**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****    QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

For the quarterly periodended September 3, 2005

 

OR

 

**o****    TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

Forthe transition period from                 to                 

 

**Commission File Number:  0-7277**

 

 

**PIERRE FOODS, INC.**

(Exact name of registrant as specified in its charter)

 

**North Carolina**

(State or other jurisdiction of incorporation or organization)

 

**56-0945643**

(I.R.S. Employer Identification No.)

 

**9990 Princeton RoadCincinnati, Ohio  45246**

(Address of principal executive offices) (zip code)

 

Registrant’s telephone number, including area code:  **(513) 874-8741**

 

 

(Former name, formeraddress or former fiscal year if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.
| Yes  ý |   | No  o |
|-----------------------|--------|-----------------|

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).
| Yes  o |   | No  ý |
|------------------|--------|----------------------|

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).
| Yes  o |   | No  ý |
|------------------|--------|----------------------|

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 
| **Class**                  | ** ** | **Outstanding at October 17, 2005** |
|----------------------------|------------|------------------------------------------|
| Class A Common  Stock |       | 100,000                                  |

 

 

----

 

**PIERRE FOODS, INC. AND SUBSIDIARIES**

 
| **INDEX**                                                                                                                                                                                                                                     | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                    | ** ** |
| **Part I. Financial Information:**                                                                                                                                                                                                       | ** ** |
|                                                                                                                                                                                                                                          |       |
| Item 1. Financial Statements                                                                                                                                                                                                                  |       |
|                                                                                                                                                                                                                                          |       |
| Condensed Consolidated  Balance Sheets - September 3, 2005 and March 5, 2005                                                                                                                                                        | ** ** |
|                                                                                                                                                                                                                                          |       |
| Condensed Consolidated  Statements of Operations – for the thirteen weeks endedSeptember 3, 2005 and for the  periods from June 6, 2004 through June 30, 2004  and July 1, 2004 through September 4, 2004       |       |
|                                                                                                                                                                                                                                          |       |
| Condensed Consolidated  Statements of Operations – for the twenty-six weeks endedSeptember 3, 2005 and for the  periods from March 7, 2004 through June 30, 2004  and July 1, 2004 through September 4, 2004    |       |
|                                                                                                                                                                                                                                          |       |
| Condensed  Consolidated Statement of  Shareholder’s Equity – for the twenty-six  weeks ended September 3, 2005                                                                                                                 |       |
| ** **                                                                                                                                                                                                                                    | ** ** |
| Condensed  Consolidated Statements of Cash  Flows – for the twenty-six weeks ended  September 3, 2005 and for the periods from March 7, 2004 through  June 30, 2004  and July 1, 2004 through September 4, 2004 | ** ** |
|                                                                                                                                                                                                                                          | ** ** |
| ** **                                                                                                                                                                                                                                    | ** ** |
| Notes to the Condensed Consolidated Financial  Statements                                                                                                                                                                                     | ** ** |
| ** **                                                                                                                                                                                                                                    | ** ** |
| Item 2. Management’s Discussion and  Analysis of Financial Condition  and Results of Operations                                                                                                                                          | ** ** |
| ** **                                                                                                                                                                                                                                    | ** ** |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                                                                                                                                                           | ** ** |
| ** **                                                                                                                                                                                                                                    | ** ** |
| Item 4. Controls  and Procedures                                                                                                                                                                                                              | ** ** |
| ** **                                                                                                                                                                                                                                    | ** ** |
| **Part II. Other Information:**                                                                                                                                                                                                          | ** ** |
| ** **                                                                                                                                                                                                                                    | ** ** |
| Item 6. Exhibits                                                                                                                                                                                                                              | ** ** |
| ** **                                                                                                                                                                                                                                    | ** ** |
| Signatures                                                                                                                                                                                                                                    | ** ** |
| Exhibit 31.1                                                                                                                                                                                                                             | ** ** |
| Exhibit 31.2                                                                                                                                                                                                                             | ** ** |
| Exhibit 32                                                                                                                                                                                                                               | ** ** |

 

2

----

 

**PART I.  FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**PIERREFOODS, INC. AND SUBSIDIARIES**

 

**CondensedConsolidated Balance Sheets**

 
| ** **                                 | ** ** | **Successor Pierre**       | ** **  |
|--------------------------------------------|------------|----------------------------|-------------|
| ** **                                 | ** ** | **September 3, 2005** | ** **  | **March 5, 2005** | ** ** |
| ** **                                 | ** ** | **(Unaudited)**            | ** **  | ** ** | ** ** |
| ASSETS                                     |       |                       |        |   |   |
|                                       |       |                       |        |   |   |
| CURRENT ASSETS:                            |       |                       |        |   |   |
| Cash and cash  equivalents                 |       | $                          | —      |   | $ | — |   |
| Accounts  receivable, net                  |       | 30,465,533                 |        | 29,547,340 |   |
| Inventories                                |       | 49,795,172                 |        | 45,448,224 |   |
| Refundable  income taxes                   |       | 2,228,738                  |        | 2,906,502 |   |
| Deferred income  taxes                     |       | 5,764,233                  |        | 5,764,233 |   |
| Prepaid expenses  and other current assets |       | 4,071,456                  |        | 2,954,942 |   |
|                                       |       |                       |        |   |   |
| Total current  assets                      |       | 92,325,132                 |        | 86,621,241 |   |
|                                       |       |                       |        |   |   |
| PROPERTY, PLANT AND EQUIPMENT, NET         |       | 56,472,047                 |        | 56,284,482 |   |
|                                       |       |                       |        |   |   |
| OTHER ASSETS:                              |       |                       |        |   |   |
| Other  intangibles, net                    |       | 146,533,552                |        | 158,223,072 |   |
| Goodwill                                   |       | 186,535,050                |        | 186,535,050 |   |
| Deferred loan  origination fees, net       |       | 8,227,816                  |        | 8,923,688 |   |
|                                       |       |                       |        |   |   |
| Total other  assets                        |       | 341,296,418                |        | 353,681,810 |   |
|                                       |       |                       |        |   |   |
| Total Assets                               |       | $                          | 490,093,597 |   | $ | 496,587,533 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

3

----

 

**PIERREFOODS, INC. AND SUBSIDIARIES**

 

**CondensedConsolidated Balance Sheets**

 
| ** **                                                                                                                             | ** ** | **Successor Pierre**       | ** **  |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|
| ** **                                                                                                                             | ** ** | **September 3, 2005** | ** **  | **March 5, 2005** | ** ** |
| ** **                                                                                                                             | ** ** | **(Unaudited)**            | ** **  | ** ** | ** ** |
| LIABILITIES AND SHAREHOLDER’S EQUITY                                                                                              |       |                       |        |   |   |
|                                                                                                                                   |       |                       |        |   |   |
| CURRENT LIABILITIES:                                                                                                                   |       |                       |        |   |   |
| Current  installments of long-term debt                                                                                                |       | $                          | 301,959     |   | $ | 421,713 |   |
| Trade accounts  payable                                                                                                                |       | 9,736,590                  |        | 11,172,350 |   |
| Accrued interest                                                                                                                       |       | 1,850,250                  |        | 1,832,374 |   |
| Accrued payroll  and payroll taxes                                                                                                     |       | 6,064,813                  |        | 4,663,372 |   |
| Accrued  promotions                                                                                                                    |       | 3,810,274                  |        | 3,499,230 |   |
| Accrued taxes  (other than income and payroll)                                                                                         |       | 1,035,071                  |        | 949,572 |   |
| Other accrued  liabilities                                                                                                             |       | 1,495,567                  |        | 1,420,979 |   |
|                                                                                                                                   |       |                       |        |   |   |
| Total current  liabilities                                                                                                             |       | 24,294,524                 |        | 23,959,590 |   |
|                                                                                                                                   |       |                       |        |   |   |
| LONG-TERM DEBT, less current installments                                                                                              |       | 260,414,359                |        | 263,158,658 |   |
|                                                                                                                                   |       |                       |        |   |   |
| DEFERRED INCOME TAXES                                                                                                                  |       | 52,137,864                 |        | 52,929,534 |   |
|                                                                                                                                   |       |                       |        |   |   |
| OTHER LONG-TERM LIABILITIES                                                                                                            |       | 9,475,534                  |        | 10,517,166 |   |
|                                                                                                                                   |       |                       |        |   |   |
| Total  Liabilities                                                                                                                     |       | 346,322,281                |        | 350,564,948 |   |
|                                                                                                                                   |       |                       |        |   |   |
| SHAREHOLDER’S EQUITY:                                                                                                             |       |                       |        |   |   |
| Common stock –  Class A, 100,000 shares authorized, issued and outstanding at  September 3, 2005 and March 5, 2005 |       | 150,267,522                |        | 150,351,972 |   |
| Retained deficit                                                                                                                       |       | (6,496,206                 | )           | (4,329,387 | ) |
|                                                                                                                                   |       |                       |        |   |   |
| Total  shareholder’s equity                                                                                                       |       | 143,771,316                |        | 146,022,585 |   |
|                                                                                                                                   |       |                       |        |   |   |
| Total  Liabilities and Shareholder’s Equity                                                                                       |       | $                          | 490,093,597 |   | $ | 496,587,533 |   |

 

Seeaccompanying notes to unaudited condensed consolidated financial statements.

 

4

----

 

**PIERREFOODS, INC. AND SUBSIDIARIES**

 

**Condensed Consolidated Statementsof Operations**

(Unaudited)

 
| ** **                                                                                                                                                                                                                               | ** ** | **Successor Pierre**       | ** ** | **Predecessor Pierre**     | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                               | ** ** | **For the**                | ** ** | **For the Period**         | ** ** | **For the Period** | ** ** |
| ** **                                                                                                                                                                                                                               | ** ** | **Thirteen Weeks**         | ** ** | **July 1, 2004**      | ** ** | **June 6, 2004** | ** ** |
| ** **                                                                                                                                                                                                                               | ** ** | **Ended**                  | ** ** | **Through**                | ** ** | **Through** | ** ** |
| ** **                                                                                                                                                                                                                               | ** ** | **September 3, 2005** | ** ** | **September 4, 2004** | ** ** | **June 30, 2004** | ** ** |
|                                                                                                                                                                                                                                     |       |                       |       |                       |       |   |   |
| REVENUES                                                                                                                                                                                                                                 |       | $                          | 99,180,153 |                       | $          | 75,439,415 |   | $ | 23,535,282 |   |
|                                                                                                                                                                                                                                     |       |                       |       |                       |       |   |   |
| COSTS AND EXPENSES:                                                                                                                                                                                                                      |       |                       |       |                       |       |   |   |
| Cost of goods  sold                                                                                                                                                                                                                      |       | 73,790,865                 |       | 59,432,272                 |       | 19,980,334 |   |
| Selling, general  and administrative expenses (includes related party transactions totaling  $37,690 and $52,095 for the thirteen weeks ended September 3, 2005 and  the thirteen weeks ended September 4, 2004, respectively) |       | 16,164,970                 |       | 9,554,960                  |       | 7,608,480 |   |
| Depreciation and  amortization                                                                                                                                                                                                           |       | 7,585,945                  |       | 5,972,918                  |       | 358,777 |   |
|                                                                                                                                                                                                                                     |       |                       |       |                       |       |   |   |
| Total costs and  expenses                                                                                                                                                                                                                |       | 97,541,780                 |       | 74,960,150                 |       | 27,947,591 |   |
|                                                                                                                                                                                                                                     |       |                       |       |                       |       |   |   |
| OPERATING INCOME (LOSS)                                                                                                                                                                                                                  |       | 1,638,373                  |       | 479,265                    |       | (4,412,309 | ) |
|                                                                                                                                                                                                                                     |       |                       |       |                       |       |   |   |
| OTHER INCOME (EXPENSE):                                                                                                                                                                                                                  |       |                       |       |                       |       |   |   |
| Interest expense                                                                                                                                                                                                                         |       | (5,479,488                 | )          | (9,029,105                 | )          | (1,754,115 | ) |
| Other income,  net                                                                                                                                                                                                                       |       | 8,152                      |       | —                     |       | 1,784 |   |
|                                                                                                                                                                                                                                     |       |                       |       |                       |       |   |   |
| Other expense,  net                                                                                                                                                                                                                      |       | (5,471,336                 | )          | (9,029,105                 | )          | (1,752,331 | ) |
|                                                                                                                                                                                                                                     |       |                       |       |                       |       |   |   |
| LOSS BEFORE INCOME TAX BENEFIT                                                                                                                                                                                                           |       | (3,832,963                 | )          | (8,549,840                 | )          | (6,164,640 | ) |
|                                                                                                                                                                                                                                     |       |                       |       |                       |       |   |   |
| INCOME TAX BENEFIT                                                                                                                                                                                                                       |       | 2,278,407                  |       | 2,831,071                  |       | 2,021,385 |   |
|                                                                                                                                                                                                                                     |       |                       |       |                       |       |   |   |
| NET LOSS                                                                                                                                                                                                                                 |       | $                          | (1,554,556 | )                          | $          | (5,718,769 | ) | $ | (4,143,255 | ) |
|                                                                                                                                                                                                                                     |       |                       |       |                       |       |   |   |
| NET LOSS PER COMMON SHARE – BASIC AND DILUTED                                                                                                                                                                                       |       | $                          | (15.55     | )                          | $          | (57.19 | ) | $ | (41.43 | ) |
|                                                                                                                                                                                                                                     |       |                       |       |                       |       |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING – BASIC AND DILUTED                                                                                                                                                                            |       | 100,000                    |       | 100,000                    |       | 100,000 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

5

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**PIERREFOODS, INC. AND SUBSIDIARIES**

 

**Condensed Consolidated Statements of Operations**

(Unaudited)

 
| ** **                                                                                                                                                                                                                                    | ** ** | **Successor Pierre**       | ** **  | **Predecessor Pierre**     | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                    | ** ** | **For the**                | ** **  | **For the Period**         | ** ** | **For the Period** | ** ** |
| ** **                                                                                                                                                                                                                                    | ** ** | **Twenty-Six Weeks**       | ** **  | **July 1, 2004**      | ** ** | **March 7, 2004** | ** ** |
| ** **                                                                                                                                                                                                                                    | ** ** | **Ended**                  | ** **  | **Through**                | ** ** | **Through** | ** ** |
| ** **                                                                                                                                                                                                                                    | ** ** | **September 3, 2005** | ** **  | **September 4, 2004** | ** ** | **June 30, 2004** | ** ** |
|                                                                                                                                                                                                                                          |       |                       |        |                       |       |   |   |
| REVENUES                                                                                                                                                                                                                                      |       | $                          | 206,914,851 |                       | $          | 75,439,415 |   | $ | 115,548,564 |   |
|                                                                                                                                                                                                                                          |       |                       |        |                       |       |   |   |
| COSTS AND EXPENSES:                                                                                                                                                                                                                           |       |                       |        |                       |       |   |   |
| Cost of goods  sold                                                                                                                                                                                                                           |       | 152,131,692                |        | 59,432,272                 |       | 87,025,521 |   |
| Selling, general  and administrative expenses (includes related party transactions totaling  $67,934 and $138,047 for the twenty-six weeks ended September 3, 2005  and the twenty-six weeks ended September 4, 2004, respectively) |       | 33,203,304                 |        | 9,554,960                  |       | 26,446,857 |   |
| Loss on  disposition of property, plant and equipment, net                                                                                                                                                                                    |       | —                     |        | —                     |       | 339,921 |   |
| Depreciation and  amortization                                                                                                                                                                                                                |       | 15,486,608                 |        | 5,972,918                  |       | 1,544,903 |   |
|                                                                                                                                                                                                                                          |       |                       |        |                       |       |   |   |
| Total costs and  expenses                                                                                                                                                                                                                     |       | 200,821,604                |        | 74,960,150                 |       | 115,357,202 |   |
|                                                                                                                                                                                                                                          |       |                       |        |                       |       |   |   |
| OPERATING INCOME                                                                                                                                                                                                                              |       | 6,093,247                  |        | 479,265                    |       | 191,362 |   |
|                                                                                                                                                                                                                                          |       |                       |        |                       |       |   |   |
| OTHER INCOME (EXPENSE):                                                                                                                                                                                                                       |       |                       |        |                       |       |   |   |
| Interest expense                                                                                                                                                                                                                              |       | (10,951,120                | )           | (9,029,105                 | )          | (6,537,519 | ) |
| Other income,  net                                                                                                                                                                                                                            |       | 34,675                     |        | —                     |       | 1,784 |   |
|                                                                                                                                                                                                                                          |       |                       |        |                       |       |   |   |
| Other expense,  net                                                                                                                                                                                                                           |       | (10,916,445                | )           | (9,029,105                 | )          | (6,535,735 | ) |
|                                                                                                                                                                                                                                          |       |                       |        |                       |       |   |   |
| LOSS BEFORE INCOME TAX BENEFIT                                                                                                                                                                                                                |       | (4,823,198                 | )           | (8,549,840                 | )          | (6,344,373 | ) |
|                                                                                                                                                                                                                                          |       |                       |        |                       |       |   |   |
| INCOME TAX BENEFIT                                                                                                                                                                                                                            |       | 2,656,379                  |        | 2,831,071                  |       | 2,080,338 |   |
|                                                                                                                                                                                                                                          |       |                       |        |                       |       |   |   |
| NET LOSS                                                                                                                                                                                                                                      |       | $                          | (2,166,819  | )                          | $          | (5,718,769 | ) | $ | (4,264,035 | ) |
|                                                                                                                                                                                                                                          |       |                       |        |                       |       |   |   |
| NET LOSS PER COMMON SHARE – BASIC AND DILUTED                                                                                                                                                                                            |       | $                          | (21.67      | )                          | $          | (57.19 | ) | $ | (42.64 | ) |
|                                                                                                                                                                                                                                          |       |                       |        |                       |       |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING - BASIC AND DILUTED                                                                                                                                                                                      |       | 100,000                    |        | 100,000                    |       | 100,000 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

6

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**PIERREFOODS, INC. AND SUBSIDIARIES**

 

**Condensed Consolidated Statementof Shareholder’s Equity**

 

**For the Twenty-Six Weeks Ended September 3,2005**

(Unaudited)

 
| ** **                        | ** ** | **Common**       | ** **  | ** **   | ** ** | **Total**              | ** ** |
|-----------------------------------|------------|------------------|-------------|--------------|------------|------------------------|------------|
| ** **                        | ** ** | **Stock**        | ** **  | **Retained** | ** ** | **Shareholder’s** | ** ** |
| ** **                        | ** ** | **Class A** | ** **  | **Deficit**  | ** ** | **Equity**             | ** ** |
|                              |       |             |        |         |       |                   |       |
| BALANCE AT MARCH 5, 2005     |       | $                | 150,351,972 |         | $          | (4,329,387             | )          | $ | 146,022,585 |   |
|                              |       |             |        |         |       |                   |       |
| Net loss                          |       | —           |        | (2,166,819   | )          | (2,166,819             | )          |
| Expenses paid on behalf of parent |       | (84,450          | )           | —       |       | (84,450                | )          |
|                              |       |             |        |         |       |                   |       |
| BALANCE AT SEPTEMBER 3, 2005 |       | $                | 150,267,522 |         | $          | (6,496,206             | )          | $ | 143,771,316 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

7

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**PIERRE FOODS, INC. AND SUBSIDIARIES**

 

**Condensed Consolidated Statementsof Cash Flows**

(Unaudited)

 
| ** **                                                                                 | ** ** | **Successor Pierre**       | ** ** | **Predecessor Pierre**     | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                 | ** ** | **For the**                | ** ** | **For the Period**         | ** ** | **For the Period** | ** ** |
| ** **                                                                                 | ** ** | **Twenty-Six Weeks**       | ** ** | **July 1, 2004**      | ** ** | **March 7, 2004** | ** ** |
| ** **                                                                                 | ** ** | **Ended**                  | ** ** | **Through**                | ** ** | **Through** | ** ** |
| ** **                                                                                 | ** ** | **September 3, 2005** | ** ** | **September 4, 2004** | ** ** | **June 30, 2004** | ** ** |
|                                                                                       |       |                       |       |                       |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                       |       |                       |       |                       |       |   |   |
| Net loss                                                                                   |       | $                          | (2,166,819 | )                          | $          | (5,718,769 | ) | $ | (4,264,035 | ) |
|                                                                                       |       |                       |       |                       |       |   |   |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                       |       |                       |       |   |   |
| Depreciation and  amortization                                                             |       | 15,486,608                 |       | 5,972,918                  |       | 1,544,903 |   |
| Amortization of  deferred loan origination fees                                            |       | 745,544                    |       | 220,888                    |       | 716,478 |   |
| Change in  deferred income taxes                                                           |       | (791,670                   | )          | 76,044                     |       | (2,080,338 | ) |
| Write-off of  deferred loan origination fees                                               |       | —                     |       | 4,283,122                  |       | — |   |
| Loss on  disposition of property, plant and equipment, net                                 |       | —                     |       | —                     |       | 339,921 |   |
| Decrease in  other assets                                                                  |       | —                     |       | —                     |       | 296,694 |   |
| Increase  (decrease) in other long-term liabilities                                        |       | (1,041,632                 | )          | 84,115                     |       | (94,477 | ) |
| Changes in  operating assets and liabilities:                                              |       |                       |       |                       |       |   |   |
| Receivables                                                                                |       | (918,193                   | )          | (9,721,073                 | )          | 5,660,719 |   |
| Inventories                                                                                |       | (4,346,948                 | )          | 1,592,762                  |       | (4,911,529 | ) |
| Refundable  income taxes, prepaid expenses and other current assets                        |       | (438,750                   | )          | (4,816,006                 | )          | 949,584 |   |
| Trade accounts  payable and other accrued liabilities                                      |       | 454,686                    |       | 614,359                    |       | 2,227,855 |   |
| Total  adjustments                                                                         |       | 9,149,645                  |       | (1,692,871                 | )          | 4,649,810 |   |
| Net cash  provided by (used in) operating activities                                       |       | 6,982,826                  |       | (7,411,640                 | )          | 385,775 |   |
|                                                                                       |       |                       |       |                       |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                       |       |                       |       |                       |       |   |   |
| Capital  expenditures                                                                      |       | (3,984,650                 | )          | (455,416                   | )          | (2,084,160 | ) |
| Net cash used in  investing activities                                                     |       | (3,984,650                 | )          | (455,416                   | )          | (2,084,160 | ) |
|                                                                                       |       |                       |       |                       |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                       |       |                       |       |                       |       |   |   |
| Borrowings  (repayments) of revolving credit agreement                                     |       | 4,752,000                  |       | (18,492,886                | )          | 7,712,901 |   |
| Principal  payments on long-term debt                                                      |       | (7,616,053                 | )          | (414,557                   | )          | (673,526 | ) |
| Loan origination  fees                                                                     |       | (49,673                    | )          | (8,410,987                 | )          | (3,371,999 | ) |
| Payoff of Old  Notes                                                                       |       | —                     |       | (115,000,000               | )          | — |   |
| Issuance of New  Notes                                                                     |       | —                     |       | 125,000,000                |       | — |   |
| Borrowings under  new term loan                                                            |       | —                     |       | 150,000,000                |       | — |   |
| Repayment of  debt in conjunction with the Acquisition                                     |       | —                     |       | (29,048,031                | )          | — |   |
| Termination of  certificate of deposit                                                     |       | —                     |       | 1,262,245                  |       | — |   |
| Return of  capital to parent                                                               |       | (84,450                    | )          | (99,202,584                | )          | — |   |
| Net cash  provided by (used in) financing activities                                       |       | (2,998,176                 | )          | 5,693,200                  |       | 3,667,376 |   |
|                                                                                       |       |                       |       |                       |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                       |       | —                     |       | (2,173,856                 | )          | 1,968,991 |   |
|                                                                                       |       |                       |       |                       |       |   |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                             |       | —                     |       | 2,173,856                  |       | 204,865 |   |
|                                                                                       |       |                       |       |                       |       |   |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                   |       | $                          | —     |                       | $          | — |   | $ | 2,173,856 |   |
|                                                                                            |            |                            |            |                            |            |  |  |  |  |  |  |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

8

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**PIERREFOODS, INC. AND SUBSIDIARIES**

 

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

 

**1.****                Basisof Presentation and Acquisition**

 

PierreFoods, Inc. (the “Company” or “Pierre”) is a manufacturer and marketer ofhigh-quality, differentiated processed food solutions, focusing on formed,pre-cooked protein products and hand-held convenience sandwiches.  The Company’s products include beef, poultry,pork, cheese and bakery items.  Pierreoffers comprehensive food solutions to its customers, including proprietaryproduct development, special ingredients and recipes, as well as custompackaging and marketing programs.  Pierre’spre-cooked proteins include flamebroiled burger patties, homestyle meatloaf,chicken strips and boneless, barbecued pork rib products.  Pierre markets its pre-cooked proteinproducts to a broad array of customers that includes restaurant chains, schoolsand other foodservice providers.

 

*Basis ofPresentation and Acquisition. *OnJune 30, 2004, the shareholders of PF Management, Inc. (“PFMI”), thesole shareholder of the Company, sold their shares of stock in PFMI (the “Acquisition”)to Pierre Holding Corp. (“Holding”), an affiliate of Madison Dearborn Partners,LLC (“MDP”).

 

Theunaudited condensed consolidated financial statements of Pierre and its subsidiarieshave been prepared in accordance with accounting principles generally acceptedin the United States of America (“GAAP”), as well as the instructions to Form 10-Qand Article 10 of Regulation S-X. These statements should be read in conjunction with the consolidatedfinancial statements and the notes thereto included in the Company’s AnnualReport on Form 10-K filed on June 3, 2005 (“Form 10-K”).

 

Thefinancial information as of March 5, 2005 included in these financialstatements has been derived from the Company’s audited consolidated financialstatements. In the opinion of the Company, the accompanying unaudited condensedconsolidated financial statements contain all adjustments necessary to presentfairly the financial position, the results of operations and the cash flows ofthe Company for the interim periods. The results of interim operations are notnecessarily indicative of the results to be expected for the full fiscal year,and as noted above, should be read in conjunction with the consolidatedfinancial statements and the notes thereto included in the Company’s Form 10-K.  The Company’s current accounting policies areconsistent with those described in the notes to the Company’s March 5,2005 audited consolidated financial statements.

 

Includedin this report are interim unaudited condensed consolidated financialstatements that contain all adjustments necessary to present fairly thefinancial position as of September 3, 2005, the results of operations for thethirteen week period ended September 3, 2005 and for the periods from June 6,2004 through June 30, 2004 and July 1, 2004 through September 4,2004, the results of operations for the twenty-six week period ended September 3,2005 and for the periods from March 7, 2004 through June 30, 2004 andJuly 1, 2004 through September 4, 2004, the cash flows of the Companyfor the twenty-six weeks ended September 3, 2005 and for the periods from March 7,2004 through June 30, 2004 and July 1, 2004 through September 4,2004 and the statement of shareholder’s equity for the twenty-six week periodended September 3, 2005.  Thethirteen and twenty-six week periods ended September 3, 2005 are referredto as “successor second quarter 2006” and “successor fiscal 2006”,respectively.  The periods from June 6,2004 through June 30, 2004 and March 7, 2004 through June 30,2004 are referred to as “predecessor second quarter 2005” and “predecessorfiscal 2005”, respectively.  The periodfrom July 1, 2004 through September 4, 2004 is referred to as “successorfiscal 2005.”  The thirteen and twenty-sixweek periods ended September 4, 2004 are referred to as “predecessorsecond quarter 2005 and successor fiscal 2005 combined” and “predecessor fiscal2005 and successor fiscal 2005 combined,” respectively.  Financial statement presentation used forpredecessor second quarter 2005, predecessor fiscal 2005 and successor fiscal2005 have been reclassified, where applicable, to conform to financialstatement presentation used for successor second quarter 2006 and successorfiscal 2006.

 

Thefair value adjustments related to the Acquisition, which have been pushed downto the Company from Holding, primarily include adjustments in property, plantand equipment, inventory, goodwill, other intangible assets and related deferredtaxes.

 

TheCompany reports the results of its operations using a 52-53 week basis.  In line with this, each quarter of the fiscalyear will contain 13 weeks except for the infrequent fiscal years with53 weeks.

 

9

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Inconnection with the Acquisition, the following occurred:

 

•                  The Company merged with Pierre MergerCorp., an affiliate of MDP, with the Company being the surviving corporationfollowing the merger.

 

•                  The Company terminated its three-yearvariable-rate $40 million revolving credit facility and obtained a $190 millioncredit facility from a new lender which includes a six-year variable-rate $150million term loan and a five-year variable rate $40 million revolving creditfacility with a $10 million letter of credit subfacility.  See Note 7, “Financing Arrangements,” to theCompany’s Consolidated Financial Statements included in Form 10-K.

 

•                  The Company terminated its fewremaining related party transactions (described in Note 10, “Related Party Transactions,”to the Condensed Consolidated Financial Statements), transferred miscellaneousassets to Messrs. Richardson and Clark, the Company’s former Chairman andVice Chairman, respectively, including the Company’s airplane, which wasdistributed to Mr. Richardson.

 

•                  Pierre Merger Corp. closed a cashtender offer and consent solicitation for the Company’s old notes outstandingprior to the Acquisition (the “Old Notes”). Holders of approximately $106.3 million, or approximately 92%, of the aggregateprincipal amount of the Company’s outstanding Old Notes tendered their OldNotes.  The Company, as the survivingcorporation of the merger with Pierre Merger Corp., accepted and paid for allOld Notes tendered pursuant to the tender offer.  A redemption notice for the Old Notes nottendered (approximately $8.7 million) was issued on June 30, 2004 andthese Old Notes were redeemed on July 20, 2004.

 

•                  The Company issued $125.0 million of 9-7/8%Senior Subordinated Notes due 2012 (the “New Notes”). The proceeds of the NewNotes, together with the equity contributions from MDP and certain members ofmanagement (as described below) and borrowings under the Company’s new seniorcredit facility, were used to finance the Acquisition and to repay outstandingindebtedness.

 

•                  The Company’s President and ChiefExecutive Officer, Norbert E. Woodhams, and its Senior Vice President of Sales,Marketing and New Product Development, Robert C. Naylor, signed employmentagreements committing them to continue working for the Company after theAcquisition. The stated term of employment for each executive is one year, buteach agreement will renew automatically and continuously year-to-year unlessterminated.

 

•                  The management investors, the Company’sPresident and Chief Executive Officer, Norbert E. Woodhams, and its Senior VicePresident of Sales, Marketing and New Product Development, Robert C. Naylor,invested approximately $4.9 million in a deferred compensation plan.  This deferred compensation plan is fundedthrough a rabbi trust that owns preferred stock of Holding with an aggregateliquidation value of approximately $5.4 million at September 3, 2005.

 

•                  In addition to the base purchaseprice, the stock purchase agreement entitled the selling shareholders toearn-out cash payments, which included an additional aggregate amount of $13.0million in the event that, at the end of any fiscal quarter during the fiscalyear ended March 5, 2005, the Company achieved EBITDA (as defined in thestock purchase agreement) for the prior four fiscal quarters then ended of$56.0 million or more.  No portion of theadditional amount was payable as of March 5, 2005, as this EBITDA targetwas not met.

 

Thefollowing table presents unaudited pro forma information for predecessor secondquarter 2005 and successor fiscal 2005 combined, as if the Acquisition hadoccurred on March 7, 2004 (the first day of fiscal 2005).

 
| ** ** | ** ** | **Predecessor Second**             | ** ** |
|------------|------------|------------------------------------|------------|
| ** ** | ** ** | **Quarter 2005 and**               | ** ** |
| ** ** | ** ** | **Successor Fiscal 2005 Combined** | ** ** |
| ** ** | ** ** | **Actual**                         | ** ** | **Pro Forma** | ** ** |
|       |       |                               |       |   |   |
| Revenues   |       | $                                  | 98,974,697 |   | $ | 98,974,697 |   |
|       |       |                               |       |   |   |
| Net loss   |       | $                                  | (9,862,023 | ) | $ | (10,377,473 | ) |

 

10

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Thefollowing table presents unaudited pro forma information for predecessor fiscal2005 and successor fiscal 2005 combined, as if the Acquisition had occurred on March 7,2004 (the first day of fiscal 2005).

 
| ** ** | ** ** | **Predecessor Fiscal**   | ** **  |
|------------|------------|--------------------------|-------------|
| ** ** | ** ** | **2005 and Successor**   | ** **  |
| ** ** | ** ** | **Fiscal 2005 Combined** | ** **  |
| ** ** | ** ** | **Actual**               | ** **  | **Pro Forma** | ** ** |
|       |       |                     |        |   |   |
| Revenues   |       | $                        | 190,987,979 |   | $ | 190,979,375 |   |
|       |       |                     |        |   |   |
| Net loss   |       | $                        | (9,982,804  | ) | $ | (13,189,585 | ) |

 

These unaudited pro formaresults, based on assumptions deemed appropriate by the Company’s management,have been prepared for informational purposes only and are not necessarilyindicative of the amounts that would have resulted if the Company had beenacquired by MDP on March 7, 2004.

 

Included in these proforma results are certain predecessor fees that the Company does not expect toincur in the future. These include professional fees, primarily related to the Acquisition. For predecessor second quarter 2005 andsuccessor fiscal 2005 combined and for predecessor fiscal 2005 and successorfiscal 2005 combined, these fees amounted to $336,488 and $2,591,989,respectively.  No such fees existed forsuccessor second quarter 2006 and successor fiscal 2006.

 

Otherpredecessor expenses included in these pro forma results that are no longerexpected to be incurred include outside Board of Director fees, communityrelations and donations to our former shareholder’s alma mater. For predecessorsecond quarter 2005 and successor fiscal 2005 combined and for predecessorfiscal 2005 and successor fiscal 2005 combined, these fees amounted to $122,825and $600,653, respectively.

 

Also included in the proforma results for predecessor second quarter 2005 are certain Acquisitionexpenses related to the sale of the Company to MDP. These transaction expensesinclude professional fees of $957,000 for the predecessor second quarter 2005.  Other predecessor second quarter 2005transaction expenses relating to the previous shareholders’ adviser amounted to$780,952.  A termination payoff of theendorsement between the Company and Crawford Race Cars, LLC also resulted inexpense in the predecessor second quarter 2005 amounting to $318,000 that isnot expected to be incurred in the future.

 

Theunaudited pro forma condensed consolidated financial statements reflect theAcquisition of the Company in accordance with Statement of Financial AccountingStandard No. 141 (“SFAS 141”) —”Business Combinations” and Statement ofFinancial Accounting Standard No. 142 (“SFAS 142”) —”Goodwill and OtherIntangible Assets”.

 

TheAcquisition was recorded under the purchase method of accounting.  The purchase price was allocated to assetsacquired and liabilities assumed based on the estimated fair market value atthe date of Acquisition.  The allocationof the purchase price was as follows:

 
| Current assets                     |   | $            | 75,727,665  |   |
|------------------------------------|--------|--------------|-------------|--------|
| Plant, property and equipment      |   | 57,857,942   |        |
| Non-current assets                 |   | 4,283,121    |        |
| Goodwill                           |   | 186,535,050  |        |
| Other intangibles                  |   | 175,900,000  |        |
| Debt and other liabilities assumed |   | (239,899,080 | )           |
|                               |   |         |        |
| Net assets acquired                |   | $            | 260,404,698 |   |

 

TheCompany obtained outside appraisals of acquired assets and liabilities insuccessor fiscal 2005. Deferred tax liabilities have been finalized based onthe final allocation of the purchase price and the determination of the taxbasis of the assets and liabilities acquired.

 

**2.  Stock-Based Compensation**

 

On June 30, 2004,Holding adopted a stock option plan, pursuant to which the Board of Directorsof Holding may

 

11

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grant options topurchase an aggregate of 163,778 shares of common stock of Holding (the “Options”).  Such options may be granted to directors,employees and consultants of Holding and its subsidiaries, including theCompany.  On July 5, 2005, during successorsecond quarter 2006, Holding granted 3,960 Options to two members of managementof the Company.  At September 3,2005, Options to purchase a total of 131,357 shares of common stock of Holdinghad been issued to members of management of the Company and 32,421 werereserved for future issuance.  Alloutstanding Options were granted at $10 per share and expire ten years from thedate of grant.  A portion of eachoutstanding Option vests daily on a pro-rata basis over a five-year period fromthe date of grant and the remaining portion of each outstanding Option vestsseven years from the date of grant, subject to accelerated vesting based on theachievement of certain performance measures.

 

The Company treats theOptions as stock-based employee compensation for employees of the Company.  As permitted under GAAP, the Company accountsfor the Options under the recognition and measurement principles of AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”), and related Interpretations using the intrinsic value method.  Accordingly, no compensation expense has beenrecognized for the Options in its condensed consolidated statements of operations.  Had compensation expense for the Options beendetermined in accordance with the minimum value approach as defined byStatement of Financial Accounting Standards (“SFAS”) No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”), the Company’s net loss and loss pershare would have been the following :

 
| ** **                                           | ** ** | **Successor Pierre  Thirteen Weeks Ended  September 3, 2005** | ** ** | **Successor Pierre  Twenty-Six Weeks  Ended  September 3, 2005** | ** ** | **Successor Pierre  For the Period from  July 1, 2004 through  September 4, 2004** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| Net loss as reported                                 |       | $                                                                  | (1,554,556 | )                                                                     | $          | (2,166,819                                                                                   | )          | $ | (5,718,769 | ) |
| Minimum value of stock-based compensation net of tax |       | (8,891                                                             | )          | (17,648                                                               | )          | (4,785                                                                                       | )          |
| Net loss pro forma                                   |       | $                                                                  | (1,563,447 | )                                                                     | $          | (2,184,467                                                                                   | )          | $ | (5,723,554 | ) |
|                                                 |       |                                                               |       |                                                                  |       |                                                                                         |       |
| Basic and diluted loss per share, as reported        |       | $                                                                  | (15.55     | )                                                                     | $          | (21.67                                                                                       | )          | $ | (57.19 | ) |
| Basic and diluted loss per share, pro forma          |       | $                                                                  | (15.63     | )                                                                     | $          | (21.84                                                                                       | )          | $ | (57.24 | ) |

 

TheCompany engaged an independent third party to perform a valuation analysis ofthe employee stock options.  The estimatedtotal stock-based employee compensation expense was determined using theBlack-Scholes-Merton option pricing model with the following weighted averageassumptions:

 
| Dividend yield                                               |   | —    |   |
|--------------------------------------------------------------|--------|-----------|--------|
| Term to expiration                                           |   | 10 years  |   |
| Expected life                                                |   | 6.3 years |   |
| Expected volatility                                          |   | —    |   |
| Risk free interest rate                                      |   | 3.93      | %      |
| Weighted average  minimum value per share of options granted |   | $         | 2.24   |   |
|                                                              |        |           |        |  |

 

In December of2004, the FASB issued Statement of Financial Accounting Standards No. 123(Revision 2004), “Share-Based Payment” (“SFAS 123R”), which is effective forthe first annual reporting period beginning after December 15, 2005 fornon-public companies (as defined in SFAS 123R). The new statement requirescompensation expense associated with share-based payments to employees to berecognized in the financial statements based on their fair values.  Upon the adoption of SFAS 123R, the Companywill be required to apply the provisions of the statement prospectively for anynewly issued, modified or settled award after the date of initial adoption, aswell as to the unvested portion of awards granted prior to adoption of thestandard.  As the Company currently usesthe intrinsic value method to value the Options, the fair value assigned to anynewly issued, modified or settled awards after the adoption of SFAS 123R isexpected to be significantly greater due to the differences in valuationmethods.

 

12

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**3.****                   Inventories**

 

A summary of inventories, by major classifications, follows:

 
| ** **             | ** ** | **September 3, 2005** | ** ** | **March 5, 2005** | ** ** |
|------------------------|------------|----------------------------|------------|------------------------|------------|
| Manufacturing supplies |       | $                          | 1,694,541  |                   | $          | 1,684,290 |   |
| Raw materials          |       | 7,413,081                  |       | 6,530,663              |       |
| Finished goods         |       | 40,680,590                 |       | 37,226,388             |       |
| Work in process        |       | 6,960                      |       | 6,883                  |       |
| Total                  |       | $                          | 49,795,172 |                   | $          | 45,448,224 |   |

 

**4.****                  ****Long-Term Debt**

 

Long-termdebt is comprised of the following:

 
| ** **                                                                                                               | ** ** | **September 3, 2005** | ** **  | **March 5, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|------------------------|------------|
| 9.875% Senior  Notes, interest payable on January 15 and July 15 of each year, maturing  on July 15, 2012 |       | $                          | 125,000,000 |                   | $          | 125,000,000 |   |
| $150 million term loan, with floating interest rates  maturing 2010                                                      |       | 129,125,000                |        | 136,500,000            |       |
| Revolving line  of credit, maximum borrowings of $40 million with floating interest rates,  maturing 2009                |       | 5,542,000                  |        | 790,000                |       |
| 0.0% to 7.55%  capitalized lease obligations maturing through 2011                                                       |       | 1,049,318                  |        | 1,290,371              |       |
| Total long-term  debt                                                                                                    |       | 260,716,318                |        | 263,580,371            |       |
| Less current installments                                                                                                |       | 301,959                    |        | 421,713                |       |
| Long-term debt less current installments                                                                                 |       | $                          | 260,414,359 |                   | $          | 263,158,658 |   |

 

On March 8,2004, following a consent solicitation in which consents of holders of$112.4 million in aggregate principal amount of the Company’s then outstandingOld Notes, representing 97.74% of the outstanding Old Notes, consented to aFourth Supplemental Indenture between the Company and U.S. Bank National Association,as trustee (the “Trustee”).  The Companyentered into the Fourth Supplemental Indenture with the Trustee. Among otherthings, the Fourth Supplemental Indenture increased the annual interest rate onthe Old Notes from 10.75% to 12.25% through March 31, 2005 and 13.25%thereafter, and required the payment of a cash consent fee of $3.5 million(3% of the principal amount of Old Notes held by each consenting noteholder);required the termination of all related party transactions, except for certain specifically-permittedtransactions (see Note 10, “Related Party Transactions” to the CondensedConsolidated Financial Statements); provided for the assumption by the Companyof approximately $15.3 million of subordinated debt of PFMI and waived anyand all defaults of the Indenture existing as of March 8, 2004.

 

Concurrentlywith the execution of the Fourth Supplemental Indenture, the Company took titleto an aircraft transferred from a related party subject to $5.6 million ofexisting purchase money debt; assumed $15.3 million of debt from PFMI;cancelled the $1.0 million related party note receivable against the debtassumed from PFMI; cancelled the balances owed by the Company to certainrelated parties, as follows: $0.5 million owed to Columbia Hill Aviation (“CHA”);$3.5 million owed to PF Purchasing; $0.5 million owed to PFDistribution; and assumed the operating leases of PF Distribution in connectionwith the Fourth Supplemental Indenture.  Werefer to these transactions as the “Restructuring”.

 

On June 30,2004, the shareholders of PFMI closed the sale of their shares of stock of PFMIto Holding (see Note 1, “Basis of Presentation and Acquisition,” to the CondensedConsolidated Financial Statements). Effective June 30, 2004, the Company terminated its three-yearvariable-rate $40 million revolving credit facility.  Existing debt issuance costs related to theCompany’s former $40 million facility in the amount of $0.5 millionand a prepayment penalty paid to the former lender in the amount of$0.4 million were charged to interest expense.

 

Alsoeffective June 30, 2004, the Company obtained a $190 million creditfacility from a new lender which includes a six-year variable-rate$150 million term loan, a five-year variable rate $40 million revolvingcredit facility and a $10 million letter of credit subfacility.  Funds available under this new facility areavailable for working capital requirements, permitted investments and generalcorporate purposes.  Borrowings under thenew facility bear interest at floating rates based upon the interest rateoption selected from time to time by the Company and are secured by a first-prioritysecurity interest in substantially all of the Company’s

 

13

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assets.  The interest rates for baserate borrowings under the new revolving credit facility and the new term loanat September 3, 2005 were 8.25% (prime of 6.50% plus 1.75%) and 8.00%(prime of 6.50% plus 1.50%), respectively. Actual interest rates are lowered by the use of libor tranches asappropriate.  Repayment of borrowingsunder the term loan was initially $375,000 per quarter, which began on September 4,2004, with a balloon payment of $141.4 million due on June 5, 2010.  However, in addition to paying all scheduled quarterlypayments totaling $8.6 million for the term of the loan, the Company madeprepayments on the term loan totaling $4.9 million during successor fiscal2005.  No prepayments on the term loan weremade during successor second quarter 2006. Prepayments on the term loan totaling $7.4 million were made duringsuccessor fiscal 2006.  The remainingoutstanding balance of $129.1 million as of September 3, 2005 is due on June 5,2010.

 

As of September 3,2005, the Company had outstanding borrowings under its revolving creditfacility totaling $5.5 million and had borrowing availability of approximately$28.8 million.  The maturity date ofthe $40 million revolving credit facility is June 30, 2009.  In addition, the Company is required tosatisfy certain financial covenants regarding cash flow and capitalexpenditures.  As of September 3,2005, the Company is in compliance with all financial covenants.

 

Alsoin conjunction with the Acquisition, the Company issued $125.0 million of 97/8%Senior Subordinated Notes due 2012 (the “New Notes”). The proceeds of the NewNotes, together with the equity contributions from MDP and certain members ofmanagement and borrowings under the Company’s new senior credit facility, wereused to finance the Acquisition of the Company and to repay outstandingindebtedness, including paying off debt of PFMI assumed by the Company underthe Fourth Supplemental Indenture (except capital leases), paying for the OldNotes tendered in connection with the tender offer described in Note 1, “Basisof Presentation and Acquisition” to the Condensed Consolidated FinancialStatements and redeeming the Old Notes not tendered.

 

**5.  Goodwill and OtherIntangible Assets**

 

Inconjunction with the Acquisition, the Company engaged an independent party to performvaluations for financial reporting purposes on the Company’s goodwill and otherintangibles. Assets identified through this valuation process includedgoodwill, formulas, customer relationships, licensing agreements and certaintrade names and trademarks.

 

Inaccordance with SFAS 142, the Company tests recorded goodwill and otherintangible assets with indefinite lives for impairment at least annually. Allother intangible assets with finite lives are amortized over their estimatedeconomic or estimated useful lives. In addition, all other intangible assetsare reviewed for impairment in accordance with SFAS 144.  Based on the Company’s review and the reviewperformed by third parties, no impairment existed at September 3, 2005 or March 5,2005.

 

TheCompany’s amortizable other intangible assets are amortized using acceleratedamortization methods that match the expected benefit derived from the assets.The accelerated amortization methods allocate amortization expense inproportion to each year’s expected revenues to the total expected revenues overthe estimated useful lives of the assets.

 

Thegross carrying value of goodwill and the gross carrying value and accumulatedamortization of other intangible assets are as follows:

 
| ** **                               | ** ** | **As of  September 3, 2005** | ** ** | **As of  March 5, 2005** | ** **  |
|------------------------------------------|------------|-----------------------------------|------------|-------------------------------|-------------|
| ** **                               | ** ** | **Useful**                        | ** ** | **Gross**                     | ** **  | ** ** | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                               | ** ** | **Life**                          | ** ** | **Carrying**                  | ** **  | **Accumulated** | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **                               | ** ** | **(years)**                       | ** ** | **Amount**                    | ** **  | **Amortization** | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                     |       |                              |       |                          |        |   |   |   |   |   |   |   |   |   |   |
| **Amortizable  intangible assets:**      |       |                              |       |                          |        |   |   |   |   |   |   |   |   |   |   |
| Formulas                                 |       | 15                                |       | $                             | 95,000,000  |   | $ | 17,530,407 |   | $ | 77,469,593 |   | $ | 95,000,000 |   | $ | 10,380,233 |   | $ | 84,619,767 |   |
| Tradename and  trademarks                |       | 12-20                             |       | 20,100,000                    |        | 2,421,557 |   | 17,678,443 |   | 20,100,000 |   | 1,409,337 |   | 18,690,663 |   |
| Customer  Relationships                  |       | 12                                |       | 28,500,000                    |        | 7,539,816 |   | 20,960,184 |   | 28,500,000 |   | 4,851,794 |   | 23,648,206 |   |
| Licensing  Agreements                    |       | 10                                |       | 12,100,000                    |        | 1,874,668 |   | 10,225,332 |   | 12,100,000 |   | 1,035,564 |   | 11,064,436 |   |
| **Total  amortizable intangible assets** |       | ** **                        |       | $                             | 155,700,000 |   | $ | 29,366,448 |   | $ | 126,333,552 |   | $ | 155,700,000 |   | $ | 17,676,928 |   | $ | 138,023,072 |   |

 

14

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| ** **                                 | ** ** | **As of September 3, 2005** | ** **  | **As of March 5, 2005** | ** ** |
|--------------------------------------------|------------|----------------------------------|-------------|------------------------------|------------|
| ** **                                 | ** ** | **Gross**                        | ** **  | ** **                   | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Carrying**                     | ** **  | **Accumulated**              | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                                 | ** ** | **Amount**                       | ** **  | **Amortization**             | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
|                                       |       |                             |        |                         |       |   |   |   |   |
| **Unamortizable intangible assets:**       |       |                             |        |                         |       |   |   |   |   |
| Tradename                                  |       | $                                | 20,200,000  |                         | —     |   | $ | 20,200,000 |   | — |   |
| Goodwill                                   |       | 186,535,050                      |        | —                       |       | 186,535,050 |   | — |   |
| **Total  unamortizable intangible assets** |       | $                                | 206,735,050 |                         | —     |   | $ | 206,735,050 |   | — |   |

 

The future amortization of other intangible assets (in thousands) forthe next five fiscal years is estimated to be as follows:

 
| ** **               | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |     |       |     |       |     |       |
| Formulas                 |       | $        | 12,671     |     | $          | 11,165   |       | $        | 9,761      |     | $          | 8,468 |   | $ | 7,030 |   |
| Tradename and Trademarks |       | 1,919    |       | 1,821    |       | 1,732    |       | 1,646    |       | 1,539    |       |
| Customer Relationships   |       | 4,011    |       | 3,358    |       | 2,874    |       | 2,391    |       | 1,869    |       |
| Licensing Agreements     |       | 1,569    |       | 1,495    |       | 1,426    |       | 1,361    |       | 1,239    |       |
|                          |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

**6.****                 Commitmentsand Contingencies**

 

TheCompany provided a letter of credit in the amount of $5.5 million and $4.5 millionat September 3, 2005 and March 5, 2005, respectively, to itsinsurance carrier for the underwriting of certain performance bonds.  This letter of credit expires in successorfiscal 2006.  The Company also providessecured letters of credit to its insurance carriers for outstanding andpotential worker’s compensation and general liability claims.  Letters of credit for these claims totaled$110,000 at both September 3, 2005 and March 5, 2005.  In addition, the Company provides securedletters of credit to a limited number of suppliers.  The Company had no letters of credit forsuppliers at September 3, 2005 and March 5, 2005.

 

The following tables summarize our contractualobligations and commitments as of September 3, 2005.

 
| ** **                                | ** ** | **Commitments by Fiscal Year** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Total**                      | ** ** | **Less than 1  Year** | ** ** | **1 - 3  Years** | ** ** | **3-5  Years** | ** ** | **More than 5  Years** | ** ** |
|                                      |       |                           |       |   |   |   |   |   |   |   |   |
| Letters of credit                         |       | $                              | 5,610,000  |   | $ | 5,610,000 |   | $ | — |   | $ | — |   | $ | — |   |
| Purchase commitments for capital projects |       | 1,950,000                      |       | 1,950,000 |   | — |   | — |   | — |   |
| Purchase  commitments for electricity     |       | 428,400                        |       | 428,400 |   | — |   | — |   | — |   |
| Purchase  commitments for raw materials   |       | 919,093                        |       | 919,093 |   | — |   | — |   | — |   |
| Purchase commitments for natural gas      |       | 605,674                        |       | 605,674 |   | — |   | — |   | — |   |
| Total                                     |       | $                              | 9,513,167  |   | $ | 9,513,167 |   | $ | — |   | $ | — |   | $ | — |   |

 

15

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| ** **                  | ** ** | **Contractual Obligations by Fiscal Year** | ** **  |
|-----------------------------|------------|--------------------------------------------|-------------|
| ** **                  | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Total**                                  | ** **  | **Less than 1  Year** | ** ** | **1 – 3  Years** | ** ** | **3-5  Years** | ** ** | **More than  5 Years** | ** ** |
|                        |       |                                       |        |   |   |   |   |   |   |   |   |
| Long-term debt              |       | $                                          | 259,667,000 |   | $ | — |   | $ | — |   | $ | 134,667,000 |   | $ | 125,000,000 |   |
| Capital lease obligations   |       | 1,049,318                                  |        | 301,958 |   | 380,990 |   | 350,997 |   | 15,373 |   |
| Operating lease obligations |       | 6,138,277                                  |        | 3,493,387 |   | 2,426,128 |   | 205,637 |   | 13,125 |   |
| Total                       |       | $                                          | 266,854,595 |   | $ | 3,795,345 |   | $ | 2,807,118 |   | $ | 135,223,634 |   | $ | 125,028,498 |   |

 

Also inconjunction with the Acquisition, the Company and the selling shareholders****entered into a tax sharing and indemnification agreementcontaining certain representations and warranties of the selling shareholderswith respect to taxes.  The agreementprovides that any net operating loss carryforwards (“NOLs”) attributable toexpenses relating to the sale of the Company, will be for the benefit of theselling shareholders.  As of the date ofthe Acquisition, these NOLs totaled approximately $24.2 million.  Accordingly, the Company is required to payto the selling shareholders the amount of any tax benefit attributable to suchNOLs, except that the first $4.0 million of such tax benefits shall be paidinto an escrow account that will secure the selling shareholdersindemnification obligations under the tax sharing agreement.  The Company is required to make payments tothe selling shareholders or the escrow account for tax benefits derived fromsuch utilization 20 days after the filing of the tax return that utilizes suchNOLs.

 

In conjunctionwith the Acquisition, the Company had recorded a net long-term liability to theformer shareholders totaling $10.3 million for the estimated obligations underthe tax sharing agreement.  As of September 3,2005, the Company has utilized $5.1 million of the aforementioned NOLs andsubmitted payment based on the tax benefit, net of other tax assessments due tothe Company from the selling shareholders, to an escrow account for a total of$1.3 million.  As of September 3, 2005,the Company has a net long-term liability to the former shareholders totaling $8.9million.  This amount is excluded fromthe table above due to the uncertainty of when such utilization of the NOLswill occur.

 

The Companyexpects to realize $1.7 million of deal related expenses, decreasing taxableincome for the tax year ended February 26, 2005, of which the related taxbenefit to the Company of $0.7 must be reimbursed to the sellingshareholders.  In addition, the Companyexpects to utilize approximately $15.3 million of NOLs in the tax return duefor the tax year ended February 26, 2005. The NOLs enable the Company to defer cash tax payments required by thetax sharing agreement of approximately $5.5 million attributable to this taxperiod.  However, the Company will berequired to reimburse the selling shareholders or the escrow account for theentire amount 20 days subsequent to the filing of its tax return in November 2006.

 

As a result of thecurrent year calculated losses for tax purposes during successor fiscal 2006,the Company was able to defer cash tax payments of approximately $3.4 millionfor both successor second quarter 2006 and successor fiscal 2006.  The Company expects such deferred amounts tobe paid out 20 days subsequent to the filing of its tax return in November 2007.

 

**7**.                   **Comprehensive Income**

 

Total comprehensive lossis comprised solely of net loss in successor second quarter 2006, successorfiscal 2005, predecessor second quarter 2005, and predecessor fiscal 2005.

 

16

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**8.****                   SupplementalCash Flow Disclosures - Cash Paid During the Period and Non-Cash Transactions**

 
| ** **                                                       | ** ** | **Successor Pierre**       | ** ** | **Predecessor Pierre**     | ** ** |
|------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                       | ** ** | **For the**                | ** ** | **For the Period**         | ** ** | **For the Period** | ** ** |
| ** **                                                       | ** ** | **Twenty-Six Weeks**       | ** ** | **July 1, 2004**      | ** ** | **March 7, 2004** | ** ** |
| ** **                                                       | ** ** | **Ended**                  | ** ** | **Through**                | ** ** | **Through** | ** ** |
| ** **                                                       | ** ** | **September 3, 2005** | ** ** | **September 4, 2004** | ** ** | **June 30, 2004** | ** ** |
|                                                             |       |                       |       |                       |       |   |   |
| Cash paid during the period for:                                 |       |                       |       |                       |       |   |   |
| Interest                                                         |       | $                          | 10,148,868 |                       | $          | 3,162,636 |   | $ | 7,915,332 |   |
| Income taxes  refunds, net of payments                           |       | $                          | 2,542,473  |                       | $          | — |   | $ | — |   |
|                                                             |       |                       |       |                       |       |   |   |
| Non-cash transactions:                                           |       |                       |       |                       |       |   |   |
| Assumption of PF  Management debt                                |       | $                          | —     |                       | $          | — |   | $ | 14,274,050 |   |
| Assumption of  deferred tax liability for airplane               |       | $                          | —     |                       | $          | — |   | $ | 1,576,000 |   |
| Cancellation of  note receivable                                 |       | $                          | —     |                       | $          | — |   | $ | 993,247 |   |
| Cancellation of  accrual to PF Purchasing                        |       | $                          | —     |                       | $          | — |   | $ | 3,479,007 |   |
| Cancellation of  accrual to PF Distribution                      |       | $                          | —     |                       | $          | — |   | $ | 535,251 |   |
| Other                                                            |       | $                          | —     |                       | $          | — |   | $ | 174,874 |   |
|                                                             |       |                       |       |                       |       |   |   |
| Acquisition transactions                                         |       |                       |       |                       |       |   |   |
| Elimination of  Predecessor Pierre capital and retained earnings |       | $                          | —     |                       | $          | 4,883,415 |   | $ | — |   |
| Cancellation of  receivable from former owner                    |       | $                          | —     |                       | $          | 5,000,000 |   | $ | — |   |
| Distribution of  plant, property and equipment                   |       | $                          | —     |                       | $          | 8,476,079 |   | $ | — |   |
| Distribution of  other current assets                            |       | $                          | —     |                       | $          | 9,255 |   | $ | — |   |
| Equity from  Parent                                              |       | $                          | —     |                       | $          | 244,779,225 |   | $ |   |   |
| Deferred tax  liability                                          |       | $                          | —     |                       | $          | 47,328,427 |   | $ | — |   |
| Tax sharing  liability to previous shareholders                  |       | $                          | —     |                       | $          | 10,317,601 |   | $ | — |   |
| Valuation of  goodwill and other intangibles                     |       | $                          | —     |                       | $          | 311,182,069 |   | $ | — |   |
| Valuation of  inventory                                          |       | $                          | —     |                       | $          | 2,020,948 |   | $ | — |   |
| Valuation of  plant, property and equipment                      |       | $                          | —     |                       | $          | 4,438,984 |   | $ | — |   |
| Other transactions                                               |       |                       |       |                       |       |   |   |
| Capital lease  addition                                          |       | $                          | —     |                       | $          | — |   | $ | 1,013,300 |   |
|                                                                  |            |                            |            |                            |            |  |  |  |  |  |  |

 

**9.****                   RecentlyIssued Accounting Guidance**

 

In November 2004,the Financial Accounting Standards Board (the “FASB”) issued SFAS  151, “InventoryCosts—an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151amends ARB 43, Chapter 4, to clarify that abnormal amounts of idlefacility expense, freight, handling costs and wasted materials (spoilage)should be recognized as current-period charges. In addition, SFAS 151 requiresthat allocation of fixed production overheads to the costs of conversion bebased on the normal capacity of the production facilities. The Company will adoptthe provisions of SFAS 151, effective March 5, 2006 for its fiscal 2007 consolidatedfinancial statements. Management is currently evaluating the impact the adoptionof the provisions of SFAS 151 will have on the Company’s consolidated financialstatements.

 

In May 2005,FASB issued SFAS 154, “AccountingChanges and Error Corrections”. The Statement requires retroactive application of a voluntary change inaccounting principle to prior period financial statements unless it isimpracticable. SFAS 154 also requires that a change in method of depreciation,amortization, or depletion for long-lived, non-financial assets be accountedfor as a change in accounting estimate that is affected by a change in accountingprinciple.  SFAS 154 replaces APB Opinion20, “Accounting Changes”, andSFAS 3, “Reporting Accounting Changesin Interim Financial Statements”.  TheCompany will adopt the provisions of SFAS 154, effective March 5, 2006 forits fiscal 2007 consolidated financial statements.  Management currently believes that adoptionof the provisions of SFAS 154 will not have a material impact on the Company’sconsolidated financial statements.

 

**10.  RelatedParty Transactions**

 

**Successor Pierre**

 

At September 3, 2005,there were no significant changes in related party transactions from thosedescribed at March 5, 2005 in the Company’s Form 10-K.

 

**Predecessor Pierre**

 

Asdescribed in Note 4, “Long-Term Debt” to the Condensed Consolidated FinancialStatements, on March 8, 2004, following a consent solicitation in which amajority of the holders of the Company’s outstanding Old Notes consented to aFourth Supplemental Indenture between the Company and the Trustee, the Companyentered into the Fourth Supplemental Indenture with the Trustee. Among otherthings, the Fourth Supplemental Indenture limited future related partytransactions and required the termination of all related party transactions,except for certain specifically-permitted transactions.

 

Thefollowing related party transactions were specifically permitted under theterms of the Fourth Supplemental Indenture:

 

17

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•                  Columbia Hill Land Company, LLC,owned 50% by each of James C. Richardson and David R. Clark, the Company’s thenChairman and Vice-Chairman, respectively, leased office space to the Company inHickory, North Carolina, pursuant to a ten-year lease that commenced in September 1998.Rents paid under the lease were approximately $29,000 for both predecessorfiscal 2005 and successor fiscal 2005.

 

•                  On March 8, 2004 the Companytook title to an aircraft that was transferred from CHA, owned 100% by PFMI,subject to existing purchase money debt. The aircraft was originally leased bythe Company from CHA beginning in the fourth quarter of fiscal 2002. Effective March 1,2002, the original lease was cancelled and replaced with a non-exclusive leaseagreement. Pursuant to this new lease, the Company was obligated to make 16quarterly lease payments of $471,500 each for the right to use the aircraft forup to 115 flight hours per quarter, based on availability. Under this leaseagreement, CHA was responsible for all expenses incurred in the operation ofthe use of the aircraft, except that the Company provided its own flight crew.

 

Allother related party transactions that were in effect at March 6, 2004 wereterminated as of March 8, 2004 pursuant to the terms of the FourthSupplemental Indenture. As a result of the termination of these related partytransactions, subsequent to March 8, 2004, the Company has performed itspurchasing and distribution services internally.

 

Thefollowing transactions were entered into on March 8, 2004 as permitted bythe Fourth Supplemental Indenture:

 
| Assumption of  PFMI debt                          |   | $          | (14,274,050 | )      |
|---------------------------------------------------|--------|------------|-------------|--------|
| Accrued liabilities to PF Purchasing cancelled    |   | 3,479,007  |        |
| Assumption of deferred tax liability for aircraft |   | (1,576,000 | )           |
| Note receivable cancelled                         |   | (993,247   | )           |
| Accrued liabilities to PF Distribution cancelled  |   | 535,251    |        |
| Cash received                                     |   | 763,998    |        |
| Other                                             |   | (174,874   | )           |
| Total                                             |   | $          | (12,239,915 | )      |
|                                              |   |       |        |
| Allocated to the following accounts:              |   |       |        |
| Retained earnings                                 |   | $          | 11,900,276  |   |
| Common stock                                      |   | 339,639    |        |
| Total                                             |   | $          | 12,239,915  |   |

 

The $339,639 chargerepresents the removal of members’ equity of CHA.

 

On June 30, 2004, inconjunction with the sale by the shareholders of PFMI of their shares of stockof PFMI to Holding, all predecessor Pierre related party transactions wereterminated as described in Note 1, “Basis of Presentation and Acquisition” tothe Condensed Consolidated Financial Statements.

 

**11.  Legal Proceedings andContingencies**

 

On August 19, 2003, as a result of complaintsfrom neighboring businesses, the Company received a Notice of Violation (“NOV”)from the Hamilton County Department of Environmental Services (“HCDOES”) relatingto operations at its Cincinnati, Ohio plant facility.  The NOV alleged that the Company violated itspermits by exceeding the visual emission (“VE”) specification of 20%opacity.  The Company received additionalNOV’s for opacity violations on October 22, 2003 and November 26,2003, all of which were the result of complaints from neighboring businesses.

 

Subsequent to the original NOV received in August of2003, the Company began investigating and testing various emission reductiontechnologies.  The Company found asolution that enabled operations to continue with less smoke output and completedthe upgrade during early 2004.  HCDOESinspected the upgrade in April 2004 and determined that the Company  had returned to compliance with the opacitylimit.  In connection with the upgrade,the Company was required to submit a revised Permit to Install (“PTI”)application.

 

Recently, pursuant to its regulatory authority, HCDOESrequested a Method 5 Stack Test be performed to assess the Company’s compliancewith its emissions limits.  The Companycontacted HCDOES, requesting the scheduled stack emission compliance test bepostponed while a series of engineering stack tests were performed at bothcontrolled and uncontrolled emission test points in order to evaluate themagnitude of the emissions based on current production data and to estimate newemissions factors by product line. HCDOES agreed to this approach and granted permission to delay the standardMethod 5 Stack Test originally

 

18

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requested until the Companyperforms a series of engineering tests utilizing a third party service provider.

 

TheCompany contracted with a third party firm to perform the testing andevaluation.  This firm performedpreliminary testing in early September 2005, which indicated thatviolations of emission levels may have occurred, and retested September 28,2005 through September 30, 2005. The Company anticipates receiving the results of the retest in the near future.  The results will allow the Company toevaluate the Facility’s current and historical potential and actual emissions.

 

TheCompany is cooperating with the authorities in all aspects of thesematters.  In addition, the Company consultedwith its outside legal counsel to assist them in resolving these matters andestimate the potential fines and penalties that may be assessed in the future.  If the Company is deemed non-compliant, additionalexpenditures for further testing, permits, equipment upgrades and legal expensemay be required.

 

The Company continuously evaluates contingencies basedupon the best available information.  TheCompany believes it has recorded appropriate liabilities to the extentnecessary in cases where the outcome of such liabilities is considered probableand reasonably estimable, and that its assessment of contingencies isreasonable.  To the extent that resolutionof contingencies results in amounts that vary from management’s estimates,future earnings will be charged or credited accordingly.

 

As part of its ongoing operations in the foodmanufacturing industry, the Company is subject to extensive federal, state, andlocal regulations and its food processing facilities and food products aresubject to frequent inspection, audits and inquiries by the United StatesDepartment of Agriculture, the Food and Drug Administration and various localhealth and agricultural agencies and  byfederal, state and local agencies responsible for the enforcement ofenvironmental laws and regulations.  TheCompany is also involved in various legal actions arising in the normal courseof business.  These matters arecontinuously being evaluated and, in some cases, are being contested by theCompany and the outcome is not predictable. Consequently, an estimate of thepossible loss or range of loss associated with these actions cannot bemade.  Although occasional adverseoutcomes (or settlements) may occur and could possibly have an adverse effecton the results of operations in any one accounting period, the Company believesthat the final disposition of such matters will not have a material adverseaffect on the Company’s consolidated financial position.

 

19

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| **ITEM 2.** | ** ** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

**Resultsof Operations**

 

**SuccessorSecond Quarter 2006 Compared to Predecessor Second Quarter 2005 and SuccessorFiscal 2005 Combined**

 

As aresult of the Acquisition as described in Note 1, “Basis of Presentation andAcquisition,” to the Condensed Consolidated Financial Statements and elsewherein this report, the following results of operations comparisons demonstrate asignificant difference between compared periods.  The Acquisition on June 30, 2004 wasaccounted for under the purchase method of accounting resulting in an increasein the basis of the Company’s assets. Due to the change in basis, the Company’s results of operations andthose of the Company’s predecessor are not considered comparable.  The Company’s results of operations includeamortization related to the identifiable intangible assets and interest expenserelated to the borrowings incurred in connection with the Acquisition.

 

*Revenues, net. *Netrevenues increased by $0.2 million in successor second quarter 2006 compared topredecessor second quarter 2005 and successor fiscal 2005 combined, or 0.2%.  The reduction in revenue growth in thesuccessor second quarter 2006 relative to the growth experienced in previousperiods was primarily a result of decreased sales to several large National Accounts customers ($6.9million).  The decreased NationalAccounts sales were offset by strong revenue growth in the Company’s otherend-market segments and by the net impact of price increases implemented duringthe prior year in response to higher raw material prices.  Sales for these National Accounts customerscontinue to be negatively impacted by higher gasoline prices and the relatedeffect on consumers’ discretionary spending.

 

*Cost of goods sold.   *Cost of goods sold decreasedby $5.6 million in successor second quarter 2006 compared to predecessorsecond quarter 2005 and successor fiscal 2005 combined, or 7.1%.  This decrease was primarily due to (1) anincrease in mix to lower cost, higher margin products; (2) start-up costsincurred in predecessor second quarter 2005 and successor fiscal 2005 combinedassociated with a National Accounts restaurant chain customer that were notincurred during successor second quarter 2006 ($1.8 million); (3) theimpact of a purchase accounting adjustment on beginning inventory (as a resultof the Acquisition) in the prior year comparable period that did not occurduring successor second quarter 2006 ($1.5 million); offset by (4) netincreased raw material protein prices and unfavorable formulation mix ($1.4million).  As a percentage of revenues,cost of goods sold decreased from 80.2% to 74.4%.

 

Theprimary materials used in the Company’s food processing operations includeboneless beef, chicken, pork, flour, yeast, seasonings, cheese, breading, soyproteins, and packaging supplies. Meat proteins are generally purchased under 7-daypayment terms.  Historically, we have nothedged in the futures markets, and over time, our raw material costs havefluctuated with movement in the relevant commodity markets.  Additionally, we have contracts withformulaic pricing that allow us to immediately pass along commodity priceincreases.  The $1.4 million netincreased raw material protein prices included $2.0 million related to theseformulaic contracts, offset by $0.6 million raw material protein pricedecreases related to other non-contracted sales.

 

Approximately40.9% of total sales for successor second quarter 2006 were protected fromcommodity exposure, of which 36.2% were attributable to cost-plus contracts,while the other 4.7% were related to the USDA Commodity Reprocessing Program,which also insulates us from raw material price fluctuations.   For predecessor second quarter 2005 andsuccessor fiscal 2005 combined, approximately 47.4% of total sales wereprotected from commodity exposure, of which 44.1% were attributable tocost-plus contracts, while the other 3.3% were related to the USDA CommodityReprocessing Program.  This decrease ininsulated sales from commodity exposure is directly related to the decrease inNational Accounts sales.

 

Thefollowing table represents the (increases)/decreases in the weighted averageprices the Company paid for beef, pork, chicken and cheese excludingformulation mix and contracts with formulaic pricing during the successor secondquarter 2006 compared to the predecessor second quarter 2005 and successorfiscal 2005 combined.

 

20

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| ** ** | ** ** | **(Increase)/Decrease**             | ** ** |
|------------|------------|-------------------------------------|------------|
| ** ** | ** ** | **Successor Second Quarter 2006**   | ** ** |
| ** ** | ** ** | **Compared to**                     | ** ** |
| ** ** | ** ** | **Predecessor Second Quarter 2005** | ** ** |
| ** ** | ** ** | **And**                             | ** ** |
| ** ** | ** ** | **Successor Fiscal 2005 Combined**  | ** ** |
| Beef       |       | (6.8                                | )%         |
| Pork       |       | 13.8                                | %          |
| Chicken    |       | 43.3                                | %          |
| Cheese     |       | 10.5                                | %          |
| Aggregate  |       | 9.3                                 | %          |

 

*Selling, general and administrative*.  Selling, general and administrative expensesdecreased by $1.0 million in successor second quarter 2006 compared topredecessor second quarter 2005 and successor fiscal 2005 combined, or 5.8%. Asa percentage of revenues, selling, general and administrative expensesdecreased from 17.3% to 16.3%. This decrease was primarily due to (1) theelimination of expenses related to the previous shareholders as a result of theAcquisition of $3.6 million; offset by (2) an increase in selling expensesprimarily due to product line expansion ($0.7 million); (3) higher costsfor the storage of increased inventory ($0.6 million); (4) an increase inincentive compensation ($0.5 million); (5) an increase in freight chargesdue to an increase in the mix of products shipped by the Company versusproducts picked up by customers and higher fuel surcharges impacted by theprice of crude oil ($0.3 million); and (6) an increase in sales mix tolower cost, higher margin end-markets with greater selling burden rates ($0.5million).  Expenses associated with theprevious shareholders in predecessor second quarter 2005 and successor fiscal2005 combined that are not present in successor second quarter 2006 and are notexpected to be incurred in the future include the following:

 
| ** **                                        | ** ** | **Predecessor**      | ** ** |
|---------------------------------------------------|------------|----------------------|------------|
| ** **                                        | ** ** | **Second Quarter**   | ** ** |
| ** **                                        | ** ** | **2005 and**         | ** ** |
| ** **                                        | ** ** | **Successor Fiscal** | ** ** |
| **(in millions)**                                 | ** ** | **2005 Combined**    | ** ** |
|                                              |       |                 |       |
| Compensation  expense (a)                         |       | $                    | 0.3        |   |
| Travel and  entertainment (b)                     |       | 0.3                  |       |
| Aircraft expense  (c)                             |       | 0.4                  |       |
| Professional  fees (d)                            |       | 0.3                  |       |
| Previous shareholders’  other expenses (e)   |       | 0.1                  |       |
| Previous  shareholders’ transaction fees (f) |       | 1.0                  |       |
| Consulting  services (g)                          |       | 0.8                  |       |
| Endorsement  termination (h)                      |       | 0.3                  |       |
| Other (i)                                         |       | 0.1                  |       |
| Total                                             |       | $                    | 3.6        |   |

 

Compensationexpense (a) relates to personnel who were terminated in connection withthe sale of the Company and will not be replaced. Travel and entertainment (b) relatesto expenses incurred by personnel who were terminated and will not be replacedas a result of the Acquisition.  Aircraftexpense (c) relates to the leasing of an aircraft owned by CHA, formerly asubsidiary of PFMI, which was retained by the selling shareholders.  The professional fees (d) primarily arerelated to the Acquisition. The previous shareholders’ other expenses (e) relateto outside board of director fees, community relations, and contributions madeto the former owner’s alma mater. The previous shareholders’ transaction fees (f) includelegal, accounting, and tax consulting fees related to the Acquisition. Theconsulting services (g) consist of the fee paid to the sellingshareholders’ adviser for his role in the Acquisition. The endorsementtermination (h) relates to the contract between the Company and CrawfordRace Cars, LLC. Other (i) includes employee travel and other expensesincurred in connection with the financing of the Acquisition.

 

*Depreciation and amortization.  *Depreciation andamortization expense increased in successor second quarter 2006 compared topredecessor second quarter 2005 and successor fiscal 2005 combined by$1.3 million. This is primarily due to the amortization related to theallocation of the Acquisition purchase price to other intangible assets thatwas present for the entire successor second quarter 2006.  For the prior year comparable period, suchamortization of intangible assets only occurred subsequent to the Acquisitionduring successor fiscal 2005.  Inaddition, depreciation expense increased as a result of the allocation of theAcquisition purchase price and re-valuation of property, plant and equipment asa result of purchase accounting due to the Acquisition.

 

21

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*Other expense*.  Other expense consists primarily of intereston fixed and variable rate long-term debt and interest on the revolving loan,both of which were entered into in connection with the Acquisition. Interestexpense decreased in successor second quarter 2006 compared with predecessorsecond quarter 2005 and successor fiscal 2005 combined by $5.3 million, or 49.3%. This decrease is primarily due toexpenses incurred during predecessor second quarter 2005 and successor fiscal2005 combined as a result of the Acquisition, including: (1) $4.3 millionfor the write-off of deferred loan origination fees; (2) $0.6 million forthe repayment of the Old Notes and (3) $0.5 million for the repayment ofthe Company’s former revolving credit facility.

 

*Income taxes*.* *The effective taxrate for successor second quarter 2006 was 59.4% compared to 33.0% forpredecessor second quarter 2005 and successor fiscal 2005 combined.  The increase in the effective tax rate isprimarily due to the impact of new Ohio tax laws enacted June 30,2005.  These new laws include thephase-out of Ohio franchise tax and Ohio personal property tax and the phase-inof a gross receipts tax referred to as the Commercial Activity Tax (“CAT”).  As a result of the enactment, the Companyreduced its deferred tax liability based on the phase-out of franchise tax andrecorded an additional valuation allowance based on Ohio investment tax creditsthat are expected to expire prior to utilization.  Excluding the one-time impact of thisenactment, the effective tax rate for successor second quarter 2006 would havebeen 38.8%.  The increase in theeffective tax rate excluding the impact of the Ohio law changes is primarilydue to the Company’s profitability and expected pre-tax income in the currentyear.

 

**SuccessorFiscal 2006 Compared to Predecessor Fiscal 2005 and Successor Fiscal 2005Combined**

 

*Revenues, net. *Netrevenues increased by $15.9 million in successor fiscal 2006 compared topredecessor fiscal 2005 and successor fiscal 2005 combined, or 8.3%. Thisincrease is primarily due to (1) strong growth in most of the Company’send-market segments and (2) the impact of price increases implementedduring the prior year in response to higher raw material prices, offset by (3) decreasedsales to several large National Accounts customers ($4.7 million).  Sales for these National Accounts customers continueto be negatively impacted by higher gasoline prices and the related effect onconsumers’ discretionary spending.

 

*Cost of goods sold.  *Costof goods sold increased by $5.7 million in successor fiscal 2006 comparedto predecessor fiscal 2005 and successor fiscal 2005 combined, or 3.9%.   This increase was primarily due to (1) highernet raw material protein prices and unfavorable formulation mix related to theincrease in protein prices ($7.1 million); (2) increased costs as a resultof increased net revenues due to substantial volume growth ($3.8 million) and (3) increasedincentive compensation expense ($0.4 million); offset by (4) start-upcosts incurred in predecessor fiscal 2005 and successor fiscal 2005 combinedassociated with a National Accounts restaurant chain customer that were notincurred during successor fiscal 2006 ($3.2 million); (5) the impact of apurchase accounting adjustment on beginning inventory (as a result of theAcquisition) in the prior year comparable period that did not occur duringsuccessor fiscal 2006 ($1.5 million) and (6) other favorabilityprimarily related to production downtime for equipment replacement incurred inpredecessor fiscal 2005 and successor fiscal 2005 combined that was notincurred during successor fiscal 2006. As a percentage of revenues, cost of goods sold decreased from 76.7% to73.5%.

 

Theprimary materials used in the Company’s food processing operations includeboneless beef, chicken, pork, flour, yeast, seasonings, cheese, breading, soyproteins, and packaging supplies. Meat proteins are generally purchased under 7-daypayment terms.  Historically, we have nothedged in the futures markets, and over time, our raw material costs havefluctuated with movement in the relevant commodity markets.  Additionally, we have contracts withformulaic pricing that allow us to immediately pass along commodity priceincreases.  The $7.1 million netincreased raw material protein prices included $6.3 million related to theseformulaic contracts and by $0.8 million raw material protein price increasesrelated to other non-contracted sales.

 

Approximately42.6% of total sales for successor fiscal 2006 were protected from commodityexposure, of which 38.2% were attributable to cost-plus contracts, while theother 4.4% were related to the USDA Commodity Reprocessing Program, which alsoinsulates us from raw material price fluctuations.  For predecessor fiscal 2005 and successorfiscal 2005 combined, approximately 43.2% of total sales were protected fromcommodity exposure, of which 40.2% were attributable to cost-plus contracts,while the other 3.0% were related to the USDA Commodity Reprocessing Program.  This decrease in insulated sales fromcommodity exposure is directly related to the decrease in National Accountssales.

 

Thefollowing table represents the (increases)/decreases in the weighted averageprices the Company paid for beef, pork, chicken and cheese excludingunfavorable formulation mix and contracts with formulaic pricing duringsuccessor fiscal 2006 compared to predecessor fiscal 2005 and successor fiscal2005 combined:

 

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| ** ** | ** ** | **(Increase)/Decrease**             | ** ** |
|------------|------------|-------------------------------------|------------|
| ** ** | ** ** | **Successor Fiscal 2006**           | ** ** |
| ** ** | ** ** | **Compared to**                     | ** ** |
| ** ** | ** ** | **Predecessor Fiscal 2005**         | ** ** |
| ** ** | ** ** | **And**                             | ** ** |
| ** ** | ** ** | **Successor Fiscal 2005  Combined** | ** ** |
| Beef       |       | (16.9                               | )%         |
| Pork       |       | (0.4                                | )%         |
| Chicken    |       | 44.0                                | %          |
| Cheese     |       | 1.9                                 | %          |
| Aggregate  |       | 3.2                                 | %          |

 

*Selling, general and administrative*.  Selling, general and administrative expenses decreasedby $2.8 million, or 7.8%. As a percentage of revenues, selling, generaland administrative expenses decreased from 18.9% to 16.0%. This decrease wasprimarily due to (1) the elimination of expenses related to the previousshareholders as a result of the Acquisition of $8.8 million; offset by (2) anincrease in incentive compensation ($1.5 million); (3) an increase insales volume and an increase in sales mix to lower cost, higher marginend-markets with greater selling burden rates ($1.5 million); (4) anincrease in selling expenses primarily due to product line expansion ($1.0million); (5) higher costs for the storage of increased inventory ($0.7million) and higher freight charges due to an increase in the mix of productsshipped by the Company versus products picked up by customers and fuelsurcharges impacted by the price of crude oil ($0.7 million); (6) anincrease in selling and distribution expense due to increased sales volume and (7) anon-cash deferred compensation charge related to management’s investment in theAcquisition.  Expenses associated withthe previous shareholders in predecessor fiscal 2005 and successor fiscal 2005combined that are not present in successor fiscal 2006 and are not expected tobe incurred in the future include the following: 

 
| **(dollars in millions)**                         | ** ** | **Predecessor  Fiscal 2005  And Successor  Fiscal 2005  Combined** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Compensation  expense (a)                         |       | $                                                                  | 1.2        |   |
| Travel and  entertainment (b)                     |       | 1.0                                                                |       |
| Office  expense(c)                                |       | 0.8                                                                |       |
| Aircraft expense  (d)                             |       | 0.2                                                                |       |
| Compass  Outfitters (e)                           |       | 0.1                                                                |       |
| Professional  fees (f)                            |       | 2.6                                                                |       |
| Previous  shareholders’ other expenses (g)   |       | 0.7                                                                |       |
| Previous  shareholders’ transaction fees (h) |       | 1.0                                                                |       |
| Consulting  services (i)                          |       | 0.8                                                                |       |
| Endorsement  termination (j)                      |       | 0.3                                                                |       |
| Other (k)                                         |       | 0.1                                                                |       |
| Total                                             |       | $                                                                  | 8.8        |   |

 

Compensationexpense (a) relates to personnel who were terminated in connection withthe sale of the Company and will not be replaced. Travel and entertainment (b) relatesto expenses incurred by personnel who were terminated and will not be replacedas a result of the sale of the Company. Office Expense (c) relates to rentexpense, maintenance and other occupancy costs associated with the lease of anoffice building from a related party that was terminated in connection with thesale of the Company. Aircraft expense (d) relates to the leasing of anaircraft owned by CHA, formerly a subsidiary of PF Management, which wasretained by the selling shareholders. Compass Outfitters (e) relates to anasset that was retained by the selling shareholders. The professional fees (f) primarilyare related to the Acquisition. The previous shareholders’ other expenses (g) relateto outside board of director fees, community relations, and contributions madeto the former owners alma mater. The previous shareholders’ transaction fees (h) includelegal, accounting, and tax consulting fees related to the Acquisition. Theconsulting services (i) consist of the fee paid to the selling shareholders’adviser for his role in the transaction. The endorsement termination(j) relates to the contract between the Company and Crawford Race Cars,LLC. Other (k) includes employee travel and other expenses incurred as aresult of the debt placement for the Acquisition.

 

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*Depreciation and Amortization. *Depreciation andamortization expense increased by $8.0 million.  This is primarily due to the amortizationrelated to the allocation of the Acquisition purchase price to other intangibleassets that was present for the entire successor second fiscal 2006.  For the prior year comparable period, suchamortization of intangible assets only occurred subsequent to the Acquisitionduring successor fiscal 2005.  Inaddition, depreciation expense increased as a result of the allocation of theAcquisition purchase price and re-valuation of property, plant and equipment asa result of purchase accounting due to the Acquisition.

 

*Loss on Disposal of Assets. *The loss on disposal of assets decreased by$0.3 million. The decrease is due to the recording of losses in the prioryear related to affiliated companies as a consequence of the Restructuring.

 

*Other Expense. *Otherexpense consists primarily of interest on fixed and variable rate long-termdebt and interest on a revolving loan, both of which were entered into inconnection with the Acquisition. Other expense decreased by $4.6 million,or 29.9%.  This decrease is primarily dueto expenses incurred during predecessor fiscal 2005 and successor fiscal 2005combined as a result of the Acquisition, including: (1) $4.3 million forthe write-off of deferred loan origination fees; (2) $0.6 million for therepayment of the Old Notes and (3) $0.5 million for the repayment of theCompany’s former revolving credit facility. This decrease was offset by increased debt and related interest expenseas a result of the Acquisition.

 

*Income taxes.  *Theeffective tax rate for successor fiscal 2006 was 55.1% compared to 33.0% for predecessorfiscal 2005 and successor fiscal 2005 combined. The increase in the effective tax rate is primarily due to the impact ofnew Ohio tax laws enacted June 30, 2005. These new laws include the phase-out of Ohio franchise tax and Ohiopersonal property tax and the phase-in of a gross receipts tax referred to asthe Commercial Activity Tax (“CAT”).  Asa result of the enactment, the Company reduced its deferred tax liability basedon the phase-out of franchise tax and recorded an additional valuation allowancebased on Ohio investment tax credits that are expected to expire prior toutilization.  Excluding the one-time impactof this enactment, the effective tax rate for successor fiscal 2006 would havebeen 38.7%.  The increase in theeffective tax rate excluding the impact of the Ohio law changes is primarilydue to the Company’s profitability and expected pre-tax income in the currentyear.

 

**Liquidityand Capital Resources**

 

Netcash provided by operating activities for successor fiscal 2006 was $7.0 millioncompared to net cash used in operating activities of $7.0 million forpredecessor fiscal 2005 and successor fiscal 2005 combined.  The primary components of the net cashprovided by operating activities for successor fiscal 2006 were: (1) depreciationand amortization of intangible assets of $15.5 million, of which $3.8 millionrelates to depreciation of fixed assets and $11.7 million relates toamortization of intangible assets; (2) amortization of deferred loan fees totaling$0.7 million  and (3) a decrease intrade accounts payable and other accrued liabilities of $0.5 million, primarilydue to a decrease in trade accounts payable offset by an increase in accruedcompensation expense and accrued promotional expenses; offset by (4) anincrease in inventory of $4.3 million due to an inventory build to satisfycustomer needs and meet requirements for scheduled equipment maintenance; (5) adecrease in other long-term liabilities of $1.0 million; (6) an increasein receivables of $0.9 million, primarily as a result of the increase in tradeaccounts receivables; (7) a change in deferred income taxes of $0.8million as a result of the enactment of new Ohio tax laws as of June 30,2005 and (8) an increase in refundable income taxes, prepaid expense andother current assets of $0.4 million primarily due to the tax benefit recordedas a result of losses in successor fiscal 2006.

 

Netcash used in investing activities for successor fiscal 2006 was$4.0 million compared to $2.5 million for predecessor fiscal 2005 andsuccessor fiscal 2005 combined.  Net cashused in investing activities consists of capital expenditures for bothsuccessor fiscal 2006 and predecessor fiscal 2005 successor fiscal 2005combined, which consisted of various plant improvements and routine capitalexpenditures.

 

Netcash used in financing activities for successor fiscal 2006 was $3.0 millioncompared to net cash provided by financing activities of $9.4 million forpredecessor fiscal 2005 and successor fiscal 2005 combined. Net cash used infinancing activities for successor fiscal 2006 was due primarily to: (1) principalpayments on long-term debt of $7.6 million; offset by (2) net borrowingsunder the revolving credit agreement of $4.8 million.

 

As of September 3,2005, the Company had no cash and cash equivalents on hand, outstandingborrowings under its revolving credit facility totaling $5.5 million andborrowing availability of approximately $28.8 million.  Also as of September 3, 2005, theCompany had borrowings under its term loan of $129.1 million and $125.0 millionof the New Notes outstanding.

 

TheCompany has budgeted approximately $8.5 million for capital expenditures forthe remainder of fiscal 2006.  Theseexpenditures include a provision for capacity expansion, system upgrades androutine food processing capital improvement

 

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projects and othermiscellaneous expenditures within the Company’s existing facilities.  The Company believes that funds fromoperations and funds from its new $40 million revolving credit facility, aswell as the Company’s ability to enter into capital or operating leases, willbe adequate to finance these capital expenditures.  As described in Note 11, “Legal Proceedingsand Contingencies,” to the Condensed Consolidated Financial Statements, if the HCDOESdetermines that the Company is non-compliant with emissions requirements, theCompany may potentially be required to install additional controlequipment.  The Company is unable toestimate the cost of such upgrades to existing equipment as of September 3,2005.  Should such capital expendituresbe required, the Company would likely adjust the remaining capital budget forfiscal 2006 or delay previously budgeted capital expenditures.

 

If theCompany continues its historical revenue growth trend as expected, then theCompany will be required to raise and invest additional capital for additionalplant expansion projects to provide operating capacity to satisfy increaseddemand.  Management believes that futurecash requirements for these plant expansion projects would need to be metthrough other long-term financing sources. The incurrence of additional long-term debt is governed and restrictedby the Company’s existing debt instruments. Furthermore, there can be no assurance that additional long-termfinancing will be available on advantageous terms (or any terms) when needed bythe Company.

 

On March 8,2004, following a consent solicitation in which consents of holders of$112.4 million in aggregate principal amount of the Company’s thenoutstanding Old Notes, representing 97.74% of the outstanding Old Notes,consented to a Fourth Supplemental Indenture between the Company and U.S. BankNational Association, as trustee (the “Trustee”).  The Company entered into the FourthSupplemental Indenture with the Trustee. Among other things, the FourthSupplemental Indenture increased the annual interest rate on the Old Notes from10.75% to 12.25% through March 31, 2005 and 13.25% thereafter and requiredthe payment of a cash consent fee of $3.5 million (3% of the principalamount of Old Notes held by each consenting noteholder); required thetermination of all related party transactions, except for certainspecifically-permitted transactions (see Note 10, “Related Party Transactions”to the Condensed Consolidated Financial Statements); provided for theassumption by the Company of approximately $15.3 million of subordinateddebt of PFMI and waived any and all defaults of the Indenture existing as of March 8,2004.

 

Concurrentlywith the execution of the Fourth Supplemental Indenture, the Company took titleto an aircraft transferred from a related party subject to $5.6 million ofexisting purchase money debt; assumed $15.3 million of debt from PFMI;cancelled the $1.0 million related party note receivable against the debtassumed from PFMI; cancelled the balances owed by the Company to certainrelated parties, as follows: $0.5 million owed to CHA; $3.5 millionowed to PF Purchasing; $0.5 million owed to PF Distribution; and assumedthe operating leases of PF Distribution in connection with the FourthSupplemental Indenture.  We refer tothese transactions as the “Restructuring”.

 

On June 30,2004, the shareholders of PFMI closed the sale of their shares of stock of PFMIto Holding (see Note 1, “Basis of Presentation and Acquisition,” to theCondensed Consolidated Financial Statements). Effective June 30, 2004, the Company terminated its three-yearvariable-rate $40 million revolving credit facility.  Existing debt issuance costs related to theCompany’s former $40 million facility in the amount of $0.5 millionand a prepayment penalty paid to the former lender in the amount of$0.4 million were charged to interest expense.

 

Alsoeffective June 30, 2004, the Company obtained a $190 million creditfacility from a new lender which includes a six-year variable-rate$150 million term loan, a five-year variable rate $40 million revolvingcredit facility and a $10 million letter of credit subfacility.  Funds available under this new facility areavailable for working capital requirements, permitted investments and generalcorporate purposes.  Borrowings under thenew facility bear interest at floating rates based upon the interest rateoption selected from time to time by the Company and are secured by afirst-priority security interest in substantially all of the Company’sassets.  The interest rates for base rateborrowings under the new revolving credit facility and the new term loan at September 3,2005 were 8.25% (prime of 6.50% plus 1.75%) and 8.00% (prime of 6.50% plus1.50%), respectively.  Actual interestrates are lowered by the use of libor tranches as appropriate.  Repayment of borrowings under the term loanwas initially $375,000 per quarter, which began on September 4, 2004, witha balloon payment of $141.4 million due on June 5, 2010.  However, in addition to paying all scheduledquarterly payments totaling $8.6 million for the term of the loan,  the Company made prepayments on the term loantotaling $4.9 million during successor fiscal 2005.  No prepayments on the term loan were madeduring successor second quarter 2006. Prepayments on the term loan totaling $7.4 million were made during successorfiscal 2006.  The remaining outstandingbalance of $129.1 million as of September 3, 2005 is due on June 5,2010.

 

As of September 3,2005, the Company had outstanding borrowings under its revolving creditfacility totaling $5.5 million and had borrowing availability of approximately$28.8 million.  The maturity date ofthe $40 million revolving credit facility is June 30, 2009.  In addition, the Company is required tosatisfy certain financial covenants regarding cash flow and capitalexpenditures.  As of September 3,2005, the Company is in compliance with all financial covenants.

 

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Alsoin conjunction with the Acquisition, the Company issued the New Notes. Theproceeds of the New Notes, together with the equity contributions from MDP andcertain members of management and borrowings under the Company’s new seniorcredit facility, were used to finance the Acquisition of the Company and torepay outstanding indebtedness, including paying off debt of PFMI assumed bythe Company under the Fourth Supplemental Indenture (except capital leases),paying for the Old Notes tendered in connection with the tender offer describedin Note 1, “Basis of Presentation and Acquisition” to the CondensedConsolidated Financial Statements and redeeming the Old Notes not tendered.

 

Also inconjunction with the Acquisition, the Company and the selling shareholders****entered into a tax sharing and indemnification agreementcontaining certain representations and warranties of the selling shareholderswith respect to taxes.  The agreementprovides that any net operating loss carryforwards (“NOLs”) attributable toexpenses relating to the sale of the Company, will be for the benefit of theselling shareholders.  As of the date ofthe Acquisition, these NOLs totaled approximately $24.2 million.  Accordingly, the Company is required to payto the selling shareholders the amount of any tax benefit attributable to suchNOLs, except that the first $4.0 million of such tax benefits shall be paidinto an escrow account that will secure the selling shareholders indemnificationobligations under the tax sharing agreement. The Company is required to make payments to the selling shareholders orthe escrow account for tax benefits derived from such utilization 20 days afterthe filing of the tax return that utilizes such NOLs.

 

In conjunctionwith the Acquisition, the Company had recorded a net long-term liability to theformer shareholders totaling $10.3 million for the estimated obligations underthe tax sharing agreement.  As of September 3,2005, the Company has utilized $5.1 million of the aforementioned NOLs andsubmitted payment based on the tax benefit, net of other tax assessments due tothe Company from the selling shareholders, to an escrow account for a total of$1.3 million.  As of September 3, 2005,the Company has a net long-term liability to the former shareholders totaling $8.9million.  This amount is excluded fromthe table above due to the uncertainty of when such utilization of the NOLswill occur.

 

The Companyexpects to realize $1.7 million of deal related expenses, decreasing taxableincome for the tax year ended February 26, 2005, of which the related taxbenefit to the Company of $0.7 must be reimbursed to the sellingshareholders.  In addition, the Companyexpects to utilize approximately $15.3 million of NOLs in the tax return duefor the tax year ended February 26, 2005. The NOLs enable the Company to defer cash tax payments required by thetax sharing agreement of approximately $5.5 million attributable to this taxperiod.  However, the Company will berequired to reimburse the selling shareholders or the escrow account for theentire amount 20 days subsequent to the filing of its tax return in November 2006.

 

As a result of thecurrent year calculated losses for tax purposes during successor fiscal 2006,the Company was able to defer cash tax payments of approximately $3.4 millionfor both successor second quarter 2006 and successor fiscal 2006.  The Company expects such deferred amounts tobe paid out 20 days subsequent to the filing of its tax return in November 2007.

 

**CriticalAccounting Policies and Estimates**

 

The preparation of financialstatements in conformity with GAAP requires the appropriate application of certain accounting policies,many of which require the Company to make estimates and assumptions aboutfuture events and their impact on amounts reported in the financial statementsand related notes.  Since future eventsand the impact of those events cannot be determined with certainty, the actualresults will inevitably differ from the Company’s estimates.  Such differences could be material to thefinancial statements.

 

TheCompany believes its application of accounting policies, and the estimatesinherently required therein, are reasonable. These accounting policies and estimates are constantly reevaluated, andadjustments are made when facts and circumstances dictate a change.  Historically, the Company’s application ofaccounting policies has been appropriate, and actual results have not differedmaterially from those determined using necessary estimates.

 

Thefollowing critical accounting policies affect the Company’s more significantjudgments and estimates used in the preparation of its financial statements.

 

*RevenueRecognition. *Revenuefrom sales of food processing products is recorded at the time titletransfers.  Standard shipping terms areFOB destination, therefore, title passes at the time the product is deliveredto the customer.  Revenue is recognizedas the net amount to be received after deductions for estimated discounts,product returns and other allowances. These estimates are based on historical trends and expected futureliabilities (see also *Promotions*below).

 

*Goodwilland Other Intangible Assets*. In conjunction with the Acquisition, the Company engaged an independentparty to perform valuations for financial reporting purposes of the Company’sgoodwill and other intangibles. Assets identified through this 

 

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valuation process includedgoodwill, formulas, customer relationships, licensing agreements and certaintrade names and trademarks.

 

Inaccordance with SFAS 142—”Goodwill and Other Intangible Assets,” the Companytests recorded goodwill and intangibles with indefinite lives for impairment atleast annually.  All other intangibleassets with finite lives are amortized over their estimated economic orestimated useful lives.  In addition, allother intangible assets are reviewed for impairment in accordance with SFAS144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” As of March 5,2005, the Company performed the annual impairment review of goodwill andindefinite-lived intangible assets and also assessed whether theindefinite-lived intangible assets continue to have indefinite lives.  The Company engaged an independent party toperform valuations to assist in the impairment review.  There were not any impairment charges as aresult of this review.

 

TheCompany’s amortizable intangible assets are amortized using acceleratedamortization methods that match the expected benefit derived from theassets.  The accelerated amortizationmethods allocate amortization expense in proportion to each year’s expectedrevenues to the total expected revenues over the estimated useful lives of theassets.

 

*Promotions*.  Promotional expenses associated with rebates,marketing promotions and special pricing arrangements are recorded as areduction of revenues or selling expense at the time the sale is recorded.  Certain of these expenses are estimated basedon historical trends, expected future payments to be made under these programsand expected future customer deductions to be taken under these programs.  The Company believes the estimates recordedin the financial statements are reasonable estimates of the Company’s liabilityunder the programs.

 

*Concentration of Credit Risk and Significant Customers*.  Financial instruments that potentiallysubject the Company to concentrations of credit risk consist primarily of tradereceivables.  The Company performsperiodic credit evaluations of its customers’ financial condition and generallydoes not require collateral.  The Companyencounters a certain amount of credit risk as a result of a concentration ofreceivables among a few significant customers. Sales to the Company’s largest customer were approximately 24% and 28%of revenues for successor second quarter 2006 and predecessor second quarter2005 and successor fiscal 2005 combined, respectively.  Sales to the Company’s largest customer wereapproximately 24% and 28% of revenues for successor fiscal 2006 and predecessorfiscal 2005 and successor fiscal 2005 combined, respectively. Accounts receivableat September 3, 2005 and March 5, 2005 included receivables from theCompany’s largest customer totaling $3.2 million and $4.4 million,respectively.

 

*Stock-Based Compensation*.  The Company treats the options to purchaseshares of common stock of Holding issued to employees of the Company (“Options”)as stock-based compensation for employees of the Company.  As permitted under GAAP, the Company accountsfor the Options under the recognition and measurement principles of AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”), and related Interpretations using the intrinsic value method.  Accordingly, no compensation expense has beenrecognized for the stock option plan in the Company’s condensed consolidatedstatements of operations.

 

*NewAccounting Pronouncements*.     In November 2004, the Financial AccountingStandards Board (the “FASB”) issued SFAS  151, “Inventory Costs—anamendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amendsARB 43, Chapter 4, to clarify that abnormal amounts of idle facilityexpense, freight, handling costs and wasted materials (spoilage) should be recognizedas current-period charges. In addition, SFAS 151 requires that allocation offixed production overheads to the costs of conversion be based on the normalcapacity of the production facilities. The Company will adopt the provisions ofSFAS 151, effective March 5, 2006 for its fiscal 2007 consolidatedfinancial statements. Management is currently evaluating the impact theadoption of the provisions of SFAS 151 will have on the Company’s consolidatedfinancial statements.

 

In May 2005,FASB issued SFAS 154, “AccountingChanges and Error Corrections”. The Statement requires retroactive application of a voluntary change inaccounting principle to prior period financial statements unless it isimpracticable. The Statement also requires that a change in method ofdepreciation, amortization, or depletion for long-lived, non-financial assetsbe accounted for as a change in accounting estimate that is affected by achange in accounting principle.  TheStatement replaces APB Opinion 20, “AccountingChanges”, and SFAS 3, “ReportingAccounting Changes in Interim Financial Statements”.  The Company will adopt the provisionsof SFAS 154, effective March 5, 2006 for its fiscal 2007 consolidatedfinancial statements.  Managementcurrently believes that adoption of the provisions of SFAS 154 will not have amaterial impact on the Company’s consolidated financial statements.

 

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**Seasonality**

 

Exceptfor sales to school districts, which represent approximately 18% of the Company’stotal sales annually and which decline significantly during summer, late November andDecember, there is no other significant seasonal variation in the Company’s sales.

 

**Effect ofNatural Disasters**

 

During the quarter ended September 3, 2005,Hurricane Katrina caused significant damage to parts of the Southeastern andMidwestern United States.  Additionally,during mid-September 2005, Hurricane Rita caused further damage, though toa lesser extent than Hurricane Katrina. The impact of these hurricanes on the Company’s sales and bad debtexpense as a result of uncollectible receivables may adversely affect thirdquarter fiscal 2006 operating profits. The Company’s management is unable to estimate the materiality to thebusiness and financial condition, but will continue to evaluate the impact ofthe hurricanes.

 

**CautionaryStatement As To Forward Looking Information**

 

Thisreport includes “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, including statements about thebusiness, operations, financial results and future prospects of theCompany.  Forward-looking statementsrelate to future events or future financial performance.  In some cases, you can identifyforward-looking statements by terminology such as “may,” “will,” “should,” “expect,”“plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,”the negative of such terms or other comparable terminology.  These statements may involve risks anduncertainties related to, among other things:

 

•                  changes in economic and businessconditions in the world;

•                  potential impact of hurricanes andother natural disasters on sales, raw material costs, fuel costs, insurancecosts and bad debt expense resulting from uncollectible accounts receivables;

•                  increased global tensions, marketdisruption resulting from a terrorist or other attach and any armed conflictinvolving the United States;

•                  adverse changes in food costs andavailability of supplies or costs of distribution;

•                  the Company’s level of indebtedness;

•                  restrictions imposed by the Company’sdebt instruments;

•                  increased competitive activity;

•                  government regulatory actions,including those relating to federal and state environmental laws;

•                  dependence on significant customers;

•                  consolidation of the Company’scustomers;

•                  general risks of the food industry,including risk of contamination, mislabeling of food products, a decline inmeat consumption and outbreak of disease among cattle, chicken or pigs;

•                  adverse change in the Company’sCincinnati, Ohio or Claremont, North Carolina facilities;

•                  dependence on key personnel; and

•                  potential labor disruptions.

 

TheCompany is not under any duty to update any forward-looking statements afterthe date of this report to conform such statements to actual results or tochanges in the Company’s expectations. All forward-looking statements contained in this report and anysubsequently filed reports are expressly qualified in their entirety by thesecautionary statements.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Asdiscussed in the Company’s Annual Report on Form 10-K, the Company isexposed to market risk stemming from changes in interest rates, foreignexchange rates and commodity prices. Changes in these factors could cause fluctuations in the Company’sfinancial condition, results of operations and cash flows.  The Company owned no derivative financialinstruments or nonderivative financial instruments held for trading purposes atSeptember 3, 2005 or March 5, 2005. Certain of the Company’s outstanding nonderivative financial instrumentsat September 3, 2005 are subject to interest rate risk, but not subject toforeign currency or commodity price risk. In successor fiscal 2006, the average price the Company paid for beef,pork, chicken and cheese (increased)/decreased approximately 0.3%, 23.4%,(3.9%) and 6.1%, respectively, compared to the prices paid during the fourthquarter of the fiscal year ended March 5, 2005. The Company managescommodity price risk through purchase orders, non-cancelable contracts and bypassing on such cost increases to customers. There was no significant change inmarket risk during successor fiscal 2006.

 

TheCompany’s major market risk exposure is potential loss arising from changinginterest rates and its impact on long-term debt. The Company’s policy is tomanage interest rate risk by maintaining a combination of fixed and variablerate financial instruments in amounts and with maturities that managementconsiders appropriate. The risks associated with long-term debt at September 3,2005 have not changed materially since March 5, 2005. Of the long-termdebt outstanding at September 3, 2005, the $125.0 million of NewNotes accrue interest at a fixed interest rate, while the $129.1 millionoutstanding borrowings under the term loan facility and the revolving creditfacility accrue interest at a variable interest rate. At September 3, 2005,there were outstanding borrowings under the revolving credit facility totaling$5.5 million.  A rise in prevailinginterest rates could have adverse effects on the Company’s financial conditionand results of operations.  A 25 basispoint increase in the reference rates for the Company’s average variable ratedebt outstanding during successor second quarter 2006 and successor fiscal 2006would have increased net loss for that period by approximately $83,225 and $168,270,respectively.

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

As ofthe end of the period covered by this report, the Company performed anevaluation, under the supervision and with the participation of its managementincluding the chief executive officer and the principal accounting officer, ofthe effectiveness of its disclosure controls and procedures. Based on thatevaluation, the Company’s management, including the chief executive officer andprincipal accounting officer, concluded that the Company’s disclosure controlsand procedures were effective.  Therewere no changes in the internal control over financial reporting that occurredduring the quarter ended September 3, 2005 that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 6.  EXHIBITS**

 

(a)  Exhibits

 

31.1         Rule 13a-14(a)/15d-14(a) Certificationof the Chief Executive Officer

 

31.2         Rule 13a-14(a)/15d-14(a) Certificationof the Principal Financial Officer

 

32            Section 1350 Certifications of the Chief ExecutiveOfficer and the Principal Financial Officer

 

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**SIGNATURES**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   |   | PIERRE  FOODS, INC.                    |   |
|--------|--------|----------------------------------------|--------|
|   |   |                                   |   |
|   |   | /s/ Norbert  E. Woodhams               |   |
|   |   | By: Norbert  E. Woodhams               |   |
|   |   | President  and Chief Executive Officer |   |
|   |   | Dated:  October 18, 2005          |   |
|   |   |                                   |   |
|   |   | /s/ Joseph  W. Meyers                  |   |
|   |   | By:  Joseph W. Meyers                  |   |
|   |   | Vice  President, Finance               |   |
|   |   | Dated:  October 18, 2005          |   |
|        |        |                                        |        |  |

 

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