** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For thequarterly period ended December 2, 2006**

**OR**

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

**For thetransition period from                to                **

#### **Commission File Number:  0-7277**

**PIERRE FOODS, INC.**

(Exact name ofregistrant as specified in its charter)

#### **North Carolina**

(State or otherjurisdiction of incorporation or organization)

**56-0945643**

(I.R.S. EmployerIdentification No.)

**9990 Princeton Road**

**Cincinnati, Ohio  45246**

(Address ofprincipal executive offices) (zip code)

Registrant’stelephone number, including area code: (513) 874-8741

----

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

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding twelve months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.    Yes  x  No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Largeaccelerated filer o    Accelerated filer o  Non-accelerated filer x

Indicate by check markwhether the registrant is a shell company (as defined in Exchange Act Rule12b-2).  Yes oNo x

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

| **Class**             | ** ** | **Outstanding  at January 16, 2007** |
|-----------------------|------------|--------------------------------------|
| Class A Common  Stock |       | 100,000                              |

 

 

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**PIERRE FOODS, INC. ANDSUBSIDIARIES**

** **
|                                                                                                                 | ** ** | **Page**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **INDEX**                                                                                                       | ** ** | **Number** | ** ** |
| ** **                                                                                                      | ** ** | ** ** | ** ** |
| **Part  I.   Financial  Information:**                                                                | ** ** | ** ** | ** ** |
| ** **                                                                                                      | ** ** | ** ** | ** ** |
| Item  1.   Financial  Statements                                                                      | ** ** | ** ** | ** ** |
| ** **                                                                                                      | ** ** | ** ** | ** ** |
| Condensed Consolidated Balance Sheets — December 2,  2006 and March 4, 2006                                |       | 3          |       |
| ** **                                                                                                      |       |       |       |
| Condensed  Consolidated Statements of Operations — for the thirteen weeks ended                            |       |       |       |
| December 2,  2006 and December 3, 2005                                                                          |       | 4          |       |
| ** **                                                                                                      |       |       |       |
| Condensed  Consolidated Statements of Operations — for the thirty-nine weeks ended                         |       |       |       |
| December 2,  2006 and December 3, 2005                                                                          |       | 5          |       |
| ** **                                                                                                      |       |       |       |
| Condensed  Consolidated Statement of  Shareholder’s Equity — for the thirty-nine                      |       |       |       |
| weeks ended  December 2, 2006                                                                                   |       | 6          |       |
| ** **                                                                                                      |       |       |       |
| Condensed  Consolidated Statements of Cash  Flows — for the thirty-nine weeks ended                        |       |       |       |
| December 2,  2006 and December 3, 2005                                                                          |       | 7          |       |
| ** **                                                                                                      |       |       |       |
| Notes to the Condensed  Consolidated Financial Statements                                                       |       | 8          |       |
| ** **                                                                                                      |       |       |       |
| ** **                                                                                                      |       |       |       |
| Item 2.   Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 16         |       |
| ** **                                                                                                      |       |       |       |
| ** **                                                                                                      |       |       |       |
| Item 3.   Quantitative and  Qualitative Disclosures About Market Risk                                 |       | 23         |       |
| ** **                                                                                                      |       |       |       |
| ** **                                                                                                      |       |       |       |
| Item  4.   Controls  and Procedures                                                                   |       | 23         |       |
| ** **                                                                                                      |       |       |       |
| ** **                                                                                                      |       |       |       |
| **Part  II.   Other  Information:**                                                                   |       |       |       |
| ** **                                                                                                      |       |       |       |
| Item  1.   Legal  Proceedings                                                                         |       | 25         |       |
| ** **                                                                                                      |       |       |       |
| Item  1A.   Risk  Factors                                                                             |       | 26         |       |
| ** **                                                                                                      |       |       |       |
| Item  4.   Other  Information                                                                         |       | 26         |       |
| ** **                                                                                                      |       |       |       |
| Item 6.   Exhibits                                                                                    |       | 26         |       |
| ** **                                                                                                      |       |       |       |
| ** **                                                                                                      |       |       |       |
| ** **                                                                                                      |       |       |       |
| Signatures                                                                                                      |       | 27         |       |
| ** **                                                                                                      |       |       |       |
| Exhibit Index                                                                                                   |       | 28         |       |
| ** **                                                                                                      |       |       |       |
| Exhibits                                                                                                        |       |       |       |
| Exhibit 10.1                                                                                                    |       |       |       |
| Exhibit 31.1                                                                                                    |       |       |       |
| Exhibit 31.2                                                                                                    |       |       |       |
| Exhibit 32                                                                                                      |       |       |       |

 

2

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**PART I.  FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

**PIERREFOODS, INC. AND SUBSIDIARIES**

**Condensed Consolidated Balance Sheets**
| ** **                                                                                                              | ** ** | **December 2, 2006** | ** **  | **March 4, 2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                              | ** ** | **(Unaudited)**                | ** **  | ** **                  | ** ** |
| ASSETS                                                                                                                  |       |                           |        |                        |       |
|                                                                                                                    |       |                           |        |                        |       |
| CURRENT ASSETS:                                                                                                         |       |                           |        |                        |       |
| Cash and cash  equivalents                                                                                              |       | $                              | 85,243      |                        | $          | 2,540,722 |   |
| Accounts  receivable, net                                                                                               |       | 33,591,424                     |        | 29,590,488                  |       |
| Inventories                                                                                                             |       | 58,768,697                     |        | 45,686,342                  |       |
| Refundable  income taxes                                                                                                |       | —                         |        | 1,650,812                   |       |
| Deferred income  taxes                                                                                                  |       | 1,982,748                      |        | 3,976,012                   |       |
| Prepaid expenses  and other current assets                                                                              |       | 3,743,168                      |        | 3,165,310                   |       |
|                                                                                                                    |       |                           |        |                        |       |
| Total current  assets                                                                                                   |       | 98,171,280                     |        | 86,609,686                  |       |
|                                                                                                                    |       |                           |        |                        |       |
| PROPERTY, PLANT, AND  EQUIPMENT, NET                                                                                    |       | 69,464,157                     |        | 56,206,497                  |       |
|                                                                                                                    |       |                           |        |                        |       |
| OTHER ASSETS:                                                                                                           |       |                           |        |                        |       |
| Other  intangibles, net                                                                                                 |       | 122,286,254                    |        | 134,844,032                 |       |
| Goodwill                                                                                                                |       | 196,031,650                    |        | 186,535,050                 |       |
| Deferred loan  origination fees, net                                                                                    |       | 6,854,201                      |        | 7,331,561                   |       |
| Other                                                                                                                   |       | 1,566,465                      |        | 897,845                     |       |
|                                                                                                                    |       |                           |        |                        |       |
| Total other  assets                                                                                                     |       | 326,738,570                    |        | 329,608,488                 |       |
|                                                                                                                    |       |                           |        |                        |       |
| Total Assets                                                                                                            |       | $                              | 494,374,007 |                        | $          | 472,424,671 |   |
| ** **                                                                                                              | ** ** | ** **                     | ** **  | ** **                  | ** ** |
| LIABILITIES AND  SHAREHOLDER’S EQUITY                                                                              | ** ** | ** **                     | ** **  | ** **                  | ** ** |
|                                                                                                                    |       |                           |        |                        |       |
| CURRENT LIABILITIES:                                                                                                    |       |                           |        |                        |       |
| Current  installments of long-term debt                                                                                 |       | $                              | 203,851     |                        | $          | 229,172 |   |
| Trade accounts  payable                                                                                                 |       | 14,389,938                     |        | 11,897,576                  |       |
| Accrued interest                                                                                                        |       | 4,845,466                      |        | 1,780,618                   |       |
| Accrued payroll  and payroll taxes                                                                                      |       | 5,725,156                      |        | 5,014,821                   |       |
| Accrued  promotions                                                                                                     |       | 3,163,665                      |        | 3,258,650                   |       |
| Accrued taxes  (other than income and payroll)                                                                          |       | 932,369                        |        | 796,531                     |       |
| Current portion  of obligation to selling shareholders                                                                  |       | 3,918,948                      |        | —                      |       |
| Other accrued  liabilities                                                                                              |       | 2,329,659                      |        | 1,635,052                   |       |
|                                                                                                                    |       |                           |        |                        |       |
| Total current  liabilities                                                                                              |       | 35,509,052                     |        | 24,612,420                  |       |
|                                                                                                                    |       |                           |        |                        |       |
| LONG-TERM DEBT, less  current installments                                                                              |       | 259,658,895                    |        | 244,764,487                 |       |
|                                                                                                                    |       |                           |        |                        |       |
| DEFERRED INCOME TAXES                                                                                                   |       | 44,064,261                     |        | 48,821,259                  |       |
|                                                                                                                    |       |                           |        |                        |       |
| OTHER LONG-TERM  LIABILITIES                                                                                            |       | 3,542,242                      |        | 6,168,649                   |       |
|                                                                                                                    |       |                           |        |                        |       |
| Total  Liabilities                                                                                                      |       | 342,774,450                    |        | 324,366,815                 |       |
|                                                                                                                    |       |                           |        |                        |       |
| SHAREHOLDER’S EQUITY:                                                                                              |       |                           |        |                        |       |
| Common stock —  Class A, 100,000 shares authorized, issued, and outstanding at December 2,  2006 and March 4, 2006 |       | 150,195,651                    |        | 150,225,541                 |       |
| Retained  earnings (deficit)                                                                                            |       | 1,403,906                      |        | (2,167,685                  | )          |
|                                                                                                                    |       |                           |        |                        |       |
| Total  shareholder’s equity                                                                                        |       | 151,599,557                    |        | 148,057,856                 |       |
|                                                                                                                    |       |                           |        |                        |       |
| Total Liabilities and  Shareholder’s Equity                                                                        |       | $                              | 494,374,007 |                        | $          | 472,424,671 |   |

 

See accompanying notes to unaudited CondensedConsolidated Financial Statements.

3

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**PIERREFOODS, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements of Operations**

(Unaudited)
| ** **                                                                                                                                                                                          | ** ** | **For the**               | ** **  | **For the**               | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|-------------|--------------------------------|------------|
| ** **                                                                                                                                                                                          | ** ** | **Thirteen Weeks**        | ** **  | **Thirteen Weeks**        | ** ** |
| ** **                                                                                                                                                                                          | ** ** | **Ended**                      | ** **  | **Ended**                      | ** ** |
| ** **                                                                                                                                                                                          | ** ** | **December 2, 2006** | ** **  | **December 3, 2005** | ** ** |
|                                                                                                                                                                                                |       |                           |        |                           |       |
| REVENUES, NET                                                                                                                                                                                       |       | $                              | 127,137,507 |                           | $          | 115,452,651 |   |
|                                                                                                                                                                                                |       |                           |        |                           |       |
| COSTS AND  EXPENSES:                                                                                                                                                                                |       |                           |        |                           |       |
| Cost of goods sold                                                                                                                                                                                  |       | 87,874,486                     |        | 81,100,838                     |       |
| Selling, general, and administrative expenses  (includes related party transactions totaling $57,006 and $35,333 for the  thirteen weeks ended December 2, 2006 and December 3, 2005, respectively) |       | 21,820,429                     |        | 17,011,852                     |       |
| Depreciation and amortization                                                                                                                                                                       |       | 7,281,289                      |        | 7,545,947                      |       |
| Loss on disposition of property, plant, and  equipment, net                                                                                                                                         |       | —                         |        | 6,388                          |       |
|                                                                                                                                                                                                |       |                           |        |                           |       |
| Total costs and expenses                                                                                                                                                                            |       | 116,976,204                    |        | 105,665,025                    |       |
|                                                                                                                                                                                                |       |                           |        |                           |       |
| OPERATING INCOME                                                                                                                                                                                    |       | 10,161,303                     |        | 9,787,626                      |       |
|                                                                                                                                                                                                |       |                           |        |                           |       |
| INTEREST EXPENSE  AND OTHER INCOME:                                                                                                                                                                 |       |                           |        |                           |       |
| Interest expense                                                                                                                                                                                    |       | (6,189,779                     | )           | (5,688,999                     | )          |
| Other income                                                                                                                                                                                        |       | 1,186                          |        | 58,607                         |       |
|                                                                                                                                                                                                |       |                           |        |                           |       |
| Interest expense and other income, net                                                                                                                                                              |       | (6,188,593                     | )           | (5,630,392                     | )          |
|                                                                                                                                                                                                |       |                           |        |                           |       |
| INCOME BEFORE  INCOME TAX PROVISION                                                                                                                                                                 |       | 3,972,710                      |        | 4,157,234                      |       |
|                                                                                                                                                                                                |       |                           |        |                           |       |
| INCOME TAX  PROVISION                                                                                                                                                                               |       | (1,211,167                     | )           | (1,606,989                     | )          |
|                                                                                                                                                                                                |       |                           |        |                           |       |
| NET INCOME                                                                                                                                                                                          |       | $                              | 2,761,543   |                           | $          | 2,550,245 |   |
|                                                                                                                                                                                                |       |                           |        |                           |       |
| NET INCOME PER  COMMON SHARE — BASIC AND DILUTED                                                                                                                                               |       | $                              | 27.62       |                           | $          | 25.50 |   |
|                                                                                                                                                                                                |       |                           |        |                           |       |
| WEIGHTED AVERAGE SHARES  OUTSTANDING — BASIC AND DILUTED                                                                                                                                       |       | 100,000                        |        | 100,000                        |       |

 

See accompanying notes to unaudited CondensedConsolidated Financial Statements.

4

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**PIERREFOODS, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements of Operations**

(Unaudited)
| ** **                                                                                                                                                                                               | ** ** | **For the**               | ** **  | **For the**               | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|-------------|--------------------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **Thirty-Nine Weeks**     | ** **  | **Thirty-Nine Weeks**     | ** ** |
| ** **                                                                                                                                                                                               | ** ** | **Ended**                      | ** **  | **Ended**                      | ** ** |
| ** **                                                                                                                                                                                               | ** ** | **December 2, 2006** | ** **  | **December 3, 2005** | ** ** |
|                                                                                                                                                                                                     |       |                           |        |                           |       |
| REVENUES, NET                                                                                                                                                                                            |       | $                              | 331,805,601 |                           | $          | 322,367,502 |   |
|                                                                                                                                                                                                     |       |                           |        |                           |       |
| COSTS AND  EXPENSES:                                                                                                                                                                                     |       |                           |        |                           |       |
| Cost of goods sold                                                                                                                                                                                       |       | 230,612,991                    |        | 233,232,529                    |       |
| Selling, general, and administrative expenses  (includes related party transactions totaling $167,710 and $103,267 for the  thirty-nine weeks ended December 2, 2006 and December 3, 2005, respectively) |       | 57,739,823                     |        | 50,215,157                     |       |
| Depreciation and amortization                                                                                                                                                                            |       | 20,955,152                     |        | 23,032,555                     |       |
| Loss on disposition of property, plant, and  equipment, net                                                                                                                                              |       | 5,301                          |        | 6,388                          |       |
|                                                                                                                                                                                                     |       |                           |        |                           |       |
| Total costs and expenses                                                                                                                                                                                 |       | 309,313,267                    |        | 306,486,629                    |       |
|                                                                                                                                                                                                     |       |                           |        |                           |       |
| OPERATING INCOME                                                                                                                                                                                         |       | 22,492,334                     |        | 15,880,873                     |       |
|                                                                                                                                                                                                     |       |                           |        |                           |       |
| INTEREST EXPENSE  AND OTHER INCOME:                                                                                                                                                                      |       |                           |        |                           |       |
| Interest expense                                                                                                                                                                                         |       | (17,294,347                    | )           | (16,640,118                    | )          |
| Other income                                                                                                                                                                                             |       | 37,144                         |        | 93,281                         |       |
|                                                                                                                                                                                                     |       |                           |        |                           |       |
| Interest expense and other income, net                                                                                                                                                                   |       | (17,257,203                    | )           | (16,546,837                    | )          |
|                                                                                                                                                                                                     |       |                           |        |                           |       |
| INCOME (LOSS)  BEFORE INCOME TAX (PROVISION) BENEFIT                                                                                                                                                     |       | 5,235,131                      |        | (665,964                       | )          |
|                                                                                                                                                                                                     |       |                           |        |                           |       |
| INCOME TAX  (PROVISION) BENEFIT                                                                                                                                                                          |       | (1,663,540                     | )           | 1,049,390                      |       |
|                                                                                                                                                                                                     |       |                           |        |                           |       |
| NET INCOME                                                                                                                                                                                               |       | $                              | 3,571,591   |                           | $          | 383,426 |   |
|                                                                                                                                                                                                     |       |                           |        |                           |       |
| NET INCOME PER  COMMON SHARE — BASIC AND DILUTED                                                                                                                                                    |       | $                              | 35.72       |                           | $          | 3.83 |   |
|                                                                                                                                                                                                     |       |                           |        |                           |       |
| WEIGHTED AVERAGE SHARES  OUTSTANDING — BASIC AND DILUTED                                                                                                                                            |       | 100,000                        |        | 100,000                        |       |

 

See accompanying notes to unaudited CondensedConsolidated Financial Statements.

5

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**PIERREFOODS, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statement of Shareholder’sEquity**

**For theThirty-Nine Weeks Ended December 2, 2006**

(Unaudited)
| ** **                         | ** ** | **Common**       | ** **  | ** **                   | ** ** | **Total**              | ** ** |
|------------------------------------|------------|------------------|-------------|------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **Stock**        | ** **  | **Retained**                 | ** ** | **Shareholder’s** | ** ** |
| ** **                         | ** ** | **Class A** | ** **  | **Earnings/ (Deficit)** | ** ** | **Equity**             | ** ** |
|                               |       |             |        |                         |       |                   |       |
| BALANCE AT MARCH  4, 2006          |       | $                | 150,225,541 |                         | $          | (2,167,685             | )          | $ | 148,057,856 |   |
|                               |       |             |        |                         |       |                   |       |
| Net income                         |       | —           |        | 3,571,591                    |       | 3,571,591              |       |
| Expenses paid on  behalf of parent |       | (29,890          | )           | —                       |       | (29,890                | )          |
|                               |       |             |        |                         |       |                   |       |
| BALANCE AT DECEMBER 2,  2006       |       | $                | 150,195,651 |                         | $          | 1,403,906              |       | $ | 151,599,557 |   |

 

See accompanying notes to unaudited CondensedConsolidated Financial Statements.

6

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**PIERREFOODS, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements of Cash Flows**

(Unaudited)
| ** **                                                                           | ** ** | **For the**               | ** ** | **For the**               | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                                           | ** ** | **Thirty-Nine Weeks**     | ** ** | **Thirty-Nine Weeks**     | ** ** |
| ** **                                                                           | ** ** | **Ended**                      | ** ** | **Ended**                      | ** ** |
| ** **                                                                           | ** ** | **December 2, 2006** | ** ** | **December 3, 2005** | ** ** |
|                                                                                 |       |                           |       |                           |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                                |       |                           |       |                           |       |
| Net income                                                                           |       | $                              | 3,571,591  |                           | $          | 383,426 |   |
|                                                                                 |       |                           |       |                           |       |
| Adjustments to reconcile net income to net cash  provided by operating activities:   |       |                           |       |                           |       |
| Depreciation and amortization                                                        |       | 20,955,152                     |       | 23,032,555                     |       |
| Amortization of deferred loan origination fees                                       |       | 1,158,973                      |       | 1,108,040                      |       |
| Change in deferred taxes                                                             |       | (5,681,742                     | )          | (791,670                       | )          |
| Loss on disposition of plant, property, and  equipment                               |       | 5,301                          |       | 6,388                          |       |
| Changes in operating assets and liabilities-net of  acquired assets and liabilities: |       |                           |       |                           |       |
| Receivables                                                                          |       | (2,266,529                     | )          | 915,846                        |       |
| Inventories                                                                          |       | (9,728,630                     | )          | (1,166,280                     | )          |
| Refundable income taxes, prepaid expenses, and other  current assets                 |       | 1,179,229                      |       | 2,313,411                      |       |
| Trade accounts payable and other accrued liabilities                                 |       | 8,477,091                      |       | 2,823,720                      |       |
| Other long-term liabilities                                                          |       | (3,955,495                     | )          | (917,898                       | )          |
| Other assets                                                                         |       | (650,995                       | )          | —                         |       |
| Total adjustments                                                                    |       | 9,492,355                      |       | 27,324,112                     |       |
| Net cash provided by operating activities                                            |       | 13,063,946                     |       | 27,707,538                     |       |
|                                                                                 |       |                           |       |                           |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                |       |                           |       |                           |       |
| Net cash used in the Acquisition of Clovervale                                       |       | (21,815,835                    | )          | —                         |       |
| Capital expenditures                                                                 |       | (6,221,810                     | )          | (4,749,684                     | )          |
| Net cash used in investing activities                                                |       | (28,037,645                    | )          | (4,749,684                     | )          |
|                                                                                 |       |                           |       |                           |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                |       |                           |       |                           |       |
| Net borrowings of revolving credit agreement                                         |       | 3,169,000                      |       | (790,000                       | )          |
| Additional borrowings under term loan                                                |       | 24,000,000                     |       | —                         |       |
| Repayment of debt acquired in the Acquisition of  Clovervale                         |       | (1,612,378                     | )          | —                         |       |
| Principal payments on long-term debt                                                 |       | (12,299,911                    | )          | (12,732,209                    | )          |
| Loan origination fees                                                                |       | (708,601                       | )          | (59,843                        | )          |
| Return of capital to parent                                                          |       | (29,890                        | )          | (93,429                        | )          |
|                                                                                 |       |                           |       |                           |       |
| Net cash provided by (used in) financing activities                                  |       | 12,518,220                     |       | (13,675,481                    | )          |
|                                                                                 |       |                           |       |                           |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                |       | (2,455,479                     | )          | 9,282,373                      |       |
|                                                                                 |       |                           |       |                           |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                      |       | 2,540,722                      |       | —                         |       |
|                                                                                 |       |                           |       |                           |       |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                            |       | $                              | 85,243     |                           | $          | 9,282,373 |   |

 

See accompanying notes to unaudited CondensedConsolidated Financial Statements.

7

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**PIERREFOODS, INC. AND SUBSIDIARIES**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

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

Pierre Foods, Inc. and its subsidiaries (the “Company” or“Pierre”) manufactures, markets, and distributes 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.

* *The unaudited Condensed Consolidated Financial Statements of Pierre andits subsidiaries have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”), as well as theinstructions to Form 10-Q and Article 10 of Regulation S-X.  These statements should be read inconjunction with the Consolidated Financial Statements and the notes theretoincluded in the Company’s Annual Report on Form 10-K filed on June 2, 2006 (“Form10-K”).

The financial information as of March 4, 2006included in these financial statements has been derived from the Company’saudited Consolidated Financial Statements. In the opinion of the Company, the accompanying unaudited CondensedConsolidated Financial Statements contain all adjustments necessary to presentfairly the financial position, the results of operations, and the cash flows ofthe Company for the interim periods.  Theresults of interim operations are not necessarily indicative of the results tobe expected for the full fiscal year, and as noted above, should be read inconjunction with the Consolidated Financial Statements and the notes theretoincluded in the Company’s Form 10-K.  TheCompany’s current accounting policies are consistent with those described inthe notes to the Company’s March 4, 2006 audited Consolidated FinancialStatements.

Included in this report are interim unauditedCondensed Consolidated Financial Statements that contain all adjustmentsnecessary to present fairly the financial position as of December 2, 2006, theresults of operations for the thirteen and thirty-nine week periods endedDecember 2, 2006 and December 3, 2005, the cash flows of the Company for thethirty-nine weeks ended December 2, 2006 and December 3, 2005, and thestatement of shareholder’s equity for the thirty-nine week period ended December2, 2006.  The thirteen week periods endedDecember 2, 2006 and December 3, 2005 are referred to as “third quarter fiscal2007” and “third quarter fiscal 2006”, respectively.  The thirty-nine week periods ended December2, 2006 and December 3, 2005 are referred to as “fiscal 2007” and “fiscal 2006”,respectively.

The Company reports the results of its operationsusing a 52-53 week basis.  In linewith this, each quarter of the fiscal year will contain 13 weeks except for theinfrequent fiscal years with 53 weeks.

On June 30, 2004, the shareholders of PFManagement, Inc. (“PFMI”), the sole shareholder of the Pierre, sold theirshares of stock in PFMI (the “Acquisition of Pierre”) to Pierre Holding Corp. (“Holding”),an affiliate of Madison Dearborn Partners, LLC (“MDP”).  The fair value adjustments related to theAcquisition of Pierre, were pushed down to the Company from Holding, whichprimarily included adjustments in property, plant, and equipment, inventories,goodwill, other intangible assets and related deferred taxes.

**2.****                ****Acquisition of Clovervale**

OnAugust 21, 2006, the Company acquired all of the outstanding shares of stock ofClovervale Farms, Inc., two of its subsidiaries, and certain of the realproperty used in its business (“Clovervale”). The acquisition of Clovervale is referred to herein as the “Acquisitionof Clovervale”.  The preliminaryaggregate purchase price was $22.8 million, which was paid in cash at theclosing.  After repayment of indebtednessand other post-closing adjustments, the net purchase price was $21.8 millionand is subject to a post-closing working capital adjustment.  Pierre funded the Acquisition of Clovervalethrough an amendment to its Credit Agreement (“Amendment No. 2”).   See Note 5, “Long-Term Debt” for further discussion.** **Pierre’s investmentin Clovervale was based on the expectation that such an investment wouldincrease Pierre’s presence with targeted customer channels and add capacity andproduction capabilities in order to increase product offerings.

Clovervalewas a privately held company and currently employs approximately 96employees.  Clovervale has operations inAmherst, Ohio and Easley, South Carolina and manufactures and sells a varietyof food items including individually proportioned entrees, vegetables,sandwiches, fruits, cobblers, peanut butter and jelly bars, sandwiches andcups, sherbets, apple sauce, and other similar products through variouscustomer channels including schools, military, hospitals, and senior citizenmeal programs.  Operating results forClovervale are included in the Company’s Condensed Consolidated Statement ofOperations from the date of the Acquisition of Clovervale.

Inconjunction with the Acquisition of Clovervale, management of the Company, withthe assistance of an independent valuation firm, performed valuations on theClovervale goodwill and other intangibles for financial reportingpurposes.  Assets identified through thisvaluation process included goodwill, customer relationships, non-competeagreements, and certain tradenames and trademarks.    The increases in the carrying amounts ofgoodwill and other intangible assets presented in Note 6, “Goodwill and OtherIntangible Assets” to the Condensed Consolidated Financial Statements representthe preliminary valuations performed in conjunction with the Acquisition ofClovervale.  In addition, other fairvalue adjustments were made in conjunction with 

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theAcquisition of Clovervale, which primarily include adjustments in property,plant, and equipment, inventory, and related deferred taxes.

The following tables presentunaudited pro forma information for the third quarter fiscal 2006, fiscal 2007,and fiscal 2006, as if the Acquisition of Clovervale had been completed at thebeginning of the respective periods.

 
| ** ** | ** ** | ** **           | ** **  | **Third Quarter  Fiscal 2006** | ** ** |
|------------|------------|----------------------|-------------|------------------------------------------|------------|
| ** ** | ** ** | ** **           | ** **  | ** **                               | ** ** | **Actual** | ** ** | **Pro Forma** | ** ** |
| ** ** | ** ** | ** **           | ** **  | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues   |       |                 |        |                                     | ** ** | $ | 115,452,651 |   | $ | 131,457,250 |   |
| ** ** | ** ** | ** **           | ** **  | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income |       |                 |        |                                     | ** ** | $ | 2,550,245 |   | $ | 3,734,397 |   |
|       |       |                 |        |                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **Fiscal 2007** | ** **  | **Fiscal 2006**                     | ** ** |
| ** ** | ** ** | **Actual**           | ** **  | **Pro Forma**                       | ** ** | **Actual** | ** ** | **Pro Forma** | ** ** |
|       |       |                 |        |                                     |       |   |   |   |   |
| Revenues   |       | $                    | 331,805,601 |                                     | $          | 340,136,099 |   | $ | 322,367,502 |   | $ | 353,039,933 |   |
|       |       |                 |        |                                     |       |   |   |   |   |
| Net income |       | $                    | 3,571,591   |                                     | $          | 2,412,058 |   | $ | 383,426 |   | $ | 1,002,497 |   |

 

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 theCompany had acquired Clovervale at the beginning of the respectiveperiods.  Purchase related adjustments tothe results of operations include the effects on depreciation and amortization,interest expense, cost of goods sold, and income taxes.

In addition to the purchase related adjustments,included in these pro forma results are certain reclassifications of Clovervale’sexpenses, which are consistent with the classifications of Pierre.  These reclassifications include thepresentation of various sales discounts previously reported by Clovervale asselling expenses, but more appropriately classified as a reduction of revenues.

Alsoincluded in these pro forma results are the elimination of miscellaneous incomepreviously reported by Clovervale and the elimination of interest expenserelated to Clovervale’s debt, which was partially paid off in conjunction withthe Acquisition of Clovervale, and will no longer be present in the Company’sresults of operations.

TheAcquisition of Clovervale was recorded under the purchase method ofaccounting.  The preliminary net purchaseprice has been allocated to assets acquired and liabilities assumed based onthe estimated fair market value at the date of the Acquisition ofClovervale.  The preliminary allocationof the net purchase price is as follows:
| Current assets                      |   | $          | 5,194,556  |   |
|-------------------------------------|--------|------------|------------|--------|
| Property, plant and  equipment      |   | 12,876,729 |       |
| Non-current  assets                 |   | 17,625     |       |
| Goodwill                            |   | 8,167,512  |       |
| Other intangible  assets            |   | 2,730,000  |       |
| Debt and other  liabilities assumed |   | (4,252,438 | )          |
| Deferred tax  liabilities           |   | (2,918,008 | )          |
|                                |   |       |       |
| Net assets acquired                 |   | $          | 21,815,976 |   |

 

Of the $2,730,000 ofacquired other intangible assets, $2,400,000 was assigned to customerrelationships with a weighted-average estimated useful life of 10 years.  The remaining acquired other intangibleassets include tradenames and trademarks of $280,000 with a weighted-averageuseful life of 3 years and a non-compete agreement of $50,000 with a usefullife of 2 years.  The goodwill related tothe Acquisition of Clovervale is not expected to be deductible for taxpurposes.

The initial allocation of the preliminary netpurchase price to specific assets and liabilities was based, in part, uponpreliminary appraisals, and was therefore subject to change. Net assetsacquired totaling $21,810,576 were previously reported in the Company’s Reporton Form 10-Q for the period ended September 2, 2006.  The increase in net assets acquired is due tomiscellaneous adjustments made during third quarter fiscal 2007.  The Company expects to further adjust andfinalize the appraisals of acquired assets and liabilities in fiscal 2008.  Deferred tax liabilities will also befinalized after the final allocation of the purchase price and the final taxbasis of the assets and liabilities has been determined.

**3.****                ****Stock-Based Compensation**

On June 30, 2004, Holding adopted a stock optionplan, pursuant to which the Board of Directors of Holding may grant options topurchase an aggregate of 163,778 shares of common stock of Holding.  Such options may be granted to directors,employees, and consultants of Holding and its subsidiaries, including theCompany.  At both December 2, 2006 andMarch 4, 2006, options to purchase a total of 126,219 shares of common stock ofHolding had been issued to members of management of the 

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Company (the “Options”) and 37,559 were reserved for futureissuance.  All outstanding Options were grantedwith an exercise price of $10 per share and expire ten years from the date ofgrant.  A portion of each outstandingOption vests daily on a pro-rata basis over a five-year period from the date ofgrant and the remaining portion of each outstanding Option vests seven yearsfrom the date of grant, subject to accelerated vesting based on the achievementof certain performance measures.  AtDecember 2, 2006 and March 4, 2006, options to purchase 23,604 shares and 16,064shares, respectively, were vested and exercisable.

The Company treats the Options as stock-based employee compensation foremployees of the Company.  Prior toimplementing Statement of Financial Accounting Standards (“SFAS “) No. 123(R), “Accountingfor Stock-Based Compensation” (revision 2004), (“SFAS 123(R)”), as previouslypermitted under GAAP, the Company accounted 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 wasrecognized for the Options in the Company’s Condensed Consolidated Statementsof Operations.  The weighted averageminimum value per share of the options granted was $2.24 based on theBlack-Scholes-Merton option pricing model with the following weighted averageassumptions:
| Dividend yield          |   | —    |   |
|-------------------------|--------|-----------|--------|
| Term to  expiration     |   | 10 years  |   |
| Expected life           |   | 6.3 years |   |
| Expected  volatility    |   | —    |   |
| Risk free interest rate |   | 3.93      | %      |

 

Effective March 5, 2006, as required for the firstannual reporting period beginning after December 15, 2005 for non-publiccompanies (as defined in SFAS 123(R)), the Company adopted SFAS 123(R) usingthe prospective adoption method.  The newstatement requires compensation expense associated with share-based payments toemployees to be recognized in the financial statements based on their fairvalues**. **Uponthe adoption of SFAS 123(R), because the Company had used the minimum value methodprior to the adoption, the Company was required to apply the provisions of thestatement only prospectively for any newly issued, modified or settled awardsafter the date of initial adoption.  Nonew Options were issued, modified or settled subsequent to adoption,however,  the fair value assigned to anynewly issued, modified or settled awards in the future is expected to besignificantly greater due to the differences in valuation methods.

**4.****                ****Inventories**

A summary of inventories, by major classifications, follows:
| ** **      | ** ** | **December 2, 2006** | ** ** | **March 4, 2006** | ** ** |
|-----------------|------------|--------------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                              | 10,380,716 |                        | $          | 7,589,997 |   |
| Finished goods  |       | 48,358,187                     |       | 38,090,709                  |       |
| Work in process |       | 29,794                         |       | 5,636                       |       |
|            |       |                           |       |                        |       |
| Total           |       | $                              | 58,768,697 |                        | $          | 45,686,342 |   |

 

**5.****                ****Long-Term Debt**

Long-term debt is comprised of the following:
| ** **                                                                                                | ** ** | **December 2, 2006** | ** **  | **March 4, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------|-------------|-----------------------------|------------|
| 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                                       |       | 131,000,000                    |        | 119,125,000                 |       |
| Revolving line  of credit, maximum borrowings of $40 million with  floating interest rates, maturing 2009 |       | 3,169,000                      |        | —                      |       |
|                                                                                                      |       |                           |        |                        |       |
| 4.6% to 7.5%  capitalized lease obligations maturing through 2011                                         |       | 693,746                        |        | 868,659                     |       |
| Total long-term  debt                                                                                     |       | 259,862,746                    |        | 244,993,659                 |       |
| Less current  installments                                                                                |       | 203,851                        |        | 229,172                     |       |
| Long-term debt less  current installments                                                                 |       | $                              | 259,658,895 |                        | $          | 244,764,487 |   |

 

Effective June 30, 2004, the Company obtained a$190 million credit facility, which includes a six-year variable-rate$150 million term loan, a five-year variable-rate $40 million revolvingcredit facility, and a $10 million letter of credit subfacility.  Funds available under this facility areavailable for working capital requirements, permitted investments and generalcorporate purposes.  Borrowings under thefacility bear interest at floating rates based upon the interest rate optionselected from time to time by the Company and are secured by a first-prioritysecurity interest in substantially all of the Company’s assets.  The interest rates for base rate borrowingsunder the revolving credit facility and the term loan at December 2, 2006 were10.00% (prime of 8.25% plus 1.75%) and 9.25% (prime of 8.25% plus 1.00%),respectively.  Repayment of borrowingsunder the term loan was initially $375,000 per quarter, which began onSeptember 4, 2004, with a balloon payment of $141.4 million due onJune 30, 2010.  The Company has madeall scheduled quarterly payments totaling $8.6 million for the term of the loanand prepayments on the term loan totaling $34.4 million.  As previously discussed in Note 2, “Acquisitionof Clovervale” to the Condensed Consolidated Financial Statements, inconjunction with the Acquisition of Clovervale, the Company increasedborrowings with respect to its term loan by 

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$24.0 million in order to finance the Acquisition of Clovervale.  The outstanding balance of $131.0 million asof December 2, 2006 is due on June 30, 2010.

Base interest rates for the term loan and the revolvingline of credit are lowered by the use of LIBOR tranches as appropriate. Thefollowing table summarizes the Company’s outstanding LIBOR tranches as ofDecember 2, 2006, including the amount, the respective rate of interest, andthe date of expiration.
| ** **                               | ** ** | **Amount** | ** **  | **Interest Rate** | ** ** | **Expiration Date** | ** **      |
|------------------------------------------|------------|------------|-------------|------------------------|------------|--------------------------|-----------------|
|                                     |       |       |        |                   |       |                     |            |
| Term loan LIBOR  tranch:                 |       | $          | 131,000,000 |                   | 7.5%       |                     | March 28, 2007  |   |
|                                     |       |       |        |                   |       |                     |            |
| Revolving credit  facility LIBOR tranch: |       | $          | 3,000,000   |                   | 8.1%       |                     | January 2, 2007 |   |

 

On April 3, 2006, the Company entered into AmendmentNo. 1 to its credit facility (“Amendment No. 1”).  Amendment No. 1 provided for, among otherthings, a reduction of 0.5% in the per annum interest rate with respect toborrowings under the Company’s term loan. The applicable interest rate for base rate borrowings under the termloan was decreased from the base rate (which is the greater of the applicablePrime Rate and 1⁄2 of 1% above the Federal Funds Rate) plus 1.50% to such baserate plus 1.00%.  A copy of Amendment No.1 is included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filedwith the SEC on April 7, 2006.  On August21, 2006, the Company entered into Amendment No. 2 to its credit facility (“AmendmentNo. 2”).  Amendment No. 2 provided for,among other things, an increase in borrowings with respect to the Company’sterm loan totaling $24.0 million.  A copyof Amendment No. 2 is included as Exhibit 10.1 to the Company’s Current Reporton Form 8-K filed with the SEC on August 22, 2006.

Effective June 30, 2004, in conjunction with the Acquisitionof Pierre, the Company issued 9.875% senior notes, with interest payable onJanuary 15 and July 15 of each year (the “Notes”).  The proceeds of the Notes, together with theequity contributions from MDP and certain members of management and borrowingsunder the Company’s senior credit facility, were used to finance theAcquisition of Pierre and to repay outstanding indebtedness.

As of December 2, 2006, the Company had cash and cashequivalents on hand of $0.1 million, outstanding borrowings under its revolvingcredit facility of $3.2 million, outstanding letters of credit of approximately$2.3 million, and borrowing availability of approximately$34.5 million.  Also as ofDecember 2, 2006, the Company had borrowings under its term loan of $131.0million and $125.0 million of Notes outstanding.  As of March 4, 2006, the Company had cash andcash equivalents on hand of $2.5 million, no outstanding borrowings under itsrevolving credit facility, outstanding letters of credit of approximately $5.6million, and borrowing availability of approximately $34.4 million underits revolving credit facility.  Also asof March 4, 2006, the Company had borrowings under its term loan of $119.1million and $125.0 million of Notes outstanding.  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 2, 2006,the Company is in compliance with all financial covenants.

**6.****                ****Goodwill and Other IntangibleAssets**

In conjunction with the Acquisition of Pierre,management of the Company, with the assistance of an independent valuationfirm, performed valuations on the Company’s goodwill and other intangibles forfinancial reporting purposes.  Assetsidentified through this valuation process included goodwill, formulas, customerrelationships, licensing agreements, and certain tradenames and trademarks.

In conjunction with the Acquisition of Clovervale,management of the Company, with the assistance of an independent valuationfirm, performed similar valuations on the Clovervale goodwill and otherintangibles for financial reporting purposes. Assets identified through this valuation process included goodwill,customer relationships, non-compete agreements, and certain tradenames andtrademarks.  The increases in thecarrying amounts of goodwill, amortizable intangible assets, andindefinite-lived intangible assets during fiscal 2007 relates primarily to theassets recorded as a result of the preliminary valuations performed inconjunction with the Acquisition of Clovervale.

In accordance with SFAS No. 142, “Goodwill and OtherIntangible Assets,” (“SFAS 142”), the Company tests recorded goodwill and otherintangible assets with 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 No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” (“SFAS 144”).  Based on the Company’s review and the reviewperformed by third parties, no impairment existed at December 2, 2006 or March4, 2006.

The Company’s amortizable other intangible assets areamortized using straight-line and accelerated amortization methods based onexpected benefits derived from each asset. The accelerated amortization methods allocate amortization expense inproportion to each year’s expected revenues to the total expected revenues overthe estimated economic or estimated useful lives of the assets.

The gross carrying amount of goodwill and the grosscarrying amount and accumulated amortization of other intangible assets as ofDecember 2, 2006 are as follows: 

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| ** **                               | ** ** | **As of December 2, 2006** | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|
| ** **                               | ** ** | **Useful**                                     | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **                               | ** ** | **Life (yrs)**                            | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| **Amortizable  intangible assets:**      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Formulas                                 |       | 5-15                                           |       | $ | 95,000,000 |   | $ | 34,183,654 |   | $ | 60,816,346 |   |
| Tradename and trademarks                 |       | 3-20                                           |       | 20,380,000 |   | 4,899,891 |   | 15,480,109 |   |
| Customer relationships                   |       | 10-12                                          |       | 30,900,000 |   | 13,362,272 |   | 17,537,728 |   |
| Licensing agreements                     |       | 10                                             |       | 12,100,000 |   | 3,890,717 |   | 8,209,283 |   |
| Non-Compete agreement                    |       | 2                                              |       | 50,000 |   | 7,212 |   | 42,788 |   |
| **Total  amortizable intangible assets** | ** ** |                                           |       | 158,430,000 |   | 56,343,746 |   | 102,086,254 | ** ** |
| ** **                               | ** ** |                                           |       |   |   |   |   |   | ** ** |
| **Indefinite-lived  intangible assets:** | ** ** |                                           |       |   |   |   |   |   | ** ** |
| Tradename                                |       | Indefinite                                     |       | 20,200,000 |   | — |   | 20,200,000 |   |
| **Total  other intangible assets**       | ** ** |                                           |       | 178,630,000 |   | 56,343,746 |   | 122,286,254 | ** ** |
| ** **                               | ** ** |                                           |       |   |   |   |   |   | ** ** |
| Goodwill                                 |       | N/A                                            |       | 196,031,650 |   | — |   | 196,031,650 |   |
| **Total intangible assets**              | ** ** |                                           |       | $ | 374,661,650 |   | $ | 56,343,746 |   | $ | 318,317,904 | ** ** |

 

The gross carrying value of goodwill and the grosscarrying amount and accumulated amortization of other intangible assets as ofMarch 4, 2006 were as follows:
| ** **                               | ** ** | **As of March 4, 2006** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **Useful**                                  | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **                               | ** ** | **Life (yrs)**                         | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| **Amortizable  intangible assets:**      |       |                                        |       |   |   |   |   |   |   |
| Formulas                                 |       | 15                                          |       | $ | 95,000,000 |   | $ | 24,680,581 |   | $ | 70,319,419 |   |
| Tradename and trademarks                 |       | 12-20                                       |       | 20,100,000 |   | 3,433,777 |   | 16,666,223 |   |
| Customer relationships                   |       | 12                                          |       | 28,500,000 |   | 10,227,838 |   | 18,272,162 |   |
| Licensing agreements                     |       | 10                                          |       | 12,100,000 |   | 2,713,772 |   | 9,386,228 |   |
| **Total  amortizable intangible assets** |       |                                        |       | 155,700,000 |   | 41,055,968 |   | 114,644,032 |   |
|                                     |       |                                        |       |   |   |   |   |   |   |
| **Indefinite-lived  intangible assets:** | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Tradename                                |       | Indefinite                                  |       | 20,200,000 |   | — |   | 20,200,000 |   |
| **Total  other intangible assets**       |       |                                        |       | 175,900,000 |   | 41,055,968 |   | 134,844,032 |   |
|                                     |       |                                        |       |   |   |   |   |   |   |
| Goodwill                                 |       | N/A                                         |       | 186,535,050 |   | — |   | 186,535,050 |   |
| **Total intangible assets**              |       |                                        |       | $ | 362,435,050 |   | $ | 41,055,968 |   | $ | 321,379,082 |   |

 

The following table represents activity related to goodwill and amortizableintangible assets during fiscal 2007:
| **Goodwill:**                                | ** ** | ** **  | ** **  |
|----------------------------------------------|------------|-------------|-------------|
| ** **                                   | ** ** | ** **  | ** **  |
| Balance as of  March 4, 2006                 |       | $           | 186,535,050 |   |
| Adjustment for  contingent consideration (1) |       | 1,329,088   |        |
| Acquisition of  Clovervale                   |       | 8,167,512   |        |
| Balance as of  December 2, 2006              |       | $           | 196,031,650 |   |
| ** **                                   | ** ** | ** **  | ** **  |
| **Amortizable  intangible assets:**          | ** ** | ** **  | ** **  |
| ** **                                   | ** ** | ** **  | ** **  |
| Balance as of  March 4, 2006                 |       | $           | 114,644,032 |   |
| Acquisition of  Clovervale                   |       | 2,730,000   |        |
| Amortization                                 |       | (15,287,778 | )           |
| Balance as of December  2, 2006              |       | $           | 102,086,254 |   |

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(1)             Represents a change in estimate related to theliability to the selling shareholders; see Note 7, “Commitments andContingencies”, for further discussion.

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The future amortization of other intangible assets (excluding intangibleassets that the Company will record in conjunction with the Acquisition ofZartic) for the next five fiscal years is estimated to be as follows:
| ** **                | ** ** | **(in thousands)** | ** ** |
|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **2008**                | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** |
|                      |       |                    |       |   |   |   |   |   |   |   |   |
| Formulas                  |       | $                       | 11,092     |   | $ | 10,046 |   | $ | 8,906 |   | $ | 7,637 |   | $ | 6,494 |   |
| Tradename and  trademarks |       | $                       | 1,914      |   | $ | 1,825 |   | $ | 1,689 |   | $ | 1,539 |   | $ | 1,412 |   |
| Customer  relationships   |       | $                       | 3,771      |   | $ | 3,243 |   | $ | 2,717 |   | $ | 2,151 |   | $ | 1,650 |   |
| Licensing  agreements     |       | $                       | 1,495      |   | $ | 1,426 |   | $ | 1,361 |   | $ | 1,239 |   | $ | 1,097 |   |
| Non-compete agreement     |       | $                       | 25         |   | $ | 12 |   | $ | — |   | $ | — |   | $ | — |   |

 

Note that the table above includes amounts for theacceleration of amortization of intangible assets associated with formulasdeveloped for two National Accounts Restaurant Chain customers.  In order to re-negotiate new five-year supplycontracts with these customers, the Company agreed to transfer ownership ofsuch formulas to these customers at the beginning of each contract period.  As such, rights to the formulas transferredon December 1, 2006 and will transfer on August 1, 2007, respectively.

The intangible assets associated with these formulaswere initially recorded by the Company in conjunction with the Acquisition ofPierre.  The original amortizationperiods (estimated lives) were 15 years. The remaining net book value of the intangible assets associated with theseformulas was approximately $7.2 million at December 2, 2006.  The Company will accelerate the amortizationof the remaining book value over the five-year contract periods so that theassets are fully amortized at the end of the respective contract periods.

**7.****                ****Commitments and Contingencies**

The Company provided a letter of credit totaling $2.2million and $5.5 million as of December 2, 2006 and March 4, 2006,respectively, to its insurance carrier for the underwriting of certain performancebonds.  This current letter of creditexpires in fiscal 2008.  The Company alsoprovides a secured letter of credit to its insurance carrier for outstandingand potential workers’ compensation and general liability claims.  The letter of credit for these claims totaled$150,000 and $110,000 as of December 2, 2006 and March 4, 2006,respectively.  In addition, if requiredby a supplier, the Company provides secured letters of credit to suchsuppliers.  The Company had no letters ofcredit for suppliers as of December 2, 2006 or March 4, 2006.

The Company is involved in various legalproceedings.  Management believes, basedon the advice of legal counsel, that the outcome of such proceedings will nothave a materially adverse effect on the Company’s financial position or futureresults of operations and cash flows. See Note 12 — “Legal Proceedings,” to the Condensed ConsolidatedFinancial Statements for further discussion of proceedings as of December 2,2006.

 In conjunctionwith the Acquisition of Pierre, the Company and the selling shareholders****entered into a tax sharing and indemnification agreementcontaining certain representations and warranties of the selling shareholderswith respect to taxes.  The agreementprovides that any net operating loss carryforwards attributable to expensesrelating to the sale of the Company (“Deal Related NOLs”) and certain otherdeal related expenses, will be for the benefit of the sellingshareholders.  As of the date of theAcquisition of Pierre, these Deal Related NOLs and other deal related expensestotaled approximately $24.2 million and $6.6 million, respectively.  Accordingly, the Company was 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 was paid into an escrow account that secures theselling shareholders indemnification obligations under the tax sharing andindemnification agreement.  The Companyis required to make payments to the selling shareholders or the escrow accountfor tax benefits derived from such utilization 20 days after the filing of thetax return that utilizes such Deal Related NOLs or other deal related expenses.  Initially, the Company recorded a netlong-term liability to the selling shareholders totaling $10.3 million for theestimated obligations under the tax sharing and indemnification agreement.  During third quarter fiscal 2007, the Companyincreased the estimated obligation under the tax sharing and indemnificationagreement by approximately $1.3 million based on the differences in the taxrate initially used to estimate the liability, the actual payments to theselling shareholders, and the estimated remaining obligation to the sellingshareholders.  The adjustment to theliability to the selling shareholders resulted in a corresponding increase ingoodwill related to the Acquisition of Pierre.

As of December 2, 2006, based on all federal andstate income tax returns filed subsequent to the Acquisition of Pierre(including the return filed recently on November 15, 2006 for the tax yearended February 24, 2006), the Company has utilized $24.2 million of the DealRelated NOLs and $1.7 million in other deal related expenses.  Also as of December 2, 2006, the Company hassubmitted payments based on the tax benefits received, net of other taxassessments due to the Company from the selling shareholders, to an escrowaccount (approximately $4.0 million) and directly to the selling shareholders (approximately$1.5 million).  As of the end of thethird quarter fiscal 2006, the Company has a remaining liability to the sellingshareholders totaling $6.1 million (including the aforementioned $1.3 millionadjustment during the third quarter fiscal 2007), of which $3.9 million was dueto the selling shareholders in conjunction with the filing of its tax return onNovember 15, 2006 and is therefore classified as a current liability atDecember 2, 2006. Such payment was made by the Company subsequent to the end ofthe third quarter fiscal 2007, on December 5, 2006.  The remaining portion of the liability isclassified as long-term based on the expected timing of the remaining paymentsto the selling shareholders.  While theCompany expects to fully utilize the Deal Related NOLs and other deal 

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related expenses, the obligations to the selling shareholders under thetax sharing and indemnification agreement have been excluded from the tableabove due to the uncertainty in the timing of such payments.

**8**.                 **Comprehensive Income**

Total comprehensive income is comprisedsolely of net income in third quarter fiscal 2007, third quarter fiscal 2006,fiscal 2007, and fiscal 2006.

**9.****                ****Supplemental Cash FlowDisclosures —Cash Refunded (Paid) During the Period and Non-Cash Transactions**
| ** **                                   | ** ** | **Thirty-Nine Weeks**     | ** **  | **Thirty-Nine Weeks**     | ** ** |
|----------------------------------------------|------------|--------------------------------|-------------|--------------------------------|------------|
| ** **                                   | ** ** | **Ended**                      | ** **  | **Ended**                      | ** ** |
| ** **                                   | ** ** | **December 2, 2006** | ** **  | **December 3, 2005** | ** ** |
|                                         |       |                           |        |                           |       |
| Cash refunded  (paid) during the period for: |       |                           |        |                           |       |
| Interest                                     |       | $                              | (12,945,789 | )                              | $          | (12,365,136 | ) |
| Income taxes, net                            |       | $                              | (5,694,471  | )                              | $          | 2,436,988 |   |
|                                         |       |                           |        |                           |       |
| Non-cash transactions:                       |       |                           |        |                           |       |
| Liability to selling shareholders            |       | $                              | 1,329,088   |                           | $          | — |   |

 

**10.****         ****Recently Issued AccountingGuidance**

InJune 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48, “Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 addresses uncertainty in tax positionsrecognized in a company’s financial statements and stipulates a recognitionthreshold and measurement of a tax position taken or expected to be taken in atax return.  FIN 48 is effective for theCompany’s fiscal year beginning March 4, 2007, with earlier adoptionpermitted.  The Company is currentlyevaluating the impact of this interpretation on the Company’s consolidatedfinancial statements.

**11.****         ****Transactions with Related Parties**

At December 2, 2006, there were no significantchanges in related party transactions from those described at March 4, 2006 inthe Company’s Form 10-K.

**12.****         ****Legal Proceedings**

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

Subsequent to the original NOVreceived in August of 2003, the Company began investigating and testing variousemission reduction technologies.  TheCompany found a solution that enabled operations to continue with less smokeoutput and completed the upgrade during early 2004.  HCDOES inspected the upgrade in April of 2004and determined that the Company had returned to compliance with the opacitylimit.  In connection with the upgrade,the Company was required to submit a revised Permit to Install (“PTI”)application.

In August, 2005, pursuant to itsregulatory authority, HCDOES requested a Method 5 Stack Test be performed toassess 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 Company contracted with an independentenvironmental consulting firm to perform the audit and evaluation.  As part of the overall audit, this firmperformed preliminary testing in early September 2005, which indicated thatviolations of emission levels may have occurred, and retested September 28,2005 through September 30, 2005.  Thefirm conducted additional tests during October 27, 2005 through November 8,2005.  The Company received the resultsof the audit in January 2006.  Theresults allowed the Company to evaluate the facility’s current and historicalpotential and actual emissions.  Thetesting revealed that assumptions made by the Company’s former outside engineeringfirm concerning particulate emissions and throughput were incorrect.  This miscalculation caused the Company toreceive permit limits that are lower than actual emissions for certain cooklines.  The Company met with the localair permitting authority in February 2006, to discuss the results of theemissions audit program.

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On March 20, 2006, HCDOES sent a notice of violationto the Company alleging that the Company violated its permit limits forparticulate matter (“PM”) and reserved the right to pursue an enforcementaction and a civil penalty in the future. On July 7, 2006, HCDOES sent another notice of violation to the Companyalleging that the Company was in violation of its permit limits for PM emissionsand again reserved the right to pursue an enforcement action in thefuture.  Depending on HCDOES’interpretation of the data, HCDOES may allege additional violations of emissionlimits and other regulatory requirements. To date, the Company has spent approximately $0.8 million foremissions control equipment purchases, which is expected to be installed inearly calendar year 2007.   In addition,the Company has committed to and expects to commit to before the end of thefirst quarter of 2008, control equipment purchases of approximately $0.8 millionand $0.2 million, respectively, to comply with relevant laws.  Furthermore, in August 2006 HCDOES requestedthat the Company submit a determination as to whether or not it was subject toTitle V or major new source permitting requirements.  The Company responded to HCDOES’ request inSeptember 2006, concluding that the Company was not subject to Title V or majornew source permitting requirements based on the Company’s interpretation ofsuch regulations.  The ultimateresolution of whether or not the Company was subject to Title V or major newsource permitting requirements depends on potentially disputed legalissues.  The Company is cooperating withthe 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.

***Labor***.*** ***In June 2006, the Departmentof Homeland Security (“DHS”) announced that it would regard a large number ofemployee Social Security Number mismatches as a sign of an “egregious violator”of the laws against hiring and employing illegal aliens.  The Immigration & Customs Enforcement (“ICE”),which is part of DHS, proposed a safe harbor for dealing with Social Securitymismatch letters.  An employer thatreceives a mismatch letter has 14 days to check its records for clerical errorsand verify the resolution with the Social Security Administration.  If the error was not made by the employer,the employer must instruct the employee to resolve the discrepancy in 60 days.  If the employee does not correct the mismatchwithin such 60 days, the employer has 3 days to complete certain requireddocumentation or terminate the employee. Any employer complying with the safe harbor will not deemed to have “constructiveknowledge” of the fact that the employee is an unauthorized worker, andtherefore, such employer will not be in violation of the laws regulating thehiring and employment of illegal aliens. A knowing violation of such laws constitutes a felony.  The DHSoffers a voluntary Basic Pilot Employment Verification Program (the “PilotProgram”), which includes an internet-based system to assist employers indetermining the eligibility of new hires and verifying their Social Securitynumbers.

The Company’s Claremont, North Carolina facilityreceived 209 mismatch letters from the Social Security Administration and hasresolved each in compliance with the safe harbor requirements.  Since March 2006, all new employees in theCompany’s Claremont facility have been subject to the Pilot Program and sinceJuly 27, 2006, a total of 345 employees have been hired to work in suchfacility, of which only 200 of such employees remain with the Company followingcompliance with the Pilot Program.  Management believes that with theCompany’s use of the Pilot Program in all of its existing facilities, theCompany will be compliant with laws and regulations regarding Social Securitymismatches.

***General.***  The Company continuously evaluatescontingencies based upon the best available information.  The Company believes it has recordedappropriate liabilities to the extent necessary in cases where the outcome ofsuch liabilities is considered probable and reasonably estimable, and that itsassessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that varyfrom management’s estimates, future earnings will be charged or creditedaccordingly.

As part of its ongoing operations inthe food manufacturing industry, the Company is subject to extensive federal,state, and local regulations and its food processing facilities and foodproducts are subject to frequent inspection, audits and inquiries by the UnitedStates Department of Agriculture, the Food and Drug Administration, and variouslocal health and agricultural agencies and by federal, state, and local agenciesresponsible for the enforcement of environmental laws and regulations.  The Company is also involved in various legalactions arising in the normal course of business.  These matters are continuously beingevaluated and, in some cases, are being contested by the Company and theoutcome is not predictable. Consequently, an estimate of the possible loss orrange of loss associated with these actions cannot be made.  Although occasional adverse outcomes (orsettlements) may occur and could possibly have an adverse effect on the resultsof operations in any one accounting period, the Company believes that the finaldisposition of such matters will not have a material adverse affect on theCompany’s consolidated financial position.

**13.****         ****Subsequent Events**

On November 6, 2006, Pierre Newco I,LLC, a wholly-owned subsidiary of Pierre (“Pierre Newco I”), and Pierre NewcoII, LLC, a wholly-owned subsidiary of Pierre (“Pierre Newco II” and togetherwith Pierre Newco I, the “Buyers”), entered into an Asset Purchase Agreementwith  Zartic, Inc. (“Zartic”), Zar Tran,Inc. (“Zar Tran”), Jem Sales, Inc., MNM Leasing Company, LLC, James E. Mauer,Jeffrey J. Mauer, Christopher W. Mauer, and Tamara L. Mauer, pursuant to whichthe Buyers acquired substantially all of the assets and assumed certainliabilities of Zartic, Zar Tran and certain real property and other assets usedin the businesses of Zartic and Zar Tran. Subsequent to the end of third quarter fiscal 2007, on December 11,2006, the transaction was closed (“Acquisition of Zartic”).  The Asset Purchase Agreement and the FirstAmendment to the Asset Purchase Agreement dated as of December 11, 2006 werefiled as exhibits to the Current Report on Form 8-K with the SEC on December15, 2006.  The aggregate preliminary purchaseprice was $94.0 million plus the assumption of certain liabilities, which waspaid in cash at the closing and is subject to certain post-closingadjustments.  The Asset Purchase Agreement includes representations andwarranties of the sellers and post-closing indemnification by the sellers forbreaches of those representations and warranties and certain other specifiedmatters.  Following the closing of theAcquisition of Zartic, Pierre Newco I was renamed “Zartic, LLC” and PierreNewco II was renamed “Zar Tran, LLC”. Zartic manufactures, markets, sells, and through its affiliateddistribution company, Zar Tran, delivers and distributes, a variety of fooditems including packaged beef, poultry, pork, and veal products.

In conjunction with the Acquisitionof Zartic, on December 11, 2006, Pierre entered into Amendment No. 3 (“AmendmentNo. 3”) to its Credit Agreement dated as of June 30, 2004 among Pierre MergerCorp., Wachovia Bank, National Association, as 

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administrative and collateral agent, Wachovia CapitalMarkets, LLC and Banc of America Securities LLC, as joint lead arrangers andbook-running managers, and a syndicate of banks, financial institutions andother institutional lenders party thereto, as amended by Amendment No. 1 datedApril 3, 2006 and Amendment No. 2 dated August 21, 2006 (the “Credit Agreement”). Amendment No. 3 amended the Credit Agreement to, among other things,(i) increase the term loan by $100.0 million in part to finance theAcquisition of Zartic, (ii) amend the repayment schedule of the term loanto provide for quarterly payments of $250,000 commencing March 2007 with aballoon payment of $227.8 million in June 2010, and (iii) increasethe per annum interest rate with respect to borrowings under the Company’s termloan by .25% (with a decrease of .25% upon the Company’s achievement of aconsolidated leverage ratio of 4.0:1 or less). Amendment No. 3 is filed as Exhibit 10.1 to this 10-Q.

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following discussion relatesto the financial condition and results of operations for third quarter fiscal2007 compared to third quarter fiscal 2006 and fiscal 2007 compared to fiscal2006.  The thirteen week periods endedDecember 2, 2006 and December 3, 2005 are referred to as “third quarter fiscal2007” and “third quarter fiscal 2006”, respectively. The thirty-nine weekperiods ended December 2, 2006 and December 3, 2005 are referred to as “fiscal2007” and “fiscal 2006”, respectively.  Thissection should be read in conjunction with the Company’s Condensed ConsolidatedFinancial Statements and considered with “Risk Factors”  and “Quantitative and Qualitative DisclosuresAbout Market Risk” discussed in Item 1A and Item 7, respectively, of theCompany’s Annual Report on Form 10-K for the fiscal year ended March 4, 2006filed with the SEC on June 2, 2006, and Item 1A of Part II, and Item 3 of PartI, respectively, of this Quarterly Report on Form 10-Q, and “CautionaryStatements Regarding Forward Looking Information,” which precedes Item 3 ofPart I of this Report.

Pierre operates on a 52-week or53-week fiscal year ending on the first Saturday in March or if the last day ofFebruary is a Saturday, the last day of February.  Each quarter of the fiscal year contains13 weeks except for the infrequent fiscal years with 53 weeks.

**Results ofOperations**

**ThirdQuarter Fiscal 2007 Compared to Third Quarter Fiscal 2006**

***Revenues, net.**** *Net revenues increased by $11.7 million in third quarter fiscal 2007compared to third quarter fiscal 2006, or 10.1%.  This increase was primarily due to anincrease in sales volume and mix (approximately $17.3 million), primarily dueto an increase in volume across most of the Company’s end-market segments andan increase in sales volume related to the Company’s acquisition of Clovervale(the “Acquisition of Clovervale”), offset by decreased sales volume to twolarge National Accounts restaurant chain customers (approximately $4.8million), primarily the  result of promotionalactivity that did not include Pierre’s products and a decrease due to lower netsales prices (approximately $0.8 million), primarily as a result of decliningcommodity protein pricing attributable to market-related pricing contracts withthese two large National Accounts restaurant chain customers.

***Cost of goodssold.**** *Cost of goods sold increased by $6.8 millionin third quarter fiscal 2007 compared to third quarter fiscal 2006, or8.4%.  This increase was primarily due to(1) increased costs (approximately $10.2 million) as a result of increasedsales volumes and a change in mix to higher cost products and (2) increasedoverhead costs (approximately $1.0 million) primarily related to increasedcosts associated with labor, as discussed in Note 12, “Legal Proceedings” tothe Condensed Consolidated Financial Statements, in addition to other increasesin other plant expenses; offset by (3) decreased raw material protein costs(approximately $4.4 million).

As a percentage of revenues, cost of goods sold decreasedfrom 70.2% to 69.1%, a decrease of 1.1%. This decrease was primarily due to (1) the net impact of decreasedprices paid for raw material proteins and formulation mix (approximately 3.0%);offset by (2) increased costs as a result of a change in mix to higher costproducts (approximately 1.2%); and (3) increased overhead costs primarilyrelated to increased labor and other plant expenses  (approximately 0.7%).

The primary materials used inthe Company’s food processing operations include boneless beef, pork, chicken,flour, yeast, seasonings, cheese, breading, soy proteins, and packagingsupplies.  Meat proteins are generallypurchased under 7-day payment terms. Historically, the Company has not hedged in the futures markets, andover time, the Company’s raw material costs have fluctuated with movement inthe relevant commodity markets. Additionally, the Company has contracts with formulaic pricing thatrequire the Company to immediately pass along commodity price variances.  During third quarter fiscal 2007, net rawmaterial protein prices decreased approximately $4.7 million, including a $1.2million decrease related to the Company’s two largest formulaic contracts withcustomers and decreases of approximately $3.5 million related to other formulaiccontracts and non-contracted sales.

Approximately 34.1% of total sales for third quarterfiscal 2007 were protected from commodity exposure, of which 25.7% wereattributable to market-related pricing contracts, while the other 8.4% wererelated to the USDA Commodity Reprocessing Program, which also insulates theCompany from raw material price fluctuations. For third quarter fiscal 2006, approximately 43.0% of total sales wereprotected from commodity exposure, of which 34.5% were attributable to market-relatedpricing contracts, while the other 8.5% were related to the USDA CommodityReprocessing Program.

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The following tablerepresents the (increases) decreases in the weighted average prices the Companypaid for beef, pork, chicken, and cheese during third quarter fiscal 2007compared to third quarter fiscal 2006 excluding formulation mix and contractswith formulaic pricing.

|            | ** ** | **% (Increase)/Decrease in**       | ** ** |
|------------|------------|----------------------------------------------|------------|
| ** ** | ** ** | **Third Quarter Fiscal 2007** | ** ** |
| ** ** | ** ** | **Compared to**                         | ** ** |
| ** ** | ** ** | **Third Quarter Fiscal 2006** | ** ** |
| Beef       |       | (1.1)%                                       |       |
| Pork       |       | (5.3)%                                       |       |
| Chicken    |       | 12.2%                                        |       |
| Cheese     |       | 10.6                                         |       |
| Aggregate  |       | 3.1                                          |       |

 

***Selling,general, and administrative*****.**  Selling, general, and administrative expensesincreased by $4.8 million in third quarter fiscal 2007 compared to thirdquarter fiscal 2006, or 28.3%.  Thisincrease was primarily due to (1) increased selling expenses (approximately$2.5 million) incurred primarily as a result of increased demonstrationexpenses related to growth in the Warehouse Club selling channel, a shift insales mix to customers with higher burden rates for sales and marketingexpenses, and increased incentive compensation expense; (2) increased freight(approximately $1.0 million) due to increased sales volume; (3) increasedstorage expense (approximately $0.8 million) due to increased replenishmentcosts and build of inventories associated with the Acquisition of Clovervale;and (4) increased administrative expense (approximately $0.5 million),primarily as a result of an increase in incentive compensation recorded by theCompany.  As a percentage of revenues,selling, general, and administrative expenses increased from 14.7% to 17.2%.

***Depreciationand amortization****. *Depreciation and amortization expensedecreased by $0.3 million in third quarter fiscal 2007 compared to thirdquarter fiscal 2006, or 3.5%.  This isdue to decreased amortization expense (approximately $0.7 million), primarilydue to the accelerated amortization method used for certain intangible assets,offset by an increase in depreciation expense (approximately $0.4 million)primarily due to the additional property, plant, and equipment beingdepreciated as a result of the Acquisition of Clovervale.

***Interestexpense and other income, net*****.**  Interest expense and other income, netconsists primarily of interest on fixed and variable-rate long-term debt andinterest on the revolving loan.  Interestexpense and other income, net increased by $0.6 million, or 9.9%.  This increase is primarily due to increasedaverage outstanding borrowings under the term loan as a result of Amendment No.2 in order to finance the Acquisition of Clovervale, increased floatinginterest rates related to the Company’s variable-rate interest, and increasedaverage borrowings under the Company’s revolving credit facility.

***Income taxes*****.*** *The effective tax rate for third quarter fiscal 2007 was 30.5% comparedto 38.7% for third quarter fiscal 2006. The change in the effective tax rate is primarily due to (1) theestimated impact of the Section 199 adjustment (the “Domestic ManufacturingDeduction”) in the current year; (2) the estimated impact of Extra-TerritorialIncome deduction (“ETI”) in the current year as a result of the Company’s salesand business activity in foreign countries (primarily Canada); and (3) thetrue-up of the provision to return differences in conjunction with the filingof the fiscal 2006 federal tax return on November 15, 2006.

**Results ofOperations**

**Fiscal2007 Compared to Fiscal 2006**

***Revenues, net.**** *Net revenues increased by $9.4 million in fiscal 2007 compared to fiscal2006, or 2.9%.  This increase wasprimarily due to increased sales volume and mix (approximately $30.4 million)primarily due to an increase in volume across most of the Company’s end-marketsegments and an increase in volume related to the Acquisition of Clovervale,offset by a decrease in sales volume to two large National Accounts restaurantchain customers (approximately $16.4 million) and a decrease in revenues due tolower net sales prices (approximately $4.6 million) as a result of decliningcommodity protein pricing attributable to market-related pricing contracts withthese two large National Accounts restaurant chain customers, primarily theresult of promotional activity that did not include Pierre’s products.

***Cost of goodssold.**** *Cost of goods sold decreased by$2.6 million in fiscal 2007 compared to fiscal 2006, or 1.1%.  This decrease was primarily due to (1)decreased raw material protein costs (approximately $15.0 million); offset by(2) increased costs as a result of increased sales volumes and mix(approximately $8.7 million) and (3) increased overhead costs (approximately$3.7 million) primarily related to increased costs associated with labor, asdiscussed in Note 12, “Legal Proceedings” to the Condensed ConsolidatedFinancial Statements, in addition to increases in expenses for utilities,insurance, maintenance repairs, and property taxes.

As a percentage of revenues, cost of goods solddecreased from 72.3% to 69.5%, a decrease of 2.8%.  This decrease was primarily due to (1) the netimpact of decreased prices paid for raw material proteins and formulation mix(approximately 3.6%); (2) decreased costs as a result of a change in mix tolower cost products (approximately 0.2%); offset by (3) increased overheadcosts primarily related to increased labor, utilities, insurance, maintenancerepairs and property taxes (approximately 1.0%).

During fiscal 2007, net rawmaterial protein prices decreased approximately $14.6 million, including a $6.6million decrease related to the Company’s two largest formulaic contracts withcustomers and decreases of approximately $8.0 million related to otherformulaic contracts and non-contracted sales.

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Approximately 34.6% of total sales for fiscal 2007were protected from commodity exposure, of which 28.6% were attributable tomarket-related pricing contracts, while the other 6.0% were related to the USDACommodity Reprocessing Program, which also insulates the Company from rawmaterial price fluctuations.  For fiscal2006, approximately 43.1% of total sales were protected from commodityexposure, of which 37.2% were attributable to market-related pricing contracts,while the other 5.9% were related to the USDA Commodity Reprocessing Program.

The following table represents the decreases in theweighted average prices the Company paid for beef, pork, chicken, and cheeseduring fiscal 2007 compared to fiscal 2006 excluding formulation mix andcontracts with formulaic pricing.

|            | ** ** | **% Decrease in** | ** ** |
|------------|------------|-----------------------------|------------|
| ** ** | ** ** | **Fiscal 2007**        | ** ** |
| ** ** | ** ** | **Compared to**        | ** ** |
| ** ** | ** ** | **Fiscal 2006**        | ** ** |
| Beef       |       | 5.5%                        |       |
| Pork       |       | 3.1%                        |       |
| Chicken    |       | 18.1%                       |       |
| Cheese     |       | 14.2%                       |       |
| Aggregate  |       | 9.4%                        |       |

 

***Selling,general, and administrative*****.**  Selling, general, and administrative expensesincreased by $7.5 million in fiscal 2007 compared to fiscal 2006, or15.0%.  This increase was primarily dueto (1) increased selling expenses (approximately $3.6 million) incurredprimarily as a result of increased demonstration expenses related to growth inthe Warehouse Club selling channel and a shift in sales mix to customers with higherburden rates for sales and marketing expenses; (2) increased freight(approximately $2.2 million) due to higher fuel surcharges, a change in salesmix to delivered customers versus customers who pick up at the Company’sfacilities, and increased sales volume; and (3) increased storage expense(approximately $1.8 million) as a result of increased inventories built tomaintain customer service levels for customer requirements and product lineexpansion, increased replenishment costs, build of inventories associated withthe Acquisition of Clovervale, and increased storage rates paid by theCompany.  As a percentage of revenues,selling, general, and administrative expenses increased from 15.6% to 17.4%.

***Depreciationand amortization.**** *Depreciation and amortization expensedecreased by $2.1 million in fiscal 2007 compared to fiscal 2006.  This is due to decreased amortization expense(approximately $2.3 million), primarily due to the accelerated amortizationmethod used for certain intangible assets, offset by an increase indepreciation expense (approximately $0.2 million) primarily due to theadditional property, plant, and equipment being depreciated as a result of theAcquisition of Clovervale.

***Interestexpense and other income, net*****.**  Interest expense and other income, netconsists primarily of interest on fixed and variable-rate long-term debt andinterest on the revolving loan.  Interestexpense and other income, net increased by $0.7 million, or 4.3%.  This increase is primarily due to increasedaverage outstanding borrowings under the term loan as a result of Amendment No.2 in order to finance the Acquisition of Clovervale, increased floatinginterest rates related to the Company’s variable-rate interest, and increasedaverage borrowings under the Company’s revolving credit facility.

***Income taxes*****.*** *The effective tax rate for fiscal 2007 was 31.8% compared to 157.6% forfiscal 2006.  The change in the effectivetax rate is primarily due to (1) the phase-out of Ohio franchise tax and thephase-in of a gross receipts tax referred to as the Commercial Activity Tax (“CAT”);(2) the Company’s increased profitability and expected pre-tax income in thecurrent year relative to the impact of permanent differences between GAAP andtax basis income/deductions; (3) the estimated impact of the Section 199adjustment (the “Domestic Manufacturing Deduction”) in the current year; (4)the impact of Extra-Territorial Income deduction (“ETI”) in the current year asa result of the Company’s sales and business activity in foreign countries(primarily Canada); and (5) the true-up of the provision to return differencesin conjunction with the filing of the fiscal 2006 federal tax return onNovember 15, 2006.

**Liquidity and Capital Resources**

Thefollowing table summarizes the Company’s net cash provided by (used in)operating, investing, and financing activities for the thirty-nine weeks endedDecember 2, 2006 and December 3, 2005, respectively.
| ** **                       | ** ** | **Thirty-Nine**                | ** **  | **Thirty-Nine**                | ** ** |
|----------------------------------|------------|--------------------------------|-------------|--------------------------------|------------|
| ** **                       | ** ** | **Weeks Ended**           | ** **  | **Weeks Ended**           | ** ** |
| ** **                       | ** ** | **December 2, 2006** | ** **  | **December 3, 2005** | ** ** |
| Net cash  provided by (used in): |       |                           |        |                           |       |
| Operating activities             |       | $                              | 13,063,946  |                           | $          | 27,707,538 |   |
| Investing activities             |       | $                              | (28,037,645 | )                              | $          | (4,749,684 | ) |
| Financing  activities            |       | $                              | 12,518,220  |                           | $          | (13,675,481 | ) |

 

Net cash provided byoperating activities for fiscal 2007 was $13.1 million compared to netcash provided by operating activities of $27.7 million for fiscal2006.  The decrease in net cash providedby operating activities was primarily due to (1) an 

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increase in inventories (approximately $9.7 million)in fiscal 2007 compared with less of an increase in the prior year comparableperiod (approximately $1.2 million); (2) an increase in accounts receivable(approximately $2.3 million) during fiscal 2007 compared to a decrease in theprior year comparable period (approximately $0.9 million); (3) a change indeferred income taxes (approximately $5.7 million) in fiscal 2007 compared to achange (approximately $0.8 million) in fiscal 2006; (4) a decrease indepreciation and amortization expense (approximately $2.1 million) in fiscal2007 compared with fiscal 2006, primarily due to the accelerated amortizationmethods used for certain intangible assets; (5) an increase in refundable income taxes, prepaid expenses, and othercurrent assets (approximately $1.8 million) during fiscal 2007 compared to moreof an increase in the prior year comparable period (approximately $2.3million); (6) an increase in other non-current assets (approximately $0.7million) that did not exist in fiscal 2006 related to capitalized costs inconjunction with the Acquisition of Zartic; and (7) a decrease in otherlong-term liabilities in fiscal 2007 (approximately $4.0 million) compared witha less of a decrease  (approximately $0.9million) in fiscal 2006; offset by (8) an increase in accounts payable andother accrued liabilities (approximately $8.5 million) during fiscal 2007compared to less of an increase (approximately $2.8 million) in the prior yearcomparable period.  The operating cashflow impact of these changes was partially offset by the Company’s increasedprofitability during fiscal 2007 compared to fiscal 2006.

The primary components of netcash provided by operating activities for fiscal 2007 were (1) depreciation andamortization of intangible assets (approximately $21.0 million), of which $5.7million relates to depreciation of fixed assets and $15.3 million relates toamortization of intangible assets recorded in conjunction with the Acquisitionof Pierre and the Acquisition of Clovervale; (2) an increase in trade accountspayable and other accrued liabilities (approximately $8.5 million), partiallythe result of a reclassification of the current portion of the liability to theselling shareholders (previously recorded in other long-term liabilities) inconjunction with the filing of the federal tax return on November 15, 2006; (3)a decrease in refundable income taxes, prepaid expenses, and other currentassets (approximately $1.8 million) due to the reduction in refundable incometaxes resulting from the tax provision recorded based on the income in fiscal2007 and due to the reduction in prepaid expenses, primarily prepaid insurancepremiums; and (4) amortization of deferred loan fees (approximately $1.2million); offset by (5) an increase in inventories (approximately $9.7 million)due to an inventory build to maintain customer service levels for customerrequirements and product line expansion, in addition to a build of inventoriesassociated with the Acquisition of Clovervale; (6) a change in deferred incometaxes (approximately $5.7 million) as a result of the tax provision recordeddue to the income in fiscal 2007; (7) a decrease in other long-term liabilities(approximately $4.0 million) as a result of the reclassification noted above toreflect the payment due to the selling shareholders; (8) an increase inreceivables (approximately $2.7 million), primarily the result of increasedsales; and (9) an increase in other non-current assets (approximately $0.7million).

Net cash used in investingactivities for fiscal 2007 was $28.0 million compared to $4.7 millionfor fiscal 2006.  Net cash used ininvesting activities during fiscal 2007 consists of the net cash used inconjunction with the Acquisition of Clovervale (approximately $21.8 million),in addition to capital expenditures (approximately $6.2 million), whichconsisted of various plant improvements, including the expenditures on thecontrol equipment discussed below, and routine capital expenditures.  Net cash used in investing activities duringfiscal 2006 consists of capital expenditures for various plant improvements androutine capital expenditures.

Net cash provided by financing activities for fiscal2007 was $12.5 million compared to net cash used in financing activities forfiscal 2006 of $13.7 million.  Net cashprovided by financing activities for fiscal 2007 was due primarily to: (1)increased term loan borrowings provided by Amendment No. 2 (totaling $24.0million) for the Acquisition of Clovervale and (2) net borrowings under theCompany’s revolving credit facility (approximately $3.2 million); offset by (3) principal payments onlong-term debt  (approximately $12.3million); (4)  repayment of debt  (approximately $1.6 million) acquired inconjunction with the Acquisition of Clovervale; and (5) loan originationfees (approximately $0.7 million) as a result of Amendment No. 1 and AmendmentNo. 2 to the Credit Agreement, as discussed in Note 5, “Long-Term Debt” to theCondensed Consolidated Financial Statements.

Effective June 30, 2004, the Company obtained a$190 million credit facility, which includes a six-year variable-rate$150 million term loan, a five-year variable-rate $40 million revolvingcredit facility and a $10 million letter of credit subfacility.  Funds available under this facility areavailable for working capital requirements, permitted investments and generalcorporate purposes.  Borrowings under thefacility bear interest at floating rates based upon the interest rate optionselected from time to time by the Company and are secured by a first-prioritysecurity interest in substantially all of the Company’s assets.  The interest rates for base rate borrowingsunder the revolving credit facility and the term loan at December 2, 2006 were10.00% (prime of 8.25% plus 1.75%) and 9.25% (prime of 8.25% plus 1.00%),respectively.  Repayment of borrowingsunder the term loan was initially $375,000 per quarter, which began onSeptember 4, 2004, with a balloon payment of $141.4 million due onJune 30, 2010.  The Company has madeall scheduled quarterly payments totaling $8.6 million for the term of the loanand prepayments on the term loan totaling $34.4 million.  As previously discussed in Note 2, “Acquisitionof Clovervale” to the Condensed Consolidated Financial Statements, inconjunction with the Acquisition of Clovervale, the Company increasedborrowings with respect to the term loan by $24.0 million in order to financethe Acquisition of Clovervale.  Theoutstanding balance of $131.0 million as of December 2, 2006 is due on June 30,2010.

On April 3, 2006, the Company entered into AmendmentNo. 1 to its credit facility (“Amendment No. 1”).  Amendment No. 1 provided for, among otherthings, a reduction of 0.5% in the per annum interest rate with respect toborrowings under the Company’s term loan. The applicable interest rate for base rate borrowings under the termloan was decreased from the base rate (which is the greater of the applicablePrime Rate and 1⁄2 of 1% above the Federal Funds Rate) plus 1.50% to such baserate plus 1.00%.  A copy of Amendment No.1 is included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filedwith the SEC on April 7, 2006.

On August 21, 2006, the Company entered intoAmendment No. 2 to its credit facility (“Amendment No. 2”).  Amendment No. 2 provided for, among otherthings, an increase in borrowings with respect to the Company’s term loantotaling $24.0 million.  A copy ofAmendment No. 2 is included as Exhibit 10.1 to the Company’s Current Report onForm 8-K filed with the SEC on August 22, 2006.

Effective June 30, 2004, in conjunction with theacquisition of Pierre by an affiliate of Madison Dearborn Partners (“MDP”) (the“Acquisition of Pierre”), the Company issued 9.875% senior notes, with interestpayable on January 15 and July 15 of each year (the “Notes”).  The proceeds of the Notes, together with theequity contributions from MDP and certain members of 

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management and borrowings under the Company’s senior credit facility,were used to finance the Acquisition of Pierre and to repay outstanding indebtedness.

As of December 2, 2006, the Company had cash and cashequivalents on hand of $0.1 million, outstanding borrowings under its revolvingcredit facility of $3.2 million, outstanding letters of credit of approximately$2.3 million, and borrowing availability of approximately$34.5 million.  Also as ofDecember 2, 2006, the Company had borrowings under its term loan of $131.0million and $125.0 million of Notes outstanding.  As of March 4, 2006, the Company had cash andcash equivalents on hand of $2.5 million, no outstanding borrowings under itsrevolving credit facility, outstanding letters of credit of approximately $5.6million, and borrowing availability of approximately $34.4 million underits revolving credit facility.  Also asof March 4, 2006, the Company had borrowings under its term loan of $119.1million and $125.0 million of Notes outstanding.  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 2, 2006,the Company is in compliance with all financial covenants.

TheCompany has budgeted approximately $7.3 million for capital expenditures forthe remainder of fiscal 2007.  These expenditures include a provision forcapacity expansion, system upgrades, and routine food processing capitalimprovement projects and other miscellaneous expenditures within the Company’sexisting facilities.  The Companybelieves that funds from operations and funds from its $40 million revolvingcredit facility, as well as the Company’s ability to enter into capital oroperating leases, will be adequate to finance these capital expenditures.  As described in Note 12, “Legal Proceedings,”to the Condensed Consolidated Financial Statements, as of December 2, 2006, theCompany has spent approximately $0.8 million in control equipment, entered intocommitments for approximately $0.8 million in control equipment, and expects tocommit to approximately $0.2 million of additional control equipment prior tothe end of the Company’s first quarter of fiscal 2008.

If the Company continues its historical annualrevenue growth trend as expected, then the Company will be required to raiseand invest additional capital for additional plant expansion projects toprovide operating capacity to satisfy increased demand.  Managementbelieves that future cash requirements for these plant expansion projects wouldneed to be met through other long-term financing sources.  The incurrence of additional long-term debtis governed and restricted by the Company’s existing debt instruments.  Furthermore, there can be no assurance thatadditional long-term financing will be available on advantageous terms (or anyterms) when needed by the Company.

The Company provided a letter of credit in the amountof $2.2 million and $5.5 million as of December 2, 2006 and March 4, 2006,respectively, to its insurance carrier for the underwriting of certainperformance bonds.  The current letter ofcredit outstanding expires in fiscal 2008. The Company also provides a secured letter of credit to its insurancecarrier for outstanding and potential workers’ compensation and generalliability claims.  The letter of creditfor these claims totaled $150,000 and $110,000 as of December 2, 2006 and March4, 2006, respectively.  In addition, ifrequired by a supplier, the Company provides secured letters of credit to suchsuppliers.  The Company had no letters ofcredit for suppliers as of December 2, 2006 or March 4, 2006.

The Company is involved in various legalproceedings.  Management believes, basedon the advice of legal counsel, that the outcome of such proceedings will nothave a materially adverse effect on the Company’s financial position or futureresults of operations and cash flows. See Note 12 — “Legal Proceedings,” to the Condensed ConsolidatedFinancial Statements for further discussion of proceedings as of December 2,2006.

Thefollowing tables summarize our commitments and contractual obligations byfiscal year as of December 2, 2006.
| ** **                                 | ** ** | **Commitments by Fiscal Year** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | **Total**                                     | ** ** | **Less than 1  Year** | ** ** | **1 — 3  Years** | ** ** | **3-5  Years** | ** ** | **More than 5  Years** | ** ** |
| Letters of  credit                         |       | $                                             | 2,342,100  |   | $ | 2,342,100 |   | $ | — |   | $ | — |   | $ | — |   |
| Purchase  commitments for capital projects |       | 1,100,000                                     |       | 1,100,000 |   | — |   | — |   | — |   |
| Purchase commitments for raw materials     |       | 1,710,757                                     |       | 1,710,757 |   | — |   | — |   | — |   |
| Purchase commitments for natural gas       |       | 42,470                                        |       | 42,470 |   | — |   | — |   | — |   |
| Purchase  commitments for miscellaneous    |       | 135,300                                       |       | 132,900 |   | 2,400 |   | — |   | — |   |
| Total                                      |       | $                                             | 5,330,627  |   | $ | 5,328,227 |   | $ | 2,400 |   | $ | — |   | $ | — |   |

 
| ** **                        | ** ** | **Contractual Obligations by Fiscal Year** | ** **  |
|-----------------------------------|------------|----------------------------------------------------------------|-------------|
| ** **                        | ** ** | **Total**                                                      | ** **  | **Less than 1  Year** | ** ** | **1 — 3  Years** | ** ** | **3-5  Years** | ** ** | **More than 5  Years** | ** ** |
|                              |       |                                                           |        |   |   |   |   |   |   |   |   |
| Long-term debt                    |       | $                                                              | 259,169,000 |   | $ | — |   | $ | 134,169,000 |   | $ | 125,000,000 |   | $ | — |   |
| Capital lease  obligations*       |       | 693,746                                                        |        | 203,852 |   | 339,111 |   | 150,783 |   | — |   |
| Operating lease  obligations      |       | 4,724,343                                                      |        | 3,754,721 |   | 720,763 |   | 248,859 |   | — |   |
| Interest on  fixed-rate debt**    |       | 62,166,777                                                     |        | 12,599,555 |   | 24,879,722 |   | 24,687,500 |   | — |   |
| Interest on  variable-rate debt** |       | 27,581,746                                                     |        | 10,196,954 |   | 17,384,792 |   | — |   | — |   |
| Total                             |       | $                                                              | 354,335,612 |   | 26,755,082 |   | 177,493,388 |   | 150,087,142 |   | $ | — |   |
|                                   |            |                                                                |             |  |  |  |  |  |  |  |  |  |  |  |  |  |

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*                    Capital leaseobligations include interest component related to leases.

**             Estimatedpayments for interest are based on actual interest rates for fixed andvariable-rate debt outstanding as of December 2, 2006 assuming that theoutstanding balances remain unchanged until maturity.

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In conjunction with the Acquisition of Pierre, theCompany and 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 deal related expenses, will be for thebenefit of the selling shareholders.  Asof the date of the Acquisition of Pierre, these Deal Related NOLs and otherdeal related expenses totaled approximately $24.2 million and $6.6 million,respectively.  Accordingly, the Companywas required pay to the selling shareholders the amount of any tax benefitattributable to such Deal Related NOLs and other deal related expenses, exceptthat the first $4.0 million of such tax benefits was paid into an escrowaccount that secures the selling shareholders indemnification obligations underthe tax sharing 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.  Initially, the Companyrecorded a net long-term liability to the selling shareholders totaling $10.3million for the estimated obligations under the tax sharing and indemnificationagreement.  During third quarter fiscal2007, the Company increased the estimated obligation under the tax sharing andindemnification agreement by approximately $1.3 million based on thedifferences in the tax rate initially used to estimate the liability, theactual payments to the selling shareholders, and the estimated remainingobligation to the selling shareholders. The adjustment to the liability to the selling shareholders resulted ina corresponding increase in goodwill related to the Acquisition of Pierre.

As of December 2, 2006, based on all federal andstate income tax returns filed subsequent to the Acquisition of Pierre(including the return filed recently on November 15, 2006 for the tax year endedFebruary 24, 2006), the Company has utilized $24.2 million of the Deal RelatedNOLs and $1.7 million in other deal related expenses.  Also as of December 2, 2006, the Company hassubmitted payments based on the tax benefits received, net of other taxassessments due to the Company from the selling shareholders, to an escrowaccount (approximately $4.0 million) and directly to the selling shareholders(approximately $1.5 million).  As of theend of the third quarter fiscal 2006, the Company has a remaining liability tothe selling shareholders totaling $6.1 million (including the aforementioned$1.3 million adjustment during the third quarter fiscal 2007), of which $3.9million was due to the selling shareholders in conjunction with the filing ofits tax return on November 15, 2006 and is therefore classified as a currentliability at December 2, 2006. Such payment was made by the Company subsequentto the end of the third quarter fiscal 2007, on December 5, 2006.  The remaining portion of the liability isclassified as long-term based on the expected timing of the remaining paymentsto the selling shareholders.  While theCompany expects to fully utilize the Deal Related NOLs and other deal relatedexpenses, the obligations to the selling shareholders under the tax sharing andindemnification agreement and the timing of future payments are unknown, andtherefore, excluded from the table above.

**CriticalAccounting Policies and Estimates**

The preparation of financialstatements 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.

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

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

***Cash and cash equivalents.***  Forfinancial statement presentation purposes, the Company presents bookoverdrafts, principally outstanding checks in excess of cash on hand with thesame financial institution, as accounts payable.   As of December 2, 2006, the Company had cashon hand of $0.5 million (of which $0.4 million was held in accounts with theCompany’s bank that is primarily responsible for its cash management), whichwas offset by outstanding checks of $6.2 million, resulting in a netreclassification of $5.8 million to accounts payable and a remaining cash onhand balance of $0.1 million.  Theremaining cash balance represents cash in other financial institutions otherthan the Company’s bank primarily responsible for its cash management.  The Company considers all highly liquidinvestments purchased with an original maturity of three months or less to becash equivalents.  As of December 2,2006, the Company had no cash equivalents.

***Revenue Recognition.**** *The Company records revenuesfrom its sales of food processing products at the time title transfers.  Standard shipping terms are FOBdestination.  Based on these terms, titlepasses at the time the product is delivered to the customer.  Revenue is recognized as the net amount to bereceived by the Company after deductions for estimated discounts, productreturns, and other allowances.  Theseestimates are based on historical trends and expected future payments (see also*Promotions*below).

***Goodwill and Other IntangibleAssets*****.**  Inconjunction with the Acquisition of Pierre, the Company engaged an independentparty, with the assistance of Pierre’s management, to perform valuations forfinancial reporting purposes of the Company’s goodwill and other intangible assets.  Assets identified through these valuationprocesses included goodwill, formulas, customer relationships, licensingagreements, and certain trade names and trademarks.

In addition, in conjunctionwith the Acquisition of Clovervale, management of the Company, with theassistance of an independent valuation firm, performed similar valuations onthe Clovervale goodwill and other intangibles for financial reportingpurposes.  Assets identified through thisvaluation process included goodwill, customer relationships, non-competeagreements, and certain tradenames and trademarks.  The increases in the carrying amounts ofgoodwill, amortizable intangible assets, and

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indefinite-livedintangible assets represent the assets recorded as a result of the preliminaryvaluations performed in conjunction with the Acquisition of Clovervale.

In accordance with SFAS No. 142 (“SFAS 142”) —”Goodwill and OtherIntangible Assets,” the Company tests recorded goodwill and intangibles withindefinite lives for impairment at least annually.  Intangible assets with finite lives areamortized over their estimated economic or estimated useful lives.  In addition, all other intangible assets arereviewed for impairment in accordance with SFAS 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” As of March 4, 2006, the Company performed the annual impairment reviewof goodwill and indefinite-lived intangible assets and also assessed whetherthe indefinite-lived intangible assets continue to have indefinite lives.  The Company engaged an independent party toperform valuations to assist in the impairment review.  There were no impairment charges as a resultof this review.

The Company’s amortizable intangible assets are amortized using bothstraight-line and accelerated amortization methods that match the expectedbenefit derived from the assets.  Theaccelerated amortization methods allocate amortization expense in proportion toeach year’s expected revenues to the total expected revenues over the estimateduseful lives of the assets.

***Promotions*****.**  Promotional expenses associated with rebates,marketing promotions, and special pricing arrangements are recorded as areduction of revenues or as selling expense at the time the sale isrecorded.  Certain of these expenses areestimated based on historical trends, expected future payments to be made underthese programs, and expected future customer deductions to be taken under theseprograms.  The Company believes theestimates recorded in the financial statements are reasonable estimates of theCompany’s liability under these 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 13% and 18%of net revenues for third quarter fiscal 2007 and third quarter fiscal 2006,respectively.  Sales to the Company’slargest customer were approximately 16% and 22% of net revenues for fiscal 2007and fiscal 2006, respectively.  Accountsreceivable at December 2, 2006 and March 4, 2006 included receivables fromthe Company’s largest customer totaling $2.6 million and $3.4 million,respectively.

***Stock-Based Compensation*****.**  The Company treats the options to purchaseshares of common stock of Holding issued to employees of the Company (“Options”)as stock-based compensation for employees of the Company.  Prior to fiscal 2007, as permitted underGAAP, the Company accounted for the Options under the recognition andmeasurement principles of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”), and related Interpretations usingthe intrinsic value method.  Accordingly,no compensation expense was recognized for the stock option plan in the Company’sCondensed Consolidated Statements of Operations.

EffectiveMarch 5, 2006, as required for the first annual reporting period beginningafter December 15, 2005 for non-public companies (as defined in SFAS 123(R)),the Company adopted SFAS 123(R) using the prospective adoption method.  The new statement requires compensationexpense associated with share-based payments to employees to be recognized inthe financial statements based on their fair values**. **Upon the adoption of SFAS 123(R)because the Company had used the minimum value method prior to the adoption,the Company was required to apply the provisions of the statement onlyprospectively for any newly issued, modified or settled award after the date ofinitial adoption.  No new Options wereissued, modified or settled subsequent to adoption, however,  the fair value assigned to any newly issued,modified or settled awards in the future is expected to be significantlygreater due to the differences in valuation methods.

***New Accounting Pronouncement.***  InJune 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48, “Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 addresses uncertainty in tax positionsrecognized in a company’s financial statements and stipulates a recognitionthreshold and measurement of a tax position taken or expected to be taken in atax return.  FIN 48 is effective for theCompany’s fiscal year beginning March 4, 2007, with earlier adoptionpermitted.  The Company is currentlyevaluating the impact of this interpretation on the Company’s consolidated financialstatements.

**Seasonality**

Except for sales to school districts, which represent approximately 20%of the Company’s total sales annually and which decline significantly duringsummer, late November and December, there is no significant seasonal variationin the Company’s sales.

**CautionaryStatement As To Forward-Looking Information**

Thisreport includes “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, including statements about the business,operations, financial results, and future prospects of the Company.  Forward-looking statements relate to futureevents or future financial performance. In some cases, you can identify forward-looking statements byterminology such as “may,” “should,” “expect,” “plan,” “anticipate,” “believe,”“estimate,” “predict,” “potential” or “continue,” the negative of such terms orother comparable terminology.  Thesestatements may involve risks and uncertainties related to, among other things:

·                  changes in economic andbusiness conditions in the world;

·                  potential impact ofhurricanes and other natural disasters on sales, raw material costs, fuelcosts, insurance costs, and bad debt expense resulting from uncollectibleaccounts receivables;

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·                  increased globaltensions, market disruption resulting from a terrorist or other attack and anyarmed conflict involving the United States;

·                  adverse changes in foodcosts and availability of supplies or costs of distribution;

·                  the Company’s level ofindebtedness;

·                  restrictions imposed bythe Company’s debt instruments;

·                  acquisitions, if any,including identification of appropriate targets and successful integration ofany acquired businesses;

·                  integration of theClovervale and Zartic businesses;

·                  dependence on co-packers,some of whom may be competitors or sole-source suppliers;

·                  increased competitiveactivity;

·                  government regulatoryactions, including those relating to federal and state environmental laws;

·                  dependence on significantcustomers;

·                  changes in consumerpreferences and diets;

·                  consolidation of theCompany’s customers;

·                  general risks of the foodindustry, including risk of contamination, mislabeling of food products, adecline in meat consumption, and outbreak of disease among cattle, chicken orpigs, or any change in consumer perception of certain protein products;

·                  adverse change to, orefficient utilization or successful rationalization of, the Company’sfacilities;

·                  dependence on key personnel;and

·                  changes in theavailability and relative costs of labor and potential labor disruptions orunion organization activities.

The Company is not under any duty to update anyforward-looking statements after the date of this report to conform such statementsto actual results or to changes in the Company’s expectations.  All forward-looking statements contained inthis report and any subsequently filed reports are expressly qualified in theirentirety by these cautionary statements.

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

As discussed in the Company’s Annual Report on Form 10-K for the fiscalyear ended March 4, 2006, the Company is exposed to market risk stemming fromchanges in interest rates, foreign exchange rates and commodity prices.  Changes in these factors could causefluctuations in the Company’s financial condition, results of operations andcash flows.  The Company owned noderivative financial instruments or nonderivative financial instruments heldfor trading purposes at December 2, 2006 or March 4, 2006.  Certain of the Company’s outstandingnonderivative financial instruments at December 2, 2006 are subject to interestrate risk, but not subject to foreign currency or commodity price risk.  During third quarter fiscal 2007, the averageprice the Company paid for beef, pork, chicken, and cheese(increased)/decreased approximately (1.2%), (15.6%), 11.6% and 5.8%,respectively, compared to the prices paid during the fourth quarter of thefiscal year ended March 4, 2006. During fiscal 2007, the average price the Company paid for beef, pork,chicken, and cheese (increased)/decreased approximately (0.8%), (12.6%), 10.5%and 9.2%, respectively, compared to the prices paid during the fourth quarterof the fiscal year ended March 4, 2006. The Company manages commodity price risk through purchase orders,non-cancelable contracts and by passing on such cost increases tocustomers.  There was no significantchange in market risk during fiscal 2007.

The Company’s major market risk exposure is potential loss arising fromchanging interest rates and its impact on long-term debt.  The Company’s policy is to manage interestrate risk by maintaining a combination of fixed and variable-rate financialinstruments in amounts and with maturities that management considersappropriate.  The risks associated withlong-term debt at December 2, 2006 have not changed materially sinceMarch 4, 2006.  Of the long-termdebt outstanding at December 2, 2006, the $125.0 million of Notesaccrue interest at a fixed interest rate, while the $131.0 millionoutstanding borrowings under the term loan facility and the $3.2 million ofoutstanding borrowings under the revolving credit facility accrue interest atvariable interest rates.  A rise inprevailing interest rates could have adverse effects on the Company’s financialcondition and results of operations.  A25 basis point increase in the reference rates for the Company’s averagevariable-rate debt outstanding during third quarter fiscal 2007 and fiscal 2007would have decreased net income for that period by approximately $87,000 and$229,000 respectively.

**ITEM 4. CONTROLS AND PROCEDURES**

***Evaluation of Disclosure Controls and Procedures*****.**  As of the end of the period covered by thisReport, the Company performed an evaluation, under the supervision and with theparticipation of its management including the President and Chief ExecutiveOfficer and Chief Financial Officer of the effectiveness of the Company’sdisclosure controls and procedures (as such term is defined in Exchange ActRules 13a-15(e) and 15d-15(e)).  Basedupon this evaluation, the Company’s President and Chief Executive Officer and ChiefFinancial Officer have concluded that as of December 2, 2006, the Company’sdisclosure controls and procedures were effective for the purposes of ensuringthat information required to bedisclosed in reports that the Company files or submits under the 1934 Act hasbeen recorded, processed, summarized and reported in accordance with the rulesand forms of the SEC.

***Changes in Internal Controls*****.**  Therehave been no changes in the Company’s internal controls over financialreporting during the quarter ended December 2, 2006 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

****Section 404 ofSarbanes-Oxley Act of 2002.****** On December 15, 2006, the SEC issued a rule (Release No. 33-8731) togrant relief to non-accelerated filers by further extending the date ofcompliance with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Act”).  Pursuant to the rule,  the Company is required to comply with theAct in two phases.  The first phase iseffective for the Company’s fiscal year ending March 1, 2008 and requires theCompany to issue a management report on internal control over financialreporting.  The second phase requires theCompany to provide an auditor’s attestation report on internal control overfinancial reporting beginning with the Company’s fiscal year ending February28, 2009.**

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The Company is currently undergoing an effort to comply with the Act.This effort includes documenting, evaluating the design and testing theeffectiveness of the Company’s internal controls. During this process, Pierremay make improvements to the design and operation of its internal controls,including but not limited to, further formalization of policies andprocedures.  Although the Companybelieves that its efforts will enable the Company to provide the requiredmanagement report on internal controls and its independent auditors to providethe required attestation based on the required dates above, Pierre can give noassurance that these efforts will be successfully completed in a timely manner.

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**PART II.  OTHER INFORMATION**

**ITEM 1.  LEGAL PROCEEDINGS**

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

Subsequent to the original NOV received in August 2003, theCompany began investigating and testing various emission reductiontechnologies.  The Company found asolution that enabled operations to continue with less smoke output andcompleted the upgrade during early 2004. HCDOES inspected the upgrade in April of 2004 and determined that theCompany had returned to compliance with the opacity limit.  In connection with the upgrade, the Companywas required to submit a revised Permit to Install (“PTI”) application.

In August, 2005, pursuant to its regulatory authority, HCDOESrequested a Method 5 Stack Test be performed to assess the Company’s compliancewith its emissions limits.  The Companycontacted HCDOES, requesting the scheduled stack emission compliance test bepostponed while the Company’s independent consulting firm conducted anemissions audit program consisting of a series of engineering stack tests thatwere performed at both controlled and uncontrolled emission test points inorder to evaluate the magnitude of the emissions based on current productiondata and to estimate new emissions factors by product line.  HCDOES agreed to this approach and grantedpermission to delay the standard Method 5 Stack Test originally requested whilethe Company conducted its emissions audit program.

The Company contracted with an independent environmental consulting firmto perform the audit and evaluation.  Aspart of the overall audit, this firm performed preliminary testing in earlySeptember 2005, which indicated that violations of emission levels may haveoccurred, and retested September 28, 2005 through September 30, 2005.  The firm conducted additional tests duringOctober 27, 2005 through November 8, 2005. The Company received the results of the audit in January 2006.  The results allowed the Company to evaluatethe facility’s current and historical potential and actual emissions.  The testing revealed that assumptions made bythe Company’s former outside engineering firm concerning particulate emissionsand throughput were incorrect.  Thismiscalculation caused the Company to receive permit limits that are lower thanactual emissions for certain cook lines. The Company met with the local air permitting authority in February,2006, to discuss the results of the emissions audit program.

On March 20, 2006, HCDOES sent a notice of violation to the Companyalleging that the Company violated its permit limits for particulate matter (“PM”)and reserved the right to pursue an enforcement action and a civil penalty inthe future.  On July 7, 2006, HCDOES sentanother notice of violation to the Company alleging that the Company was inviolation of its permit limits for PM emissions and again reserved the right topursue an enforcement action in the future. Depending on HCDOES’ interpretation of the data, HCDOES may allegeadditional violations of emission limits and other regulatoryrequirements.  To date, the Company hasspent approximately $0.8 million for emissions control equipment purchases,which is expected to be installed in early calendar year 2007.  In addition, the Company has committed to andexpects to commit to before the end of the first quarter of 2008, controlequipment purchases of approximately $0.8 million and $0.2 million,respectively, to comply with relevant laws. Furthermore, in August 2006 HCDOES requested that the Company submit adetermination as to whether or not it was subject to Title V or major new sourcepermitting requirements.  The Companyresponded to HCDOES’ request in September 2006, concluding that the Company wasnot subject to Title V or major new source permitting requirements based on theCompany’s interpretation of such regulations. The ultimate resolution of whether or not the Company was subject toTitle V or major new source permitting requirements depends on potentiallydisputed legal issues.  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.

***Labor***.*** ***InJune 2006, the Department of Homeland Security (“DHS”) announced that it wouldregard a large number of employee Social Security Number mismatches as a signof an “egregious violator” of the laws against hiring and employing illegalaliens.  The Immigration & CustomsEnforcement (“ICE”), which is part of DHS, proposed a safe harbor for dealingwith Social Security mismatch letters. An employer that receives a mismatch letter has 14 days to check itsrecords for clerical errors and verify the resolution with the Social SecurityAdministration.  If the error was notmade by the employer, the employer must instruct the employee to resolve thediscrepancy in 60 days.  If the employeedoes not correct the mismatch within such 60 days, the employer has 3 days tocomplete certain required documentation or terminate the employee.  Any employer complying with the safe harborwill not deemed to have “constructive knowledge” of the fact that the employeeis an unauthorized worker, and therefore, such employer will not be inviolation of the laws regulating the hiring and employment of illegalaliens.  A knowing violation of such lawsconstitutes a felony.  The DHS offers a voluntary Basic Pilot EmploymentVerification Program (the “Pilot Program”), which includes an internet-basedsystem to assist employers in determining the eligibility of new hires andverifying their Social Security numbers.

The Company’s Claremont, North Carolina facility received 209 mismatchletters from the Social Security Administration and has resolved each incompliance with the safe harbor requirements. Since March 2006, all new employees in the Company’s Claremont facilityhave been subject to the Pilot Program and since July 27, 2006, a total of 345employees have been hired to work in such facility, of which only 200 of suchemployees remain with the Company following compliance with the PilotProgram.  Management believes that with the Company’s use of the PilotProgram in all of its existing facilities, the Company will be compliant withlaws and regulations regarding Social Security mismatches.

***General.***  The Company continuously evaluatescontingencies based upon the best available information.  The Company believes it has recordedappropriate liabilities to the extent necessary in cases where the outcome ofsuch liabilities is considered 

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probable andreasonably estimable, and that its assessment of contingencies isreasonable.  To the extent thatresolution of contingencies results in amounts that vary from management’sestimates, future earnings will be charged or credited accordingly.

As part of its ongoing operations in the foodmanufacturing industry, the Company is subject to extensive federal, state, andlocal regulations and its food processing facilities and food products aresubject to frequent inspection, audits and inquiries by the United StatesDepartment of Agriculture, the Food and Drug Administration, and various localhealth and agricultural agencies and by federal, state, and local agenciesresponsible for the enforcement of environmental laws and regulations.  The Company is also involved in various legalactions arising in the normal course of business.  These matters are continuously beingevaluated and, in some cases, are being contested by the Company and theoutcome is not predictable. Consequently, an estimate of the possible loss orrange of loss associated with these actions cannot be made.  Although occasional adverse outcomes (orsettlements) may occur and could possibly have an adverse effect on the resultsof operations in any one accounting period, the Company believes that the finaldisposition of such matters will not have a material adverse affect on theCompany’s consolidated financial position.

**ITEM 1A.  RISK FACTORS**

At December 2, 2006, there were no material changesin risk factors from those described at March 4, 2006 in the Company’s AnnualReport on Form 10-K.

**ITEM 4.  OTHER INFORMATION**

Effective January 9, 2007, Joseph W. Meyers, the Company’sVice President, Finance, was promoted to Chief Financial Officer of theCompany.  Mr. Meyers, age 40, served as the Company’s Vice President,Finance since February 2003 and has held various accounting and financepositions with the Company since 1996. Prior to this, Mr. Meyers held the position of General AccountingManager at OhSe Foods, Lunch Meat Division of Hudson Foods in Topeka, Kansasfrom 1991 through 1996.  In 1996, OhSeFoods divested into Hudson Foods.

**ITEM 6.  EXHIBITS**

SeeExhibit Index.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|        | PIERRE FOODS,  INC.                    |
|--------|----------------------------------------|
|   |                                   |
|   | /s/ Norbert E. Woodhams                |   |
|   | By: Norbert E.  Woodhams               |
|   | President and  Chief Executive Officer |
|   | Dated: January  16, 2007               |
|   |                                   |
|   | /s/ Joseph W.  Meyers                  |   |
|   | By: Joseph W.  Meyers                  |
|   | Chief Financial  Officer               |
|   | Dated: January  16, 2007               |

 

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**EXHIBIT INDEX**
| Exhibit No. and Description: |
|------------------------------|
|                         |   |   |   |   |
| (10)                         |   | Material Contracts |
|                         |   |   |   |   |
|                         |   | 10.1 |   | Amendment No. 3 dated December  11, 2006 to the Credit Agreement dated June 30, 2006 among Pierre Merger  Corp., Wachovia Bank, National Association, as administrative and collateral  agent, Wachovia Capital Markets, LLC, and Bank of America Securities, LLC, as  joint lead arrangers and book-running managers, and a syndicate of banks,  financial institutions and other institutional lenders party thereto, as  amended by Amendment No. 1 dated April 3, 2006 and Amendment No. 2 dated  August 21, 2006 (1) |
|                         |   |   |   |   |
| (31)                         |   | Rule 13a - 14(a) / 15d - 14(a)  Certifications |
|                         |   |   |   |   |
|                         |   | 31.1 |   | Rule 13a - 14(a) / 15d - 14(a)  Certification of Chief Executive Officer (1) |
|                         |   |   |   |   |
|                         |   | 31.2 |   | Rule 13a - 14(a) / 15d - 14(a)  Certification of Chief Financial Officer (1) |
|                         |   |   |   |   |
| (32)                         |   | Section 1350 Certifications |
|                         |   |   |   |   |
|                         |   | 32 |   | Section 1350 Certifications of  the Chief Executive Officer and the Chief Financial Officer (1) |

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(1)             Filed herewith.

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