statement was false, and/or the forward-looking

statement was authorized and/or approved by an executive officer of Pennexx who knew that

those statements were false when made.

COUNT I

Violations of Section 10(b) of the Exchange Act And Rule 10b-5 Promulgated Thereunder Against Pennexx and The

Individual Defendants (Queen, McGreal, Luter IV and Cole)

179. Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein.

180. This count, Count I, is asserted against Pennexx and the Individual Defendants for

violations of Section 10(b) of the Securities Exchange Act of 1934, 15 USCS § 78j (2003)

(“Section 10(b)”) and Rule 10b-5, 17 C.F.R. 240.10b-5, (“Rule 10b-5”), promulgated thereunder.

181. Section 10(b) provides in relevant part that:

It shall be unlawful for any person, directly or indirectly, by the use of anymeans or instrumentality of interstate commerce or of the mails, or of any facilityof any national securities exchange--

* * *

(b) To use or employ, in connection with the purchase or sale of anysecurity registered on a national securities exchange or any security not soregistered, . . . any manipulative or deceptive device or contrivance incontravention of such rules and regulations as the Commission may prescribe asnecessary or appropriate in the public interest or for the protection of investors.

182. Rule 10b-5 provides that:


85

It shall be unlawful for any person, directly or indirectly, by the use of anymeans or instrumentality of interstate commerce, or of the mails or of any facilityof any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state amaterial fact necessary in order to make the statements made, in the light of thecircumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates orwould operate as a fraud or deceit upon any person, in connection with the purchase orsale of any security.

183. During the Securities Law Class Period, defendants disseminated or approved the

false statements specified above, which they knew or recklessly disregarded were materially

false and misleading in that they contained material misrepresentations and failed to disclose

material facts necessary in order to make the statements made, in light of the circumstances

under which they were made, not misleading.

184. Defendants violated Section 10(b) and Rule 10b-5 in that they:

a. Employed devices, schemes and artifices to defraud;

b. Made untrue statements of material facts or omitted to state material facts

necessary in order to make statements made, in light of the circumstances under which

they were made not misleading; or

c. Engaged in acts, practices and a course of business that operated as a fraud

or deceit upon plaintiff and others similarly situated in connection with their purchases of

Pennexx publicly traded securities during the Securities Law Class Period.

185. Plaintiff and the Securities Law Class have suffered damages in that, in reliance

on the integrity of the market, they paid artificially inflated prices for Pennexx publicly traded

securities. Plaintiff and the Securities Law Class would not have purchased Pennexx publicly


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traded securities at the prices they paid, or at all, if they had been aware that the market prices

had been artificially and falsely inflated by defendants' misleading statements.

186. As a direct and proximate result of these defendants' wrongful conduct, plaintiff

and the other members of the Securities Law Class suffered damages in connection with their

purchases of Pennexx publicly traded securities during the Securities Law Class Period.

187. Pennexx and the Individual Defendants should be held jointly and severally liable

for violations of Section 10(b) and Rule 10b-5.

COUNT II

Violations of Section 20(a) of The Exchange Act Against Smithfield Foods and the Individual Defendants (Queen, McGreal, Luter IV and Cole)



189. This count, Count II, is asserted against defendant Smithfield Foods and the

Individual Defendants and is based upon Section 20(a) of the 1934 Act.

190. Section 20(a), 15 U.S.C.§ 78t(a),of the Securities Exchange Act provides:

Every person who, directly or indirectly controls any person liable under anyprovision of this title or of any rule or regulation thereunder shall also be liablejointly and severally with and to the same extent as such controlled person to anyperson to whom such controlled person is liable, unless the controlling personacted in good faith and did not directly or indirectly induce the act or actsconstituting the violation or cause of action.

191. Smithfield and the Individual Defendants possessed, directly or indirectly, the

power to direct or cause the direction of the management and policies of Pennexx, whether

through their day to day participation in the management of Pennexx, through their involvement

in the financial matters of Pennexx, through their ownership of voting securities, through their


87

status as controlling shareholder, by contract, and/or through their positions as senior officers

and/or directors.

192. Thus, Smithfield and the Individual Defendants, by virtue of their offices,

directorships, stock ownership and specific acts were, at the time of the wrongs alleged herein

and as set forth in Count I, controlling persons of Pennexx within the meaning of Section 20(a)

of the 1934 Act. Defendants had the power and influence and exercised the same to cause

Pennexx to engage in the illegal conduct and practices complained of herein by causing the

Company to disseminate the false and misleading information referred to above.

193. The Defendants’ position made them privy to and provided them with actual

knowledge of the material facts concealed from Plaintiffs and the Class. Additionally, Pope

personally wrote and rewrote some of the statements issued in Pennexx’s name and caused

material information to be omitted from such statements.

194. By virtue of the conduct alleged in Count I, the Defendants are liable for the

aforesaid wrongful conduct and are liable to Plaintiff and the Class for damages suffered.


88

COUNT III

Breach of Fiduciary Duty Against Defendant Queen

195. Plaintiff repeats and realleges each and every allegation contained

above as if fully set forth herein.

196. This count, Count III, alleging breach of fiduciary duty, is asserted against

Defendant Queen as an officer of Pennexx.

197. As an officer of Pennexx, Defendant Queen stood in a fiduciary relationship to

the Pennexx shareholders and owed the Pennexx shareholders the duty of care, diligence, and

good faith.

198. Defendant Queen breached those fiduciary duties by, in his capacity as an officer

(President) of Pennexx, entering into a Forbearance and Peaceful Possession Agreement dated

May 29, 2003 (“Forbearance Agreement”) with Smithfield, that provided for a broad and general

release of Smithfield from liability for claims against Smithfield not only by Pennexx

individually, but also purportedly provided a release of claims against Smithfield possessed by

Pennexx stockholders. In contravention of his fiduciary duties as a Pennexx officer (President),

Queen purported to cause Pennexx shareholders, who were not even a party to the Forbearance

Agreement, and thus cannot be bound by it, to be stripped of their legal rights without their

knowledge or consent and without authority to do so.

COUNT IV

Breach of Fiduciary Duty Against Defendant Smithfield Foods

199. Plaintiff repeats and realleges the allegations contained above as if fully set forth

herein.


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200. This count, alleging breach of fiduciary duty, is not based on any allegation

herein alleging untrue statements or omissions of a material fact in connection with the purchase

or sale of Pennexx’s securities. Rather it is based solely on conduct and actions taken by

Smithfield.

201. This count, Count IV, alleging breach of fiduciary duty, is asserted against

Smithfield Foods as a controlling shareholder, primary lender and supplier of Pennexx.

202. At relevant times, Smithfield was a controlling shareholder, primary lender and

supplier of Pennexx standing in a fiduciary relationship with the Fiduciary Class. Based on at

least the following, Smithfield was a controlling shareholder of Pennexx thereby owing fiduciary

duties to the non-controlling or minority shareholders:

(a) At relevant times, Smithfield owned 50% of Pennexx’s outstanding

shares;

(b) Two of Smithfield’s officers sat on Pennexx’s Board of Directors;

(c) Smithfield was Pennexx’s primary lender and supplier;

(d) Smithfield controlled the acquisition of, renovations to, the outfitting with

equipment of, the Tabor Facility;

(e) Smithfield participated in and prevailed at important meetings concerning

the business and operations of Pennexx, the renovation of and equipment for the Tabor

Facility; and

(f) Smithfield exercised domination over Pennexx through actual exercise of

direction over corporate conduct.

203. As a controlling shareholder of Pennexx, Smithfield owed the non-

controlling/minority shareholders of Pennexx the duty of care, diligence, and good faith.


90

In accordance with these duties:

(a) Smithfield must act to protect Pennexx’s non-controlling/minority

shareholders' interests;

(b) Smithfield must act in the best interest of all of Pennexx’s shareholders;

(c) Smithfield is prohibited from pursuing any narrow self-interest in dealing

with the property of Pennexx’s non-controlling/minority shareholders; and

(d) Smithfield must not use its position of trust and authority for personal gain

at the expense of Pennexx’s non-controlling/minority shareholders.

204. By the acts alleged herein, Smithfield breached its fiduciary duties owed to

Pennexx’s non-controlling/minority shareholders by:

(a) Depriving and usurping Pennexx’s non-controlling shareholders of their

rights as Pennexx shareholders;

(b) Implementing and carrying out a scheme to improperly take over Pennexx,

its business and its assets, without any Pennexx shareholder approval, consent or

ratification, or any consideration to Pennexx’s shareholders;

(c) Failing to protect Pennexx’s non-controlling/minority shareholders'

interests;

(d) Failing to act in the best interest of all of Pennexx’s shareholders by

improperly taking over Pennexx’s business and assets, leaving Pennexx as a shell and

unable to continue its business;

(e) Pursuing its narrow self-interest in dealing with the property of Pennexx’s

non-controlling/minority shareholders;


91

(f) Using its position of trust and authority as a controlling shareholder and

creditor for personal gain at the expense of Pennexx’s non-controlling/minority

shareholders;

(g) Proposing and executing the Pennexx/Smithfield Transactions in a manner

to effectuate the transfer of Pennexx’s business and its assets without shareholder

approval, consent or ratification;

(h) Controlling, supervising, dictating, delaying and cutting corners with

respect to the renovations to the Tabor Facility, so as to garner for themselves substantial

benefits (the acquisition of substantial assets and business opportunities and the ability to

overcharge for supplies) to the detriment, harm, monetary damage, and expense of

Pennexx’s non-controlling/minority shareholders who were left with a worthless

investment in a shell corporation;

(i) Cheating Pennexx by shorting Pennexx on supplies and charging Pennexx

above-market prices for such supplies via its subsidiary Moyer Foods.

205. Accordingly, Smithfield Foods is liable for breaching its fiduciary duties owed to

the Pennexx non-controlling/minority shareholders.

COUNT V

Aiding and Abetting Breach of Fiduciary Duty by Defendants Luter IV and Cole



207. This count, Count V, for aiding and abetting breach of fiduciary duty is asserted

against defendants Luter IV and Cole.


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208. Smithfield as a controlling shareholder of Pennexx breached its fiduciary duties

owed to Pennexx’s non-controlling/minority shareholders and Defendants Luter IV and Cole by

their acts alleged herein knowingly gave substantial assistance or encouragement in effecting

Smithfield’s breaches of fiduciary duties.

209. Defendants Luter IV and Cole in their capacities as officers of Smithfield and

because of their direct and substantial assistance in the formulation, implementation and

carrying-out of the Pennexx/Smithfield Transactions, their direct and substantial involvement in

decisions pertaining to the Tabor Facility, their direct control over the renovations and

installation of equipment at the Tabor Facility, their directorships with Pennexx, and their direct

and substantial involvement with various aspects of Pennexx’s business and finances, are liable

to the non-controlling/minority shareholders for aiding and abetting Smithfield Food’s breach of

fiduciary duty.

210. Each of defendants Luter IV and Cole’s acts constitute intentional, direct and

active participation in Smithfield’s breaches of fiduciary duties operating injuriously to the

prejudice of the non-controlling/minority shareholders.

211. Defendants Luter IV and Cole specifically directed that these particular acts

constituting Smithfield’s breach of its fiduciary duties be done or participated, or cooperated

therein, and as such are each individually, and jointly and severally, personally liable to

Pennexx’s non-controlling/minority shareholders for breaching its fiduciary duties.

COUNT VI


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Successor Liability as to Smithfield Foods and Showcase Foods, Inc.



212. This count, Count VI, holds Smithfield Foods and Showcase Foods, Inc. liable for

the acts of Pennexx complained of herein.

213. Smithfield Foods took control over all the Company’s assets and transferred them

to a Smithfield Foods-owned corporation, Showcase Foods, Inc., ending Pennexx’s ability to

continue its operations.

214. Smithfield’s SEC Form 10-Q, filed September 10, 2003 disclosed that Smithfield

is “operating the [Pennexx] assets under the name Showcase Foods, Inc. as part of the

[Smithfield] Beef segment.”

215. After taking possession of the assets, including the Tabor Facility, the old

equipment used by Pennexx in the Pottstown facility and the new equipment, the receivables, the

customers, Smithfield did not sell it. Rather, it began operating Pennexx’s business through the

new Smithfield entity called Showcase Foods, Inc.

216. As Queen, who remained at the Tabor Facility for two weeks after Smithfield

took over, testified during his deposition:

(a) The Tabor Facility was operating and producing meat products. On the

day that Smithfield took over, business continued as normal.

(b) There was an agreement that Smithfield made with Pennexx’s largest

customer whereby there would be no disruption in service.

(c) Smithfield continued to do business with all of Pennexx’s customers.


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(d) Smithfield kept, and continued to pay, certain of Pennexx’s vendors,

including the phone company, electric company and insurance policies.

(e) Smithfield continued to employ substantially all of the Pennexx

employees. Pennexx operated a “union plant,” with approximately 200 union employees.

Smithfield met with the president of the union, negotiated a contract and took over

Pennexx’s existing union contract with very few changes, keeping the rates, and all

senior employees. Substantially all of the union employees who were previously with

Pennexx continued their employment with Smithfield.

(f) Smithfield also continued to use Pennexx’s United States Department of

Agriculture license, a inspection legend number.

217. Smithfield has continued to manufacture Pennexx’s products, held itself out to the

customers as a continuation of Pennexx and enjoyed the goodwill created by Pennexx’s business.

218. Not only did Smithfield acquire Pennexx’s assets and continue Pennexx’s

business, Smithfield has expressly or impliedly agreed to assumed Pennexx obligations,

including $12.1 million of Pennexx equipment lease obligations, to facilitate the uninterrupted

continuation of normal business operations of Pennexx.

219. Smithfield and Smithfield’s wholly owned corporation, Showcase Foods, Inc., are

merely a continuation of Pennexx and its business constituting a de facto merger.

220. Smithfield acquired all of Pennexx’s assets and continued Pennexx’s business

with substantial continuity in, at the least, the product line, customers and employees.

221. As a result of Smithfield’s seizing of Pennexx’s assets, Pennexx was left as no

more than a corporate shell, virtually destroying the Classes’ remedies against Pennexx.


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222. Accordingly, Smithfield Foods and Showcase Foods, Inc. should be held liable as

the successor corporation for the acts of Pennexx complained of herein.

JURY DEMAND

Plaintiff hereby demands a trial by jury.

PRAYER FOR RELIEF

WHEREFORE, Plaintiff demands judgment:

1. Determining that the instant action is a proper class action maintainable

under Rule 23 of the Federal Rules of Civil Procedure;

2. Awarding compensatory and punitive damages as appropriate against

Defendants, in favor of Plaintiff and all members of the Class for damages sustained as a result

of Defendants' wrongdoing;

3. Awarding Plaintiff and members of the Class the costs and disbursements

of this suit, including reasonable attorneys', accountants' and experts' fees; and

4. Awarding such other and further relief as the Court may deem just andproper.


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Dated: December 22, 2003 CHIMICLES & TIKELLIS LLP

By: ___/s/ Steven A. SchwartzSteven A. SchwartzPa. I.D. No. 50579Kimberly M. DonaldsonPa. I.D. No. 84116One Haverford Centre 361 West Lancaster AvenueHaverford, PA 19041Telephone: (610) 642-8500Facsimile: (610) 649-3633

GLANCY & BINKOW LLPLionel Z. GlancyMichael Goldberg1801 Avenue of the Stars, Suite 311Los Angeles, California 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160

Co-Lead Plaintiff’s Counsel


CERTIFICATE OF SERVICE

I, Steven A. Schwartz, Esquire, hereby certify that I have on this date caused a copy of

the foregoing Amended Complaint to be served, via e-filing and via first class United States

mail, on the following:

Maurice R. Mitts, Esquire Edward J. Fuhr, EsquireEric F. Spade, Esquire Hunton & Williams LLPFrey, Petrakis, Deeb, Riverfront Plaza, East Tower Blum, Briggs & Mitts, P.C. 951 East Byrd Street1601 Market Street Richmond, VA 2321926th FloorPhiladelphia, PA 19103 Robert A. Nicholas, Esquire

Reed Smith LLP2500 One Liberty Place1650 Market StreetPhiladelphia, PA 19103-7301

Counsel for Defendants Counsel for Defendants Michael Queen, Dennis Bland, Smithfield Foods, Inc., Thomas McGreal and Joseph W. Luter, IV and Pennexx Foods, Inc. Michael H. Cole

Dated: December 22,, 2003 /s/ Steven A. Schwartz STEVEN A. SCHWARTZ

Case 2:03-cv-04318-JP Document 28-2 Filed 12/22/2003 Page 1 of 1