**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

| **ý****          ****QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                   |   |   |
|                                                                                                                                                                   |   | **For the  quarterly period ended December 3, 2005** |
|                                                                                                                                                                   |   |   |
|                                                                                                                                                                   |   | **OR** |
|                                                                                                                                                                   |   |   |
| **o****          ****TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|                                                                                                                                                                   |   |   |
|                                                                                                                                                                   |   | **For the  transition period from                                    to                                 ** |

 

**Commission File Number:  0-7277**

**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 Road**

**Cincinnati, Ohio  45246**

(Address of principal executive offices) (zip code)

 

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

 

 

(Formername,  former address or former fiscalyear if changed since last report)

 

Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding twelve months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes ý  No  o

 

Indicate by check mark whether the registrantis an accelerated filer, as defined in Exchange Act Rule 12b-2). Yes o No ý

 

Indicate by check mark whether the registrantis a shell company (as defined in Exchange Act Rule 12b-2).  Yes o No ý

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 
| **Class**             | ** ** | **Outstanding  at January 16, 2006** |
|-----------------------|------------|--------------------------------------|
| Class  A Common Stock |       | 100,000                              |

 

 

----

 

**PIERRE FOODS, INC. AND SUBSIDIARIES**

 
| **INDEX**                                                                                                                                                                                                         | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | ** ** |
| **Part I. Financial Information:**                                                                                                                                                                                | ** ** | ** ** |
| ** **                                                                                                                                                                                                        | ** ** | ** ** |
| Item 1. Financial Statements                                                                                                                                                                                      |       |       |
| ** **                                                                                                                                                                                                        | ** ** | ** ** |
| Condensed Consolidated Balance Sheets — December 3, 2005 and March 5,  2005                                                                                                                                  |       |       |
|                                                                                                                                                                                                              |       |       |
| Condensed Consolidated Statements of Operations – for the thirteen  weeks ended December 3, 2005 and  for the thirteen weeks ended December 4, 2004                                                          |       |       |
|                                                                                                                                                                                                              |       |       |
| Condensed Consolidated Statements of Operations – for the thirty-nine  weeks ended December 3, 2005 and for  the periods from March 7, 2004 through June 30, 2004 and July 1, 2004  through December 4, 2004 |       |       |
|                                                                                                                                                                                                              |       |       |
| Condensed Consolidated Statement of Shareholder’s  Equity — for the thirty-nine weeks ended December 3, 2005                                                                                            |       |       |
|                                                                                                                                                                                                              |       |       |
| Condensed Consolidated Statements of Cash Flows –  for the thirty-nine weeks ended December 3, 2005 and for the periods from  March 7, 2004 through June 30, 2004 and July 1, 2004 through December 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 5.Other Information                                                                                                                                                                                          |       |       |
|                                                                                                                                                                                                              |       |       |
| Item 6. Exhibits                                                                                                                                                                                                  |       |       |
|                                                                                                                                                                                                              |       |       |
| Signatures                                                                                                                                                                                                        |       |       |
| Exhibit 14                                                                                                                                                                                                        |       |       |
| Exhibit 31.1                                                                                                                                                                                                      |       |       |
| Exhibit 31.2                                                                                                                                                                                                      |       |       |
| Exhibit 32                                                                                                                                                                                                        |       |       |

 

----

 

**PART I.  FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**PIERRE FOODS, INC. AND SUBSIDIARIES**

 

**Condensed Consolidated Balance Sheets**

 
| ** **                                | ** ** | **Successor Pierre** | ** **  |
|-------------------------------------------|------------|----------------------|-------------|
| ** **                                | ** ** | **December 3, 2005** | ** **  | **March 5, 2005** | ** ** |
| ** **                                | ** ** | **(Unaudited)**      | ** **  | ** ** | ** ** |
| ASSETS                                    |       |                 |        |   |   |
|                                      |       |                 |        |   |   |
| CURRENT  ASSETS:                          |       |                 |        |   |   |
| Cash and cash equivalents                 |       | $                    | 9,282,373   |   | $ | — |   |
| Accounts receivable, net                  |       | 28,631,494           |        | 29,547,340 |   |
| Inventories                               |       | 46,614,504           |        | 45,448,224 |   |
| Refundable income taxes                   |       | 727,234              |        | 2,906,502 |   |
| Deferred income taxes                     |       | 5,764,233            |        | 5,764,233 |   |
| Prepaid expenses and other current assets |       | 2,820,799            |        | 2,954,942 |   |
|                                      |       |                 |        |   |   |
| Total current assets                      |       | 93,840,637           |        | 86,621,241 |   |
|                                      |       |                 |        |   |   |
| PROPERTY,  PLANT AND EQUIPMENT, NET       |       | 55,540,070           |        | 56,284,482 |   |
|                                      |       |                 |        |   |   |
| OTHER  ASSETS:                            |       |                 |        |   |   |
| Other intangibles, net                    |       | 140,688,792          |        | 158,223,072 |   |
| Goodwill                                  |       | 186,535,050          |        | 186,535,050 |   |
| Deferred loan origination fees, net       |       | 7,875,489            |        | 8,923,688 |   |
|                                      |       |                 |        |   |   |
| Total other assets                        |       | 335,099,331          |        | 353,681,810 |   |
|                                      |       |                 |        |   |   |
| Total Assets                              |       | $                    | 484,480,038 |   | $ | 496,587,533 |   |

 

See accompanying notes to unaudited Condensed Consolidated FinancialStatements.

 

3

----

 

**PIERRE FOODS, INC. AND SUBSIDIARIES**

 
| ** **                                                                                                            | ** ** | **Successor Pierre** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------|-------------|
| ** **                                                                                                            | ** ** | **December 3, 2005** | ** **  | **March 5, 2005** | ** ** |
| ** **                                                                                                            | ** ** | **(Unaudited)**      | ** **  | ** ** | ** ** |
| LIABILITIES  AND SHAREHOLDER’S EQUITY                                                                            |       |                 |        |   |   |
|                                                                                                                  |       |                 |        |   |   |
| CURRENT  LIABILITIES:                                                                                                 |       |                 |        |   |   |
| Current installments of long-term debt                                                                                |       | $                    | 242,834     |   | $ | 421,713 |   |
| Trade accounts payable                                                                                                |       | 9,729,960            |        | 11,172,350 |   |
| Accrued interest                                                                                                      |       | 4,873,378            |        | 1,832,374 |   |
| Accrued payroll and payroll taxes                                                                                     |       | 5,357,854            |        | 4,663,372 |   |
| Accrued promotions                                                                                                    |       | 4,039,645            |        | 3,499,230 |   |
| Accrued taxes (other than income and  payroll)                                                                        |       | 666,322              |        | 949,572 |   |
| Other accrued liabilities                                                                                             |       | 1,694,438            |        | 1,420,979 |   |
|                                                                                                                  |       |                 |        |   |   |
| Total current liabilities                                                                                             |       | 26,604,431           |        | 23,959,590 |   |
|                                                                                                                  |       |                 |        |   |   |
| LONG-TERM  DEBT, less current installments                                                                            |       | 249,825,893          |        | 263,158,658 |   |
|                                                                                                                  |       |                 |        |   |   |
| DEFERRED  INCOME TAXES                                                                                                |       | 52,137,864           |        | 52,929,534 |   |
|                                                                                                                  |       |                 |        |   |   |
| OTHER  LONG-TERM LIABILITIES                                                                                          |       | 9,599,268            |        | 10,517,166 |   |
|                                                                                                                  |       |                 |        |   |   |
| Total Liabilities                                                                                                     |       | 338,167,456          |        | 350,564,948 |   |
|                                                                                                                  |       |                 |        |   |   |
| SHAREHOLDER’S  EQUITY:                                                                                           |       |                 |        |   |   |
| Common stock – Class A, 100,000 shares  authorized, issued and outstanding at December 3, 2005 and March 5, 2005 |       | 150,258,543          |        | 150,351,972 |   |
| Retained deficit                                                                                                      |       | (3,945,961           | )           | (4,329,387 | ) |
|                                                                                                                  |       |                 |        |   |   |
| Total shareholder’s equity                                                                                       |       | 146,312,582          |        | 146,022,585 |   |
|                                                                                                                  |       |                 |        |   |   |
| Total Liabilities and Shareholder’s Equity                                                                       |       | $                    | 484,480,038 |   | $ | 496,587,533 |   |

 

See accompanying notes tounaudited Condensed Consolidated Financial Statements.

 

4

----

 

**PIERRE FOODS, INC. AND SUBSIDIARIES**

 

**Condensed Consolidated Statements ofOperations**

(Unaudited)

 
| ** **                                                                                                                                                                                          | ** ** | **Successor Pierre** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|-------------|
| ** **                                                                                                                                                                                          | ** ** | **For the**          | ** **  | **For the** | ** ** |
| ** **                                                                                                                                                                                          | ** ** | **Thirteen Weeks**   | ** **  | **Thirteen Weeks** | ** ** |
| ** **                                                                                                                                                                                          | ** ** | **Ended**            | ** **  | **Ended** | ** ** |
| ** **                                                                                                                                                                                          | ** ** | **December 3, 2005** | ** **  | **December 4, 2004** | ** ** |
|                                                                                                                                                                                                |       |                 |        |   |   |
| REVENUES                                                                                                                                                                                            |       | $                    | 115,452,651 |   | $ | 111,968,412 |   |
|                                                                                                                                                                                                |       |                 |        |   |   |
| COSTS AND EXPENSES:                                                                                                                                                                                 |       |                 |        |   |   |
| Cost of goods sold (includes related party  transactions totaling $194,847 for the thirteen weeks ended December 4, 2004)                                                                           |       | 81,100,838           |        | 80,147,774 |   |
| Selling, general and administrative  expenses (includes related party transactions totaling $35,333 and $27,793  for the thirteen weeks ended December 3, 2005 and December 4, 2004,  respectively) |       | 17,011,852           |        | 15,409,997 |   |
| Depreciation and amortization                                                                                                                                                                       |       | 7,545,947            |        | 8,576,802 |   |
| Loss on disposal of plant, property and  equipment, net                                                                                                                                             |       | 6,388                |        | — |   |
|                                                                                                                                                                                                |       |                 |        |   |   |
| Total costs and expenses                                                                                                                                                                            |       | 105,665,025          |        | 104,134,573 |   |
|                                                                                                                                                                                                |       |                 |        |   |   |
| OPERATING  INCOME                                                                                                                                                                                   |       | 9,787,626            |        | 7,833,839 |   |
|                                                                                                                                                                                                |       |                 |        |   |   |
| OTHER INCOME  (EXPENSE):                                                                                                                                                                            |       |                 |        |   |   |
| Interest expense                                                                                                                                                                                    |       | (5,688,999           | )           | (5,246,142 | ) |
| Other income, net                                                                                                                                                                                   |       | 58,607               |        | 12,405 |   |
|                                                                                                                                                                                                |       |                 |        |   |   |
| Other expense, net                                                                                                                                                                                  |       | (5,630,392           | )           | (5,233,737 | ) |
|                                                                                                                                                                                                |       |                 |        |   |   |
| INCOME  BEFORE INCOME TAX PROVISION                                                                                                                                                                 |       | 4,157,234            |        | 2,600,102 |   |
|                                                                                                                                                                                                |       |                 |        |   |   |
| INCOME TAX  PROVISION                                                                                                                                                                               |       | (1,606,989           | )           | (823,685 | ) |
|                                                                                                                                                                                                |       |                 |        |   |   |
| NET INCOME                                                                                                                                                                                          |       | $                    | 2,550,245   |   | $ | 1,776,417 |   |
|                                                                                                                                                                                                |       |                 |        |   |   |
| NET INCOME  PER COMMON SHARE – BASIC AND DILUTED                                                                                                                                               |       | $                    | 25.50       |   | $ | 17.76 |   |
|                                                                                                                                                                                                |       |                 |        |   |   |
| WEIGHTED  AVERAGE SHARES OUTSTANDING — BASIC AND DILUTED                                                                                                                                       |       | 100,000              |        | 100,000 |   |

 

See accompanying notes tounaudited Condensed Consolidated Financial Statements.

 

5

----

 

**PIERRE FOODS, INC. AND SUBSIDIARIES**

 

**CondensedConsolidated Statements of Operations**

(Unaudited)

 
| ** **                                                                                                                                                                                                                               | ** ** | **Successor Pierre**  | ** **  | **Predecessor Pierre** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|------------------------|------------|
| ** **                                                                                                                                                                                                                               | ** ** | **For the**           | ** **  | **For the Period**     | ** ** | **For the Period** | ** ** |
| ** **                                                                                                                                                                                                                               | ** ** | **Thirty-Nine Weeks** | ** **  | **July 1, 2004**       | ** ** | **March 7, 2004** | ** ** |
| ** **                                                                                                                                                                                                                               | ** ** | **Ended**             | ** **  | **Through**            | ** ** | **Through** | ** ** |
| ** **                                                                                                                                                                                                                               | ** ** | **December 3, 2005**  | ** **  | **December 4, 2004**   | ** ** | **June 30, 2004** | ** ** |
|                                                                                                                                                                                                                                     |       |                  |        |                   |       |   |   |
| REVENUES                                                                                                                                                                                                                                 |       | $                     | 322,367,502 |                   | $          | 187,407,827 |   | $ | 115,548,564 |   |
|                                                                                                                                                                                                                                     |       |                  |        |                   |       |   |   |
| COSTS AND  EXPENSES:                                                                                                                                                                                                                     |       |                  |        |                   |       |   |   |
| Cost of goods sold                                                                                                                                                                                                                       |       | 233,232,529           |        | 139,580,046            |       | 87,025,521 |   |
| Selling, general and administrative  expenses (includes related party transactions totaling $103,267 and $165,840  for the thirty-nine weeks ended December 3, 2005 and for the thirty-nine  weeks ended December 4, 2004, respectively) |       | 50,215,157            |        | 24,964,958             |       | 26,446,857 |   |
| Loss on disposal of property, plant and  equipment, net                                                                                                                                                                                  |       | 6,388                 |        | —                 |       | 339,921 |   |
| Depreciation and amortization                                                                                                                                                                                                            |       | 23,032,555            |        | 14,549,719             |       | 1,544,903 |   |
|                                                                                                                                                                                                                                     |       |                  |        |                   |       |   |   |
| Total costs and expenses                                                                                                                                                                                                                 |       | 306,486,629           |        | 179,094,723            |       | 115,357,202 |   |
|                                                                                                                                                                                                                                     |       |                  |        |                   |       |   |   |
| OPERATING  INCOME                                                                                                                                                                                                                        |       | 15,880,873            |        | 8,313,104              |       | 191,362 |   |
|                                                                                                                                                                                                                                     |       |                  |        |                   |       |   |   |
| OTHER INCOME  (EXPENSE):                                                                                                                                                                                                                 |       |                  |        |                   |       |   |   |
| Interest expense                                                                                                                                                                                                                         |       | (16,640,118           | )           | (14,275,247            | )          | (6,537,519 | ) |
| Other income, net                                                                                                                                                                                                                        |       | 93,281                |        | 12,405                 |       | 1,784 |   |
|                                                                                                                                                                                                                                     |       |                  |        |                   |       |   |   |
| Other expense, net                                                                                                                                                                                                                       |       | (16,546,837           | )           | (14,262,842            | )          | (6,535,735 | ) |
|                                                                                                                                                                                                                                     |       |                  |        |                   |       |   |   |
| LOSS BEFORE  INCOME TAX BENEFIT                                                                                                                                                                                                          |       | (665,964              | )           | (5,949,738             | )          | (6,344,373 | ) |
|                                                                                                                                                                                                                                     |       |                  |        |                   |       |   |   |
| INCOME TAX  BENEFIT                                                                                                                                                                                                                      |       | 1,049,390             |        | 2,007,386              |       | 2,080,338 |   |
|                                                                                                                                                                                                                                     |       |                  |        |                   |       |   |   |
| NET  INCOME/(LOSS)                                                                                                                                                                                                                       |       | $                     | 383,426     |                   | $          | (3,942,352 | ) | $ | (4,264,035 | ) |
|                                                                                                                                                                                                                                     |       |                  |        |                   |       |   |   |
| NET INCOME/(LOSS) PER COMMON SHARE – BASIC  AND DILUTED                                                                                                                                                                             |       | $                     | 3.83        |                   | $          | (39.42 | ) | $ | (42.64 | ) |
|                                                                                                                                                                                                                                     |       |                  |        |                   |       |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING — BASIC  AND DILUTED                                                                                                                                                                            |       | 100,000               |        | 100,000                |       | 100,000 |   |

 

See accompanying notes tounaudited Condensed Consolidated Financial Statements.

 

6

----

 

**PIERRE FOODS, INC. AND SUBSIDIARIES**

 

**Condensed Consolidated Statement ofShareholder’s Equity**

 

**For the Thirty-Nine Weeks Ended December 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 income                         |       | —      |        | 383,426      |       | 383,426                |       |
| Expenses  paid on behalf of parent |       | (93,429     | )           | —       |       | (93,429                | )          |
|                               |       |        |        |         |       |                   |       |
| BALANCE AT  DECEMBER 3, 2005       |       | $           | 150,258,543 |         | $          | (3,945,961             | )          | $ | 146,312,582 |   |

 

See accompanying notes to unaudited Condensed Consolidated FinancialStatements.

 

7

----

 

**PIERRE FOODS, INC. AND SUBSIDIARIES**

 

**Condensed Consolidated Statements of CashFlows**

(Unaudited)

 
| ** **                                                                                | ** ** | **Successor Pierre**  | ** ** | **Predecessor Pierre** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                | ** ** | **For the**           | ** ** | **For the Period**     | ** ** | **For the Period** | ** ** |
| ** **                                                                                | ** ** | **Thirty-Nine Weeks** | ** ** | **July 1, 2004**       | ** ** | **March 7, 2004** | ** ** |
| ** **                                                                                | ** ** | **Ended**             | ** ** | **Through**            | ** ** | **Through** | ** ** |
| ** **                                                                                | ** ** | **December 3, 2005**  | ** ** | **December 4, 2004**   | ** ** | **June 30, 2004** | ** ** |
|                                                                                      |       |                  |       |                   |       |   |   |
| CASH FLOWS  FROM OPERATING ACTIVITIES                                                     |       |                  |       |                   |       |   |   |
| Net income/(loss)                                                                         |       | $                     | 383,426    |                   | $          | (3,942,352 | ) | $ | (4,264,035 | ) |
|                                                                                      |       |                  |       |                   |       |   |   |
| Adjustments to reconcile net income/(loss)  to net cash provided by operating activities: |       |                  |       |                   |       |   |   |
| Depreciation and amortization                                                             |       | 23,032,555            |       | 14,549,720             |       | 1,544,903 |   |
| Amortization of deferred loan origination  fees                                           |       | 1,108,040             |       | 612,920                |       | 716,478 |   |
| Change in deferred income taxes                                                           |       | (791,670              | )          | 918,893                |       | (2,080,338 | ) |
| Write-off of deferred loan origination fees                                               |       | —                |       | 4,283,122              |       | — |   |
| Loss on disposition of property, plant and  equipment, net                                |       | 6,388                 |       | —                 |       | 339,921 |   |
| Decrease in other assets                                                                  |       | —                |       | —                 |       | 296,694 |   |
| Increase (decrease) in other long-term  liabilities                                       |       | (917,898              | )          | 205,615                |       | (94,477 | ) |
| Changes in operating assets and  liabilities:                                             |       |                  |       |                   |       |   |   |
| Receivables                                                                               |       | 915,846               |       | (9,357,006             | )          | 5,660,719 |   |
| Inventories                                                                               |       | (1,166,280            | )          | 2,915,543              |       | (4,911,529 | ) |
| Refundable income taxes, prepaid expenses  and other current assets                       |       | 2,313,411             |       | (3,843,645             | )          | 949,584 |   |
| Trade accounts payable and other accrued  liabilities                                     |       | 2,823,720             |       | 2,556,338              |       | 2,227,855 |   |
| Total adjustments                                                                         |       | 27,324,112            |       | 12,841,502             |       | 4,649,810 |   |
| Net cash provided by operating activities                                                 |       | 27,707,538            |       | 8,899,150              |       | 385,775 |   |
|                                                                                      |       |                  |       |                   |       |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES                                                     |       |                  |       |                   |       |   |   |
| Capital expenditures                                                                      |       | (4,749,684            | )          | (1,746,791             | )          | (2,084,160 | ) |
| Net cash used in investing activities                                                     |       | (4,749,684            | )          | (1,746,793             | )          | (2,084,160 | ) |
|                                                                                      |       |                  |       |                   |       |   |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES                                                     |       |                  |       |                   |       |   |   |
| Borrowings (repayments) of revolving credit  agreement                                    |       | (790,000              | )          | (18,492,886            | )          | 7,712,901 |   |
| Principal payments on long-term debt                                                      |       | (12,732,209           | )          | (11,101,957            | )          | (673,526 | ) |
| Loan origination fees                                                                     |       | (59,843               | )          | (9,737,366             | )          | (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                                                               |       | (93,429               | )          | (100,064,711           | )          | — |   |
| Net cash provided by (used in) financing  activities                                      |       | (13,675,481           | )          | (7,182,706             | )          | 3,667,376 |   |
|                                                                                      |       |                  |       |                   |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                     |       | 9,282,373             |       | (30,349                | )          | 1,968,991 |   |
|                                                                                      |       |                  |       |                   |       |   |   |
| CASH AND  CASH EQUIVALENTS, BEGINNING OF PERIOD                                           |       | —                |       | 2,173,856              |       | 204,865 |   |
|                                                                                      |       |                  |       |                   |       |   |   |
| CASH AND  CASH EQUIVALENTS, END OF PERIOD                                                 |       | $                     | 9,282,373  |                   | $          | 2,143,507 |   | $ | 2,173,856 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

8

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**PIERRE FOODS, INC. AND SUBSIDIARIES**

 

**Notes to Condensed Consolidated Financial Statements**

(Unaudited)

 

**1.****        Basis of Presentation andAcquisition**

 

Pierre Foods, Inc. (the “Company”or “Pierre”) is a manufacturer and marketer of high-quality, differentiatedprocessed food solutions, focusing on formed, pre-cooked protein products andhand-held convenience sandwiches.  TheCompany’s products include beef, pork, poultry, cheese and bakery items.  Pierre offers comprehensive food solutions toits customers, including proprietary product development, special ingredientsand recipes, as well as custom packaging and marketing programs.  Pierre’s pre-cooked proteins includeflamebroiled burger patties, homestyle meatloaf, chicken strips and boneless,barbecued pork rib products.  Pierremarkets its pre-cooked protein products to a broad array of customers thatincludes restaurant chains, schools and other foodservice providers.

 

*Basis ofPresentation and Acquisition. *OnJune 30, 2004, the shareholders of PF Management, Inc. (“PFMI”), the soleshareholder 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”).

 

The unauditedCondensed Consolidated Financial Statements of Pierre and its subsidiaries havebeen prepared in accordance with accounting principles generally accepted inthe United States of America (“GAAP”), as well as the instructions to Form 10-Qand Article 10 of Regulation S-X.  Thesestatements should be read in conjunction with the Consolidated FinancialStatements and the notes thereto included in the Company’s Annual Report onForm 10-K filed on June 3, 2005 (“Form 10-K”) and the Company’s Annual Reporton Form 10-K/A filed on January 3, 2006 (“Form 10-K/A”).

 

The financialinformation as of March 5, 2005 included in these financial statements hasbeen derived from the Company’s audited Consolidated Financial Statements. Inthe opinion of the Company, the accompanying unaudited Condensed ConsolidatedFinancial Statements contain all adjustments necessary to present fairly thefinancial position, the results of operations and the cash flows of the Companyfor the interim periods. The results of interim operations are not necessarilyindicative of the results to be expected for the full fiscal year, and as notedabove, should be read in conjunction with the Consolidated Financial Statementsand the notes thereto included in the Company’s Form 10-K and the Company’sForm 10-K/A.  The Company’s current accountingpolicies are consistent with those described in the notes to the Company’sMarch 5, 2005 audited Consolidated Financial Statements.

 

Included inthis report are interim unaudited Condensed Consolidated Financial Statementsthat contain all adjustments necessary to present fairly the financial positionas of December 3, 2005, the results of operations for the thirteen week periodsended December 3, 2005 and December 4, 2004, the results of operations for thethirty-nine week period ended December 3, 2005 and for the periods from March7, 2004 through June 30, 2004 and July 1, 2004 through December 4, 2004, thecash flows of the Company for the thirty-nine weeks ended December 3, 2005 andfor the periods from March 7, 2004 through June 30, 2004 and July 1, 2004through December 4, 2004 and the statement of shareholder’s equity for thethirty-nine week period ended December 3, 2005. The thirteen and thirty-nine week periods ended December 3, 2005 arereferred to as “successor third quarter 2006” and “successor fiscal 2006”,respectively.  The thirteen weeks endedDecember 4, 2004 are referred to as “successor third quarter 2005”.  The period from March 7, 2004 through June30, 2004 is referred to as “predecessor fiscal 2005.”  The period from July 1, 2004 through December4, 2005 is referred to as “successor fiscal 2005”.  The thirty-nine week period ended December 4,2004 is referred to as “predecessor fiscal 2005 and successor fiscal 2005combined”.  Financial statementpresentation used for predecessor fiscal 2005, successor third quarter 2005,and successor fiscal 2005 have been reclassified, where applicable, to conformto financial statement presentation used for successor third quarter 2006 andsuccessor fiscal 2006.

 

The fair valueadjustments related to the Acquisition, which have been pushed down to theCompany from Holding, primarily include adjustments in property, plant andequipment, inventories, goodwill, other intangible assets and related deferredtaxes.

 

9

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The Companyreports 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.

 

In connection with theAcquisition, the following occurred:

 

•                  TheCompany merged with Pierre Merger Corp., an affiliate of MDP, with the Companybeing the surviving corporation following the merger.

 

•                  TheCompany terminated its three-year variable-rate $40 million revolving creditfacility and obtained a $190 million credit facility from a new lender whichincludes a six-year variable-rate $150 million term loan and a five-yearvariable rate $40 million revolving credit facility with a $10 million letterof credit subfacility.  See Note 7, “FinancingArrangements,” to the Company’s Consolidated Financial Statements included inForm 10-K.

 

•                  TheCompany terminated its few remaining related party transactions (described inNote 10, “Related Party Transactions,” to the Condensed Consolidated FinancialStatements), transferred miscellaneous assets to Messrs. Richardson and Clark,the Company’s former Chairman and Vice Chairman, respectively, including theCompany’s airplane, which was distributed to Mr. Richardson.

 

•                  PierreMerger Corp. closed a cash tender offer and consent solicitation for theCompany’s old notes outstanding prior to the Acquisition (the “Old Notes”).  Holders of approximately $106.3 million, orapproximately 92%, of the aggregate principal amount of the Company’s outstandingOld Notes tendered their Old Notes.  TheCompany, as the surviving corporation of the merger with Pierre Merger Corp.,accepted and paid for all Old 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 and these OldNotes were redeemed on July 20, 2004.

 

•                  TheCompany issued $125.0 million of 9-7/8% Senior Subordinated Notes due 2012 (the“New Notes”). The proceeds of the New Notes, together with the equitycontributions from MDP and certain members of management (as described below)and borrowings under the Company’s new senior credit facility, were used tofinance the Acquisition and to repay outstanding indebtedness.

 

•                  TheCompany’s President and Chief Executive Officer, Norbert E. Woodhams, and itsSenior Vice President of Sales, Marketing and New Product Development, RobertC. Naylor, signed employment agreements committing them to continue working forthe Company after the Acquisition. The stated term of employment for eachexecutive is one year, but each agreement renews automatically and continuouslyyear-to-year unless terminated.

 

•                  Themanagement investors, the Company’s President and Chief Executive Officer,Norbert E. Woodhams, and its Senior Vice President of Sales, Marketing and NewProduct Development, Robert C. Naylor, invested approximately $4.9 million in adeferred compensation plan.  Thisdeferred compensation plan is funded through a rabbi trust that owns preferredstock of Holding with an aggregate liquidation value of approximately $5.6million at December 3, 2005.

 

•                  Inaddition to the base purchase price, the stock purchase agreement entitled theselling shareholders to earn-out cash payments, which included an additionalaggregate amount of $13.0 million in the event that, at the end of any fiscalquarter during the fiscal year ended March 5, 2005, the Company achieved EBITDA(as defined in the stock purchase agreement) for the prior four fiscal quartersthen ended of $56.0 million or more.  Noportion of the additional amount was payable, as this EBITDA target was notmet.

 

The followingtable presents unaudited pro forma information for predecessor fiscal 2005 andsuccessor 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   |       | $                                  | 302,956,391 |   | $ | 302,947,787 |   |
| Net loss   |       | $                                  | (8,206,387  | ) | $ | (11,413,168 | ) |

 

10

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Theseunaudited pro forma results, based on assumptions deemed appropriate by theCompany’s management, have been prepared for informational purposes only andare not necessarily indicative of the amounts that would have resulted if the Companyhad been acquired by MDP on March 7, 2004.

 

Included inthese pro forma results are certain predecessor fees that the Company does notexpect to incur in the future.  Theseinclude professional fees, primarily related to the Acquisition.  For predecessor fiscal 2005 and successorfiscal 2005 combined, these fees amounted to $2,591,989.  No such fees existed for successor fiscal2006.

 

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 Pierre’s former shareholder’s alma mater.  For predecessor fiscal 2005 and successorfiscal 2005 combined, these fees amounted to $600,653.

 

Also includedin the pro forma results for predecessor fiscal 2005 and successor fiscal 2005combined are certain Acquisition expenses related to the sale of the Company toMDP.  These transaction expenses includeprofessional fees of $957,000 for predecessor fiscal 2005 and successor fiscal2005 combined.  Other predecessor fiscal2005 and successor fiscal 2005 combined transaction expenses relating to theprevious shareholders’ adviser amounted to $780,952.  A termination payoff of the endorsementbetween the Company and Crawford Race Cars, LLC also resulted in expense inpredecessor fiscal 2005 and successor fiscal 2005 combined amounting to$318,000 that is not expected to be incurred in the future.

 

The unauditedpro forma Condensed Consolidated Financial Statements reflect the Acquisitionof the Company in accordance with Statement of Financial Accounting StandardNo. 141 (“SFAS 141”) —”Business Combinations” and Statement of FinancialAccounting Standard No. 142 (“SFAS 142”) —”Goodwill and Other IntangibleAssets”.

 

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 |   |

 

The Companyobtained outside appraisals of acquired assets and liabilities in successorfiscal 2005.  Deferred tax liabilitieshave been finalized based on the final allocation of the purchase price and thedetermination of the tax basis 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 ofDirectors of Holding may grant options to purchase an aggregate of 163,778shares of common stock of Holding (the “Options”).  Such options may be granted to directors,employees and consultants of Holding and its subsidiaries, including theCompany.  Holding granted no new Optionsduring successor third quarter 2006.  OnJuly 5, 2005, during successor fiscal 2006, Holding granted 3,960 Options totwo members of management of the Company. At December 3, 2005, Options to purchase a total of 131,357 shares ofcommon stock of Holding had been issued to members of management of the Companyand 32,421 were reserved for future issuance. All outstanding Options were granted at $10 per share and expire tenyears from the date of grant.  A portionof each outstanding Option vests daily on a pro-rata basis over a five-yearperiod from the date of grant and the remaining portion of each outstandingOption vests seven years from the date of grant, subject to accelerated vestingbased on the achievement of certain performance measures.

 

11

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The Companytreats the Options as stock-based employee compensation for employees of theCompany.  As permitted under GAAP, theCompany accounts for the Options under the recognition and measurementprinciples of Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees” (“APB 25”), and related Interpretations using theintrinsic value method.  Accordingly, nocompensation expense has been recognized for the Options in its CondensedConsolidated Financial 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, “Accounting forStock-Based Compensation” (“SFAS 123”), the Company’s net income/(loss) andincome/(loss) per share would have been the following:

 
| ** **                                              | ** ** | **Successor Pierre**                        | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                              | ** ** | **Thirteen Weeks  Ended  December 3, 2005** | ** ** | **Thirty-Nine  Weeks Ended  December 3, 2005** | ** ** | **Thirteen Weeks  Ended  December 4, 2004** | ** ** | **For the Period from  July 1, 2004 through  December 4, 2004** | ** ** |
| Net income/(loss) as reported                           |       | $                                           | 2,550,245  |   | $ | 383,426 |   | $ | 1,776,417 |   | $ | (3,942,352 | ) |
| Minimum value of stock- based compensation  net of tax  |       | (8,972                                      | )          | (26,620 | ) | (9,540 | ) | (14,326 | ) |
| Net income/(loss) pro forma                             |       | $                                           | 2,541,273  |   | $ | 356,806 |   | $ | 1,766,877 |   | $ | (3,956,678 | ) |
|                                                    |       |                                        |       |   |   |   |   |   |   |
| Basic and diluted income/(loss) per share,  as reported |       | $                                           | 25.50      |   | $ | 3.83 |   | $ | 17.76 |   | $ | (39.42 | ) |
| Basic and diluted income/(loss) per share,  pro forma   |       | $                                           | 25.41      |   | $ | 3.57 |   | $ | 17.67 |   | $ | (39.57 | ) |

 

The Companyengaged an independent third party to perform a valuation analysis of theOptions.  The estimated total stock-basedemployee compensation expense was determined using the Black-Scholes-Mertonoption pricing model with the following weighted average assumptions:

 
| 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 requires compensation expense associated with share-basedpayments to employees to be recognized in the financial statements based ontheir fair values.  Upon the adoption ofSFAS 123R, the Company will be required to apply the provisions of thestatement prospectively for any newly issued, modified or settled award afterthe date of initial adoption, as well as to the unvested portion of awardsgranted prior to adoption of the standard. As the Company currently uses the intrinsic value method to value theOptions, the fair value assigned to any newly issued, modified or settledawards after the adoption of SFAS 123R is expected to be significantly greaterdue to the differences in valuation methods.

 

**3.****             Inventories**

 

A summary of inventories, by major classifications,follows:

 
| ** **              | ** ** | **December 3, 2005** | ** ** | **March 5, 2005** | ** ** |
|-------------------------|------------|----------------------|------------|-------------------|------------|
| Manufacturing  supplies |       | $                    | 1,749,256  |              | $          | 1,684,290 |   |
| Raw  materials          |       | 7,651,656            |       | 6,530,663         |       |
| Finished  goods         |       | 37,207,542           |       | 37,226,388        |       |
| Work in  process        |       | 6,050                |       | 6,883             |       |
| Total                   |       | $                    | 46,614,504 |              | $          | 45,448,224 |   |

 

12

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

 

Long-term debt is comprised of the following:

 
| ** **                                                                                               | ** ** | **December 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                                      |       | 124,125,000          |        | 136,500,000       |       |
| Revolving line of credit, maximum borrowings  of $40 million with floating interest rates, maturing 2009 |       | —               |        | 790,000           |       |
| 0.0% to 7.55% capitalized lease obligations  maturing through 2011                                       |       | 943,727              |        | 1,290,371         |       |
| Total long-term debt                                                                                     |       | 250,068,727          |        | 263,580,371       |       |
| Less current installments                                                                                |       | 242,834              |        | 421,713           |       |
| Long-term debt less current installments                                                                 |       | $                    | 249,825,893 |              | $          | 263,158,658 |   |

 

OnMarch 8, 2004, following a consent solicitation in which consents ofholders of $112.4 million in aggregate principal amount of the Company’sthen outstanding 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 Fourth Supplemental Indenture increased theannual interest rate on the Old Notes from 10.75% to 12.25% throughMarch 31, 2005 and 13.25% thereafter, and required the payment of a cashconsent fee of $3.5 million (3% of the principal amount of Old Notes heldby each consenting noteholder); required the termination of all related partytransactions, except for certain specifically-permitted transactions (see Note10, “Related Party Transactions” to the Condensed Consolidated FinancialStatements); provided for the assumption by the Company of approximately$15.3 million of subordinated debt of PFMI and waived any and all defaultsof 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. We refer to these transactions as the “Restructuring”.

 

OnJune 30, 2004, the shareholders of PFMI closed the sale of their shares ofstock of PFMI to Holding (see Note 1, “Basis of Presentation and Acquisition,”to the Condensed Consolidated Financial Statements).  Effective June 30, 2004, the Companyterminated its three-year variable-rate $40 million revolving creditfacility.  Existing debt issuance costsrelated to the Company’s former $40 million facility in the amount of$0.5 million and a prepayment penalty paid to the former lender in theamount of $0.4 million were charged to interest expense.

 

Also effectiveJune 30, 2004, the Company obtained a $190 million credit facilityfrom a new lender which includes a six-year variable-rate $150 millionterm loan, a five-year variable rate $40 million revolving credit facility anda $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 atDecember 3, 2005 were 8.75% (prime of 7.00% plus 1.75%) and 8.50% (prime of7.00% plus 1.50%), respectively.  Actualinterest rates 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, with aballoon 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 Companymade

 

13

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prepayments on the term loantotaling $4.9 million during successor fiscal 2005.  Prepayments totaling $5.0 million and $12.4million were made during successor third quarter 2006 and successor fiscal2006, respectively.  The remainingoutstanding balance of $124.1 million as of December 3, 2005 is due on June 5,2010.

 

As of December3, 2005, the Company had no outstanding borrowings under its revolving creditfacility and had borrowing availability of approximately$34.4 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 December 3, 2005,the Company is in compliance with all financial covenants.

 

Also inconjunction 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 outstanding indebtedness,including paying off debt of PFMI assumed by the Company under the FourthSupplemental Indenture (except capital leases), paying for the Old Notestendered in connection with the tender offer described in Note 1, “Basis ofPresentation and Acquisition” to the Condensed Consolidated FinancialStatements and redeeming the Old Notes not tendered.

 

**5.  Goodwill and Other Intangible Assets**

 

In conjunctionwith the Acquisition, the Company engaged an independent party to performvaluations for financial reporting purposes on the Company’s goodwill and otherintangibles.  Assets identified throughthis valuation process included goodwill, formulas, customer relationships,licensing agreements and certain tradenames and trademarks.

 

In accordancewith SFAS 142, the Company tests recorded goodwill and other intangible assetswith indefinite lives for impairment at least annually.  All other intangible assets with finite livesare amortized over their estimated economic or estimated useful lives.  In addition, all other intangible assets arereviewed for impairment in accordance with SFAS 144.  Based on the Company’s review and the reviewperformed by third parties, no impairment existed at December 3, 2005 or March5, 2005.

 

The Company’samortizable other 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 economic orestimated useful lives of the assets.

 

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

 
| ** **                              | ** ** | **As of December 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  |   | $ | 21,105,494 |   | $ | 73,894,506 |   | $ | 95,000,000 |   | $ | 10,380,233 |   | $ | 84,619,767 |   |
| Tradename and Trademarks                |       | 12-20                      |       | 20,100,000              |        | 2,927,667 |   | 17,172,333 |   | 20,100,000 |   | 1,409,337 |   | 18,690,663 |   |
| Customer Relationships                  |       | 12                         |       | 28,500,000              |        | 8,883,827 |   | 19,616,173 |   | 28,500,000 |   | 4,851,794 |   | 23,648,206 |   |
| Licensing Agreements                    |       | 10                         |       | 12,100,000              |        | 2,294,220 |   | 9,805,780 |   | 12,100,000 |   | 1,035,564 |   | 11,064,436 |   |
| **Total amortizable intangible assets** |       |                       |       | $                       | 155,700,000 |   | $ | 35,211,208 |   | $ | 120,488,792 |   | $ | 155,700,000 |   | $ | 17,676,928 |   | $ | 138,023,072 |   |

 

14

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| ** **                                 | ** ** | **As of December 3, 2005** | ** **  | **As of March 5, 2005** | ** ** |
|--------------------------------------------|------------|----------------------------|-------------|-------------------------|------------|
| ** **                                 | ** ** | **Gross Carrying**         | ** **  | **Accumulated**         | ** ** | **Gross 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 ofother intangible assets (in thousands) for the next five fiscal years isestimated 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**

 

The Companyprovided a letter of credit in the amount of $5.5 million and $4.5 million atDecember 3, 2005 and March 5, 2005, respectively, to its insurance carrier forthe underwriting of certain performance bonds. This letter of credit expires in fiscal 2007.  The Company also provides secured letters ofcredit to its insurance carriers for outstanding and potential worker’scompensation and general liability claims. Letters of credit for these claims totaled $0.1 million at both December3, 2005 and March 5, 2005.  In addition,the Company provides secured letters of credit to a limited number ofsuppliers.  The Company had no letters ofcredit for suppliers at December 3, 2005 or March 5, 2005.

 

The following tables summarize our commitments andcontractual obligations by fiscal year as of December 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 |       | 2,910,000                      |       | 2,910,000 |   | — |   | — |   | — |   |
| Purchase commitments for electricity       |       | 225,000                        |       | 225,000 |   | — |   | — |   | — |   |
| Purchase commitments for raw materials     |       | 299,400                        |       | 299,400 |   | — |   | — |   | — |   |
| Purchase commitments for natural gas       |       | 640,400                        |       | 640,400 |   |   |   |   |   |   |   |
| Purchase  commitments for miscellaneous    |       | 79,786                         |       | 79,786 |   | — |   | — |   | — |   |
| Total                                      |       | $                              | 9,764,586  |   | $ | 9,764,586 |   | $ | — |   | $ | — |   | $ | — |   |

 

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              |       | $                                          | 249,125,000 |   | $ | — |   | $ | — |   | $ | 124,125,000 |   | $ | 125,000,000 |   |
| Capital  lease obligations   |       | 943,727                                    |        | 242,834 |   | 376,656 |   | 324,237 |   | — |   |
| Operating  lease obligations |       | 5,527,277                                  |        | 3,549,468 |   | 1,730,515 |   | 221,374 |   | 25,920 |   |
| Total                        |       | $                                          | 255,596,004 |   | $ | 3,792,302 |   | $ | 2,107,171 |   | $ | 124,670,611 |   | $ | 125,025,920 |   |

 

Also in conjunction with the Acquisition, the Companyand the selling shareholders****entered into atax sharing and indemnification agreement containing certain representationsand warranties of the selling shareholders with respect to taxes.  The agreement provides that any net operatingloss carryforwards attributable to expenses relating to the sale of theCompany  (“Deal Related NOLs”) andcertain other deal related expenses, will be for the benefit of the sellingshareholders.  As of the date of theAcquisition, these Deal Related NOLs and other deal related expenses totaledapproximately $24.2 million and $6.6 million, respectively.  Accordingly, the Company is required pay tothe selling shareholders the amount of any tax benefit attributable to suchDeal Related NOLs and other deal related expenses, except that the first $4.0million of such tax benefits shall be paid into an escrow account that willsecure the selling shareholders indemnification obligations under the taxsharing and indemnification 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 Deal Related NOLs or other dealrelated expenses.

 

In conjunction with the Acquisition, the Companyrecorded a net long-term liability to the selling shareholders totaling $10.3million for the estimated obligations under the tax sharing and indemnificationagreement.  As of December 3, 2005, basedon the federal income tax return filed November 15, 2005 (for the tax yearended February 26, 2005), the Company has utilized $8.6 million of the DealRelated NOLs and $1.7 million in other deal related expenses.  As of December 3, 2005, the Company hassubmitted 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.  An additional $3.6 millionwill be submitted to the escrow account during successor fourth quarter 2006for Deal Related NOLs utilized in connection with the tax returns filedNovember 15, 2005 for the tax year ended February 26, 2005.  As of December 3, 2005, the Company has a netlong-term liability to the selling shareholders totaling $8.9 million.  This amount is excluded from the table abovedue to the uncertainty of when such utilization of the Deal Related NOLs willoccur.

 

For the tax year ended February 26, 2005, the Companyutilized approximately $3.3 million of non-deal related NOLs in its tax returnfiled November 15, 2005.  The non-dealrelated NOLs enabled the Company to defer cash tax payments required by the taxsharing and indemnification agreement of approximately $1.2 millionattributable to this tax period.

 

For the tax year ending February 25, 2006, as a resultof the current year estimated taxable income for successor fiscal 2006, theCompany was able to defer cash tax payments of approximately $4.2 million.  The Company expects a portion of suchdeferred amounts to be paid out pursuant to the tax sharing and indemnificationagreement subsequent to the filing of its tax return in November 2007.

 

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

 

Total comprehensive income/(loss) is comprisedsolely of net income/(loss) in successor third quarter 2006, successor fiscal2006, successor third quarter 2005, successor fiscal 2005 and predecessorfiscal 2005.

 

16

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**8.****             SupplementalCash Flow Disclosures —Cash Refunded/(Paid) During the Period and Non-CashTransactions**

 
| ** **                                                       | ** ** | **Successor Pierre**  | ** **  | **Predecessor Pierre** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|-------------|------------------------|------------|
| ** **                                                       | ** ** | **For the**           | ** **  | **For the Period**     | ** ** | **For the Period** | ** ** |
| ** **                                                       | ** ** | **Thirty-Nine Weeks** | ** **  | **July 1, 2004**       | ** ** | **March 7, 2004** | ** ** |
| ** **                                                       | ** ** | **Ended**             | ** **  | **Through**            | ** ** | **Through** | ** ** |
| ** **                                                       | ** ** | **December 3, 2005**  | ** **  | **December 4, 2004**   | ** ** | **June 30, 2004** | ** ** |
|                                                             |       |                  |        |                   |       |   |   |
| Cash  refunded/(paid) during the period for:                     |       |                  |        |                   |       |   |   |
| Interest                                                         |       | $                     | (12,365,136 | )                      | $          | (5,082,683 | ) | $ | (7,915,332 | ) |
| Income taxes, net                                                |       | $                     | 2,436,988   |                   | $          | (52,973 | ) | $ | — |   |
|                                                             |       |                  |        |                   |       |   |   |
| Non-cash  transactions:                                          |       |                  |        |                   |       |   |   |
| Assumption of PFMI 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                                               |       | $                     | —      |                   | $          | 250,087,097 |   | $ |   |   |
| Deferred tax liability                                           |       | $                     | —      |                   | $          | 54,464,900 |   | $ | — |   |
| Tax sharing liability to previous  shareholders                  |       | $                     | —      |                   | $          | 10,317,601 |   | $ | — |   |
| Valuation of goodwill and other intangibles                      |       | $                     | —      |                   | $          | 323,626,414 |   | $ | — |   |
| Valuation of inventories                                         |       | $                     | —      |                   | $          | 2,020,948 |   | $ | — |   |
| Valuation of plant, property and equipment                       |       | $                     | —      |                   | $          | 4,438,984 |   | $ | — |   |
| Other  transactions                                              |       |                  |        |                   |       |   |   |
| Capital lease addition                                           |       | $                     | 10,565      |                   | $          | 142,395 |   | $ | 1,013,300 |   |
|                                                                  |            |                       |             |                        |            |  |  |  |  |  |  |

 

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

 

InNovember 2004, the Financial Accounting Standards Board (the “FASB”)issued SFAS  151, “Inventory Costs—an amendment of ARB No. 43,Chapter 4” (“SFAS 151”).  FAS 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 requires that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities.  The Company willadopt the provisions of SFAS 151, effective March 5, 2006 for its fiscal 2007consolidated financial statements. Management is currently evaluating the impact the adoption of theprovisions 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 requiresthat a change in method of depreciation, amortization, or depletion forlong-lived, non-financial assets be accounted for as a change in accountingestimate that is affected by a change in accounting principle.  SFAS 154 replaces APB Opinion 20, “Accounting Changes”, and SFAS 3, “Reporting Accounting Changes in InterimFinancial Statements”.  TheCompany will adopt the provisions of SFAS 154, effective March 5, 2006 for itsfiscal 2007 Consolidated Financial Statements. Management currently believes that adoption of the provisions of SFAS154 will not have a material impact on the Company’s Consolidated FinancialStatements.

 

**10.  Related Party Transactions**

 

**SuccessorPierre**

 

At December 3, 2005, there were no significant changes in related partytransactions from those described at March 5, 2005 in the Company’s Form 10-K.

 

**PredecessorPierre**

 

As describedin Note 4, “Long-Term Debt” to the Condensed Consolidated Financial Statements,on March 8, 2004, following a consent solicitation in which a majority ofthe holders of the Company’s outstanding Old

 

17

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Notes consented to a FourthSupplemental Indenture between the Company and the Trustee, the Company enteredinto the Fourth Supplemental Indenture with the Trustee.  Among other things, the Fourth SupplementalIndenture limited future related party transactions and required thetermination of all related party transactions, except for certainspecifically-permitted transactions.

 

The followingrelated party transactions were specifically permitted under the terms of theFourth Supplemental Indenture:

 

•                  Columbia HillLand Company, LLC, owned 50% by each of James C. Richardson and David R. Clark,the Company’s then Chairman and Vice-Chairman, respectively, leased officespace to the Company in Hickory, North Carolina, pursuant to a ten-year leasethat commenced in September 1998.  Rentspaid under the lease were approximately $29,000 for both predecessor fiscal 2005and successor fiscal 2005.

 

•                  On March 8, 2004the Company took title to an aircraft that was transferred from CHA, owned 100%by PFMI, subject to existing purchase money debt.  The aircraft was originally leased by theCompany from CHA beginning in the fourth quarter of fiscal 2002.  Effective March 1, 2002, the original leasewas cancelled and replaced with a non-exclusive lease agreement.  Pursuant to this new lease, the Company wasobligated to make 16 quarterly lease payments of $471,500 each for the right touse the aircraft for up to 115 flight hours per quarter, based onavailability.  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.

 

All otherrelated party transactions that were in effect at March 6, 2004 were terminatedas of March 8, 2004 pursuant to the terms of the Fourth SupplementalIndenture.  As a result of thetermination of these related party transactions, subsequent to March 8, 2004,the Company has performed its purchasing and distribution services internally.

 

The followingtransactions were entered into on March 8, 2004 as permitted by the FourthSupplemental 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 $339,639charge represents the removal of members’ equity of CHA.

 

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

 

**11.****         ****LegalProceedings and Contingencies**

 

On August19, 2003, as a result of complaints from neighboring businesses, the Companyreceived a Notice of Violation (“NOV”) from the Hamilton County Department ofEnvironmental Services (“HCDOES”) relating to operations at its Cincinnati,Ohio plant facility.  The NOV allegedthat the Company violated its permits by exceeding the visual emission (“VE”)specification of 20% opacity.  TheCompany received additional NOV’s for

 

18

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opacity violations on October 22,2003 and November 26, 2003, all of which were the result of complaints fromneighboring businesses.

 

Subsequentto the original NOV received in August of 2003, the Company began investigatingand testing various emission reduction technologies.  The Company found a solution that enabledoperations to continue with less smoke output and completed the upgrade duringearly 2004.  HCDOES inspected the upgradein April of 2004 and determined that the Company had returned to compliancewith the opacity limit.  In connectionwith the upgrade, the Company was required to submit a revised Permit toInstall (“PTI”) application.

 

Recently,pursuant to its regulatory authority, HCDOES requested a Method 5 Stack Test beperformed to assess the Company’s compliance with its emissions limits.  The Company contacted HCDOES, requesting thescheduled stack emission compliance test be postponed while the Company’sindependent consulting firm conducted an emissions audit program consisting ofa series of engineering stack tests that were performed at both controlled anduncontrolled emission test points in order to evaluate the magnitude of theemissions based on current production data and to estimate new emissionsfactors by product line.  HCDOES agreedto this approach and granted permission to delay the standard Method 5 StackTest originally requested while the Company conducted its emissions auditprogram.

 

The Companycontracted with an independent environmental consulting firm to perform theaudit and evaluation.  As part of theoverall audit, this firm performed preliminary testing in early September 2005,which indicated that violations of emission levels may have occurred, andretested September 28, 2005 through September 30, 2005.  The firm conducted additional tests duringOctober 27, 2005 through November 8, 2005. The Company anticipates receiving the complete results of the audit inthe near future.  The results will allowthe Company to evaluate the facility’s current and historical potential andactual emissions.  The Company intends tomeet with the local air permitting authority in February, 2006, to discuss theresults of the emissions audit program.

 

The Company iscooperating with the authorities in all aspects of these matters.  In addition, the Company consulted with itsoutside legal counsel to assist them in resolving these matters and estimatethe potential fines and penalties that may be assessed in the future.  If the Company is deemed non-compliant,additional expenditures for further testing, permits, equipment upgrades andlegal expense may be required.

 

The Companycontinuously evaluates contingencies based upon the best availableinformation.  The Company believes it hasrecorded appropriate liabilities to the extent necessary in cases where theoutcome of such liabilities is considered probable and reasonably estimable,and that its assessment of contingencies is reasonable.  To the extent that resolution ofcontingencies results in amounts that vary from management’s estimates, futureearnings will be charged or credited accordingly.

 

As part ofits ongoing operations in the food manufacturing industry, the Company issubject to extensive federal, state, and local regulations and its foodprocessing facilities and food products are subject to frequent inspection,audits and inquiries by the United States Department of Agriculture, the Foodand Drug Administration and various local health and agricultural agencies andby federal, 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** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

**Results ofOperations**

 

**SuccessorThird Quarter 2006 Compared to Successor Third Quarter 2005**

 

*Revenues, net. *Net revenuesincreased by $3.5 million in successor third quarter 2006 compared to successorthird quarter 2005, or 3.1%.  Thisincrease was primarily due to sales volume growth in most of the Company’send-market segments and higher margin product sales.  This increase was partially offset bydecreased sales to a large National Accounts customer ($3.9 million less thansuccessor third quarter 2005).  Sales tothis customer were impacted, in part, by higher gasoline prices, which impactstore traffic, coupled with promotional activity towards sandwiches that do notinclude our products.

 

*Cost of goods sold. *Cost of goods soldincreased by $1.0 million in successor third quarter 2006 compared tosuccessor third quarter 2005, or 1.2%. This increase was primarily due to (1) an increase in costs as a resultof increased net revenues due to volume growth and an increase in mix to lowercost, higher margin products and (2) an increase in costs as a result ofmanufacturing efficiencies related to changes in sales mix; offset by (3) thenet impact of recent decreases in prices paid for raw material proteins andformulation mix ($2.3 million) and (4) a favorable impact as a result of a $0.4million purchase accounting adjustment on beginning inventory in the prior yearcomparable period made in connection with the Acquisition.

 

As apercentage of revenues, cost of goods sold decreased from 71.6% to 70.2%, adecrease of 1.4%.  This decrease wasprimarily due to (1) the net impact of decreases in prices paid for rawmaterial proteins and formulation mix (approximately 1.2%); (2) a decrease incosts as a result of an increase in mix to lower cost, higher margin products(approximately 0.6%) and (3) a favorable impact as a result of a purchaseaccounting adjustment on beginning inventory in the prior year comparable periodmade in connection with the Acquisition (approximately 0.4%); offset by (4) anincrease in costs as a result of manufacturing efficiencies related to changesin sales mix.

 

The primarymaterials used in the Company’s food processing operations include bonelessbeef, pork, chicken, flour, yeast, seasonings, cheese, breading, soy proteinsand packaging supplies.  Meat proteinsare generally purchased under 7-day payment terms.  Historically, the Company has not hedged inthe futures markets, and over time, its raw material costs have fluctuated withmovement in the relevant commodity markets. Additionally, the Company has contracts with formulaic pricing thatrequire the Company to immediately pass along commodity price variances.  The $2.4 million net decreased raw materialprotein prices included $1.0 million related to these formulaic contracts and$1.4 million raw material protein price decreases related to othernon-contracted sales.

 

Approximately43.0% of total sales for successor third quarter 2006 were protected fromcommodity exposure, of which 34.5% were attributable to cost-plus contracts,while the other 8.5% were related to the USDA Commodity Reprocessing Program,which also insulates the Company from raw material price fluctuations.  For successor third quarter 2005,approximately 43.4% of total sales were protected from commodity exposure, ofwhich 34.9% were attributable to cost-plus contracts, while the other 8.5% wererelated to the USDA Commodity Reprocessing Program.

 

The followingtable represents the decreases in the weighted average prices the Company paidfor beef, pork, chicken and cheese excluding formulation mix and contracts withformulaic pricing during successor third quarter 2006 compared to successorthird quarter 2005.

 
| ** ** | ** ** | **(Increase)/Decrease**          | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **Successor Third Quarter 2006** | ** ** |
| ** ** | ** ** | **Compared to**                  | ** ** |
| ** ** | ** ** | **Successor Third Quarter 2005** | ** ** |
| Beef       |       | 0.6                              | %          |
| Pork       |       | 20.0                             | %          |
| Chicken    |       | 10.9                             | %          |
| Cheese     |       | 4.1                              | %          |
| Aggregate  |       | 6.5                              | %          |

 

*Selling, general and administrative*.  Selling, general and administrative expensesincreased by $1.6 million in successor third quarter 2006 compared to successorthird quarter 2005, or 10.4%.  As apercentage of revenues, selling, general and administrative expenses increasedfrom 13.8% to 14.7%.  This increase wasprimarily due to (1) an increase in storage expense of $0.6 million as aresult of increased inventories built to maintain customer service levels forcustomer requirements and product line expansion; (2) an increase of $1.1million in freight due to higher fuel prices and an increase in the mix ofproducts shipped by the Company versus products picked up by customers, as aresult of decreased sales for a large National Accounts customer; (3) anincrease of $0.5 million in selling expense related to product line expansion; (4) anincrease of $0.5 million in administrative costs and (5) an increase insales mix to lower cost, higher margin end-markets with greater selling burdenrates; partially offset by (6) a decrease in incentive compensation.

 

20

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*Depreciation and amortization. *Depreciation andamortization expense decreased in successor third quarter 2006 compared tosuccessor third quarter 2005 by $1.0 million. This is primarily due to the accelerated amortization method used forcertain intangible assets.

 

*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.  Other expense increased in successor thirdquarter 2006 compared with successor third quarter 2005 by $0.4 million, or7.6%.  This increase is primarily due tothe increase in floating interest rates related to the Company’s term loan,offset by decreased borrowings as a result of partial repayment of the termloan.

 

*Income taxes*.* *Theeffective tax rate for successor third quarter 2006 was 38.7% compared to 31.7%for successor third quarter 2005.  Theincrease in the effective tax rate is primarily due to the Company’sprofitability and expected pre-tax income in the current year relative to theimpact of permanent differences, offset partially by the impact of new Ohio taxlaws enacted June 30, 2005.  These newlaws include the phase-out of Ohio franchise tax and Ohio personal property taxand the phase-in of a gross receipts tax referred to as the Commercial ActivityTax (“CAT”).

 

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

 

As a result ofthe 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. *Net revenues increasedby $19.4 million in successor fiscal 2006 compared to predecessor fiscal 2005and successor fiscal 2005 combined, or 6.4%. This increase was primarily due to sales volume growth in most of theCompany’s end-market segments and higher margin product sales.  This increase was partially offset bydecreased sales to two large National Accounts customer ($7.4 million less thansuccessor fiscal 2005).  Sales to thesecustomers were impacted, in part, by higher gasoline prices, which impact storetraffic, coupled with promotional activity towards sandwiches that do notinclude our products.

 

*Cost of goods sold. *Cost of goods soldincreased by $6.6 million in successor fiscal 2006 compared to predecessorfiscal 2005 and successor fiscal 2005 combined, or 2.9%.  This increase was primarily due to (1) anincrease in costs $6.6 million as a result of increased net revenues due tovolume growth and an increase in mix to lower cost, higher margin products; (2) anincrease in costs as a result of manufacturing efficiencies related to changesin sales mix and (3) the net impact of increases in prices paid for rawmaterial proteins and formulation mix ($3.3 million); offset by (4) afavorable impact as a result of a $1.9 million purchase accounting adjustmenton beginning inventory in the prior year comparable period made in connectionwith the Acquisition and (5) start-up costs of $3.1 million incurred inpredecessor fiscal 2005 and successor fiscal 2005 combined associated with aNational Accounts customer that were not incurred during successor fiscal 2006.

 

As apercentage of revenues, cost of goods sold decreased from 74.8% to 72.3%, adecrease of 2.5%.  This decrease wasprimarily due to (1) start-up costs incurred in predecessor fiscal 2005 andsuccessor fiscal 2005 combined associated with a National Accounts customerthat were not incurred during successor fiscal 2006 (approximately 1.0%); (2) adecrease in costs as a result of an increase in mix to lower cost, highermargin products (approximately 0.9%) and (3) a favorable impact as a result ofa purchase accounting adjustment on beginning inventory in the prior yearcomparable period made in connection with the Acquisition; offset by (4) anincrease in costs as a result of manufacturing efficiencies related to changesin sales mix and (5) the net impact of increases in prices paid for rawmaterial proteins and formulation mix.

 

The primarymaterials used in the Company’s food processing operations include bonelessbeef, pork, chicken, flour, yeast, seasonings, cheese, breading, soy proteins,and packaging supplies.  Meat proteinsare generally purchased under 7-day payment terms.  Historically, the Company has not hedged inthe futures markets, and over time, the Company’s raw material costs havefluctuated with movement in the relevant commodity markets.  Additionally, the Company has contracts withformulaic pricing that require the Company to immediately pass along commodityprice variances.  The $5.3 million netincreased raw material protein prices included $5.2 million related to theseformulaic contracts and $0.1 million raw material protein price increasesrelated to other non-contracted sales.

 

21

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Approximately43.1% of total sales for successor fiscal 2006 were protected from commodityexposure, of which 37.2% were attributable to cost-plus contracts, while theother 5.9% were related to the USDA Commodity Reprocessing Program, which alsoinsulates the Company from raw material price fluctuations.  For predecessor fiscal 2005 and successorfiscal 2005 combined, approximately 43.5% of total sales were protected fromcommodity exposure, of which 38.5% were attributable to cost-plus contracts,while the other 5.0% were related to the USDA Commodity Reprocessing Program.

 

The followingtable represents the (increases)/decreases in the weighted average prices theCompany paid for beef, pork, chicken and cheese excluding unfavorableformulation mix and contracts with formulaic pricing during successor fiscal2006 compared to predecessor fiscal 2005 and successor fiscal 2005 combined:

 
| ** ** | ** ** | **(Increase)/Decrease**             | ** ** |
|------------|------------|-------------------------------------|------------|
| ** ** | ** ** | **Successor Fiscal 2006**           | ** ** |
| ** ** | ** ** | **Compared to**                     | ** ** |
| ** ** | ** ** | **Predecessor Fiscal 2005**         | ** ** |
| ** ** | ** ** | **and**                             | ** ** |
| ** ** | ** ** | **Successor Fiscal 2005  Combined** | ** ** |
| Beef       |       | (9.4                                | )%         |
| Pork       |       | 10.8                                | %          |
| Chicken    |       | 37.2                                | %          |
| Cheese     |       | 4.8                                 | %          |
| Aggregate  |       | 5.2                                 | %          |

* *

*Selling, general and administrative*.  Selling, general and administrative expensesdecreased by $1.2 million, or 2.3%. As a percentage of revenues, selling,general and administrative expenses decreased from 17.0% to 15.6%. Thisdecrease was primarily due to (1) the elimination of expenses related tothe previous shareholders and non-recurring transaction fees as a result of theAcquisition of $8.8 million; offset by (2) an increase in sales volume andan increase in sales mix to lower cost, higher margin end-markets with greaterselling burden rates; (3) an increase in storage expense of $1.5 millionas a result of increased inventories built to maintain customer service levelsfor customer requirements and product line expansion; (4) an increase of$2.4 million in freight due to higher fuel prices and an increase in the mix ofproducts shipped by the Company versus products picked up by customers, as aresult of decreased sales for a large National Accounts customer; (5) anincrease of $1.5 million in selling expenses primarily due to product lineexpansion and (6) an increase of $0.7 million in administrativecosts.  Expenses associated with theprevious shareholders in predecessor fiscal 2005 and successor fiscal 2005 combinedthat are not present in successor fiscal 2006 and are not expected to beincurred 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)                                |       | 0.2                                                                |       |
| Aircraft  expense (d)                             |       | 0.8                                                                |       |
| 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        |   |

 

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Compensationexpense (a) relates to personnel who were terminated in connection with thesale of the Company and will not be replaced. Travel and entertainment(b) relates to expenses incurred by personnel who were terminated and willnot be replaced as a result of the sale of the Company. Office Expense(c) relates to rent expense, maintenance and other occupancy costsassociated with the lease of an office building from a related party that wasterminated in connection with the sale of the Company. Aircraft expense(d) relates to the leasing of an aircraft owned by CHA, formerly asubsidiary of PFMI, which was retained by the selling shareholders. CompassOutfitters (e) relates to an asset that was retained by the sellingshareholders. The professional fees (f) primarily are related to theAcquisition. The previous shareholders’ other expenses (g) relate tooutside board of director fees, community relations, and contributions made tothe former owners alma mater. The previous shareholders’ transaction fees(h) include legal, accounting, and tax consulting fees related to theAcquisition. The consulting services (i) consist of the fee paid to theselling shareholders’ adviser for his role in the transaction. The endorsementtermination (j) relates to the contract between the Company and CrawfordRace Cars, LLC. Other (k) includes employee travel and other expenses incurredas a result of the debt placement for the Acquisition.

 

*Depreciation and Amortization. *Depreciation andamortization expense increased by $6.9 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 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 disposalof assets decreased by $0.3 million. The decrease is due to the recordingof losses in the prior year related to affiliated companies as a consequence ofthe Restructuring.

 

*Other Expense. *Other expenseconsists primarily of interest on fixed and variable rate long-term debt andinterest on the revolving loan, both of which were entered into in connectionwith the Acquisition. Other expense decreased by $4.3 million, or20.4%.  This decrease is primarily due toexpenses incurred during predecessor fiscal 2005 and successor fiscal 2005combined as a result of the Acquisition, including: (1) $4.3 million for thewrite-off of deferred loan origination fees; (2) $0.6 million for the repaymentof the Old Notes and (3) $0.5 million for the repayment of the Company’s formerrevolving credit facility.  This decreasewas offset by increased debt and related interest expense as a result of theAcquisition, in addition to an increase in floating interest rates related tothe Company’s term loan.

 

*Income taxes. *The effective tax rate for successor fiscal2006 was 157.6% compared to 33.3% for predecessor fiscal 2005 and successorfiscal 2005 combined.  The increase inthe effective tax rate is primarily due to the impact of new Ohio tax lawsenacted June 30, 2005.  These new lawsinclude the phase-out of Ohio franchise tax and Ohio personal property tax andthe phase-in of a gross receipts tax referred to as the Commercial Activity Tax(“CAT”).  As a result of the enactment,the Company reduced its deferred tax liability based on the phase-out offranchise tax and recorded an additional valuation allowance based on Ohioinvestment tax credits that are expected to expire prior to utilization.  Excluding the one-time impact of this enactment,the effective tax rate for successor fiscal 2006 would have been 38.7%.  The increase in the effective tax rateexcluding the impact of the Ohio law changes is primarily due to the Company’sprofitability and expected pre-tax income in the current year relative to theimpact of permanent differences.

 

**Liquidityand Capital Resources**

 

Net cashprovided by operating activities for successor fiscal 2006 was$27.7 million compared to net cash provided by operating activities of$9.3 million for predecessor fiscal 2005 and successor fiscal 2005 combined.  The increase in net cash provided byoperating activities was primarily due to the Company’s increased profitabilityduring successor fiscal 2006, in addition to (1) a decrease in accountsreceivable during successor fiscal 2006 compared with an increase during theprior year comparable period; (2) a decrease in refundable income taxes,prepaid expense and other current assets during successor fiscal 2006 comparedto an increase in the prior year comparable period and (4) an increase ininventories during successor fiscal 2006 that was substantially less than theincrease in the prior year comparable period; offset by (5) an increase inaccounts payable and other accrued liabilities during successor fiscal 2006that was significantly less than the increase in the prior year comparableperiod.

 

The primary components of the net cash provided by operating activitiesfor successor fiscal 2006 were (1) depreciation and amortization ofintangible assets of $23.0 million, of which $5.5 million relates to depreciationof fixed assets and $17.5 million relates to amortization of intangible assets;(2) an increase in trade accounts payable and other accrued liabilities of $2.8million; (3) a decrease in refundable income taxes, prepaid expenses and othercurrent assets of $2.3 million, primarily due to the tax provision recorded asa result of the income in successor third quarter 2006, reducing previouslyrecorded tax benefits; (4) amortization of deferred loan fees totaling $1.1million and (5) a decrease in receivables of $0.9 million, primarily as aresult of the decrease in trade accounts receivables; offset by (6) an increasein inventories of $1.2 million due to an inventory build to satisfy customerneeds and meet requirements for scheduled equipment maintenance; (7) a decreasein other long-term liabilities

 

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totaling $0.9million, primarily as a result of the payment to previous shareholders asrequired by the tax sharing agreement, partially offset by an increase inliability for deferred compensation and (8) a change in deferred income taxesof $0.8 million as a result of the enactment of new Ohio tax laws as of June30, 2005.

 

Net cash used in investing activities for successor fiscal 2006 was$4.7 million compared to $3.8 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.

 

Net cash usedin financing activities for successor fiscal 2006 and for predecessor fiscal2005 and successor fiscal 2005 combined was $13.7 million and $3.5million, respectively.  Net cash used infinancing activities for successor fiscal 2006 was due primarily to: (1)principal payments on long-term debt of $12.7 million and (2) netrepayments under the revolving credit agreement of $0.8 million.

 

As of December3, 2005, the Company had cash and cash equivalents on hand totaling $9.3million, no borrowings under its revolving credit facility and borrowingavailability of approximately $34.4 million.  Also as of December 3, 2005, the Companyhad borrowings under its term loan of $124.1 million and New Notes outstandingof $125.0 million.

 

The Companyhas budgeted approximately $7.8 million for capital expenditures for theremainder of fiscal 2006.  Theseexpenditures include a provision for capacity expansion, system upgrades androutine food processing capital improvement projects and other miscellaneousexpenditures 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 theHCDOES determines that the Company is non-compliant with emissionsrequirements, the Company may potentially be required to install additionalcontrol equipment.  The Company is unableto estimate the cost of such upgrades to existing equipment as of December 3, 2005.  Should such capital expenditures be required,the Company would likely adjust the capital budget for fiscal 2007 or delaypreviously budgeted capital expenditures.

 

If the Companycontinues its historical revenue growth trend as expected, then the Companywill be required to raise and invest additional capital for additional plantexpansion projects to provide operating capacity to satisfy increaseddemand.  Management believes that future cash requirements for these plantexpansion projects would need to be met through other long-term financingsources.  The incurrence of additionallong-term debt is governed and restricted by the Company’s existing debtinstruments.  Furthermore, there can beno assurance that additional long-term financing will be available onadvantageous terms (or any terms) when needed by the Company.

 

OnMarch 8, 2004, following a consent solicitation in which consents ofholders of $112.4 million in aggregate principal amount of the Company’sthen outstanding 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 ofMarch 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”.

 

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OnJune 30, 2004, the shareholders of PFMI closed the sale of their shares ofstock of PFMI to Holding (see Note 1, “Basis of Presentation and Acquisition,”to the Condensed Consolidated Financial Statements).  Effective June 30, 2004, the Companyterminated its three-year variable-rate $40 million revolving creditfacility.  Existing debt issuance costsrelated to the Company’s former $40 million facility in the amount of$0.5 million and a prepayment penalty paid to the former lender in theamount of $0.4 million were charged to interest expense.

 

Also effectiveJune 30, 2004, the Company obtained a $190 million credit facilityfrom a new lender which includes a six-year variable-rate $150 millionterm loan, a five-year variable rate $40 million revolving credit facility anda $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 atDecember 3, 2005 were 8.75% (prime of 7.00% plus 1.75%) and 8.50% (prime of7.00% plus 1.50%), respectively.  Actualinterest rates 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, with a balloonpayment 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 Companymade prepayments on the term loan totaling $4.9 million during successor fiscal2005.  Prepayments totaling $5.0 millionand $12.4 million were made during successor third quarter 2006 and successorfiscal 2006, respectively.  The remainingoutstanding balance of $124.1 million as of December 3, 2005 is due on June 5,2010.

 

As of December3, 2005, the Company had no borrowings under its revolving credit facility andhad borrowing availability of approximately $34.4 million.  The maturity date of the $40 millionrevolving credit facility is June 30, 2009.  In addition, the Company is required tosatisfy certain financial covenants regarding cash flow and capitalexpenditures.  As of December 3, 2005,the Company is in compliance with all financial covenants.

 

Also inconjunction 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 in conjunction with the Acquisition, the Companyand the selling shareholders****entered into atax sharing and indemnification agreement containing certain representationsand warranties of the selling shareholders with respect to taxes.  The agreement provides that any net operatingloss carryforwards attributable to expenses relating to the sale of the Company  (“Deal Related NOLs”) and certain other dealrelated expenses, will be for the benefit of the selling shareholders.  As of the date of the Acquisition, these DealRelated NOLs and other deal related expenses totaled approximately $24.2million and $6.6 million, respectively. Accordingly, the Company is required pay to the selling shareholders theamount of any tax benefit attributable to such Deal Related NOLs and other dealrelated expenses, except that the first $4.0 million of such tax benefits shallbe paid into an escrow account that will secure the selling shareholdersindemnification obligations under the tax sharing and indemnificationagreement.  The Company is required tomake payments to the selling shareholders or the escrow account for tax benefitsderived from such utilization 20 days after the filing of the tax return thatutilizes such Deal Related NOLs or other deal related expenses.

 

In conjunction with the Acquisition, the Companyrecorded a net long-term liability to the selling shareholders totaling $10.3million for the estimated obligations under the tax sharing and indemnificationagreement.  As of December 3, 2005, basedon the federal income tax return filed November 15, 2005 (for the tax yearended February 26, 2005), the Company has utilized $8.6 million of the Deal RelatedNOLs and $1.7 million in other deal related expenses.  As of December 3, 2005, the Company hassubmitted 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.  An additional $3.6 millionwill be submitted to the escrow account during successor fourth quarter 2006for Deal Related NOLs utilized in connection with the tax returns filedNovember 15, 2005 for the tax year ended February 26, 2005.  As of December 3, 2005, the Company has a netlong-term liability to the selling

 

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shareholders totaling$8.9 million.  This amount is excludedfrom the table above due to the uncertainty of when such utilization of theDeal Related NOLs will occur.

 

For the tax year ended February 26, 2005, the Companyutilized approximately $3.3 million of non-deal related NOLs in its tax returnfiled November 15, 2005.  The non-dealrelated NOLs enabled the Company to defer cash tax payments required by the taxsharing and indemnification agreement of approximately $1.2 millionattributable to this tax period.

 

For the tax year ending February 25, 2006, as a resultof the current year estimated taxable income for successor fiscal 2006, theCompany was able to defer cash tax payments of approximately $4.2 million.  The Company expects a portion of suchdeferred amounts to be paid out pursuant to the tax sharing and indemnificationagreement subsequent to the filing of its tax return in November 2007.

 

**CriticalAccounting Policies and Estimates**

 

The preparation of financial statements in conformity with GAAP requires the appropriate application ofcertain accounting policies, many of which require the Company to makeestimates and assumptions about future events and their impact on amountsreported in the financial statements and related notes.  Since future events and the impact of thoseevents cannot be determined with certainty, the actual results will inevitablydiffer from the Company’s estimates. Such differences could be material to the financial statements.

 

The Company believes its application ofaccounting policies, and the estimates inherently required therein, arereasonable.  These accounting policiesand estimates are constantly reevaluated, and adjustments are made when factsand circumstances dictate a change. Historically, the Company’s application of accounting policies has beenappropriate, and actual results have not differed materially from thosedetermined using necessary estimates.

 

The following critical accounting policiesaffect the Company’s more significant judgments and estimates used in thepreparation 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).

 

*Goodwill and Other Intangible Assets*.  In conjunction with the Acquisition, theCompany engaged an independent party to perform valuations for financialreporting purposes of the Company’s goodwill and other intangibles. Assetsidentified through this valuation process included goodwill, formulas, customerrelationships, licensing agreements and certain trade names and trademarks.

 

In accordancewith SFAS 142—”Goodwill and Other Intangible Assets,” the Company testsrecorded goodwill and intangibles with indefinite lives for impairment at leastannually.  All other intangible assetswith finite lives are amortized over their estimated economic or estimateduseful lives.  In addition, all otherintangible assets are reviewed for impairment in accordance with SFAS 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.” As of March 5, 2005, theCompany performed the annual impairment review of goodwill and indefinite-livedintangible assets and also assessed whether the indefinite-lived intangibleassets continue to have indefinite lives. The Company engaged an independent party to perform valuations to assistin the impairment review.  There were notany impairment charges as a result of this review.

 

The Company’samortizable intangible assets are amortized using accelerated amortizationmethods that match the expected benefit derived from the assets.  The accelerated amortization methods allocateamortization expense in proportion to each year’s expected revenues to thetotal expected revenues over the estimated useful lives of the assets.

 

*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 programs

 

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and expected future customerdeductions to be taken under these programs. The Company believes the estimates recorded in the financial statementsare reasonable estimates of the Company’s liability under the programs.

 

*Concentration of Credit Risk and SignificantCustomers*. Financial instruments that potentially subject the Company toconcentrations of credit risk consist primarily of trade receivables.  The Company performs periodic creditevaluations of its customers’ financial condition and generally does notrequire 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 18% and 22%of revenues for successor third quarter 2006 and successor third quarter 2005,respectively.  Sales to the Company’slargest customer were approximately 22% and 26% of revenues for successorfiscal 2006 and predecessor fiscal 2005 and successor fiscal 2005 combined,respectively. Accounts receivable at December 3, 2005 and March 5, 2005included receivables from the Company’s largest customer totaling$3.4 million and $4.4 million, respectively.

 

*Stock-BasedCompensation*. The Company treats the options to purchase shares of common stock ofHolding issued to employees of the Company (“Options”) as stock-basedcompensation for employees of the Company. As permitted under GAAP, the Company accounts for the Options under therecognition and measurement principles of Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and relatedInterpretations using the intrinsic value method.  Accordingly, no compensation expense has beenrecognized for the stock option plan in the Company’s Condensed ConsolidatedFinancial Statements of Operations.

 

*NewAccounting Pronouncements*.  In November 2004, the FinancialAccounting 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 willadopt the provisions of SFAS 151, effective March 5, 2006 for its fiscal 2007consolidated financial statements. Management is currently evaluating theimpact the adoption of the provisions of SFAS 151 will have on the Company’sconsolidated financial 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 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 inaccounting principle.  The Statementreplaces 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 consolidated financialstatements.  Management currentlybelieves that adoption of the provisions of SFAS 154 will not have a materialimpact on the Company’s consolidated financial statements.

 

**Seasonality**

 

Except forsales to school districts, which represent approximately 18% of the Company’stotal sales annually and which decline significantly during summer, lateNovember and December, there is no other significant seasonal variation in theCompany’s sales.

 

**Effect of Natural Disasters**

 

During thequarter ended September 3, 2005, Hurricane Katrina caused significant damage toparts of the Southeastern and Midwestern United States.  Additionally, during mid-September 2005,Hurricane Rita caused further damage, though to a lesser extent than HurricaneKatrina.  The Company’s managementbelieves these hurricanes had an adverse affect on the Company’s sales, distributionexpense and bad debt expense (as a result of uncollectible receivables) duringsuccessor third quarter 2006, and may have an adverse affect during fourthquarter 2006.  While the Company’smanagement is unable to fully quantify the effect of these hurricanes, theoverall impact on the Company’s business and financial condition is notexpected to be material.

 

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**CautionaryStatement As To Forward Looking Information**

 

This report includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended,including statements about the business, operations, financial results andfuture prospects of the Company. Forward-looking statements relate to future events or future financialperformance.  In some cases, you canidentify forward-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 business conditions in theworld;

•                  potential impact of hurricanes and other naturaldisasters on sales, raw material costs, fuel costs, insurance costs and baddebt expense resulting from uncollectible accounts receivables;

•                  increased global tensions, market disruptionresulting from a terrorist or other attack and any armed conflict involving theUnited States;

•                  adverse changes in food costs and availability ofsupplies or costs of distribution;

•                  the Company’s level of indebtedness;

•                  restrictions imposed by the Company’s debtinstruments;

•                  increased competitive activity;

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

•                  dependence on significant customers;

•                  consolidation of the Company’s customers;

•                  general risks of the food industry, including riskof contamination, mislabeling of food products, a decline in meat consumptionand outbreak of disease among cattle, chicken or pigs;

•                  adverse change in the Company’s Cincinnati, Ohioor Claremont, North Carolina facilities;

•                  dependence on key personnel; and

•                  potential labor disruptions or union organizationactivities.

 

The Company is not under anyduty to update any forward-looking statements after the date of this report toconform such statements to actual results or to changes in the Company’sexpectations.  All forward-lookingstatements contained in this report and any subsequently filed reports areexpressly qualified in their entirety by these cautionary statements.

 

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

 

As discussedin the Company’s Annual Report on Form 10-K, the Company is exposed to marketrisk stemming from changes in interest rates, foreign exchange rates andcommodity prices.  Changes in thesefactors could cause fluctuations in the Company’s financial condition, resultsof operations and cash flows.  TheCompany owned no derivative financial instruments or nonderivative financialinstruments held for trading purposes at December 3, 2005 or March 5, 2005.  Certain of the Company’s outstandingnonderivative financial instruments at December 3, 2005 are subject to interestrate risk, but not subject to foreign currency or commodity price risk.  In successor fiscal 2006, the average pricethe Company paid for beef, pork, chicken and cheese decreased approximately2.9%, 26.3%, 0.8% and 6.4%, respectively, compared to the prices paid duringthe fourth quarter of the fiscal year ended March 5, 2005.  The Company manages commodity price riskthrough purchase orders, non-cancelable contracts and by passing on such costincreases to customers.  There was nosignificant change in market risk during successor fiscal 2006.

 

The Company’smajor market risk exposure is potential loss arising from changing interestrates and its impact on long-term debt. The Company’s policy is to manage interest rate risk by maintaining acombination of fixed and variable rate financial instruments in amounts andwith maturities that management considers appropriate.  The risks associated with long-term debt atDecember 3, 2005 have not changed materially since March 5,2005.  Of the long-term debt outstandingat December 3, 2005, the $125.0 million of New Notes accrue interestat a fixed interest rate, while the $124.1 million outstanding borrowingsunder the term loan facility and the revolving credit facility accrue interestat variable interest rates.  At December3, 2005, there were no outstanding borrowings under the revolving creditfacility.  A rise in prevailing interestrates could have adverse effects on the Company’s financial condition andresults of operations.  A 25 basis pointincrease in the reference rates for the Company’s average variable rate debtoutstanding during successor third quarter 2006 and successor fiscal 2006 wouldhave decreased net income for that period by approximately $80,500 and$248,800, respectively.

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

As of the endof the period covered by this report, the Company performed an evaluation,under the supervision and with the participation of its management includingthe president and chief executive officer and the principal financial officer,of the effectiveness of its disclosure controls and procedures (as such term isdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based on that evaluation, the Company’smanagement, including the president and chief executive officer and principal financialofficer, concluded that as of December 3, 2005 the Company’s disclosurecontrols and procedures were effective for the purposes of ensuring thatinformation required to be disclosed in reports that the Company files orsubmits under the Exchange Act has been recorded, processed, summarized andreported in accordance with the rules and forms of the Securities and ExchangeCommission.  There were no changes in theinternal control over financial reporting that occurred during the quarterended December 3, 2005 that have materially affected, or are reasonably likelyto materially affect, the Company’s internal control over financial reporting.

 

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**PARTII.  OTHER INFORMATION**

 

**ITEM5.  OTHER INFORMATION**

 

On January 10, 2006, the Board of Directors of the Company adopted aCode of Ethics, which is applicable to all officers, directors and employees ofthe Company.  The portion of such Code ofEthics that constitutes a Code of Ethics as defined in Item 406 of RegulationS-K promulgated under the Securities Exchange Act of 1934, as amended, isattached to this report as Exhibit 14.

 

**ITEM6.  EXHIBITS**

 
| (a) Exhibits |   |                                                                                             |
|--------------|--------|--------------------------------------------------------------------------------------------------|
|         |
| 14           |   | Code of  Ethics                                                                                  |
|         |   |                                                                                             |
| 31.1         |   | Rule  13a-14(a)/15d-14(a) Certification of the Chief Executive Officer                           |
|         |   |                                                                                             |
| 31.2         |   | Rule  13a-14(a)/15d-14(a) Certification of the Principal Financial Officer                       |
|         |   |                                                                                             |
| 32           |   | Section 1350  Certifications of the Chief Executive Officer and the Principal Financial  Officer |
|              |        |                                                                                                  |  |  |

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   |   |   | PIERRE FOODS, INC.                     |   |
|--------|--------|--------|----------------------------------------|--------|
|   |   |   |                                   |   |
|   |   |   | /s/ Norbert E. Woodhams                |   |
|   |   |   | By: Norbert E. Woodhams                |   |
|   |   |   | President and Chief  Executive Officer |   |
|   |   |   | Dated: January 17, 2006                |   |
|   |   |   |                                   |   |
|   |   |   | /s/ Joseph W. Meyers                   |   |
|   |   |   | By: Joseph W. Meyers                   |   |
|   |   |   | Vice President, Finance                |   |
|   |   |   | Dated: January 17, 2006                |   |

 

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