** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

#### **FORM10-Q**

| x      |   | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934  |
|--------|--------|-------------------------------------------------------------------------------------------|
|   |   | For the quarterly  period ended June 2, 2007                                              |
|   |   | OR                                                                                        |
| o      |   | TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |

 

For the transitionperiod 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’s telephonenumber, 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 o    No x

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

| Class                 |   | Outstanding at  July 17, 2007 |
|-----------------------|--------|-------------------------------|
| Class A Common  Stock |   | 100,000                       |

 

 

----

**PIERRE FOODS, INC. AND SUBSIDIARIES**

** **
|               | ** **                                                                                                           | **Page**   | ** ** |
|---------------|----------------------------------------------------------------------------------------------------------------------|------------|------------|
| **INDEX**     | ** **                                                                                                           | **Number** | ** ** |
| ** **    | ** **                                                                                                           | ** ** | ** ** |
| **Part I.**   | **Financial  Information:**                                                                                          | ** ** | ** ** | ** ** |
|          |                                                                                                                 | ** ** | ** ** | ** ** |
| Item 1.       | Financial  Statements                                                                                                | ** ** | ** ** | ** ** |
| ** **    | ** **                                                                                                           | ** ** | ** ** | ** ** |
|          | Condensed Consolidated Balance Sheets — June 2, 2007  and March 3, 2007                                         | ** ** | 3          |   |
|          |                                                                                                                 | ** ** |       | ** ** |
|          | Condensed  Consolidated Statements of Operations — for the thirteen weeks ended June 2,  2007 and June 3, 2006  | ** ** | 4          | ** ** |
|          |                                                                                                                 | ** ** |       | ** ** |
|          | Condensed Consolidated Statement of Shareholder’s Equity — for  the thirteen weeks ended June 2, 2007 | ** ** | 5          |   |
| ** **    | ** **                                                                                                           | ** ** |       | ** ** |
|          | Condensed Consolidated Statements of Cash Flows — for the  thirteen weeks ended June 2, 2007 and June 3, 2006   | ** ** | 6          |   |
| ** **    | ** **                                                                                                           | ** ** |       | ** ** |
|          | Notes to the Condensed Consolidated Financial  Statements                                                            | ** ** | 7          |   |
|          |                                                                                                                 | ** ** |       | ** ** |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          | ** ** | 20         |   |
| ** **    | ** **                                                                                                           | ** ** |       | ** ** |
| ** **    | ** **                                                                                                           | ** ** |       | ** ** |
| Item 3.       | Quantitative and  Qualitative Disclosures About Market Risk                                                          | ** ** | 26         |   |
| ** **    | ** **                                                                                                           | ** ** |       | ** ** |
| ** **    | ** **                                                                                                           | ** ** |       | ** ** |
| Item 4.       | Controls and  Procedures                                                                                             | ** ** | 27         |   |
| ** **    | ** **                                                                                                           | ** ** |       | ** ** |
| ** **    | ** **                                                                                                           | ** ** |       | ** ** |
| **Part  II.** | **Other  Information:**                                                                                              | ** ** |       | ** ** |
|          |                                                                                                                 | ** ** |       | ** ** |
| Item 1.       | Legal  Proceedings                                                                                                   | ** ** | 27         |   |
|          |                                                                                                                 | ** ** |       | ** ** |
| Item 1A.      | Risk Factors                                                                                                         | ** ** | 29         |   |
|          |                                                                                                                 | ** ** |       | ** ** |
|          |                                                                                                                 | ** ** |       |   |
| Item 6.       | Exhibits                                                                                                             | ** ** | 29         |   |
| ** **    | ** **                                                                                                           |       | ** ** |
| ** **    | ** **                                                                                                           |       | ** ** |
| ** **    | ** **                                                                                                           |       | ** ** |
| Signatures    | ** **                                                                                                           | 30         |       |
|          | ** **                                                                                                           |       | ** ** |
| Exhibit Index | ** **                                                                                                           | 31         |       |
|          | ** **                                                                                                           |       | ** ** |
| Exhibits      | ** **                                                                                                           |       | ** ** |
| Exhibit 31.1  | ** **                                                                                                           | 32         |       |
| Exhibit 31.2  | ** **                                                                                                           | 33         |       |
| Exhibit 32    | ** **                                                                                                           | 34         |       |

 

 

2

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**PART I.  FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**
| **PIERRE FOODS, INC. AND SUBSIDIARIES** | ** ** |
|-----------------------------------------|------------|

 

**CondensedConsolidated Balance Sheets**
| ** **                                                                                                          | ** ** | **June 2, 2007** | ** **  | **March 3, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                          | ** ** | **(Unaudited)**            | ** **  | ** **                  | ** ** |
| ASSETS                                                                                                              |       |                       |        |                        |       |
|                                                                                                                |       |                       |        |                        |       |
| CURRENT ASSETS:                                                                                                     |       |                       |        |                        |       |
| Cash and cash  equivalents                                                                                          |       | $                          | 153,959     |                        | $          | 88,631 |   |
| Accounts  receivable, net                                                                                           |       | 43,555,980                 |        | 46,138,649                  |       |
| Inventories                                                                                                         |       | 82,863,650                 |        | 68,496,266                  |       |
| Refundable  income taxes                                                                                            |       | 6,467,639                  |        | 4,612,613                   |       |
| Deferred income  taxes                                                                                              |       | 4,989,982                  |        | 5,159,359                   |       |
| Prepaid expenses  and other current assets                                                                          |       | 4,824,602                  |        | 5,553,263                   |       |
|                                                                                                                |       |                       |        |                        |       |
| Total current  assets                                                                                               |       | 142,855,812                |        | 130,048,781                 |       |
|                                                                                                                |       |                       |        |                        |       |
| PROPERTY, PLANT, AND  EQUIPMENT, NET                                                                                |       | 97,483,335                 |        | 98,559,861                  |       |
|                                                                                                                |       |                       |        |                        |       |
| OTHER ASSETS:                                                                                                       |       |                       |        |                        |       |
| Other  intangibles, net                                                                                             |       | 134,052,890                |        | 139,550,756                 |       |
| Goodwill                                                                                                            |       | 216,895,461                |        | 218,221,866                 |       |
| Deferred loan  origination fees                                                                                     |       | 7,722,368                  |        | 8,266,710                   |       |
| Other                                                                                                               |       | 4,897,900                  |        | 5,181,501                   |       |
|                                                                                                                |       |                       |        |                        |       |
| Total other  assets                                                                                                 |       | 363,568,619                |        | 371,220,833                 |       |
|                                                                                                                |       |                       |        |                        |       |
| Total Assets                                                                                                        |       | $                          | 603,907,766 |                        | $          | 599,829,475 |   |
| ** **                                                                                                          | ** ** | ** **                 | ** **  | ** **                  | ** ** |
| LIABILITIES AND  SHAREHOLDER’S EQUITY                                                                          |       |                       |        |                        |       |
|                                                                                                                |       |                       |        |                        |       |
| CURRENT LIABILITIES:                                                                                                |       |                       |        |                        |       |
| Current  installments of long-term debt                                                                             |       | $                          | 1,547,613   |                        | $          | 1,557,594 |   |
| Trade accounts  payable                                                                                             |       | 18,773,668                 |        | 20,567,325                  |       |
| Accrued interest                                                                                                    |       | 8,609,663                  |        | 5,568,643                   |       |
| Accrued payroll  and payroll taxes                                                                                  |       | 7,617,236                  |        | 7,116,045                   |       |
| Accrued  promotions                                                                                                 |       | 3,309,043                  |        | 3,278,430                   |       |
| Accrued taxes  (other than income and payroll)                                                                      |       | 1,235,538                  |        | 1,095,511                   |       |
| Other accrued  liabilities                                                                                          |       | 4,006,629                  |        | 3,110,606                   |       |
|                                                                                                                |       |                       |        |                        |       |
| Total current  liabilities                                                                                          |       | 45,099,390                 |        | 42,294,154                  |       |
|                                                                                                                |       |                       |        |                        |       |
| LONG-TERM DEBT, less  current installments                                                                          |       | 363,773,570                |        | 357,286,462                 |       |
|                                                                                                                |       |                       |        |                        |       |
| DEFERRED INCOME TAXES                                                                                               |       | 45,224,642                 |        | 45,662,017                  |       |
|                                                                                                                |       |                       |        |                        |       |
| OTHER LONG-TERM  LIABILITIES                                                                                        |       | 4,374,823                  |        | 4,766,732                   |       |
|                                                                                                                |       |                       |        |                        |       |
| Total  Liabilities                                                                                                  |       | 458,472,425                |        | 450,009,365                 |       |
|                                                                                                                |       |                       |        |                        |       |
| SHAREHOLDER’S EQUITY:                                                                                          |       |                       |        |                        |       |
| Common stock —  Class A, 100,000 shares authorized, issued, and outstanding at June 2, 2007  and March 3, 2007 |       | 150,180,071                |        | 150,187,941                 |       |
| Retained deficit                                                                                                    |       | (4,744,730                 | )           | (367,831                    | )          |
|                                                                                                                |       |                       |        |                        |       |
| Total  shareholder’s equity                                                                                    |       | 145,435,341                |        | 149,820,110                 |       |
|                                                                                                                |       |                       |        |                        |       |
| Total Liabilities and  Shareholder’s Equity                                                                    |       | $                          | 603,907,766 |                        | $          | 599,829,475 |   |

 

See accompanying notes tounaudited Condensed Consolidated Financial Statements.

3

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| **PIERRE FOODS, INC. AND SUBSIDIARIES** | ** ** |
|-----------------------------------------|------------|

 

**Condensed Consolidated Statements of Operations**

(Unaudited)
| ** **                                                   | ** ** | **For the**           | ** **  | **For the**           | ** ** |
|--------------------------------------------------------------|------------|----------------------------|-------------|----------------------------|------------|
| ** **                                                   | ** ** | **Thirteen Weeks**    | ** **  | **Thirteen Weeks**    | ** ** |
| ** **                                                   | ** ** | **Ended**                  | ** **  | **Ended**                  | ** ** |
| ** **                                                   | ** ** | **June 2, 2007** | ** **  | **June 3, 2006** | ** ** |
|                                                         |       |                       |        |                       |       |
| REVENUES, NET                                                |       | $                          | 157,501,314 |                       | $          | 105,755,518 |   |
|                                                         |       |                       |        |                       |       |
| COSTS AND EXPENSES:                                          |       |                       |        |                       |       |
| Cost of goods  sold                                          |       | 117,964,522                |        | 74,097,508                 |       |
| Selling,  general, and administrative expenses               |       | 28,547,442                 |        | 18,348,977                 |       |
| Depreciation and  amortization                               |       | 9,272,051                  |        | 6,795,405                  |       |
| Gain on  disposition of property, plant, and equipment, net  |       | (200                       | )           | —                     |       |
|                                                         |       |                       |        |                       |       |
| Total costs and  expenses                                    |       | 155,783,815                |        | 99,241,890                 |       |
|                                                         |       |                       |        |                       |       |
| OPERATING INCOME                                             |       | 1,717,499                  |        | 6,513,628                  |       |
|                                                         |       |                       |        |                       |       |
| INTEREST EXPENSE AND  OTHER INCOME:                          |       |                       |        |                       |       |
| Interest expense                                             |       | (8,189,472                 | )           | (5,521,903                 | )          |
| Other income                                                 |       | 22,167                     |        | 32,288                     |       |
|                                                         |       |                       |        |                       |       |
| Interest expense  and other income, net                      |       | (8,167,305                 | )           | (5,489,615                 | )          |
|                                                         |       |                       |        |                       |       |
| INCOME (LOSS) BEFORE  INCOME TAX (PROVISION) BENEFIT         |       | (6,449,806                 | )           | 1,024,013                  |       |
|                                                         |       |                       |        |                       |       |
| INCOME TAX (PROVISION) BENEFIT                               |       | 2,130,034                  |        | (343,839                   | )          |
|                                                         |       |                       |        |                       |       |
| NET INCOME (LOSS)                                            |       | $                          | (4,319,772  | )                          | $          | 680,174 |   |
|                                                         |       |                       |        |                       |       |
| NET INCOME (LOSS) PER  COMMON SHARE — BASIC AND DILUTED |       | $                          | (43.20      | )                          | $          | 6.80 |   |
|                                                         |       |                       |        |                       |       |
| WEIGHTED AVERAGE SHARES OUTSTANDING — BASIC AND DILUTED |       | 100,000                    |        | 100,000                    |       |

 

See accompanyingnotes to unaudited Condensed Consolidated Financial Statements.

4

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| **PIERRE FOODS, INC. AND SUBSIDIARIES** | ** ** |
|-----------------------------------------|------------|

 

**CondensedConsolidated Statement of Shareholder’s Equity**

**For the Thirteen Weeks Ended June 2, 2007**(Unaudited)

 
| ** **                              | ** ** | **Common**       | ** **  | ** **   | ** ** | **Total**              | ** ** |
|-----------------------------------------|------------|------------------|-------------|--------------|------------|------------------------|------------|
| ** **                              | ** ** | **Stock**        | ** **  | **Retained** | ** ** | **Shareholder’s** | ** ** |
| ** **                              | ** ** | **Class A** | ** **  | **Deficit**  | ** ** | **Equity**             | ** ** |
|                                    |       |             |        |         |       |                   |       |
| BALANCE AT MARCH 3,  2007               |       | $                | 150,187,941 |         | $          | (367,831               | )          | $ | 149,820,110 |   |
|                                    |       |             |        |         |       |                   |       |
| Net loss                                |       | —           |        | (4,319,772   | )          | (4,319,772             | )          |
|                                    |       |             |        |         |       |                   |       |
| Cumulative effect—FIN  48 adoption |       | —           |        | (57,127      | )          | (57,127                | )          |
|                                    |       |             |        |         |       |                   |       |
| Expenses paid on behalf  of parent      |       | (7,870           | )           | —       |       | (7,870                 | )          |
|                                    |       |             |        |         |       |                   |       |
| BALANCE AT JUNE 2, 2007                 |       | $                | 150,180,071 |         | $          | (4,744,730             | )          | $ | 145,435,341 |   |

 

See accompanying notes to unaudited Condensed Consolidated FinancialStatements.

 

5

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| **PIERRE FOODS, INC. AND SUBSIDIARIES** | ** ** |
|-----------------------------------------|------------|

 

**CondensedConsolidated Statements of Cash Flows**(Unaudited)
| ** **                                                                           | ** ** | **For the**           | ** ** | **For the**           | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                           | ** ** | **Thirteen Weeks**    | ** ** | **Thirteen Weeks**    | ** ** |
| ** **                                                                           | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** |
| ** **                                                                           | ** ** | **June 2, 2007** | ** ** | **June 3, 2006** | ** ** |
|                                                                                 |       |                       |       |                       |       |
| CASH FLOWS FROM OPERATING  ACTIVITIES                                                |       |                       |       |                       |       |
| Net income  (loss)                                                                   |       | $                          | (4,319,772 | )                          | $          | 680,174 |   |
|                                                                                 |       |                       |       |                       |       |
| Adjustments to  reconcile net income to net cash provided by operating activities:   |       |                       |       |                       |       |
| Depreciation and  amortization                                                       |       | 9,272,033                  |       | 6,795,405                  |       |
| Amortization of  deferred loan origination fees                                      |       | 544,340                    |       | 372,506                    |       |
| Change in  deferred taxes                                                            |       | (325,123                   | )          | (2,456,226                 | )          |
| Gain on  disposition of plant, property, and equipment                               |       | (200                       | )          | —                     |       |
| Changes in  operating assets and liabilities-net of acquired assets and liabilities: |       |                       |       |                       |       |
| Receivables                                                                          |       | 2,510,509                  |       | 7,153,353                  |       |
| Inventories                                                                          |       | (13,008,251                | )          | (4,010,583                 | )          |
| Refundable  income taxes, prepaid expenses, and other current assets                 |       | (1,126,366                 | )          | 2,578,087                  |       |
| Trade accounts  payable and other accrued liabilities                                |       | 2,825,509                  |       | 542,567                    |       |
| Other long-term  liabilities                                                         |       | (230,227                   | )          | 130,950                    |       |
| Other assets                                                                         |       | 57,242                     |       | 52,640                     |       |
| Total  adjustments                                                                   |       | 519,466                    |       | 11,158,699                 |       |
| Net cash  provided by (used in) operating activities                                 |       | (3,800,306                 | )          | 11,838,873                 |       |
|                                                                                 |       |                       |       |                       |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                |       |                       |       |                       |       |
| Net cash used in  the Acquisition of Clovervale                                      |       | (9,940                     | )          | —                     |       |
| Net cash used in  the Acquisition of Zartic                                          |       | (122,602                   | )          | —                     |       |
| Capital  expenditures                                                                |       | (2,471,081                 | )          | (1,880,302                 | )          |
| Net cash used in  investing activities                                               |       | (2,603,623                 | )          | (1,880,302                 | )          |
|                                                                                 |       |                       |       |                       |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                |       |                       |       |                       |       |
| Net borrowings  of revolving credit agreement                                        |       | 8,856,000                  |       | —                     |       |
| Principal  payments on long-term debt                                                |       | (2,378,873                 | )          | (12,189,593                | )          |
| Loan origination  fees                                                               |       | —                     |       | (266,096                   | )          |
| Return of  capital to parent                                                         |       | (7,870                     | )          | (9,871                     | )          |
|                                                                                 |       |                       |       |                       |       |
| Net cash  provided by (used in) financing activities                                 |       | 6,469,257                  |       | (12,465,560                | )          |
|                                                                                 |       |                       |       |                       |       |
| NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                                |       | 65,328                     |       | (2,506,989                 | )          |
|                                                                                 |       |                       |       |                       |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                      |       | 88,631                     |       | 2,540,722                  |       |
|                                                                                 |       |                       |       |                       |       |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                             |       | $                          | 153,959    |                       | $          | 33,733 |   |

 

See accompanying notes to unaudited Condensed Consolidated FinancialStatements.

 

6

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**PIERREFOODS, INC. AND SUBSIDIARIES**

**Notes to Condensed Consolidated FinancialStatements**

(Unaudited)

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

Pierre Foods, Inc. and itssubsidiaries (the “Company” or “Pierre”) manufactures, markets, and distributeshigh-quality, differentiated processed food solutions, focusing on formed,pre-cooked and ready-to-cook protein products, compartmentalized meals, andhand-held convenience sandwiches.  The Company’s products include, but are not limited to, beef, pork,poultry, bakery items, vegetables, fruits, cobblers, and peanut butter andjelly bars, sandwiches and cups.  Pierre offers comprehensive foodsolutions to its customers, including proprietary product development, specialingredients and recipes, as well as custom packaging and marketingprograms.   Pierre’s pre-cooked andready-to-cook proteins include flamebroiled burger patties, homestyle meatloaf,chicken strips, and boneless, barbecued pork rib products.   Pierre markets its pre-cooked andready-to-cook protein products to a broad array of customers that includerestaurant chains, schools, military, and other foodservice providers.

The unaudited Condensed Consolidated FinancialStatements of Pierre and its subsidiaries have been prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”),as well as the instructions 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 thereto includedin the Company’s Annual Report on Form 10-K filed with the SEC on June 15, 2007(“Form 10-K”).

The financial information as of March 3, 2007included 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 thereto includedin the Company’s Form 10-K.  The Company’scurrent accounting policies are consistent with those described in the notes tothe Company’s March 3, 2007 audited Consolidated Financial Statements exceptfor the adoption of Financial Accounting Standards Board (“FASB”)Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes —an Interpretation of FASB Statement No. 109, Accounting for Income Taxes”,which was effective March 4, 2007.

Included in this report are interim unaudited CondensedConsolidated Financial Statements that contain all adjustments necessary topresent fairly the financial position as of June 2, 2007, the results ofoperations for the thirteen week periods ended June 2, 2007 and June 3, 2006,the cash flows of the Company for the thirteen week periods ended June 2, 2007and June 3, 2006, and the statement of shareholder’s equity for the thirteenweek period ended June 2, 2007.  Thethirteen week periods ended June 2, 2007 and June 3, 2006 are referred to as “firstquarter fiscal 2008” and “first quarter fiscal 2007”, respectively.

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

**2.  Acquisitions**

***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 preliminary net purchase price was$21.8 million and 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 6, “Long-Term Debt” to the Company’sCondensed Consolidated Financial Statements for further discussion.  Pierre’s investment in Clovervale was basedon the expectation that such an investment would increase the Company’spresence with targeted customer channels and add capacity and productioncapabilities in order to increase product offerings.

Clovervale was a privatelyheld company and currently employs approximately 129 employees.  Clovervale has operations in Amherst, Ohioand Easley, South Carolina and manufactures and sells a variety of food itemsincluding individually proportioned entrees, vegetables, sandwiches, fruits,cobblers, peanut butter and jelly bars, sandwiches and cups, sherbets, applesauce, and other similar products through various customer channels includingschools, military, hospitals, and senior citizen meal programs.  The operating results for Clovervale areincluded in the Company’s Condensed Consolidated Statement of Operations fromthe date of the Acquisition of Clovervale.

In conjunction with theAcquisition of Clovervale, management of the Company, with the assistance of anindependent valuation firm, performed valuations on the Clovervale otherintangible assets for financial reporting purposes.  Assets identified through these valuations includedcustomer relationships, non-compete agreements, and certain tradenames andtrademarks.  Other fair value adjustmentswere made in conjunction with the Acquisition of Clovervale, which primarilyinclude adjustments to property, plant, and equipment, inventory, and relateddeferred taxes.

7

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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                      |   | $          | 5,253,602  |   |
|-------------------------------------|--------|------------|------------|--------|
| Property, plant,  and equipment     |   | 12,876,729 |       |
| Non-current  assets                 |   | 17,625     |       |
| Goodwill                            |   | 6,633,211  |       |
| Other  intangibles                  |   | 2,730,000  |       |
| Debt and other  liabilities assumed |   | (4,411,625 | )          |
| Deferred tax  liabilities           |   | (1,244,174 | )          |
| Net assets acquired                 |   | $          | 21,855,368 |   |

Of the $2.7 million ofacquired other intangible assets, $2.4 million 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 thepreliminary net purchase price to specific assets and liabilities was based, inpart, upon preliminary appraisals, and was therefore subject to change.  Net assets acquired totaling $21,845,428 werepreviously reported in the Company’s Form 10-K.  The increase in netassets acquired is due to miscellaneous adjustments.  The Company expects to further adjust andfinalize the appraisals of acquired assets and liabilities in its fiscal yearending March 1, 2008 (“fiscal 2008”).  Deferred tax liabilities will alsobe finalized after the final allocation of the purchase price and the final taxbasis of the assets and liabilities has been determined.

***Acquisition of Zartic.*****  ** On December11, 2006, the Company acquired substantially all of the assets of Zartic, Inc.and its affiliated distribution company, Zar Tran, Inc. and certain realproperty and other assets used in the businesses (collectively,  “Zartic”).  The acquisition of Zartic is referred toherein as the “Acquisition of Zartic”. The preliminary aggregate purchase price was $94.0 million, plus theassumption of certain liabilities, which was paid in cash at the closing and issubject to certain post-closing adjustments. After repayment of indebtedness and other post-closing adjustments, the preliminarynet purchase price was $91.6 million and is subject to additional post-closingadjustments, including adjustments for working capital.  Pierre funded the Acquisition of Zarticthrough an amendment to its Credit Agreement (“Amendment No. 3”).  See Note 6, “Long-Term Debt” to the Company’sCondensed Consolidated Financial Statements for further discussion.  Pierre’s investment in Zartic was based onthe expectation that such an investment would increase the Company’s presencewith targeted customer channels and add capacity and production capabilities inorder to increase product offerings.

Zartic was a privately heldcompany and currently employs approximately 925 employees.  Zartic has operations in Rome, Georgia,Cedartown, Georgia, and Hamilton, Alabama and manufactures, sells, delivers,and distributes a variety of food items including packaged beef, poultry, pork,and veal products and other similar products through various customer channelsincluding restaurant chains, schools, military, and other foodserviceproviders.  Operating results for Zarticare included in the Company’s Condensed Consolidated Statement of Operationsfrom the date of the Acquisition of Zartic.

In conjunction with theAcquisition of Zartic, management of the Company, with the assistance of anindependent valuation firm, performed valuations on the Zartic other intangibleassets for financial reporting purposes. Assets identified through this valuation process included customerrelationships, non-compete agreements, and certain tradenames andtrademarks.  Other fair value adjustmentswere made in conjunction with the Acquisition of Zartic, which primarilyinclude adjustments to property, plant, and equipment, and inventory.

TheAcquisition of Zartic 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 of Zartic.  The preliminary allocation of the netpurchase price is as follows:

| Current assets                      |   | $           | 26,296,227 |   |
|-------------------------------------|--------|-------------|------------|--------|
| Property, plant,  and equipment     |   | 29,809,308  |       |
| Non-current  assets                 |   | 319,691     |       |
| Goodwill                            |   | 22,398,112  |       |
| Other  intangibles                  |   | 27,700,000  |       |
| Debt and other  liabilities assumed |   | (14,798,162 | )          |
| Net assets acquired                 |   | $           | 91,725,176 |   |

Of the $27.7 million ofacquired other intangible assets, $15.1 million was assigned to customerrelationships with a weighted-average estimated useful life of 14 years.  The remaining acquired other intangibleassets include formula and recipes of $9.9 million with a weighted-averageuseful life of 15 years, tradenames and trademarks of $2.4 million with aweighted-average useful life of 2 years, and a non-compete agreement of $0.3million with a useful life of 3 years. The goodwill related to the Acquisition of Zartic is expected to bedeductible for tax purposes.

The initial allocation of thepreliminary net purchase price to specific assets and liabilities was based, inpart, upon preliminary appraisals, and was therefore subject to change.  Net assets acquired totaling $91,602,574 werepreviously reported in the Company’s Form 10-K.  The increase in netassets acquired is due to miscellaneous adjustments.  The Company expects to further adjust andfinalize the appraisals of acquired assets and liabilities in fiscal 2008.

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***Unaudited Pro Forma Results. ***The following tables present unaudited pro forma information for firstquarter fiscal 2007, as if the Acquisition of Clovervale and the Acquisition ofZartic had been completed at the beginning of the period.

|                   | ** ** | **First Quarter Fiscal 2007** | ** **  |
|-------------------|------------|----------------------------------------------|-------------|
| ** **        | ** ** | **Actual**                                   | ** **  | **Pro Forma** | ** ** |
|              |       |                                         |        |   |   |
| Revenues          |       | $                                            | 105,755,518 |   | $ | 148,938,094 |   |
|              |       |                                         |        |   |   |
| Net income (loss) |       | $                                            | 680,174     |   | $ | (2,745,329 | ) |

These unaudited pro formaresults, based on assumptions deemed appropriate by the Company’s management,have been prepared for informational purposes only and are not necessarilyindicative of the amounts that would have resulted if the Company had acquiredClovervale and Zartic at the beginning of the respective period.  Purchase related adjustments to the resultsof operations include the effects on depreciation and amortization, interestexpense, cost of goods sold, and income taxes.

In addition to the purchaserelated adjustments, included in these pro forma results are certainreclassifications of Clovervale’s and Zartic’s expenses, which are consistentwith the classifications of Pierre. These reclassifications include the presentation of various salesdiscounts previously reported by Clovervale as selling expenses, but moreappropriately classified as a reduction of revenues.  In addition, these reclassifications includethe presentation of depreciation and amortization previously reported by Zarticwithin operating expenses.

Also included in these proforma results are the elimination of interest expense related to Clovervale’sdebt and Zartic’s debt, both of which were partially paid off in conjunctionwith the Acquisition of Clovervale and the Acquisition of Zartic, and will nolonger be present in the Company’s results of operations.  Included in these pro forma results is theestimated interest expense for the debt incurred by the Company to finance theAcquisition of Clovervale and the Acquisition of Zartic.

**3.     Income Taxes**

Effective March 4, 2007, the Company adopted FIN 48,which requires that the financial statement effects of a tax position taken orexpected to be taken in a tax return be recognized in the financial statementswhen it is more likely than not, based on the technical merits, that theposition will be sustained upon examination.

The recognition andmeasurement guidelines of FIN 48 were applied to all of the Company’s materialtax positions as of March 4, 2007, resulting in an increase in non-current taxliabilities of $809,267, including accrued interest.  Of this amount, $57,127 was treated as adecrease to beginning retained earnings for the cumulative effect of change inaccounting principle.  The total amountof unrecognized income tax benefits as of March 4, 2007 was $809,267, of which$57,127 would affect the Company’s effective income tax rate ifrecognized.  The difference between thetotal amount of unrecognized tax benefits and the amount that effect theeffective income tax rate relates primarily to deferred tax benefits fortemporary differences between book and tax return items.

The Company files income taxreturns in the U.S. federal jurisdiction and various state jurisdictions.  The Company has substantially concluded allU.S. federal income tax matters for the tax year ended June 30, 2004.  No federal income tax returns are currentlyunder examination.  With few exceptions,the Company is no longer subject to state or local income tax examinations by taxauthorities for its fiscal 2003 tax year.

The Company’s continuingpolicy is to recognize interest and penalties related to income tax matters astax expense.  The amount of interest andpenalty expense recorded for the thirteen week period ended June 2, 2007 wasnot material.

There was no material changein the net amount of unrecognized tax benefits in first quarter fiscal2008.  Management has concluded thatthere will not be a material reduction in the unrecognized tax benefit duringthe next 12 months based on anticipated tax positions taken in the next 12months, expected settlements or payments of uncertain tax positions, and lapsesof the applicable statutes of limitations of unrecognized tax benefits.

The effective tax rate for first quarter fiscal 2008was 33.0% compared to 33.6% for first quarter fiscal 2007.  The change in the effective tax rate isprimarily due to the statutory increase in the Section 199 deduction (the “DomesticManufacturing Deduction”) from 3% to 6% of qualifying income, partially offsetby the elimination of the Extra-Territorial Income deduction (“ETI”) in thecurrent year; and a reduction in the Company’s estimated state effective taxrate due to the Acquisition of Clovervale and the Acquisition of Zartic.

**4.     Stock-Based Compensation**

On June 30, 2004, PierreHolding Corp. (“Holding”), an affiliate of Madison Dearborn Partners, LLC (“MDP”)adopted a stock option plan, pursuant to which the Board of Directors ofHolding may grant options to purchase an aggregate of 163,778 shares of commonstock of Holding.  Such options may begranted to directors, employees, and consultants of Holding and itssubsidiaries, including the Company.  AtJune 2, 2007 and March 3, 2007, outstanding options to purchase  common stock of Holding issued to members ofmanagement of the Company (the “Options”) were 124,384 and 126,219,respectively, and 37,559 shares were reserved for future issuance.  All outstanding Options were granted at $10per share and expire ten years from the date of grant.  A portion of each outstanding Option vestsdaily on a pro-rata basis over a five-year period from the date of grant andthe remaining portion of each outstanding Option vests seven 

9

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years from the date of grant,subject to accelerated vesting based on the achievement of certain performancemeasures.  At June 2, 2007 and March 3,2007, options to purchase 28,892 shares and 26,115 shares, respectively, werevested and exercisable.

The Company treats the Optionsissued to employees of the Company as stock-based compensation.  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.

Effective March 5, 2006, asrequired for the first annual reporting period beginning after December 15,2005 for non-public companies (as defined in Statement of Financial AccountingStandards (“SFAS”) No. 123(R)), the Company adopted SFAS 123(R) using theprospective adoption method.  The newstatement requires compensation expense associated with share-based payments toemployees to be recognized in the financial statements based on their fairvalues.  Upon the adoption of SFAS123(R), because the Company had used the minimum value method prior to theadoption, the Company was required to apply the provisions of the statementonly prospectively for any newly issued, modified or settled award after thedate of initial adoption.  No new Optionswere issued, modified or settled subsequent to adoption, however, the fair valueassigned to any newly issued, modified or settled award in the future isexpected to be significantly greater due to the differences in valuationmethods.  Upon the adoption of SFAS123(R) the pro forma effect of fair value accounting for prior periodspresented are no longer presented as the Company used the minimum value method.

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

| Dividend yield     |   | —    |   |
|-------------------------|--------|-----------|--------|
| Term to  expiration     |   | 10 years  |   |
| Expected life           |   | 6.3 years |   |
| Expected  volatility    |   | —    |   |
| Risk free interest rate |   | 3.93      | %      |

 

**5.     Inventories**

A summary of inventories, by major classifications, follows:
| ** **      | ** ** | **June 2, 2007** | ** ** | **March 3, 2007** | ** ** |
|-----------------|------------|----------------------------|------------|-----------------------------|------------|
| Finished goods  |       | $                          | 67,605,461 |                        | $          | 54,090,234 |   |
| Raw materials   |       | 14,997,623                 |       | 14,122,205                  |       |
| Work in process |       | 260,566                    |       | 283,827                     |       |
| Total           |       | $                          | 82,863,650 |                        | $          | 68,496,266 |   |

 

**6.     Long-Term Debt**

Long-term debt is comprised of the following:
| ** **                                                                                                | ** ** | **June 2, 2007** | ** **  | **March 3, 2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|-----------------------------|------------|
| 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                                       |       | 227,000,000                |        | 229,000,000                 |       |
| Revolving line  of credit, maximum borrowings of $40 million with floating interest rates,  maturing 2009 |       | 9,656,000                  |        | 800,000                     |       |
| 4.6% to 10.7%  capitalized lease obligations maturing through 2011                                        |       | 3,665,183                  |        | 4,044,056                   |       |
| Total long-term  debt                                                                                     |       | 365,321,183                |        | 358,844,056                 |       |
| Less current  installments                                                                                |       | 1,547,613                  |        | 1,557,594                   |       |
| Long-term debt less  current installments                                                                 |       | $                          | 363,773,570 |                        | $          | 357,286,462 |   |

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Effective June 30, 2004, the Company obtained a $190 million creditfacility, which included a six-year variable-rate $150 million term loan, afive-year variable-rate $40 million revolving credit facility and a $10 millionletter of credit subfacility.  Fundsavailable under this facility are available for working capital requirements,permitted investments and general corporate purposes.  All of the Company’s indebtedness under thecredit facility is secured by a first-priority security interest insubstantially all of the Company’s assets. Base rate borrowings under the term loan portion of the facility bearinterest at prime rate plus 1.25% and base rate borrowings under the revolvingcredit portion of the facility bear interest at prime rate plus based on primeplus pricing levels ranging from 1.0% to 1.75% determined by the consolidatedleverage ratio of the Company.  At June2, 2007, the interest rates for base rate borrowings under the revolving creditfacility and the term loans were 9.75% (prime of 8.25% plus 1.50%) and 9.50%(prime of 8.25% plus 1.25%), respectively. However, the Company lowered such rates through  the use of LIBOR tranches.  The following table summarizes the Company’soutstanding LIBOR tranches as of June 2, 2007, including the amount, therespective rate of interest, and the date of expiration.
| ** **                                | ** ** | **Amount** | ** **  | **Interest Rate** | ** ** | **Expiration Date** | ** **    |
|-------------------------------------------|------------|------------|-------------|------------------------|------------|--------------------------|---------------|
| Term loan LIBOR  tranche:                 |       | $          | 227,000,000 |                   | 7.61       | %                        | June 14, 2007 |   |
| Revolving credit  facility LIBOR tranche: |       | $          | 2,000,000   |                   | 7.82       | %                        | June 7, 2007  |   |
| Revolving credit  facility LIBOR tranche: |       | $          | 2,000,000   |                   | 7.82       | %                        | June 11, 2007 |   |

 

Repayment of borrowings underthe term loan was initially $375,000 per quarter, which began on September 4,2004, with a balloon payment of $141.4 million due on June 30,2010.  The Company made all suchscheduled quarterly payments totaling $8.6 million for the term of the loan andprepayments on the term loan totaling $34.4 million.  Additional prepayments of $2.0 million on theterm loan during first quarter fiscal 2008. As previously discussed in Note 2 “Acquisitions”, in conjunction withthe Acquisition of Clovervale, the Company increased borrowings with respect toits term loan by $24.0 million in order to finance the Acquisition ofClovervale.  In addition, also discussedin Note 2 “Acquisitions”, in conjunction with the Acquisition of Zartic, theCompany increased borrowings with respect to its term loan by $100.0 million inorder to finance the Acquisition of Zartic. The outstanding balance of $227.0 million as of June 2, 2007 is due onJune 30, 2010.

OnApril 3, 2006, the Company entered into Amendment No. 1 to its credit facility(“Amendment No. 1”).  Amendment No. 1provided for, among other things, a reduction of 0.5% in the per annum interestrate with respect to borrowings under the Company’s term loan.  The applicable interest rate for base rateborrowings under the term loan was decreased from the base rate (which is thegreater of the applicable prime rate and 1⁄2 of 1% above the Federal Funds Rate)plus 1.50% to such base rate plus 1.00%. On August 21, 2006, the Company entered into Amendment No. 2 to itscredit facility.  Amendment No. 2 provided for, among other things, anincrease in borrowings with respect to the Company’s term loan totaling $24.0million.  On December 11, 2006 theCompany entered into Amendment No. 3 to its credit facility.  Amendment No. 3 provided for, among otherthings, an increase in borrowings with respect to the Company’s term loantotaling $100.0 million and an increase in the per annum interest rate withrespect to borrowing under the company’s term loan to the base rate plus 1.25%.

OnJune 30, 2004, the shareholders of PF Management, Inc., the soleshareholder of the Company (“PFMI”), sold their shares of stock in PFMI (the“Acquisition of Pierre”) to Holding.  In conjunction with the Acquisitionof Pierre, the Company issued new notes, which are 9.875% senior notes (the “NewNotes”), with interest payable on January 15 and July 15 of each year. The proceeds of the New Notes, together with the equity contributions from MDPand certain members of management and borrowings under the Company’s seniorcredit facility, were used to finance the Acquisition of Pierre and to repayoutstanding indebtedness.

Asof June 2, 2007, the Company had cash and cash equivalents on hand of $0.2million, outstanding borrowings under its revolving credit facility of $9.7million, outstanding letters of credit of approximately $6.3 million, andborrowing availability of approximately $24.0 million.  Also as of June 2, 2007, the Company hadborrowings under its term loan of $227.0 million and $125.0 million of NewNotes outstanding.  As of March 3, 2007,the Company had cash and cash equivalents on hand of $0.1 million, outstandingborrowings under its revolving credit facility of $0.8 million, outstandingletters of credit of approximately $3.5 million, and borrowing availability ofapproximately $35.7 million.  Also as ofMarch 3, 2007, the Company had borrowings under its term loan of $229.0 millionand $125.0 million of New Notes outstanding. The Company is required to satisfy certain financial covenants regardingcash flow and capital expenditures.  Asof June 2, 2007, the Company is in compliance with all financial covenants.

Underits term loan and revolving credit facility, the Company is required to deliveraudited financial statements to the lenders within 90 days after the end of theCompany’s fiscal year, which would have required such delivery to occur on orbefore June 1, 2007.  The Company obtained a waiver of such requirementeffective June 1, 2007, which provided the Company an additional 30 days todeliver the Company’s audited financial statements to the lenders.  The Company delivered such financialstatements within such 30-day period.

**7.     Goodwilland Other Intangible Assets**

In conjunction with the Acquisition of Pierre, theCompany engaged an independent party, with the assistance of Pierre’s management,to perform valuations for financial reporting purposes of the Company’s otherintangible assets.  Assets identifiedthrough these valuations included formulas, customer relationships, licensingagreements, and certain tradenames and trademarks.

Inconjunction with the Acquisition of Clovervale, management of the Company, withthe assistance of an independent valuation firm, performed valuations on theClovervale other intangible assets for financial reporting purposes.  Assets identified through these valuations includedcustomer relationships, non-compete agreements, and certain tradenames andtrademarks.

Inconjunction with the Acquisition of Zartic, management of the Company, with theassistance of an independent valuation firm, performed valuations on the Zarticother intangible assets for financial reporting purposes.  Assets identified through these valuationsincluded customer relationships, non-compete agreements, and certain tradenamesand trademarks.

Inaccordance with SFAS No. 142 (“SFAS 142”)—”Goodwill and Other IntangibleAssets,” the Company tests recorded goodwill and intangibles with indefinitelives for impairment at least annually. Intangible assets with finite lives are amortized over their estimatedeconomic or estimated useful lives.  Inaddition, all other intangible assets are reviewed for impairment in accordancewith SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  As of March 3, 2007, the Company performedthe annual impairment review of goodwill and indefinite-lived intangible assetsand also assessed whether the indefinite-lived intangible assets continue tohave indefinite lives.  The Companyengaged an independent party to perform valuations to assist in the impairmentreview.  There were no impairment chargesas a result of this review.

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The impairment analysesrelied on financial forecasts of income and cash flows that are attributable tothe Company’s reporting units and the respective indefinite-lived intangibleassets and then discounted to present value at rates reflective of our cost ofcapital.  Future changes in our financialforecasts or cost of capital might adversely affect the value of the Company’sreporting units or indefinite-lived intangible assets.  The Company will continue to performimpairment tests on an annual basis and on an interim basis, if certainconditions exist.

The Company’s amortizableintangible assets are amortized using primarily accelerated amortizationmethods, in addition to the straight-line amortization method, in order tomatch the expected benefit derived from the assets over the life of theasset.  The accelerated amortizationmethods allocate amortization expenses based on the expected benefit derivedfrom the assets over the estimated useful lives of the assets.

The gross carrying amount of goodwill and the grosscarrying amount and accumulated amortization of other intangible assets as ofJune 2, 2007 are as follows:  
| ** **                               | ** ** | **As of June 2, 2007** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **Useful**                                 | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **                               | ** ** | **Life (yrs)**                        | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| **Amortizable intangible assets:**       |       |                                       |       |   |   |   |   |   |   |
| Formulas                                 |       | 5-15                                       |       | $ | 100,599,000 |   | $ | 40,492,098 |   | $ | 60,106,902 |   |
| Tradename and  trademarks                |       | 2-20                                       |       | 22,780,000 |   | 6,428,206 |   | 16,351,794 |   |
| Customer  relationships                  |       | 10-14                                      |       | 46,000,000 |   | 16,326,080 |   | 29,673,920 |   |
| Licensing  agreements                    |       | 10                                         |       | 12,100,000 |   | 4,663,860 |   | 7,436,140 |   |
| Non-compete  agreement                   |       | 2-3                                        |       | 350,000 |   | 65,866 |   | 284,134 |   |
| **Total amortizable intangible  assets** |       |                                       |       | 181,829,000 |   | 67,976,110 |   | 113,852,890 |   |
| ** **                               |       |                                       |       |   |   |   |   |   |   |
| **Indefinite-lived intangible  assets**  |       |                                       |       |   |   |   |   |   |   |
| Tradename                                |       | Indefinite                                 |       | 20,200,000 |   | — |   | 20,200,000 |   |
| **Total other intangible assets**        |       |                                       |       | 202,029,000 |   | 67,976,110 |   | 134,052,890 |   |
| ** **                               |       |                                       |       |   |   |   |   |   |   |
| Goodwill                                 |       | N/A                                        |       | 216,895,461 |   | — |   | 216,895,461 |   |
| **Total intangible assets**              |       |                                       |       | $ | 418,924,461 |   | $ | 67,976,110 |   | $ | 350,948,351 |   |

 

The gross carrying amount of goodwill and the grosscarrying amount and accumulated amortization of other intangible assets as ofMarch 3, 2007 are as follows:

 
| ** **                               | ** ** | **As of March 3, 2007** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **Useful**                                  | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **                               | ** ** | **Life (yrs)**                         | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| **Amortizable  intangible assets:**      |       |                                        |       |   |   |   |   |   |   |
| Formulas                                 |       | 5-15                                        |       | $ | 100,599,000 |   | $ | 37,603,680 |   | $ | 62,995,320 |   |
| Tradename and trademarks                 |       | 2-20                                        |       | 22,780,000 |   | 5,656,800 |   | 17,123,200 |   |
| Customer relationships                   |       | 10-14                                       |       | 46,000,000 |   | 14,900,116 |   | 31,099,884 |   |
| Licensing agreements                     |       | 10                                          |       | 12,100,000 |   | 4,283,032 |   | 7,816,968 |   |
| Non-compete agreement                    |       | 2-3                                         |       | 350,000 |   | 34,616 |   | 315,384 |   |
| **Total  amortizable intangible assets** |       |                                        |       | 181,829,000 |   | 62,478,244 |   | 119,350,756 |   |
| ** **                               |       |                                        |       |   |   |   |   |   |   |
| **Indefinite-lived  intangible assets:** |       |                                        |       |   |   |   |   |   |   |
| Tradename                                |       | Indefinite                                  |       | 20,200,000 |   | — |   | 20,200,000 |   |
| **Total  other intangible assets**       |       |                                        |       | 202,029,000 |   | 62,478,244 |   | 139,550,756 |   |
| ** **                               |       |                                        |       |   |   |   |   |   |   |
| Goodwill                                 |       | N/A                                         |       | 218,221,866 |   | — |   | 218,221,866 |   |
| **Total intangible assets**              |       |                                        |       | $ | 420,250,866 |   | $ | 62,478,244 |   | $ | 357,772,622 |   |

 

 

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The following table represents activity related to goodwill andamortizable intangible assets during first quarter fiscal 2008:

| **Goodwill:**                       |   |       |        |
|-------------------------------------|--------|------------|-------------|
| Balance as of  March 3, 2007        |   | $          | 218,221,866 |   |
| Acquisition of  Clovervale          |   | 9,941      |        |
| Acquisition of  Zartic              |   | (1,336,346 | )           |
| Balance as of  June 2, 2007         |   | $          | 216,895,461 |   |
| ** **                          |   |       |        |
| **Amortizable  intangible assets:** |   |       |        |
| ** **                          |   |       |        |
| Balance as of  March 3, 2007        |   | $          | 119,350,756 |   |
| Amortization                        |   | (5,497,866 | )           |
| Balance as of June 2,  2007         |   | $          | 113,852,890 |   |

 

The future amortization of other intangible assetsfor the next five fiscal years is estimated to be as follows:
| ** **                | ** ** | **(in thousands)** | ** ** |
|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **2009**                | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** |
|                      |       |                    |       |   |   |   |   |   |   |   |   |
| Formulas                  |       | $                       | 9,745      |   | $ | 8,523 |   | $ | 7,172 |   | $ | 5,946 |   | $ | 4,864 |   |
| Tradename and  trademarks |       | $                       | 2,771      |   | $ | 1,689 |   | $ | 1,539 |   | $ | 1,412 |   | $ | 1,294 |   |
| Customer  relationships   |       | $                       | 5,083      |   | $ | 4,412 |   | $ | 3,703 |   | $ | 3,058 |   | $ | 2,480 |   |
| Licensing  agreements     |       | $                       | 1,426      |   | $ | 1,361 |   | $ | 1,239 |   | $ | 1,097 |   | $ | 728 |   |
| Non-compete agreement     |       | $                       | 112        |   | $ | 78 |   | $ | — |   | $ | — |   | $ | — |   |

 

**8.   Commitments and Contingencies**

***Letters of Credit***.  TheCompany provided a letter of credit in the amount of $5.7 million and $2.8million as of June 2, 2007 and March 3, 2007, respectively, to itsinsurance carrier for the underwriting of certain performance bonds. Thecurrent letter of credit expires in fiscal 2008.  The Company also provides secured letters ofcredit to its insurance carriers for outstanding and potential workers’compensation and general liability claims. Letters of credit for these claimstotaled $675,000 as of June 2, 2007 and March 4, 2007.

***Legal Proceedings***.  TheCompany is involved in various legal proceedings.  Management believes, based on the advice oflegal counsel, that the outcome of such proceedings will not have a materialadverse effect on the Company’s financial position or future results ofoperations or cash flows.  See Item 3 — “LegalProceedings” of the Company’s Annual Report on Form 10-K for fiscal 2007 andNote 13 — “Legal Proceedings,” hereof for further discussion.

***Liability to Selling Shareholders***.  Inconjunction with the Acquisition of Pierre, the Company and the sellingshareholders 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 to payand has paid 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 makepayments to the selling shareholders or the escrow account for tax benefitsderived from such utilization 20 days after the filing of the tax return thatutilizes such Deal Related NOLs or other deal related expenses.

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 fiscal 2007, theCompany 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 June 2, 2007, theCompany has utilized $24.2 million of the Deal Related NOLs and $1.7 million inother deal related expenses.  Also as ofJune 2, 2007, the Company has submitted payments based on the tax benefitsreceived, net of other tax assessments due to the Company from the sellingshareholders, to an escrow account (approximately $4.0 million) and directly tothe selling shareholders (approximately $5.4 million).  As of June 2, 2007, the Company has aremaining liability to the selling shareholders totaling $2.2 million (whichreflects the aforementioned $1.3 million adjustment during fiscal 2007).  No payments were made to the sellingshareholders during first quarter fiscal 2008, however, the Company expects tomake additional payments in conjunction with the filing of its fiscal 2007federal and state returns during fiscal 2008. An estimate of such payments is classified by the Company as a currentliability (approximately $0.3 million). The remaining portion of the liability (approximately $1.9 million) isclassified as long-term based on the expected timing of the remaining paymentsto the selling shareholders.  The Companyexpects to fully utilize the Deal Related NOLs and other deal related expenses,however the timing of the future payments of the long-term portion is unknown.

**9**.   **Comprehensive Income**

Total comprehensive income is comprisedsolely of net income (loss) in first quarter fiscal 2008 and first quarterfiscal 2007.

13

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**10.   Supplemental Cash FlowDisclosures —Cash Paid During the Period and Non-Cash Transactions**
| ** **                            | ** ** | **Thirteen Weeks**    | ** ** | **Thirteen Weeks**    | ** ** | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------------------|------------|------------|
| ** **                            | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** | ** ** |
| ** **                            | ** ** | **June 2, 2007** | ** ** | **June 3, 2006** | ** ** | ** ** |
| Cash paid during  the period for:     |       |                       |       |                       |       |       |
| Interest                              |       | $                          | 4,567,765  |                       | $          | 2,106,064  |   |   |
| Income taxes, net                     |       | $                          | 50,116     |                       | $          | 24,055     |   |   |
|                                  | * *   | * *                   | * *   | * *                   | * *   | * *   |
| Acquisition of  Zartic adjustment:    |       |                       |       |                       |       |       |
| Adjustment of inventory to fair value |       | 1,359,133                  | * *   | *—*                   |       |       |
|                                  | * *   | * *                   | * *   | * *                   | * *   | * *   |

**11.   Recently IssuedAccounting Guidance**

In September 2006, the FASB issuedSFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  The objective SFAS157 is to define fair value, establish a framework for measuring fair value andexpand disclosures about fair value measurement.  SFAS 157 is effectivefor interim and annual reporting periods beginning after November 15,2007.  The Company has not yet assessed the impact of SFAS 157 on theCompany’s consolidated financial statements.

In February 2007, the FASBissued SFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS 159”).  SFAS 159 permits entities to choose to measuremany financial instruments and certain other items at fair value that are notcurrently required to be measured at fair value.  The objective of SFAS159 is to improve financial reporting by providing entities with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complex hedgeaccounting provisions.  SFAS 159 is effective for the first fiscal yearthat begins after November 15, 2007.  The Company has not yet assessed theimpact of SFAS 159 on the Company’s consolidated financial statements.

Effective March 4, 2007, the Companyadopted FIN 48, which requires that the financial statement effects of atax position taken or expected to be taken in a tax return be recognized in thefinancial statements when it is more likely than not, based on the technicalmerits, that the position will be sustained upon examination. The details of theadoption of FIN 48 are described in Note 3, “Income Taxes”, to the Company’sCondensed Consolidated Financial Statements.  

**12.   Transactions with Related Parties**

At June 2, 2007, there were no significant changesin related party transactions from those described at March 3, 2007 in theCompany’s Form 10-K.

**13.   Legal Proceedings**

***Environmental.  ***On August 19, 2003, as a result of complaints fromneighboring businesses, the Company received a Notice of Violation (“NOV”) fromthe Hamilton County Department of Environmental Services (“HCDOES”) relating tooperations at its Cincinnati, Ohio plant facility.  The NOV alleged thatthe Company violated its permits by exceeding the visual emission (“VE”)specification of 20% opacity.  The Company received additional NOV’s foropacity violations on October 2, 2003 and November 26, 2003, all of whichwere the result of complaints from neighboring businesses.

Subsequent to the original NOVreceived in August 2003, the Company began investigating and testing variousemission reduction technologies. The Company found a solution that enabledoperations to continue with less smoke output and completed the upgrade duringearly 2004. HCDOES inspected the upgrade in April 2004 and determined that theCompany had returned to compliance with the opacity limit.  In connectionwith 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 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 tothis approach and granted permission to delay the standard Method 5 Stack Testoriginally requested while the Company conducted its emissions audit program.

The Company contracted with anindependent environmental consulting firm to perform the audit andevaluation.  As part of the overall audit, this firm performed preliminarytesting in early September 2005, which indicated that violations of emissionlevels may have occurred, and retested in late September 2005. The firmconducted additional tests during October and November 

 

14

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of 2005. The Company received the results of the auditin January 2006. The results allowed the Company to evaluate the facility’scurrent and historical potential and actual emissions. The testing revealedthat assumptions made by the Company’s former outside engineering firmconcerning particulate emissions and throughput were incorrect. Thismiscalculation caused the Company to receive permit limits that are lower thanactual emissions for certain cook lines.  The Company met with HCDOES inFebruary 2006, to discuss the results of the emissions audit program.

On March 20, 2006, HCDOES sent anNOV to 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 sentanother NOV to the Company alleging that the Company was in violation of itspermit limits for PM emissions and again reserved the right to pursue anenforcement action in the future.  Depending on HCDOES’ interpretation ofthe data, HCDOES may allege additional violations of emission limits and otherregulatory requirements.  To date, the Company has spent approximately$1.8 million for emissions control equipment purchases to comply with relevantlaws.  The Company installed this control equipment in first and secondquarter of its successor fiscal 2007. Furthermore, in August 2006, HCDOESrequested that the Company submit a determination as to whether or not it wassubject to Title V or major new source permitting 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 Company received aletter on April 3, 2007, from the Director of the Ohio EPA agreeing thatthe Company did not trigger major new source permitting requirements.

On May 21, 2007, the Director of Ohio EPA invited theCompany to enter into consent finding and orders with Ohio EPA, in lieu ofreferral to the Ohio Attorney General’s Office and the filing of an enforcementaction in court.  The initial penaltydemand from Ohio EPA was $256,076.  OnJune 29, 2007, the Company’s outside legal counsel sent a letter on behalf ofthe Company making a counter-offer of $52,800 to settle the Ohio EPA claims,disputing various legal conclusions drawn by Ohio EPA.  The Company cannot predict the final outcomeof the settlement negotiations with a high degree of confidence.

The Company also has conducted additional stacktesting of certain of its cook lines, which use the new control equipmentinstalled for four of its cook lines. The preliminary results indicate that the new equipment is not aseffective as originally expected.  Nevertheless,the controlled emissions are expected to meet applicable regulatoryrequirements.

The Company is cooperating with the authorities inall aspects of these matters.  Inaddition, the Company consulted with its outside legal counsel to assist  in resolving these matters and estimating thepotential fines and penalties that may be assessed in the future.

***General.  ***The Company continuously evaluates contingencies based upon the bestavailable information.  The Company believes it has recorded appropriateliabilities to the extent necessary in cases where the outcome of suchliabilities is considered probable and reasonably estimable, and that itsassessment of contingencies is reasonable.   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 ongoingoperations in the food processing industry, the Company is subject to extensivefederal, state, and local regulations and its food processing facilities andfood products are subject to frequent inspection, audits and inquiries by theUSDA, the FDA, and various local health and agricultural agencies and byfederal, state, and local agencies responsible for the enforcement ofenvironmental, labor, and other laws and regulations.  The Company is alsoinvolved in various legal actions arising in the normal course ofbusiness.  These matters are continuously being evaluated and, in somecases, are being contested by the Company and the outcome is not predictable.Consequently, an estimate of the possible loss or range of loss associated withthese 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 effect on theCompany’s consolidated financial position.

**14.   Subsequent Event**

On July 14, 2007, the Company’s meatprocessing plant located in Hamilton, Alabama was destroyed by a fire. TheHamilton plant, which was acquired by the Company as part of the Acquisition ofZartic, was primarily used for processing sausage products and employedapproximately 45 people prior to the fire. The exact cause of the fire has notbeen determined as of July 17, 2007 and management is awaiting the resultsof an investigation to determine the extent of the damages. The Company is workingwith its insurance carrier to determine coverage, but believes that thedamages, including business interruption, will be covered by insurance withoutany material financial loss to the Company. The Company is executing a DisasterRecovery Plan designed to continue the supply of affected products to theCompany’s customers.

 

 

15

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**15.   Subsidiary Guarantors**

Each of the subsidiaries of PierreFoods, Inc. fully and unconditionally guarantees the New Notes on a joint andseveral basis.  The subsidiariesresulting from the Acquisition of Clovervale and the Acquisition of Zarticbecame guarantors from the date of their respective acquisitions in fiscal2007.  Fresh Foods Properties, LLC,which was the only subsidiary of Pierre Foods, Inc. prior to fiscal 2007, isinactive and holds two trademarks that are not currently in use by the Company.  The following presents financial informationabout Pierre Foods, Inc., as the issuer of the New Notes, and each of theguarantor subsidiaries.  Pierre has nonon-guarantor subsidiaries.  Intercompanytransactions are eliminated.

The following supplemental condensedstatements of operations for the thirteen week period ended June 2, 2007,condensed balance sheets as of June 2, 2007 and March 3, 2007, and thesupplemental cash flows for the thirteen week period ended June 2, 2007, depictin separate columns, the issuer (Pierre Foods, Inc.), the subsidiaries, all ofwhich are guarantors, elimination adjustments, and the consolidated total. Thefinancial information follows the legal structure of the Company and therefore,may not necessarily be indicative of the results of operations or financialposition of the Company, including the subsidiaries, had they been operated asindependent entities.

**Pierre Foods, Inc.Condensed Statements of OperationsFor the Thirteen Weeks Ended June 2, 2007**(Unaudited)
| ** **                                                  | ** ** | **Pierre Foods, Inc.** | ** **  | **Guarantor**    | ** ** | ** **       | ** ** | ** **  | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|-------------|------------------|------------|------------------|------------|-------------|------------|
| ** **                                                  | ** ** | **(Issuer)**                     | ** **  | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**   | ** ** |
|                                                        |       |                             |        |             |       |             |       |        |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| REVENUES, NET:                                              |       |                             |        |             |       |             |       |        |       |
| Customers                                                   |       | $                                | 155,333,155 |             | $          | 2,168,159        |       | $           | —     |   | $ | 157,501,314 |   |
| Intercompany                                                |       | —                           |        | 58,187,856       |       | (58,187,856      | )          | —      |       |
| Total revenues,  net                                        |       | 155,333,155                      |        | 60,356,015       |       | (58,187,856      | )          | 157,501,314 |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| COSTS AND EXPENSES:                                         |       |                             |        |             |       |             |       |        |       |
| Cost of goods  sold                                         |       | 117,964,522                      |        | 55,931,011       |       | (55,931,011      | )          | 117,964,522 |       |
| Selling,  general, and administrative expenses              |       | 26,746,492                       |        | 3,467,222        |       | (1,666,272       | )          | 28,547,442  |       |
| Depreciation and  amortization                              |       | 8,439,664                        |        | 1,422,960        |       | (590,573         | )          | 9,272,051   |       |
| Gain on  disposition of property, plant, and equipment, net |       | (200                             | )           | —           |       | —           |       | (200        | )          |
|                                                        |       |                             |        |             |       |             |       |        |       |
| Total costs and  expenses                                   |       | 153,150,478                      |        | 60,821,193       |       | (58,187,856      | )          | 155,783,815 |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| OPERATING INCOME (LOSS)                                     |       | 2,182,677                        |        | (465,178         | )          | —           |       | 1,717,499   |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| INTEREST EXPENSE AND  OTHER INCOME:                         |       |                             |        |             |       |             |       |        |       |
| Interest expense                                            |       | (7,927,431                       | )           | (262,041         | )          | —           |       | (8,189,472  | )          |
| Other income                                                |       | 22,167                           |        | —           |       | —           |       | 22,167      |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| Interest expense  and other income, net                     |       | (7,905,264                       | )           | (262,041         | )          | —           |       | (8,167,305  | )          |
|                                                        |       |                             |        |             |       |             |       |        |       |
| INCOME (LOSS) BEFORE  INCOME TAX  BENEFIT                   |       | (5,722,587                       | )           | (727,219         | )          | —           |       | (6,449,806  | )          |
|                                                        |       |                             |        |             |       |             |       |        |       |
| INCOME TAX BENEFIT                                          |       | 1,939,499                        |        | 190,535          |       | —           |       | 2,130,034   |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| EQUITY IN NET LOSS OF  SUBSIDIARIES                         |       | (536,684                         | )           | —           |       | 536,684          |       | —      |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| NET LOSS                                                    |       | $                                | (4,319,772  | )                | $          | (536,684         | )          | $           | 536,684    |   | $ | (4,319,772 | ) |

 

 

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**Pierre Foods, Inc.**

**Condensed Balance Sheets**

**June 2, 2007**

(Unaudited)
| ** **                                                                                       | ** ** | **Pierre Foods,  Inc.** | ** **  | **Guarantor**    | ** ** | ** **       | ** ** | ** **  | ** **   |
|--------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|------------------|------------|------------------|------------|-------------|--------------|
| ** **                                                                                       | ** ** | **(Issuer)**                 | ** **  | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**   | ** **   |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| ASSETS                                                                                           |       |                         |        |             |       |             |       |        |         |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| CURRENT ASSETS:                                                                                  |       |                         |        |             |       |             |       |        |         |
| Cash and cash  equivalents                                                                       |       | $                            | 141,272     |             | $          | 12,687           |       | $           | —       |   | $ | 153,959 |   |
| Accounts  receivable, net                                                                        |       | 41,456,266                   |        | 2,099,714        |       | —           |       | 43,555,980  |         |
| Inventories                                                                                      |       | 72,411,916                   |        | 10,451,734       |       | —           |       | 83,863,650  |         |
|  Refundable income taxes                                                                    |       | 3,048,897                    |        | 3,418,742        |       | —           |       | 6,467,639   |         |
|  Deferred income taxes                                                                      |       | 4,376,950                    |        | 613,032          |       | —           |       | 4,989,982   |         |
|  Prepaid expenses and other current assets                                                  |       | 3,075,562                    |        | 1,749,040        |       | —           |       | 4,824,602   |         |
|                                                                                             |       |                         |        |             |       | —           |       |        |         |
| Total current  assets                                                                            |       | 124,510,863                  |        | 18,344,949       |       | —           |       | 142,855,812 |         |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| PROPERTY, PLANT, AND  EQUIPMENT, NET                                                             |       | 56,199,877                   |        | 41,283,458       |       | —           |       | 97,483,335  |         |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| OTHER ASSETS:                                                                                    |       |                         |        |             |       |             |       |        |         |
| Other  intangibles, net                                                                          |       | 106,142,782                  |        | 27,910,108       |       | —           |       | 134,052,890 |         |
| Goodwill                                                                                         |       | 187,864,138                  |        | 29,031,323       |       | —           |       | 216,895,461 |         |
| Deferred loan  origination fees                                                                  |       | 7,722,368                    |        | —           |       | —           |       | 7,722,368   |         |
| Investment in  subsidiaries                                                                      |       | 111,261,077                  |        | —           |       | (111,261,077     | )          | —      |         |
| Intercompany  accounts                                                                           |       | —                       |        | 12,832,505       |       | (12,832,505      | )          | —      |         |
| Other                                                                                            |       | 4,609,722                    |        | 288,178          |       | —           |       | 4,897,900   |         |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| Total other  assets                                                                              |       | 417,600,087                  |        | 70,062,114       |       | (124,093,582     | )          | 363,568,619 |         |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| Total Assets                                                                                     |       | $                            | 598,310,827 |             | $          | 129,690,521      |       | $           | (124,093,582 | ) | $ | 603,907,766 |   |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| LIABILITIES AND  SHAREHOLDER’S EQUITY                                                       | ** ** | ** **                   | ** **  | ** **       | ** ** | ** **       | ** ** | ** **  | ** **   |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| CURRENT LIABILITIES:                                                                             |       |                         |        |             |       |             |       |        |         |
| Current  installments of long-term debt                                                          |       | $                            | 175,241     |             | $          | 1,372,372        |       | $           | —       |   | $ | 1,547,613 |   |
| Trade accounts  payable                                                                          |       | 10,176,514                   |        | 8,597,154        |       | —           |       | 18,773,668  |         |
| Accrued interest                                                                                 |       | 8,609,663                    |        | —           |       | —           |       | 8,609,663   |         |
| Accrued payroll  and payroll taxes                                                               |       | 5,248,894                    |        | 2,368,342        |       | —           |       | 7,617,236   |         |
| Accrued  promotions                                                                              |       | 3,246,863                    |        | 62,180           |       | —           |       | 3,309,043   |         |
| Accrued taxes  (other than income and payroll)                                                   |       | 905,848                      |        | 329,690          |       | —           |       | 1,235,538   |         |
| Other accrued  liabilities                                                                       |       | 2,426,281                    |        | 1,580,348        |       | —           |       | 4,006,629   |         |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| Total current  liabilities                                                                       |       | 30,789,304                   |        | 14,310,086       |       | —           |       | 45,099,390  |         |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| LONG-TERM DEBT, less  current installments                                                       |       | 362,064,014                  |        | 1,709,556        |       | —           |       | 363,773,570 |         |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| DEFERRED INCOME TAXES                                                                            |       | 43,598,822                   |        | 1,625,820        |       | —           |       | 45,224,642  |         |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| INTERCOMPANY ACCOUNTS                                                                            |       | 12,832,505                   |        | —           |       | (12,832,505      | )          | —      |         |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| OTHER LONG-TERM  LIABILITIES                                                                     |       | 3,590,841                    |        | 783,982          |       | —           |       | 4,374,823   |         |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| Total  Liabilities                                                                               |       | 452,875,486                  |        | 18,429,444       |       | (12,832,505      | )          | 458,472,425 |         |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| SHAREHOLDER’S EQUITY:                                                                       |       |                         |        |             |       |             |       |        |         |
| Common stock —  Class A, 100,000 shares authorized, issued, and outstanding at June 2, 2007 |       | 150,180,071                  |        | 113,580,544      |       | (113,580,544     | )          | 150,180,071 |         |
| Retained  earnings (deficit)                                                                     |       | (4,744,730                   | )           | (2,319,467       | )          | 2,319,467        |       | (4,744,730  | )            |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| Total  shareholder’s equity                                                                 |       | 145,435,341                  |        | 111,261,077      |       | (111,261,077     | )          | 145,435,341 |         |
|                                                                                             |       |                         |        |             |       |             |       |        |         |
| Total Liabilities and  Shareholder’s Equity                                                 |       | $                            | 598,310,827 |             | $          | 129,590,521      |       | $           | (124,093,582 | ) | $ | 603,907,766 |   |

 

 

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**Pierre Foods, Inc.****Condensed Balance Sheets****March 3, 2007**
| ** **                                                                                        | ** ** | **Pierre Foods,  Inc.** | ** **  | **Guarantor**    | ** ** | ** **       | ** ** | ** **  | ** **   |
|---------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|------------------|------------|------------------|------------|-------------|--------------|
| ** **                                                                                        | ** ** | **(Issuer)**                 | ** **  | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**   | ** **   |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| ASSETS                                                                                            |       |                         |        |             |       |             |       |        |         |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| CURRENT ASSETS:                                                                                   |       |                         |        |             |       |             |       |        |         |
| Cash and cash  equivalents                                                                        |       | $                            | 49,357      |             | $          | 39,274           |       | $           | —       |   | $ | 88,631 |   |
| Accounts  receivable, net                                                                         |       | 35,545,947                   |        | 10,592,702       |       | —           |       | 46,138,649  |         |
| Inventories                                                                                       |       | 51,000,807                   |        | 17,495,459       |       | —           |       | 68,496,266  |         |
|  Refundable income taxes                                                                     |       | 4,612,613                    |        | —           |       | —           |       | 4,612,613   |         |
|  Deferred income taxes                                                                       |       | 4,376,950                    |        | 782,409          |       | —           |       | 5,159,359   |         |
|  Prepaid expenses and other current assets                                                   |       | 3,563,052                    |        | 1,990,211        |       | —           |       | 5,553,263   |         |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| Total current  assets                                                                             |       | 99,148,726                   |        | 30,900,055       |       | —           |       | 130,048,781 |         |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| PROPERTY, PLANT, AND  EQUIPMENT, NET                                                              |       | 56,954,832                   |        | 41,605,029       |       | —           |       | 98,559,861  |         |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| OTHER ASSETS:                                                                                     |       |                         |        |             |       | —           |       |        |         |
| Other  intangibles, net                                                                           |       | 110,382,124                  |        | 29,168,632       |       | —           |       | 139,550,756 |         |
| Goodwill                                                                                          |       | 187,864,137                  |        | 30,357,729       |       | —           |       | 218,221,866 |         |
| Deferred loan  origination fees                                                                   |       | 8,266,710                    |        | —           |       | —           |       | 8,266,710   |         |
| Investment in  subsidiaries                                                                       |       | 111,665,219                  |        | —           |       | (111,665,219     | )          | —      |         |
| Intercompany  accounts                                                                            |       | 2,895,982                    |        | 670,075          |       | (3,566,057       | )          | —      |         |
| Other                                                                                             |       | 4,839,678                    |        | 341,823          |       | —           |       | 5,181,501   |         |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| Total other  assets                                                                               |       | 425,913,850                  |        | 60,538,259       |       | (115,231,276     | )          | 371,220,833 |         |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| Total Assets                                                                                      |       | $                            | 582,017,408 |             | $          | 133,043,343      |       | $           | (115,231,276 | ) | $ | 599,829,475 |   |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| LIABILITIES AND  SHAREHOLDER’S EQUITY                                                        | ** ** | ** **                   | ** **  | ** **       | ** ** | ** **       | ** ** | ** **  | ** **   |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| CURRENT LIABILITIES:                                                                              |       |                         |        |             |       |             |       |        |         |
| Current  installments of long-term debt                                                           |       | $                            | 190,293     |             | $          | 1,367,301        |       | $           | —       |   | $ | 1,557,594 |   |
| Trade accounts  payable                                                                           |       | 12,697,660                   |        | 7,869,665        |       | —           |       | 20,567,325  |         |
| Accrued interest                                                                                  |       | 5,568,643                    |        | —           |       | —           |       | 5,568,643   |         |
| Accrued payroll  and payroll taxes                                                                |       | 4,711,518                    |        | 2,404,527        |       | —           |       | 7,116,045   |         |
| Accrued  promotions                                                                               |       | 2,479,254                    |        | 799,176          |       | —           |       | 3,278,430   |         |
| Accrued taxes  (other than income and payroll)                                                    |       | 833,774                      |        | 261,737          |       | —           |       | 1,095,511   |         |
| Other accrued  liabilities                                                                        |       | 2,435,853                    |        | 674,753          |       | —           |       | 3,110,606   |         |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| Total current  liabilities                                                                        |       | 28,916,995                   |        | 13,377,159       |       | —           |       | 42,294,154  |         |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| LONG-TERM DEBT, less  current installments                                                        |       | 355,249,190                  |        | 2,037,272        |       | —           |       | 357,286,462 |         |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| DEFERRED INCOME TAXES                                                                             |       | 43,541,698                   |        | 2,120,319        |       | —           |       | 45,662,017  |         |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| INTERCOMPANY ACCOUNTS                                                                             |       | 670,075                      |        | 2,895,982        |       | (3,566,057       | )          | —      |         |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| OTHER LONG-TERM  LIABILITIES                                                                      |       | 3,819,340                    |        | 947,392          |       | —           |       | 4,766,732   |         |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| Total  Liabilities                                                                                |       | 432,197,298                  |        | 21,378,124       |       | (3,566,057       | )          | 450,009,365 |         |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| SHAREHOLDER’S EQUITY:                                                                        |       |                         |        |             |       |             |       |        |         |
| Common stock —  Class A, 100,000 shares authorized, issued, and outstanding at March 3, 2007 |       | 150,187,941                  |        | 113,448,002      |       | (113,448,002     | )          | 150,187,941 |         |
| Retained  earnings (deficit)                                                                      |       | (367,831                     | )           | (1,782,783       | )          | 1,782,783        |       | (367,831    | )            |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| Total  shareholder’s equity                                                                  |       | 149,820,110                  |        | 111,665,219      |       | (111,665,219     | )          | 149,820,110 |         |
|                                                                                              |       |                         |        |             |       |             |       |        |         |
| Total Liabilities and  Shareholder’s Equity                                                  |       | $                            | 582,017,408 |             | $          | 133,043,343      |       | $           | (115,231,276 | ) | $ | 599,829,475 |   |

 

 

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**Pierre Foods, Inc.****Condensed Statements of CashFlows****For the Thirteen Weeks Ended June2, 2007** (Unaudited)
| ** **                                           | ** ** | **Pierre Foods,  Inc.** | ** **  | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------------------------|-------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                           | ** ** | **(Issuer)**                 | ** **  | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
|                                                 |       |                         |        |             |       |             |       |       |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES                |       | $                            | (20,568,613 | )                | $          | 16,768,306       |       | $          | —     |   | $ | (3,800,306 | ) |
|                                                 |       |                         |        |             |       | —           |       |       |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:               |       |                         |        |             |       | —           |       |       |       |
| Net cash used in  the Acquisition of Zartic          |       | (122,602                     | )           | —           |       | —           |       | (122,602   | )          |
| Net cash used in  the Acquisition of Clovervale      |       | (9,940                       | )           | —           |       | —           |       | (9,940     | )          |
| Intercompany  accounts                               |       | 15,058,412                   |        | —           |       | (15,058,412      | )          | —     |       |
| Capital  expenditures                                |       | (1,057,245                   | )           | (1,413,836       | )          | —           |       | (2,471,081 | )          |
| Net cash (used  in) provided by investing activities |       | 13,868,625                   |        | (1,413,836       | )          | (15,058,412      | )          | (2,603,623 | )          |
|                                                 |       |                         |        |             |       |             |       |       |       |
| CASH FLOWS FROM FINANCING  ACTIVITIES:               |       |                         |        |             |       |             |       |       |       |
| Borrowings of  revolving credit agreement            |       | 8,856,000                    |        | —           |       | —           |       | 8,856,000  |       |
| Principal  payments on long-term debt                |       | (2,056,228                   | )           | (322,645         | )          | —           |       | (2,378,873 | )          |
| Intercompany  accounts                               |       |                         |        | (15,058,412      | )          | 15,058,412       |       | —     |       |
| Return of  capital to parent                         |       | (7,870                       | )           | —           |       | —           |       | (7,870     | )          |
| Net cash  provided by (used in) financing activities |       | 6,791,902                    |        | (15,381,057      | )          | 15,058,412       |       | 6,469,257  |       |
|                                                 |       |                         |        |             |       |             |       |       |       |
| INCREASE (DECREASE) IN  CASH AND CASH EQUIVALENTS    |       | 91,915                       |        | (26,587          | )          | —           |       | 65,328     |       |
|                                                 |       |                         |        |             |       |             |       |       |       |
| CASH AND CASH EQUIVALENTS,  BEGINNING OF YEAR        |       | 49,357                       |        | 39,274           |       | —           |       | 88,631     |       |
|                                                 |       |                         |        |             |       |             |       |       |       |
| CASH AND CASH EQUIVALENTS, END OF YEAR               |       | $                            | 141,272     |             | $          | 12,687           |       | $          | —     |   | $ | 153,959 |   |

 

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

The following discussion relatesto the financial condition and results of operations for first quarter fiscal2008 compared to first quarter fiscal 2007. The thirteen week periods ended June 2, 2007 and June 3, 2006 arereferred to as “first quarter fiscal 2008” and “first quarter fiscal 2007”,respectively.  This section should beread in conjunction with the Company’s Condensed Consolidated FinancialStatements included in this Quarterly Report on Form 10-Q, and considered with “RiskFactors”  and “Quantitative andQualitative Disclosures About Market Risk” discussed in Item 1A and Item 7,respectively, of the Company’s Annual Report on Form 10-K for the fiscal yearended March 3, 2007 filed with the SEC on June 15, 2007, and Item 1A of PartII, and Item 3 of Part I, respectively, of this Quarterly Report on Form 10-Q,and “Cautionary Statements Regarding Forward Looking Information,” whichprecedes Item 3 of Part 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**

**FirstQuarter Fiscal 2008 Compared to First Quarter Fiscal 2007**

***Revenues, net.**** *Net revenues increased by $51.7 million in first quarter fiscal 2008compared to first quarter fiscal 2007, or 48.9%.  This increase was due to (1) an increase insales volume due to the Acquisition of Zartic (approximately $41.5 million);(2) an increase in sales volume due to the Acquisition of Clovervale(approximately $9.4 million); and (3) an increase in volume across most of theCompany’s end-market segments (approximately $6.2 million). This was partially offsetby (1) a decrease in sales to two National Accounts restaurant chains(approximately $3.4 million); (2) a change in sales mix (approximately $1.4 million)across most of the Company’s end-markets; and (3) net price decreases tocustomers (approximately $0.6 million).

***Cost of goodssold.**** *Cost of goods sold increased by $43.9 millionin first quarter fiscal 2008 compared to first quarter fiscal 2007, or59.2%.  This increase was due to (1) anincrease in sales volume due to the Acquisition of Zartic (approximately $36.8million); (2) an increase in sales volume due to the Acquisition of Clovervale(approximately $7.4 million); (3) an increase in expense as a result ofincreased net revenues due to volume growth (approximately $3.9 million); (4) anincrease raw material costs (approximately $1.4 million), primarily due toincreased prices paid for chicken (approximately $1.2 million); and (5) anincrease in labor costs (approximately $0.7 million).  These factors contributing to the increase incost of goods sold were partially offset by (1) a decrease in sales volume totwo National Accounts restaurant chains (approximately $3.1 million); (2)favorable formulation mix and manufacturing yields (approximately $1.6million); and (3) a decrease in overhead costs (approximately $1.3 million).

As a percentage of revenues, cost of goods soldincreased from 70.1% to 74.9%, an increase of 4.8%.  This increase was primarily due to (1) salesof higher-cost products as a result of the Acquisition of Zartic (approximately5.5%); (2) higher costs as a result of increased costs associated with labor(approximately 0.6%); (3) the impact of net price decreases to customers(approximately 0.4%); (4) increased volume growth and a change in sales mix(approximately 0.6%); (5) sales of higher-cost products due to the Acquisitionof Clovervale (approximately 0.2%); partially offset by  (1) decreases in overhead costs (approximately1.1%); and  (2) the net impact ofincreases in prices paid for raw material proteins and favorable formulationmix (approximately 0.2%).

The primary materials used inthe Company’s food processing operations include boneless beef, chicken, pork, flour,yeast, seasonings, cheese, breading, soy proteins, and packaging supplies.  Meat proteins are generally purchased under7-day payment terms.  Historically, theCompany has not hedged in the futures markets, and over time, the Company’s rawmaterial costs have fluctuated with movement in the relevant commoditymarkets.  Additionally, the Company hasmarket-related pricing contracts that require the Company to immediately passalong commodity price variances.  Duringfirst quarter fiscal 2008, net prices paid for raw material proteins increasedapproximately $6.6 million; of which approximately $4.1 million was attributableto the Acquisition of Zartic.

Approximately 30.7% of total sales for first quarterfiscal 2008 were protected from commodity exposure, of which 25.0% wereattributable to market-related pricing contracts, while the other 5.7% wererelated to the USDA Commodity Reprocessing Program, which also insulates theCompany from raw material price fluctuations. For first quarter fiscal 2007, approximately 36.5% of total sales wereprotected from commodity exposure, of which 31.8% were attributable tomarket-related pricing contracts, while the other 4.7% were related to the USDACommodity Reprocessing Program.

The following table represents the increases in theweighted average prices the Company paid for beef, chicken, pork, and cheeseduring first quarter fiscal 2008 compared to first quarter fiscal 2007excluding formulation mix and market-related pricing contracts.  The first quarter fiscal 2008 reflects theweighted average prices paid for raw materials as a result of the Acquisitionof Zartic and the Acquisition of Clovervale.

|            | ** ** | **% Increase in**             | ** ** |
|------------|------------|-------------------------------|------------|
| ** ** | ** ** | **First Quarter Fiscal 2008** | ** ** |
| ** ** | ** ** | **Compared to**               | ** ** |
| ** ** | ** ** | **First Quarter Fiscal 2007** | ** ** |
| Beef       |       | (4.0%)                        |       |
| Chicken    |       | (72.1%)                       |       |
| Pork       |       | (0.7%)                        |       |
| Cheese     |       | (12.2%)                       |       |
| Aggregate  |       | (13.5%)                       |       |

 

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Whilehistorically the Company has managed fluctuations in raw material costs throughpurchase orders, market-related pricing contracts, and by passing on such costincreases to customers, the Company may be unable to protect itself from futureincreases in the prices of raw materials on a timely basis, or at all.   In addition, some of the Company’s customerspurchase products based on bid contracts with set prices, which would preventthe Company from recovering any raw materials price increases from thesecustomers during the life of those contracts.  If prices for beef,chicken, pork, and cheese were to increase significantly without a commensurateincrease in the price for processed protein food products, the Company’sfinancial condition and operating results could be adversely affected.

***Selling,general, and administrative*****.**  Selling, general, and administrative expensesincreased by $10.2 million in first quarter fiscal 2008 compared to firstquarter fiscal 2007, or 55.6%.  Thisincrease was primarily due to (1) increased volume as a result of theAcquisition of Zartic (approximately $5.7 million); (2) increased volume as aresult of the Acquisition of Clovervale (approximately $1.7 million); (3)increased selling expense primarily due to increased promotional activity(approximately $1.1 million); (4) increased expenses related to increased salesvolume across most of the Company’s end-markets ($1.0 million); (5) increasedstorage expense (approximately $0.4 million) due to increased replenishmentcosts and build of inventories associated with the Acquisition of Zartic; (6)increased integration expenses, primarily as a result of the Acquisition ofZartic (approximately $0.4 million); and (7) increased freight costs(approximately $0.3 million).  As apercentage of revenues, selling, general, and administrative expenses increasedfrom 17.4% to 18.1%.

***Depreciationand amortization****. *Depreciation and amortization expenseincreased by $2.5 million primarily due to increased amortization ($0.7million) and increased depreciation expense ($1.8 million).  The increasein amortization expense was primarily due to additional amortization expense asa result of additional amortizable intangible assets recorded in conjunctionwith the Acquisition of Zartic and the Acquisition of Clovervale; offset by thedecrease as a result of the accelerated methods of amortization used for theamortizable intangible assets recorded in conjunction with the Acquisition ofPierre.  The increased depreciation expense was primarily due to theallocation of the purchase prices in conjunction with the Acquisition of Zarticand the Acquisition of Clovervale and the valuations of property, plant, andequipment as a result of purchase accounting for such acquisitions.

***Interestexpense and other income, net*****.**  Interest expense and other income, netconsists primarily of interest on fixed and variable-rate long-term debt. Interest expense and other income, net increased by $2.7 million, or48.8%.  This increase is primarily due to increased average outstandingborrowings under the term loan as a result of Amendment No. 2 to the Company’scredit facility in order to finance the Acquisition of Clovervale and AmendmentNo. 3 to the Company’s credit facility in order to finance the Acquisition ofZartic, increased floating interest rates related to the Company’svariable-rate interest, and increased average borrowings under the Company’srevolving credit facility.  The Company’saverage outstanding long-term debt during first quarter fiscal 2008 was $358.2million versus $238.1 million during first quarter fiscal 2007.  The weighted average interest rates for firstquarter fiscal 2008 and first quarter fiscal 2007 were 8.5% and 8.3%,respectively.

***Income taxes*****.*** *The effective tax rate for first quarter fiscal 2008 was 33.0% comparedto 33.6% for first quarter fiscal 2007. The change in the effective tax rate is primarily due to (1) thestatutory increase in the Section 199 deduction (the “Domestic ManufacturingDeduction”) from 3% to 6% of qualifying income; partially offset by (2) theelimination of the Extra-Territorial Income deduction (“ETI”) in the currentyear; and (3) a reduction in the Company’s estimated state effective tax ratedue to the Acquisition of Clovervale and the Acquisition of Zartic.

The Company adopted the provisions of FinancialAccounting Standards Board (FASB) Interpretation No. 48 (“FIN 48”),“Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109, Accounting for Income Taxes” on March 4, 2007.  Asa result, the Company recorded a liability of $809,267 for unrecognized taxbenefits, including accrued interest.  Ofthis amount, $57,124 represented accrued interest and was accounted for as areduction to the beginning balance of retained earnings.  The remaining $752,143 was recorded as areduction to a non-current deferred tax liability account. The $57,124represents unrecognized tax benefits that, if recognized, would favorablyaffect the effective income tax rate in any future periods.

The Company files income tax returns in the U.S.federal jurisdiction and various state jurisdictions.  The Company hassubstantially concluded all U.S. federal income tax matters through the taxyear ended June 30, 2004.  No federal income tax returns are currentlyunder examination.  With few exceptions, the Company is no longer subjectto state or local income tax examinations by tax authorities through the fiscal2003 tax year.

The Company’s policy is to recognize interest andpenalties related to income tax matters as tax expense.  The amount ofinterest and penalty expense recorded for the thirteen week period ended June2, 2007 was not material.

**Liquidity and Capital Resources**

Thefollowing table summarizes the Company’s net cash provided by (used in)operating, investing, and financing activities for the thirteen week periods endedJune 2, 2007 and June 3, 2006, respectively.
| ** **                       | ** ** | **Thirteen  Weeks Ended  June 2, 2007** | ** ** | **Thirteen  Weeks Ended  June 3, 2006** | ** ** |
|----------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                       | ** ** | ** **                                             | ** ** | ** **                                             | ** ** |
| Net cash  provided by (used in): |       |                                                   |       |                                                   |       |
|                             |       |                                                   |       |                                                   |       |
| Operating activities             |       | $                                                      | (3,800,306 | )                                                      | $          | 11,838,873 |   |
|                             |       |                                                   |       |                                                   |       |
| Investing activities             |       | $                                                      | (2,603,623 | )                                                      | $          | (1,880,302 | ) |
|                             |       |                                                   |       |                                                   |       |
| Financing  activities            |       | $                                                      | 6,469,257  |                                                   | $          | (12,465,560 | ) |

 

 

21

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Net cash used in operatingactivities during first quarter fiscal 2008 was $3.8 million compared tonet cash provided by operating activities of $11.8 million during firstquarter fiscal 2007.  The decrease in netcash provided by operating activities was primarily due to (1) an increase ininventories (approximately $13.0 million) in first quarter fiscal 2008 comparedwith less of an increase in the prior year comparable period (approximately$4.0 million); (2) a decrease in accounts receivable (approximately $2.5million) during first quarter fiscal 2008 compared to a greater decrease in theprior year comparable period (approximately $7.2 million); (3) an increase inrefundable income taxes, prepaid expense, and other current assets(approximately $1.1 million) in first quarter fiscal 2008 compared with adecrease in first quarter fiscal 2007 (approximately $2.6 million); and (4) adecrease in other long-term liabilities in first quarter fiscal 2008(approximately $0.2 million) compared with an increase  (approximately $0.1 million) in first quarterfiscal 2007; offset by (5) depreciation and amortization expense (approximately$9.3 million) in first quarter fiscal 2008 compared with first quarter fiscal2007 (approximately $6.8 million), (6) an increase in accounts payable andother accrued liabilities (approximately $2.8 million) during first quarterfiscal 2008 compared to less of an increase (approximately $0.5 million) in theprior year comparable period; (7) a change in deferred income taxes (approximately$0.3 million) in first quarter fiscal 2008 compared to a change (approximately$2.5 million) in first quarter fiscal 2007; and (8) amortization of deferredloan fees in first quarter fiscal 2008 (approximately $0.5 million) compared toless amortization in first quarter fiscal 2007 (approximately $0.4 million).

The primary components of netcash used in operating activities for first quarter fiscal 2008 were (1) anincrease in inventories (approximately $13.0 million) due to a pipeline fill inconjunction with the Acquisition of Zartic, an increase in raw material costsused in the production of inventory, production of newly developed products tomeet customer needs, an inventory build to meet contractual obligations withone of the Company’s largest customers, and a focused effort to increase safetystock due to anticipated transitions to new suppliers; (2) an increase inrefundable income taxes, prepaid expenses, and other current assets(approximately $1.1 million); (3) a decrease in other long-term liabilities(approximately $0.2 million); offset by (4) depreciation and amortization ofintangible assets (approximately $9.3 million), of which $3.6 million relatesto depreciation of fixed assets and $5.7 million relates to amortization ofintangible assets recorded in conjunction with the Acquisition of Pierre, theAcquisition of Clovervale, and the Acquisition of Zartic; (5) an increase intrade accounts payable and other accrued liabilities (approximately $2.8million); (6) a decrease in receivables (approximately $2.5 million); and (7)amortization of deferred loan fees (approximately $0.5 million).

Net cash used in investingactivities for first quarter fiscal 2008 was $2.6 million compared to$1.9 million for first quarter fiscal 2007.  Net cash used in investing activities duringfirst quarter fiscal 2008 consists of capital expenditures (approximately $2.5million), which consisted of various plant improvements, including theexpenditures on the control equipment (See further discussion in Note 13, “LegalProceedings” to the Company’s Condensed Consolidated Financial Statements), androutine capital expenditures, in addition to net cash used in conjunction withthe Acquisition of Zartic (approximately $0.1 million).  Net cash used in investing activities duringfirst quarter fiscal 2007 consists of capital expenditures for various plantimprovements and routine capital expenditures.

Net cash provided by financing activities for firstquarter fiscal 2008 was $6.5 million compared to net cash used in financingactivities for first quarter fiscal 2007 of $12.5 million.  Net cash provided by financing activities forfirst quarter fiscal 2008 was due primarily to: (1) increased borrowings underthe Company’s revolving credit facility (approximately $8.9 million); offset byprincipal payments on long-term debt (approximately $2.4 million), whichincludes $2.0 million of prepayments on Company’s term loan and $0.4 million ofprincipal payments for capital leases.

Effective June 30, 2004, the Company obtained a $190million credit facility, which included a six-year variable-rate $150 millionterm loan, a five-year variable-rate $40 million revolving credit facility anda $10 million letter of credit subfacility. Funds available under this facility are available for working capitalrequirements, permitted investments and general corporate purposes.  All of the Company’s indebtedness under thecredit facility is secured by a first-priority security interest insubstantially all of the Company’s assets. Base rate borrowings under the term loan portion of the facility bearinterest at prime rate plus 1.25% and base rate borrowings under the revolvingcredit portion of the facility bear interest based prime plus on pricing levelsranging from 1.0% to 1.75% determined by the consolidated leverage ratio of theCompany.  At June 2, 2007, the interestrates for base rate borrowings under the revolving credit facility and the termloans were 9.75% (prime of 8.25% plus 1.50%) and 9.50% (prime of 8.25% plus1.25%), respectively.  However, theCompany lowered such rates through  theuse of LIBOR tranches.  The followingtable summarizes the Company’s outstanding LIBOR tranches as of June 2, 2007, includingthe amount, the respective rate of interest, and the date of expiration.
| ** **                                | ** ** | **Amount** | ** **  | **Interest Rate** | ** ** | **Expiration Date** | ** **    |
|-------------------------------------------|------------|------------|-------------|------------------------|------------|--------------------------|---------------|
|                                      |       |       |        |                   |       |                     |          |
| Term loan LIBOR  tranche:                 |       | $          | 227,000,000 |                   | 7.61       | %                        | July 16, 2007 |   |
| Revolving credit  facility LIBOR tranche: |       | $          | 2,000,000   |                   | 7.82       | %                        | June 7, 2007  |   |
| Revolving credit  facility LIBOR tranche: |       | $          | 2,000,000   |                   | 7.82       | %                        | June 11, 2007 |   |
|                                      |       |       |        |                   |       |                     |          |

Repayment of borrowings underthe term loan was initially $375,000 per quarter, which began on September 4,2004, with a balloon payment of $141.4 million due on June 30,2010.  The Company made all suchscheduled quarterly payments totaling $8.6 million for the term of the loan andprepayments on the term loan totaling $34.4 million.  The Company made additional prepaymentstotaling $2.0 million were made on the term loan during first quarter fiscal2008.  As previously discussed in Note 2,“Acquisitions” to the Company’s Condensed Consolidated Financial Statements, inconjunction with the Acquisition of Clovervale, the Company increasedborrowings with respect to its term loan by $24.0 million in order to financethe Acquisition of Clovervale.  Inaddition, also discussed in Note 2, “Acquisitions” to the Company’s CondensedConsolidated Financial Statements, in conjunction with the Acquisition of Zartic,the Company increased borrowings with respect to its term loan by $100.0million in order to finance the Acquisition of Zartic.  The outstanding balance of $227.0 million asof March 3, 2007 is due on June 30, 2010.

***Acquisition of Clovervale.  ***In conjunction with the Acquisition ofClovervale, on August 21, 2006, the Company entered into Amendment No. 2to its credit facility.  AmendmentNo. 2 provided for, among other things, an increase in borrowings with 

22

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respect to the Company’s termloan totaling $24.0 million.  A copyof Amendment No. 2 is included as Exhibit 10.1 to the Company’sCurrent Report on Form 8-K filed with the SEC on August 22, 2006.

***Acquisition of Zartic.  ***In conjunction with the Acquisition of Zartic,on December 11, 2006, the Company entered into Amendment No. 3 to its creditfacility.  Amendment No. 3 providedfor, among other things, an increase in borrowings with respect to the Company’sterm loan totaling $100.0 million. A copy of Amendment No. 3 is included as Exhibit 10.1 to theCompany’s Quarterly Report on Form 10-Q filed with the SEC onJanuary 16, 2007.

***Cash and Cash Equivalents; Borrowing Availability.  ***As of June 2, 2007, the Company had net cashand cash equivalents on hand of $0.2 million (See Critical Accounting Policiesbelow for further discussion on the Company’s treatment of cash and cashequivalents) outstanding borrowings under its revolving credit facility of $9.7million and borrowing availability of approximately $24.0 million.  Also as of June 2, 2007, the Company hadborrowings under its term loan of $227.0 million and $125.0 million of the9.875% senior notes outstanding that were issued in conjunction with theAcquisition of Pierre (“New Notes”).  Asof March 3, 2007, the Company had cash and cash equivalents on hand of$0.1 million, outstanding borrowings under its revolving credit facility of$0.8 million, and borrowing availability of approximately $35.7 million.  Also as of March 3, 2007, the Companyhad borrowings under its term loan of $229.0 million and$125.0 million of the New Notes outstanding.  The maturity date of the $40 millionrevolving credit facility is June 30, 2009.  The Company is required to satisfy certainfinancial covenants regarding cash flow and capital expenditures.  As of June 2, 2007, the Company is incompliance with all financial covenants.

***Income Taxes***.  The Company adopted the provisions of FIN 48on March 4, 2007.  As a result, the Company recorded a liability of$809,267 for unrecognized tax benefits, including accrued interest.  Of this amount, $57,124 was accounted for asa reduction to the beginning balance of retained earnings.  The remaining $752,193 was recorded as areduction to a non-current deferred tax liability account.  The $57,124represents unrecognized tax benefits that, if recognized, would favorablyaffect the effective income tax rate in any future periods.

The Company files income tax returnsin the U.S. federal jurisdiction and various state jurisdictions.  TheCompany has substantially concluded all U.S. federal income tax matters for thetax year ended June 30, 2004.  No federal income tax returns are currentlyunder examination.  With few exceptions, the Company is no longer subjectto state or local income tax examinations by tax authorities for the fiscalyear 2003 tax year.

The Company’s continuing policy isto recognize interest and penalties related to income tax matters as taxexpense.  The amount of interest and penalty expense recorded for the thirteenweek period ended June 2, 2007 was not material.

***Tax Sharing Agreement with Sel******lingShareholders. ***  In conjunction with the Acquisition ofPierre, the Company and the selling shareholders entered into a tax sharing andindemnification agreement containing certain representations and warranties ofthe selling shareholders with respect to taxes. The agreement provides that any net operating loss carryforwardsattributable to expenses relating to the sale of the Company (“Deal RelatedNOLs”) and certain other deal related expenses, will be for the benefit of theselling shareholders.  As of the date ofthe Acquisition of Pierre, these Deal Related NOLs and other deal relatedexpenses totaled approximately $24.2 million and $6.6 million,respectively.  Accordingly, the Companywas required pay and has paid to the selling shareholders the amount of any taxbenefit attributable to such Deal Related NOLs and other deal related expenses,except that 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 the Company’s fiscalyear ended March 2, 2007 (“Fiscal 2007”), the Company increased the estimatedobligation under the tax sharing and indemnification agreement by approximately$1.3 million based on the differences in the tax rate initially used toestimate the liability, the actual payments to the selling shareholders, andthe estimated remaining obligation to the selling shareholders.  The adjustment to the liability to theselling shareholders resulted in a corresponding increase in goodwill relatedto the Acquisition of Pierre.

As of June 2, 2007, theCompany has utilized $24.2 million of the Deal Related NOLs and $1.7 million inother deal related expenses.  Also as ofJune 2, 2007, the Company has submitted payments based on the tax benefitsreceived, net of other tax assessments due to the Company from the sellingshareholders, to an escrow account (approximately $4.0 million) and directly tothe selling shareholders (approximately $5.4 million).  As of June 2, 2007, the Company has aremaining liability to the selling shareholders totaling $2.2 million (whichreflects the aforementioned $1.3 million adjustment during fiscal 2007).  No payments were made to the sellingshareholders during first quarter fiscal 2008, however, the Company expects tomake additional payments in conjunction with the filing of its fiscal 2007federal and state returns during fiscal 2008. An estimate of such payments is classified by the Company as a currentliability (approximately $0.3 million). The remaining portion of the liability (approximately $1.9 million) isclassified as long-term based on the expected timing of the remaining paymentsto the selling shareholders.  The Companyexpects to fully utilize the Deal Related NOLs and other deal related expenses,however the timing of the future payments of the long-term portion is unknown.

***Capital Expenditures. ***The Company has budgeted approximately $13.4million for capital expenditures for the remainder of its fiscal 2008.  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 Company believesthat funds from operations and funds from its $40 million revolving creditfacility, as well as the Company’s ability to enter into capital leases, willbe adequate to finance these capital expenditures.

If the Company continues itshistorical annual revenue growth trend as expected, the Company will berequired to raise and invest additional capital for additional plant expansionprojects to provide operating capacity to satisfy increased demand and specificcustomer requirements.  In addition,management believes that future cash requirements for these plant expansionprojects would need to be met through other long-term financing sources.  The incurrence of additional long-term debtis governed 

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and restricted by the Company’sexisting debt instruments.  Furthermore,there can be no assurance that additional long-term financing will be availableon advantageous terms (or any terms) when needed by the Company.

***General.  ***Significant assumptions underlie the belief that the Company anticipatesthat its fiscal 2008 cash requirements for working capital and debt servicewill be met through a combination of funds provided by operations andborrowings under its $40 million revolving credit facility, including, amongother things, that there will be no material adverse developments in thebusiness, liquidity or significant unbudgeted capital requirements of theCompany.  In addition, if Pierre isunable implement appropriate pricing to its customers (required due to risingraw material costs), or if the Company is unable to successfully integrate therecently acquired companies, which includes consolidating the financialfunctions and obtaining planned synergies, integrating key personnel, and themaintenance and growth of the existing businesses, the Company may be unable tocontinue to generate sufficient cash flow. Such inability to generate sufficient cash flow may require the Companyto refinance all or a portion of its debt, including the New Notes and itscredit facility, obtain additional financing, which as a result, might not beavailable for its operations or other purposes, sell some of its assets oroperations, reduce or delay capital expenditures, or revise or delay itsoperations or strategic plans.  If the Company is required to take any ofthese actions, it could have a material adverse effect on its business and  financial condition.  In addition, theCompany cannot guarantee it would be able to take any of these actions, thatthese actions would enable it to continue to satisfy its capital requirements,or that these actions would be permitted under the terms of its New Notes orcredit facility.

**Commerc****ial Commitments,Contingencies, and Contractual Obligations**

The Company provided a letter of credit in the amountof $5.7 million and $2.8 million as of June 2, 2007 and March 3, 2007,respectively, to its insurance carrier for the underwriting of certainperformance bonds.  The current letter ofcredit outstanding expires in fiscal 2008. The Company also provides secured letters of credit to its insurancecarrier for outstanding and potential workers’ compensation and generalliability claims.  The letters of creditfor these claims totaled $675,000 as of June 2, 2007 and March 3, 2007.

The Company is involved invarious legal proceedings.  Managementbelieves, based on the advice of legal counsel, that the outcome of suchproceedings will not have a material adverse effect on the Company’s financialposition or future results of operations and cash flows.  See Note 13 — “Legal Proceedings,” to theCompany’s Condensed Consolidated Financial Statements for further discussion ofproceedings as of June 2, 2007.

Thefollowing tables summarize our commitments and contractual obligations byfiscal year as of June 2, 2007.
| ** **                                 | ** ** | **Commitments by Fiscal Year** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Total**                                     | ** ** | **Less than 1  Year** | ** ** | **1 — 3   Years** | ** ** | **3-5   Years** | ** ** | **More than 5   Years** | ** ** |
| Letters of  credit                         |       | $                                             | 6,369,500  |   | $ | 6,369,500 |   | $ | — |   | $ |   |   | $ |   |   |
| Purchase  commitments for capital projects |       | 1,969,687                                     |       | 1,969,687 |   | — |   | — |   | — |   |
| Purchase commitments for raw materials     |       | 3,177,854                                     |       | 3,177,854 |   | — |   | — |   | — |   |
| Purchase commitments for natural gas       |       | 392,519                                       |       | 392,519 |   | — |   | — |   | — |   |
| Purchase  commitments for miscellaneous    |       | 56,746                                        |       | 55,284 |   | 1,462 |   | — |   | — |   |
| Total                                      |       | $                                             | 11,966,306 |   | $ | 11,964,844 |   | $ | 1,462 |   | $ | — |   | $ | — |   |

 

 
| ** **                        | ** ** | **Contractual Obligations by Fiscal Year** | ** **  |
|-----------------------------------|------------|----------------------------------------------------------------|-------------|
| ** **                        | ** ** | ** **                                                     | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Total**                                                      | ** **  | **Less than 1   Year** | ** ** | **1 — 3   Years** | ** ** | **3-5   Years** | ** ** | **More than 5   Years** | ** ** |
|                              |       |                                                           |        |   |   |   |   |   |   |   |   |
| Long-term debt                    |       | $                                                              | 361,656,000 |   | $ | — |   | $ | 236,656,000 |   | $ | — |   | $ | 125,000,000 |   |
| Capital lease  obligations*       |       | 3,981,074                                                      |        | 1,756,417 |   | 2,132,586 |   | 92,071 |   | — |   |
| Operating lease  obligations      |       | 3,428,915                                                      |        | 2,836,195 |   | 544,345 |   | 48,375 |   | — |   |
| Interest on  fixed-rate debt**    |       | 68,293,704                                                     |        | 12,666,213 |   | 24,768,116 |   | 24,687,500 |   | 6,171,875 |   |
| Interest on  variable-rate debt** |       | 40,392,271                                                     |        | 18,340,504 |   | 22,051,767 |   | — |   | — |   |
| Total                             |       | $                                                              | 477,751,964 |   | $ | 35,599,329 |   | $ | 286,152,814 |   | $ | 24,827,946 |   | $ | 131,171,875 |   |

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*Capitallease obligations include interest component related to leases.

**Estimatedpayments for interest are based on actual interest rates for fixed andvariable-rate debt outstanding as of June 2, 2007 assuming that the outstandingbalances remain unchanged until maturity.

**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 

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achange.  Historically, the Company’sapplication of accounting policies has been appropriate, and actual resultshave not differed materially 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 June 2, 2007, the Company had actual cashof $5.1 million (of which $4.9 million was held in accounts with the Company’sbank that is primarily responsible for its cash management), which was offsetby outstanding checks of $9.4 million, resulting in a net reclassification of$5.6 million to accounts payable and a remaining net cash on hand balance of$0.2 million.  The remaining cash balancerepresents cash in other financial institutions other than the Company’s bankprimarily responsible for its cash management. The Company considers all highly liquid investments purchased with anoriginal maturity of three months or less to be cash equivalents.  As of June 2, 2007, the Company had no cashequivalents.

***Revenue Recognition.**** *The Company records**revenues from its sales of food processing products at thetime title transfers.  Standard shippingterms are FOB destination.  Based onthese terms, title passes at the time the product is delivered to thecustomer.  Revenue is recognized as thenet amount to be received by the Company after deductions for estimateddiscounts, product returns, and other allowances.  These estimates are based on historicaltrends and expected future payments (see also *Promotions*below).

***Goodwill and OtherIntangible Assets*****.**  Inconjunction with the Acquisition of Pierre, the Acquisition of Clovervale, andthe Acquisition of Zartic, the Company engaged an independent party to performvaluations of the Company’s other intangible assets for financial reportingpurposes.  Assets identified through eachof these valuations included formulas, customer relationships, licensingagreements, non-compete agreements, and certain tradenames and trademarks.

Inaccordance with Financial Accounting Standard (“SFAS”) No. 142 (“SFAS 142”) —“Goodwilland Other Intangible Assets,” the Company tests recorded goodwill andintangibles with indefinite 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.” Included in the review for impairment are certain assumptions andestimates which include financial forecasts of income and cash flow that areattributable to the Company’s reporting units and indefinite-lived intangibleassets (which are discounted to present value at rates reflective of theCompany’s cost of capital).  As of March3, 2007, the Company performed the annual impairment review of goodwill andindefinite-lived intangible assets and also assessed whether theindefinite-lived intangible assets continue to have indefinite lives.  The Company engaged an independent party toperform valuations to assist in the impairment review. There were no impairmentcharges as a result of this review.

Asnoted above, the impairment analyses relied on financial forecasts of incomeand cash flow that are attributable to the Company’s reporting units andindefinite-lived intangible assets and then discounted to present value atrates reflective of the Company’s cost of capital.  Future changes in the Company’s financialforecasts or cost of capital might adversely affect the value of the Company’sreporting units or indefinite-lived intangible assets.  The Company will continue to performimpairment tests on an annual basis and on an interim basis, if certainconditions exist.

TheCompany’s amortizable intangible assets are amortized using primarilyaccelerated amortization methods, in addition to the straight-line amortizationmethod, in order to allocate expected benefit derived from the assets over theestimated useful life of such assets.

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

***Stock-Based Compensation*****.**  The Companytreats the options to purchase shares of common stock of Holding issued toemployees of the Company (“Options”) as stock-based compensation for employeesof the Company.  Prior to the Company’sfiscal 2007 year ended March 3, 2007 (“fiscal 2007”), as permitted under GAAP,the Company accounted for the Options under the recognition and measurementprinciples of Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees” (“APB 25”), and related Interpretations using the intrinsicvalue method.  Accordingly, nocompensation 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 theCompany had used the minimum value method prior to the adoption, the Companywas required to apply the provisions of the statement only prospectively forany newly issued, modified or settled award after the date of initialadoption.  No new Options were issued,modified or settled subsequent to adoption, however, the fair value assigned toany newly issued, modified or settled award in the future is expected to besignificantly greater due to the differences in valuation methods.  Upon the adoption of SFAS 123(R) the proforma effect of fair value accounting for prior periods presented are no longerpresented as the Company used the minimum value method.

***New AccountingPronouncements.***  In September 2006, the FASB issued SFAS No.157, “Fair Value Measurements” (“SFAS 157”).  The objective SFAS 157 is to define fairvalue, establish a framework for measuring fair value and expand disclosuresabout fair value measurement.  SFAS 157 is effective for interim 

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and annual reporting periods beginning after November15, 2007.  The Company has not yet assessed the impact of SFAS 157 on theCompany’s consolidated financial statements.

In February 2007, the FASBissued SFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS 159”).  SFAS 159 permits entities to choose to measuremany financial instruments and certain other items at fair value that are notcurrently required to be measured at fair value.  The objective of SFAS159 is to improve financial reporting by providing entities with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions.  SFAS 159 is effective for the first fiscalyear that begins after November 15, 2007.  The Company has not yetassessed the impact of SFAS 159 on the Company’s consolidated financialstatements.

Effective March 4, 2007, the Company adopted FIN 48 whichrequires that the financial statement effects of a tax position taken orexpected to be taken in a tax return be recognized in the financial statementswhen it is more likely than not, based on the technical merits, that the positionwill be sustained upon examination.  The cumulative effect of applyingFIN 48 was $809,267 for unrecognized tax benefits, including accruedinterest.  Of such amount, $57,127 wasrecorded as an adjustment to the March 4, 2007 balance of retained earnings andthe remaining balance was recorded as a reduction in non-current deferredtaxes.

**Seasonality**

Except for sales to school districts, which representapproximately 20% of the Company’s total sales annually and which declinesignificantly during summer, late November and December, there is nosignificant seasonal variation in the Company’s sales.

**Cautionary Statement As To Forward-Looking Information**

This report includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended, including statements about the business, operations, financialresults, and future prospects of the Company.  Forward-looking statementsrelate to future events or future financial performance.  In some cases,you can identify forward-looking statements by terminology such as “may,” “should,”“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential”or “continue,” the negative of such terms or other comparableterminology.  These statements may involve risks and uncertainties relatedto, among other things:

·                  adversechanges in food costs and availability of supplies or costs of distribution,and the ability pass on such costs through increased prices to customers;

·                  theCompany’s level of indebtedness;

·                  theCompany’s ability to generate sufficient cash flows in order to satisfy cashrequirements for working capital and debt service;

·                  restrictionsimposed by the Company’s debt instruments;

·                  acquisitions,if any, including identification of appropriate targets and successfulintegration of any acquired businesses, including the integration of theClovervale and Zartic businesses;

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

·                  increasedcompetitive activity;

·                  governmentregulatory actions, including those relating to federal and state environmentaland labor laws;

·                  dependenceon significant customers;

·                  changesin consumer preferences and diets;

·                  consolidationof the Company’s customers;

·                  generalrisks of the food industry, including risk of contamination, mislabeling offood products, a decline in meat consumption, and outbreak of disease amongcattle, chicken or pigs, or any change in consumer perception of certainprotein products;

·                  adversechange to, or efficient utilization or successful rationalization of, theCompany’s facilities;

·                  dependenceon key personnel;

·                  changesin the availability and relative costs of labor and potential labor disruptionsor union organization activities;

·                  changesin federal government procurement laws or failure to retain contracts inre-bidding processes;

·                  changesin economic and business conditions in the world;

·                  potentialimpact of hurricanes and other natural disasters on sales, raw material costs,fuel costs, insurance costs, and bad debt expense resulting from uncollectibleaccounts receivables; and

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

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

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

Asdiscussed in the Company’s Annual Report on Form 10-K for the fiscal year endedMarch 3, 2007, the Company is exposed to market risk stemming from changes ininterest rates, commodity prices, and foreign exchange rates.  Changesin these factors could cause fluctuations in the Company’s financial condition,results of operations and cash flows. The Company owned no derivative financial instruments or nonderivativefinancial instruments held for trading purposes at June 2, 2007 or March 3,2007.  Certain of the Company’soutstanding nonderivative financial instruments at June 2, 2007 and March 3,2007 are subject to interest rate risk, but not subject to foreign currency orcommodity price risk.

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***Interest Rate Risk***.  TheCompany’s major market risk exposure is potential loss arising from changinginterest rates and its impact on long-term debt.  The Company’s policy is 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 June 2, 2007 have not changed materially since March 3,2007.  Of the long-term debt outstandingat June 2, 2007, the $125.0 million of New Notes accrue interest at afixed interest rate, while the $227.0 million outstanding borrowings under theterm loan facility and the $9.7 million of outstanding borrowings under therevolving credit facility accrue interest at variable interest rates.  A rise in prevailing interest rates couldhave adverse effects on the Company’s financial condition and results ofoperations.  A 25 basis point increase inthe reference rates for the Company’s average variable-rate debt outstandingduring first quarter fiscal 2008 would have decreased net income for thatperiod by approximately $0.1 million.

***Commodity Price Risk*****. **Certain raw materials used in food processingoperations are susceptible to commodity price changes. Increases in the pricesof certain commodity products could result in higher overall productioncosts.  The primary raw materials used inthe Company’s food processing operations are boneless beef, chicken and pork,flour, yeast, seasonings, cheese, breading, soy proteins, and packagingsupplies.  During first quarter fiscal2008, the weighted average prices the Company paid for beef, chicken, pork, andcheese (increased) decreased by approximately (10.2)%, (17.4%), (6.5%), and(2.1%), respectively, over the weighted average prices the Company paid forthese raw materials during the fourth quarter of fiscal 2007.  The Company manages such fluctuations throughpurchase orders, market-related pricing contracts and by passing on such costincreases to customers.

***Foreign Exchange Rate Risk.  ***The Company bills customers in foreigncountries in US dollars, with the exception of sales to Canada.  The Company does not believe the foreignexchange rate risk on Canadian sales is material.  However, a significant decline in the valueof currencies used in certain regions of the world as compared to the US dollarcould adversely affect product sales in those regions because the Company’sproducts may be more expensive for those customers to pay for in their localcurrency.  At June 2, 2007 and March 3,2007, all trade receivables were denominated in US dollars.

***Fair Value of Financial Instruments*****. **The Company’s nonderivative financialinstruments consist primarily of cash and cash equivalents, trade receivables,trade payables and long-term debt.** **The estimated fair values of thefinancial instruments have been determined by the Company using availablemarket information and appropriate valuation techniques.  Considerable judgment is required, however,to interpret market data to develop the estimates of fair value.  Accordingly, the estimates presented are notnecessarily indicative of the amounts that the Company could realize in acurrent market exchange.  The use ofdifferent market assumptions and/or estimation methodologies may have amaterial effect on the estimated fair value amounts.

**ITEM 4. CONTROLS AND PROCEDURES**

***Evaluation of Disclosure Controls and Procedures*****.**  Asof the end of the period covered by this report, the Company performed anevaluation, under the supervision and with the participation of its managementincluding the President and Chief Executive Officer and Chief Financial Officerof the effectiveness of the Company’s disclosure controls and procedures (assuch term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based upon this evaluation, the Company’sPresident and Chief Executive Officer and Chief Financial Officer haveconcluded that as of June 2, 2007, the Company’s disclosure controls andprocedures were effective for the purposes of ensuring that informationrequired to be disclosed in reports that the Company files or submits under theSecurities Exchange Act of 1934 (“Exchange Act”) has been recorded, processed,summarized and reported in accordance with the rules and forms of theSecurities and Exchange Commission (the “SEC”).

***Changes in Internal Controls*****.***** ***There have been no changes in the Company’sinternal controls over financial reporting during the quarter ended June 2,2007 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

****Section 404 ofSarbanes-Oxley Act of 2002.****** **On December15, 2006, the SEC issued a rule (Release No. 33-8760; 34-54942) to grant reliefto non-accelerated filers by further extending the date of compliance withSection 404 of the Sarbanes-Oxley Act of 2002 (the “Act”).  Pursuant to the rule, the Company is requiredto comply with the Act in two phases. The first phase is effective for the Company’s fiscal year ending March1, 2008 and requires the Company to issue a management report on internalcontrol over financial reporting.  Thesecond phase requires the Company to provide an auditor’s attestation report oninternal control over financial reporting beginning with the Company’s fiscalyear ending February 28, 2009.

The Company is currentlyundergoing 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, Pierre may makeimprovements to the design and operation of its internal controls, includingbut not limited to, further formalization of policies and procedures.  Although the Company believes that itsefforts will enable the Company to provide the required management report oninternal controls and its independent auditors to provide the requiredattestation based on the required dates above, Pierre can give no assurancethat these efforts will be successfully completed in a timely manner.

****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 NOValleged that the Company violated its permits by exceeding the visual emission(“VE”)

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specification of 20%opacity.  The Company received additional NOV’s for opacity violations onOctober 22, 2003 and November 26, 2003, all of which were the result ofcomplaints from neighboring businesses.

Subsequent to the originalNOV received in August 2003, the Company began investigating and testingvarious emission reduction technologies. The Company found a solution thatenabled operations to continue with less smoke output and completed the upgradeduring early 2004. HCDOES inspected the upgrade in April 2004 and determinedthat the Company had returned to compliance with the opacity limit.  Inconnection with the upgrade, the Company was required to submit a revisedPermit to Install (“PTI”) application.

In August 2005, pursuant toits regulatory authority, HCDOES requested a Method 5 Stack Test be performedto assess the Company’s compliance with 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 tothis approach and granted permission to delay the standard Method 5 Stack Testoriginally requested while the Company conducted its emissions audit program.

The Company contracted withan independent environmental consulting firm to perform the audit andevaluation.  As part of the overall audit, this firm performed preliminarytesting in early September 2005, which indicated that violations of emissionlevels may have occurred, and retested in late September 2005. The firmconducted additional tests during October and November of 2005. The Companyreceived the results of the audit in January 2006. The results allowed theCompany to evaluate the facility’s current and historical potential and actualemissions. The testing revealed that assumptions made by the Company’s formeroutside engineering firm concerning particulate emissions and throughput wereincorrect. This miscalculation caused the Company to receive permit limits thatare lower than actual emissions for certain cook lines.  The Company metwith HCDOES in February 2006, to discuss the results of the emissions auditprogram.

On March 20, 2006, HCDOESsent an NOV to the Company alleging that the Company violated its permit limitsfor particulate matter (“PM”) and reserved the right to pursue an enforcementaction and a civil penalty in the future.  On July 7, 2006, HCDOES sentanother NOV to the Company alleging that the Company was in violation of itspermit limits for PM emissions and again reserved the right to pursue anenforcement action in the future.  Depending on HCDOES’ interpretation ofthe data, HCDOES may allege additional violations of emission limits and otherregulatory requirements.  To date, the Company has spent approximately$1.8 million for emissions control equipment purchases to comply with relevantlaws.  The Company installed this control equipment in first and secondquarter of its successor fiscal 2007. Furthermore, in August 2006, HCDOESrequested that the Company submit a determination as to whether or not it wassubject to Title V or major new source permitting 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 Company received aletter on April 3, 2007, from the Director of the Ohio EPA agreeing thatthe Company did not trigger major new source permitting requirements.

On May 21, 2007, the Director of Ohio EPA invited theCompany to enter into consent finding and orders with Ohio EPA, in lieu ofreferral to the Ohio Attorney General’s Office and the filing of an enforcementaction in court.  The initial penaltydemand from Ohio EPA was $256,076.  OnJune 29, 2007, the Company’s outside legal counsel sent a letter on behalf ofthe Company making a counter-offer of $52,800 to settle the Ohio EPA claims,disputing various legal conclusions drawn by Ohio EPA.  The Company cannot predict the final outcomeof the settlement negotiations with a high degree of confidence.

The Company also has conducted additional stacktesting of certain of its cook lines, which use the new control equipment installedfor four of its cook lines.  Thepreliminary results indicate that the new equipment is not as effective asoriginally expected.  Nevertheless, thecontrolled emissions are expected to meet applicable regulatory requirements.

The Company is cooperating with the authorities inall aspects of these matters.  Inaddition, the Company consulted with its outside legal counsel to assist themin resolving these matters and estimate the potential fines and penalties thatmay be assessed in the future.

***General.  ***The Company continuously evaluates contingencies based upon the bestavailable information.  The Company believes it has recorded appropriateliabilities to the extent necessary in cases where the outcome of suchliabilities is considered probable and reasonably estimable, and that itsassessment of contingencies is reasonable.   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 ongoingoperations in the food processing industry, the Company is subject to extensivefederal, state, and local regulations and its food processing facilities andfood products are subject to frequent inspection, audits and inquiries by theUSDA, the FDA, and various local health and agricultural agencies and byfederal, state, and local agencies responsible for the enforcement ofenvironmental, labor, and other laws and regulations.  The Company is alsoinvolved in various legal actions arising in the normal course ofbusiness.  These matters are continuously being evaluated and, in somecases, are being contested by the Company and the outcome is not predictable.Consequently, an estimate of the possible loss or range of loss associated withthese 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.

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**ITEM 1A.  RISK FACTORS**

At June 2, 2007, there were no material changes inrisk factors from those described at March 3, 2007 in the Company’s AnnualReport on Form 10-K.

**ITEM 6.  EXHIBITS**

See Exhibit 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: July 17, 2007                  |
|   |   |                                  |
|   |   |                                  |
|   |   | /S/ JOSEPH W. MEYERS                  |
|   |   | By: Joseph W. Meyers                  |
|   |   | Chief Financial Officer               |
|   |   | Dated: July 17, 2007                  |

 

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**EXHIBIT INDEX**

ExhibitNo. and Description:

 
| (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.

31

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