**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

#### **FORM 10-Q**

 
| **ý**               | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES**  |
|--------------------------|------------|--------------------------------------------------------------------------|
| **EXCHANGE ACT OF 1934** |
|                     |       |                                                                     |
|                     |       | **For the quarterly period ended  June 4, 2005**                         |
|                     |       |                                                                     |
|                     |       | **OR**                                                                   |
|                     |       |                                                                     |
| **o**                    | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES** |
| **EXCHANGE ACT OF 1934** |
|                     |       |                                                                     |
|                     |       | **For the transition period  from _____________ to _____________**  |
|                     |       | ** **                                                               |

 

**Commission File Number:  0-7277**

 

 

**PIERRE FOODS, INC.**

(Exact name ofregistrant as specified in its charter)

 

#### **NorthCarolina**

(State or otherjurisdiction of incorporation or organization)

 

**56-0945643**

(I.R.S. EmployerIdentification No.)

 

**9990Princeton Road**

**Cincinnati,Ohio  45246**

(Address ofprincipal executive offices) (zip code)

 

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

 

 

(Former name,  former address or former fiscal year ifchanged since last report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes    ý                   No    o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

Yes    o                   No    ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 
| **Class**             | ** ** | **Outstanding at July 18, 2005** |
|-----------------------|------------|----------------------------------|
| Class A Common  Stock |       | 100,000                          |

 

 

----

 

**PIERRE FOODS, INC.**

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

 

2

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**PIERRE FOODS, INC. AND SUBSIDIARY**

 

**Condensed Consolidated Balance Sheets**

 
| ** **                                 | ** ** | **Successor Pierre** | ** **  | **Successor Pierre** | ** ** |
|--------------------------------------------|------------|----------------------|-------------|----------------------|------------|
| ** **                                 | ** ** | **June 4, 2005**     | ** **  | **March 5, 2005**    | ** ** |
| ** **                                 | ** ** | **(Unaudited)**      | ** **  | ** **           | ** ** |
| ASSETS                                     |       |                 |        |                 |       |
|                                       |       |                 |        |                 |       |
| CURRENT ASSETS:                            |       |                 |        |                 |       |
| Cash and cash  equivalents                 |       | $                    | —      |                 | $          | — |   |
| Accounts  receivable, net                  |       | 25,981,290           |        | 29,547,340           |       |
| Inventories                                |       | 50,013,489           |        | 45,448,224           |       |
| Refundable  income taxes                   |       | 1,915,694            |        | 2,906,502            |       |
| Deferred income  taxes                     |       | 5,764,233            |        | 5,764,233            |       |
| Prepaid expenses  and other current assets |       | 4,041,542            |        | 2,954,942            |       |
|                                       |       |                 |        |                 |       |
| Total current  assets                      |       | 87,716,248           |        | 86,621,241           |       |
|                                       |       |                 |        |                 |       |
| PROPERTY, PLANT  AND EQUIPMENT, NET        |       | 56,678,508           |        | 56,284,482           |       |
|                                       |       |                 |        |                 |       |
| OTHER ASSETS:                              |       |                 |        |                 |       |
| Other  intangibles, net                    |       | 152,378,312          |        | 158,223,072          |       |
| Goodwill                                   |       | 186,535,050          |        | 186,535,050          |       |
| Deferred loan  origination fees, net       |       | 8,586,456            |        | 8,923,688            |       |
|                                       |       |                 |        |                 |       |
| Total other  assets                        |       | 347,499,818          |        | 353,681,810          |       |
|                                       |       |                 |        |                 |       |
| Total Assets                               |       | $                    | 491,894,574 |                 | $          | 496,587,533 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

3

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**PIERRE FOODS, INC. AND SUBSIDIARY**

 
| ** **                                                                                                         | ** ** | **Successor Pierre** | ** **  | **Successor Pierre** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------|-------------|----------------------|------------|
| ** **                                                                                                         | ** ** | **June 4, 2005**     | ** **  | **March 5, 2005**    | ** ** |
| ** **                                                                                                         | ** ** | **(Unaudited)**      | ** **  | ** **           | ** ** |
| LIABILITIES AND  SHAREHOLDER’S EQUITY                                                                         |       |                 |        |                 |       |
|                                                                                                               |       |                 |        |                 |       |
| CURRENT  LIABILITIES:                                                                                              |       |                 |        |                 |       |
| Current  installments of long-term debt                                                                            |       | $                    | 364,809     |                 | $          | 421,713 |   |
| Trade accounts  payable                                                                                            |       | 10,906,134           |        | 11,172,350           |       |
| Accrued interest                                                                                                   |       | 4,838,323            |        | 1,832,374            |       |
| Accrued payroll  and payroll taxes                                                                                 |       | 6,449,760            |        | 4,663,372            |       |
| Accrued  promotions                                                                                                |       | 3,039,133            |        | 3,499,230            |       |
| Accrued taxes  (other than income and payroll)                                                                     |       | 1,202,053            |        | 949,572              |       |
| Other accrued  liabilities                                                                                         |       | 1,149,216            |        | 1,420,979            |       |
|                                                                                                               |       |                 |        |                 |       |
| Total current  liabilities                                                                                         |       | 27,949,428           |        | 23,959,590           |       |
|                                                                                                               |       |                 |        |                 |       |
| LONG-TERM DEBT,  less current installments                                                                         |       | 254,929,068          |        | 263,158,658          |       |
|                                                                                                               |       |                 |        |                 |       |
| DEFERRED INCOME  TAXES                                                                                             |       | 52,929,534           |        | 52,929,534           |       |
|                                                                                                               |       |                 |        |                 |       |
| OTHER LONG-TERM  LIABILITIES                                                                                       |       | 10,758,100           |        | 10,517,166           |       |
|                                                                                                               |       |                 |        |                 |       |
| Total  Liabilities                                                                                                 |       | 346,566,130          |        | 150,564,948          |       |
|                                                                                                               |       |                 |        |                 |       |
| SHAREHOLDER’S  EQUITY:                                                                                        |       |                 |        |                 |       |
| Common stock –  Class A, 100,000 shares authorized, issued and outstanding at  June 4, 2005 and March 5, 2005 |       | 150,270,094          |        | 150,351,972          |       |
| Retained deficit                                                                                                   |       | (4,941,650           | )           | (4,329,387           | )          |
|                                                                                                               |       |                 |        |                 |       |
| Total  shareholder’s equity                                                                                   |       | 145,328,444          |        | 146,022,585          |       |
|                                                                                                               |       |                 |        |                 |       |
| Total  Liabilities and Shareholder’s Equity                                                                   |       | $                    | 491,894,574 |                 | $          | 496,587,533 |   |

 

See accompanying notes to unaudited condensed consolidatedfinancial statements.

 

4

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**PIERRE FOODS, INC. ANDSUBSIDIARIES**

 

**CondensedConsolidated Statements of Operations**

 

(Unaudited)

 
| ** **                                                                                                                                      | ** ** | **Successor Pierre**     | ** **  | ** ** | **Predecessor Pierre** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|------------|------------------------|------------|
| ** **                                                                                                                                      | ** ** | **Thirteen Weeks Ended** | ** **  |
| ** **                                                                                                                                      | ** ** | **June 4, 2005**         | ** **  | ** ** | **June 5, 2004**       | ** ** |
|                                                                                                                                            |       |                     |        |       |                   |       |
| REVENUES                                                                                                                                        |       | $                        | 107,734,698 |       |                   | $          | 92,013,282 |   |
|                                                                                                                                            |       |                     |        |       |                   |       |
| COSTS AND  EXPENSES:                                                                                                                            |       |                     |        |       |                   |       |
| Cost of goods  sold                                                                                                                             |       | 78,340,827               |        |       | 67,045,187             |       |
| Selling, general  and administrative expenses (includes related party transactions totaling  $28,920 for the thirteen weeks ended June 5, 2004) |       | 17,038,334               |        |       | 18,838,377             |       |
| Loss on  disposition of property, plant and equipment, net                                                                                      |       | —                   |        |       | 339,921                |       |
| Depreciation and  amortization                                                                                                                  |       | 7,900,663                |        |       | 1,186,126              |       |
|                                                                                                                                            |       |                     |        |       |                   |       |
| Total costs and  expenses                                                                                                                       |       | 103,279,824              |        |       | 87,409,611             |       |
|                                                                                                                                            |       |                     |        |       |                   |       |
| OPERATING INCOME                                                                                                                                |       | 4,454,874                |        |       | 4,603,671              |       |
|                                                                                                                                            |       |                     |        |       |                   |       |
| OTHER INCOME  (EXPENSE):                                                                                                                        |       |                     |        |       |                   |       |
| Interest expense                                                                                                                                |       | (5,471,632               | )           |       | (4,783,404             | )          |
| Other income,  net                                                                                                                              |       | 26,523                   |        |       | —                 |       |
|                                                                                                                                            |       |                     |        |       |                   |       |
| Other expense,  net                                                                                                                             |       | (5,445,109               | )           |       | (4,783,404             | )          |
|                                                                                                                                            |       |                     |        |       |                   |       |
| LOSS BEFORE  INCOME TAX BENEFIT                                                                                                                 |       | (990,235                 | )           |       | (179,733               | )          |
|                                                                                                                                            |       |                     |        |       |                   |       |
| INCOME TAX  BENEFIT                                                                                                                             |       | 377,972                  |        |       | 58,952                 |       |
|                                                                                                                                            |       |                     |        |       |                   |       |
| NET LOSS                                                                                                                                        |       | $                        | (612,263    | )          |                   | $          | (120,781 | ) |
|                                                                                                                                            |       |                     |        |       |                   |       |
| NET LOSS PER  COMMON SHARE – BASIC AND DILUTED                                                                                             |       | $                        | (6.12       | )          |                   | $          | (1.21 | ) |
|                                                                                                                                            |       |                     |        |       |                   |       |
| WEIGHTED AVERAGE  SHARES OUTSTANDING-BASIC AND DILUTED                                                                                          |       | 100,000                  |        |       | 100,000                |       |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

5

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**PIERRE FOODS, INC. ANDSUBSIDIARIES**

 

**Condensed Consolidated Statement of Shareholder’s Equity**

 

(Unaudited)

 
| ** **                         | ** ** | **Common**  | ** **  | **Retained**  | ** ** | **Total**              | ** ** |
|------------------------------------|------------|-------------|-------------|---------------|------------|------------------------|------------|
| ** **                         | ** ** | **Stock**   | ** **  | **Earnings**  | ** ** | **Shareholder’s** | ** ** |
| ** **                         | ** ** | **Class A** | ** **  | **(Deficit)** | ** ** | **Equity**             | ** ** |
|                               |       |        |        |          |       |                   |       |
| BALANCE AT MARCH  5, 2005          |       | $           | 150,351,972 |          | $          | (4,329,387             | )          | $ | 146,022,585 |   |
|                               |       |        |        |          |       |                   |       |
| Net loss                           |       | —      |        | (612,263      | )          | (612,263               | )          |
| Expenses paid on  behalf of parent |       | (81,878     | )           | —        |       | (81,878                | )          |
|                               |       |        |        |          |       |                   |       |
| BALANCE AT JUNE  4, 2005           |       | $           | 150,270,094 |          | $          | (4,941,650             | )          | $ | 145,328,444 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

6

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**PIERRE FOODS, INC. ANDSUBSIDIARIES**

 

**Condensed Consolidated Statements of Cash Flows**

(Unaudited)

 
| ** **                                                                                 | ** ** | **Successor Pierre**     | ** ** | ** ** | **Predecessor Pierre** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------|------------------------|------------|
| ** **                                                                                 | ** ** | **Thirteen Weeks Ended** | ** ** |
| ** **                                                                                 | ** ** | **June 4, 2005**         | ** ** | ** ** | **June 5, 2004**       | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                                      |       |                     |       |       |                   |       |
|                                                                                       |       |                     |       |       |                   |       |
| Net loss                                                                                   |       | $                        | (612,263   | )          |                   | $          | (120,781 | ) |
|                                                                                       |       |                     |       |       |                   |       |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                     |       |       |                   |       |
| Depreciation and  amortization                                                             |       | 7,900,663                |       |       | 1,186,126              |       |
| Amortization of  deferred loan origination fees                                            |       | 382,938                  |       |       | 548,339                |       |
| Loss on  disposition of property, plant and equipment, net                                 |       | —                   |       |       | 339,921                |       |
| Decrease in  other assets                                                                  |       | —                   |       |       | 17,859                 |       |
| Increase  (decrease) in other long-term liabilities                                        |       | 240,934                  |       |       | (94,477                | )          |
| Changes in  operating assets and liabilities:                                              |       |                     |       |       |                   |       |
| Receivables                                                                                |       | 3,566,050                |       |       | 3,443,376              |       |
| Inventories                                                                                |       | (4,565,265               | )          |       | (3,190,551             | )          |
| Refundable  income taxes, prepaid expenses and other current assets                        |       | (95,792                  | )          |       | 56,199                 |       |
| Trade accounts  payable and other accrued liabilities                                      |       | 4,046,742                |       |       | (2,365,972             | )          |
|                                                                                       |       |                     |       |       |                   |       |
| Total  adjustments                                                                         |       | 11,476,270               |       |       | (59,180                | )          |
|                                                                                       |       |                     |       |       |                   |       |
| Net cash  provided by (used in) operating activities                                       |       | 10,864,007               |       |       | (179,961               | )          |
|                                                                                       |       |                     |       |       |                   |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                      |       |                     |       |       |                   |       |
|                                                                                       |       |                     |       |       |                   |       |
| Capital  expenditures                                                                      |       | (2,449,928               | )          |       | (1,543,062             | )          |
|                                                                                       |       |                     |       |       |                   |       |
| Net cash used in  investing activities                                                     |       | (2,449,928               | )          |       | (1,543,062             | )          |
|                                                                                       |       |                     |       |       |                   |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                      |       |                     |       |       |                   |       |
|                                                                                       |       |                     |       |       |                   |       |
| Net borrowings  (repayments) of revolving credit agreement                                 |       | $                        | (790,000   | )          |                   | $          | 6,144,555 |   |
| Principal  payments on long-term debt                                                      |       | (7,496,494               | )          |       | (1,139,342             | )          |
| Loan origination  fees                                                                     |       | (45,707                  | )          |       | (3,371,999             | )          |
| Return of  capital to parent                                                               |       | (81,878                  | )          |       | —                 |       |
|                                                                                       |       |                     |       |       |                   |       |
| Net cash  provided by (used in) financing activities                                       |       | (8,414,079               | )          |       | 1,633,214              |       |
|                                                                                       |       |                     |       |       |                   |       |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                                 |       | —                   |       |       | (89,809                | )          |
|                                                                                       |       |                     |       |       |                   |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                            |       | —                   |       |       | 204,865                |       |
|                                                                                       |       |                     |       |       |                   |       |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                  |       | $                        | —     |       |                   | $          | 115,056 |   |
|                                                                                            |            |                          |            |            |                        |            |  |  |  |  |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

7

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**PIERRE FOODS, INC. ANDSUBSIDIARIES**

 

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

 

**1.****              Basis ofPresentation and Acquisition**

 

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

 

*Basis of Presentation and Acquisition. *On June 30, 2004, theshareholders of PF Management, Inc. (“PFMI”), the sole shareholder of theCompany, sold their shares of stock in PFMI (the “Acquisition”) to PierreHolding Corp. (“Holding”), an affiliate of Madison Dearborn Partners, LLC (“MDP”).

 

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 condensed consolidated financial statements and the notesthereto included in the Company’s Annual Report on Form 10-K filed on June 3,2005 (“Form 10-K”).

 

The financial information as of March 5, 2005included in these financial statements has been derived from the Company’saudited condensed consolidated financial statements. In the opinion of theCompany, the accompanying unaudited condensed consolidated financial statementscontain all adjustments necessary to present fairly the financial position, theresults of operations and the cash flows of the Company for the interimperiods. The results of interim operations are not necessarily indicative ofthe results to be expected for the full fiscal year, and as noted above, shouldbe read in conjunction with the condensed consolidated financial statements andthe notes thereto included in the Company’s Form 10-K.  The Company’s current accounting policies areconsistent with those described in the notes to the Company’s March 5, 2005audited condensed consolidated financial statements.

 

Included in this report are interim unaudited condensedconsolidated financial statements that contain all adjustments necessary topresent fairly the financial position as of June 4, 2005, the results ofoperations for the thirteen week periods ended June 4, 2005 and June 5, 2004, thecash flows of the Company for the thirteen weeks ended June 4, 2005 and June 5,2004 and the statement of shareholder’s equity for the thirteen week periodended June 4, 2005.  The thirteen week periodsended June 4, 2005 and June 5, 2004 are referred to as “successor first quarter2006” and “predecessor first quarter 2005”, respectively.  Financial statement presentation used forpredecessor first quarter 2005 has been reclassified, where applicable, toconform to financial statement presentation used for successor first quarter2006.

 

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

 

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.

* *

In connection with theAcquisition, the following occurred:

 

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

 

8

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

 

•                  The Company terminated its fewremaining related party transactions (described in Note 9, “Related PartyTransactions,” to the Condensed Consolidated Financial Statements), transferredmiscellaneous assets to Messrs. Richardson and Clark, the Company’s formerChairman and Vice Chairman, respectively, including the Company’s airplane,which was distributed to Mr. Richardson.

 

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

 

•                  The Company issued $125.0 million of9-7/8% Senior Subordinated Notes due 2012 (the “New Notes”). The proceeds ofthe New Notes, together with the equity contributions from MDP and certainmembers of management (as described below) and borrowings under the Company’snew senior credit facility, were used to finance the Acquisition and to repayoutstanding indebtedness.

 

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

 

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

 

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

 

The following tablepresents unaudited pro forma information for predecessor first quarter 2005, asif the Acquisition had occurred on March 7, 2004 (the first day of fiscal 2005).

 
| ** ** | ** ** | **Predecessor**   | ** ** |
|------------|------------|-------------------|------------|
| ** ** | ** ** | **First Quarter** | ** ** |
| ** ** | ** ** | **2005**          | ** ** |
| ** ** | ** ** | **Actual**        | ** ** | **Pro Forma** | ** ** |
|       |       |              |       |   |   |
| Revenues   |       | $                 | 92,013,282 |   | $ | 92,004,678 |   |
| Net loss   |       | $                 | (120,781   | ) | $ | (2,812,112 | ) |

 

9

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These unaudited pro forma results, based onassumptions deemed appropriate by the Company’s management, have been preparedfor informational purposes only and are not necessarily indicative of theamounts that would have resulted if the Company had been acquired by MDP onMarch 7, 2004.

 

Included in these pro forma results are certain predecessorfees that the Company does not expect to incur in the future. These includeprofessional fees, primarily related to the restructuring of the FourthSupplemental Indenture on March 8, 2004. For predecessor first quarter2005, these fees amounted to $2,255,501. No such fees existed for the successor first quarter 2006.

 

Other predecessorexpenses included in these pro forma results that are no longer expected to beincurred include outside Board of Director fees, community relations anddonations to our former shareholder’s alma mater. For predecessor first quarter2005, these fees amounted to $477,828.

 

The unaudited pro formacondensed consolidated financial statements reflect the Acquisition of theCompany in accordance with Financial Accounting Standard No. 141 (“FAS 141”)—“Business Combinations” and Financial Accounting Standard No. 142 (“FAS142”) —“Goodwill and Other Intangible Assets”.

 

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

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

 

The Company obtained outside appraisals of acquiredassets and liabilities in successor fiscal 2005. Deferred tax liabilities havebeen finalized based on the final allocation of the purchase price and thedetermination of the tax basis of the assets and liabilities acquired.

 

**2.****              Stock-BasedCompensation**

 

On June 30, 2004, Holding adopted a stock option plan,pursuant to which the Board of Directors of Holding may grant options topurchase an aggregate of 163,778 shares of common stock of Holding.  Such options may be granted to directors,employees and consultants of Holding and its subsidiaries, including theCompany.  There were no Options grantedduring successor first quarter 2006.  AtJune 4, 2005, options to purchase a total of 127,397 shares of common stock ofHolding had been issued to members of management of the Company (the “Options”)and 36,381 were reserved for future issuance. All outstanding Options were granted at $10 per share and expire tenyears from the date of grant.  A portionof each outstanding Option vests daily on a pro-rata basis over a five-yearperiod from the date of grant and the remaining portion of each outstandingOption vests seven years from the date of grant, subject to accelerated vestingbased on the achievement of certain performance measures.

 

The Company treats the Options as stock-based employeecompensation for employees of the Company. As permitted under GAAP, the Company accounts for the Options under therecognition and measurement principles of Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and relatedInterpretations using the intrinsic value method.  Accordingly, no compensation expense has beenrecognized for the Options in its condensed consolidated statements ofoperations.  Had compensation expense forthe Options been determined in accordance with the minimum value approach asdefined by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”), the Company’s net loss and loss pershare would have been the following (in thousands, except per share data):

 

10

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| ** **                                             | ** ** | **Successor Pierre  Thirteen Weeks Ended  June 4, 2005** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Net loss as  reported                                  |       | $                                                        | (612,263   | ) |
| Minimum value of  stock-based compensation, net of tax |       | (8,808                                                   | )          |
| Net loss pro  forma                                    |       | $                                                        | (621,071   | ) |
|                                                   |       |                                                     |       |
| Basic and  diluted loss per share, as reported         |       | $                                                        | (6.12      | ) |
| Basic and  diluted loss per share, pro forma           |       | $                                                        | (6.21      | ) |

 

The Company engaged an independent third party toperform a valuation analysis of the employee stock options.  The estimated total stock-based employeecompensation expense was determined using the Black-Scholes-Merton optionpricing model with the following weighted average assumptions:

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

 

In December of 2004, the FASB issued Statement ofFinancial Accounting Standards No. 123 (Revision 2004), “Share-Based Payment” (“SFAS123R”) which is effective for the first annual reporting period beginning afterDecember 15, 2005 for non-public companies (as defined in SFAS 123R). The newstatement requires compensation expense associated with share-based payments toemployees to be recognized in the financial statements based on their fairvalues**. **Uponthe adoption of SFAS 123R, the Company will be required to apply the provisionsof the statement prospectively for any newly issued, modified or settled awardafter the date of initial adoption, as well as to the unvested portion ofawards granted prior to adoption of the standard.  As the Company currently uses the intrinsicvalue method to value the Options, the fair value assigned to any newly issued,modified or settled awards after the adoption of SFAS 123R is expected to besignificantly greater due to the differences in valuation methods.

 

**3.****              Inventories**

 

A summary of inventories, by major classifications,follows:

 
| ** **              | ** ** | **June 4, 2005** | ** ** | **March 5, 2005** | ** ** |
|-------------------------|------------|------------------|------------|-------------------|------------|
|                    |       |             |       |              |       |
| Manufacturing  supplies |       | $                | 1,769,013  |              | $          | 1,684,290 |   |
| Raw materials           |       | 6,410,721        |       | 6,530,663         |       |
| Finished goods          |       | 41,820,038       |       | 37,226,388        |       |
| Work in process         |       | 13,717           |       | 6,883             |       |
| Total                   |       | $                | 50,013,489 |              | $          | 45,448,224 |   |

 

11

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

 

Long-term debt is comprised of the following:

 
| ** **                                                                                                | ** ** | **June 4, 2005** | ** **  | **March 5, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------|-------------|-------------------|------------|
|                                                                                                      |       |             |        |              |       |
| 9.875% Senior  Notes, interest payable on January 15 and July 15 of each year, maturing on  July 15, 2012 |       | $                | 125,000,000 |              | $          | 125,000,000 |   |
| $150 million  term loan, with floating interest rates maturing 2010                                       |       | 129,125,000      |        | 136,500,000       |       |
| Revolving line  of credit, maximum borrowings of $40 million with floating interest rates  maturing 2009  |       | —           |        | 790,000           |       |
| 0.0% to 11.49%  capitalized lease obligations maturing through 2011                                       |       | 1,168,877        |        | 1, 290,371        |       |
|                                                                                                      |       |             |        |              |       |
| Total long-term  debt                                                                                     |       | 255,293,877      |        | 263,580,371       |       |
| Less current  installments                                                                                |       | 364,809          |        | 421,713           |       |
| Long-term debt,  less current installments                                                                |       | $                | 254,929,068 |              | $          | 263,158,658 |   |

 

On March 8, 2004, following a consent solicitationin which consents of holders of $112.4 million in aggregate principalamount of the Company’s then outstanding Old Notes, representing 97.74% of theoutstanding Old Notes, consented to a Fourth Supplemental Indenture between theCompany and U.S. Bank National Association, as trustee (the “Trustee”), theCompany entered into the Fourth Supplemental Indenture with the Trustee. Amongother things, the Fourth Supplemental Indenture increased the annual interestrate on the Old Notes from 10.75% to 12.25% through March 31, 2005 and13.25% thereafter and required the payment of a cash consent fee of$3.5 million (3% of the principal amount of Old Notes held by eachconsenting noteholder); required the termination of all related party transactions,except for certain specifically-permitted transactions (see Note 9, “RelatedParty Transactions”) to the Condensed Consolidated Financial Statements;provided for the assumption by the Company of approximately $15.3 millionof subordinated debt of PFMI and waived any and all defaults of the Indentureexisting as of March 8, 2004.

 

Concurrently with the execution of the FourthSupplemental Indenture, the Company took title to an aircraft transferred froma related party subject to $5.6 million of existing purchase money debt;assumed $15.3 million of debt from PFMI; cancelled the $1.0 millionrelated party note receivable against the debt assumed from PFMI; cancelled thebalances owed by the Company to certain related parties, as follows:$0.5 million owed to Columbia Hill Aviation (“CHA”); $3.5 millionowed to PF Purchasing; $0.5 million owed to PF Distribution; and assumedthe operating leases of PF Distribution in connection with the FourthSupplemental Indenture.  We refer tothese transactions as the “Restructuring”.

 

On June 30, 2004, the shareholders of PFMI closedthe sale of their shares of stock of PFMI to Holding; see Note 1, “Basis ofPresentation and Acquisition,” to the Condensed Consolidated FinancialStatements.  Effective June 30,2004, the Company terminated its three-year variable-rate $40 millionrevolving credit facility.  Existing debtissuance costs related to the Company’s former $40 million facility in theamount of $0.5 million and a prepayment penalty paid to the former lenderin the amount of $0.4 million were charged to interest expense.  Also effective June 30, 2004, theCompany obtained a $190 million credit facility from a new lender whichincludes a six-year variable-rate $150 million term loan, a five-yearvariable rate $40 million revolving credit facility and a $10 millionletter of credit subfacility.  Fundsavailable under this new facility are available for working capitalrequirements, permitted investments and general corporate purposes.  Borrowings under the new facility bear interestat floating rates based upon the interest rate option selected from time totime by the Company and are secured by a first-priority security interest insubstantially all of the Company’s assets. The interest rate for borrowings under the new revolving credit facilityand the new term loan at June 4, 2005 was 7.75% (prime plus 1.75%).  Repayment of borrowings under the term loanwas initially $375,000 per quarter, which began on September 4, 2004, with aballoon payment of $141.4 million due on June 5, 2010.  In addition to the scheduled quarterlypayments, the Company made prepayments on the term loan totaling $12.4 millionduring successor fiscal 2005, which satisfied all scheduled quarterly paymentrequirements.  Prepayments on the termloan totaling $7.4 million were made during successor first quarter 2006.  The remaining outstanding balance of $129.1million as of June 4, 2005 is due on June 5, 2010.  The maturity date of the $40 millionrevolving credit facility is June 30, 2009.  In addition, the Company is required tosatisfy certain financial covenants regarding cash flow and capitalexpenditures.

 

Also in conjunction with the Acquisition, the Companyissued $125.0 million of 97/8% Senior Subordinated Notes due2012 (the “New Notes”). The proceeds of the New Notes, together with the equitycontributions from MDP and certain members of management and borrowings underthe Company’s new senior credit facility, were used to finance the Acquisitionof the Company and to repay outstanding indebtedness, including paying off debtof PFMI assumed by the Company under the Fourth Supplemental Indenture (exceptcapital leases), paying for the Old Notes tendered in connection with thetender offer described in Note 1, “Basis of Presentation and Acquisition” tothe Condensed Consolidated Financial Statements and redeeming

 

12

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the Old Notes not tendered.  Asof June 4, 2005, the Company had no outstanding borrowings under its revolvingcredit facility and had borrowing availability of approximately $35.4 million.

 

**5.****              Goodwill and Other Intangible Assets**

 

In conjunction with the Acquisition, the Companyengaged an independent party to perform valuations for financial reportingpurposes on the Company’s goodwill and other intangibles. Assets identifiedthrough this valuation process included goodwill, formulas, customerrelationships, licensing agreements and certain trade names and trademarks.

 

In accordance with Financial Accounting Standard No.142—“Goodwill and Other Intangible Assets” (“SFAS 142”), the Company testsrecorded goodwill and other intangible assets with indefinite lives forimpairment at least annually. All other intangible assets with finite lives areamortized over their estimated economic or estimated useful lives. In addition,all other intangible assets are reviewed for impairment in accordance with SFAS144.  Based on the Company’s review andthe review performed by third parties, no impairment existed at June 4, 2005 orMarch 5, 2005.

 

The Company’s amortizable other intangible assets areamortized using accelerated amortization methods that match the expectedbenefit derived from the assets. The accelerated amortization methods allocateamortization expense in proportion to each year’s expected revenues to thetotal expected revenues over the estimated useful lives of the assets.

 

The gross carrying value of goodwill and the grosscarrying value and accumulated amortization of other intangible assets are asfollows:

 
| ** **                               | ** ** | ** **  | ** ** | **As of  June 4, 2005** | ** **  | **As of  March 5, 2005** | ** ** |
|------------------------------------------|------------|-------------|------------|-------------------------|-------------|--------------------------|------------|
| ** **                               | ** ** | **Useful**  | ** ** | **Gross**               | ** **  | ** **               | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                               | ** ** | **Life**    | ** ** | **Carrying**            | ** **  | **Accumulated**          | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **                               | ** ** | **(years)** | ** ** | **Amount**              | ** **  | **Amortization**         | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                     |       |        |       |                    |        |                     |       |   |   |   |   |   |   |   |   |
| **Amortizable  intangible assets:**      |       |        |       |                    |        |                     |       |   |   |   |   |   |   |   |   |
| Formulas                                 |       | 15          |       | $                       | 95,000,000  |                     | $          | 13,955,320 |   | $ | 81,044,680 |   | $ | 95,000,000 |   | $ | 10,380,233 |   | $ | 84,619,767 |   |
| Tradename and  trademarks                |       | 12-20       |       | 20,100,000              |        | 1,915,447                |       | 18,184,553 |   | 20,100,000 |   | 1,409,337 |   | 18,690,663 |   |
| Customer relationships                   |       | 12          |       | 28,500,000              |        | 6,195,805                |       | 22,304,195 |   | 28,500,000 |   | 4,851,794 |   | 23,648,206 |   |
| Licensing  agreements                    |       | 10          |       | 12,100,000              |        | 1,455,116                |       | 10,644,884 |   | 12,100,000 |   | 1,035,564 |   | 11,064,436 |   |
|                                     |       |        |       |                    |        |                     |       |   |   |   |   |   |   |   |   |
| **Total  amortizable intangible assets** |       |        |       | $                       | 155,700,000 |                     | $          | 23,521,688 |   | $ | 132,178,312 |   | $ | 155,700,000 |   | $ | 17,676,928 |   | $ | 138,023,072 |   |
|                                          |            |             |            |                         |             |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                 | ** ** | **As of June 4, 2005** | ** **  | **As of March 5, 2005** | ** ** |
|--------------------------------------------|------------|------------------------|-------------|-------------------------|------------|
| ** **                                 | ** ** | **Gross**              | ** **  | ** **              | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **Carrying**           | ** **  | **Accumulated**         | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                                 | ** ** | **Amount**             | ** **  | **Amortization**        | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
|                                       |       |                   |        |                    |       |   |   |   |   |
| **Unamortizable  intangible assets:**      |       |                   |        |                    |       |   |   |   |   |
| Tradename                                  |       | $                      | 20,200,000  |                    | —     |   | $ | 20,200,000 |   | — |   |
| Goodwill                                   |       | 186,535,050            |        | —                  |       | 186,535,050 |   | — |   |
| **Total  unamortizable intangible assets** |       | $                      | 206,735,050 |                    | —     |   | $ | 206,735,050 |   | — |   |

 

13

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The future amortizationof other intangible assets (in thousands) for the next five fiscal years isestimated to be as follows:

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

 

**6**.              **Comprehensive Income**

 

Total comprehensive loss is comprised solely ofnet loss in successor first quarter 2006 and predecessor first quarter 2005.

 

14

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**7.****              Supplemental CashFlow Disclosures - Cash Paid During the Period and Non-Cash Transactions**

 
| ** **                                         | ** ** | **Successor Pierre** | ** ** | ** ** | **Predecessor Pierre** | ** ** |
|----------------------------------------------------|------------|----------------------|------------|------------|------------------------|------------|
| ** **                                         | ** ** | **For the**          | ** ** | ** ** | **For the**            | ** ** |
| ** **                                         | ** ** | **Thirteen Weeks**   | ** ** | ** ** | **Thirteen Weeks**     | ** ** |
| ** **                                         | ** ** | **Ended**            | ** ** | ** ** | **Ended**              | ** ** |
| ** **                                         | ** ** | **June 4, 2005**     | ** ** | ** ** | **June 5, 2004**       | ** ** |
|                                               |       |                 |       |       |                   |       |
| Cash paid during  the period for:                  |       |                 |       |       |                   |       |
| Interest                                           |       | $                    | 2,080,565  |       |                   | $          | 7,293,586 |   |
| Income taxes  refunds received, net of payments    |       | $                    | 1,368,780  |       |                   | $          | — |   |
|                                               |       |                 |       |       |                   |       |
| Non-cash  transactions                             |       |                 |       |       |                   |       |
| Restructuring  transactions                        |       |                 |       |       |                   |       |
| Assumption of  PFMI debt                           |       | $                    | —     |       |                   | $          | 14,274,050 |   |
| Cancellation of  note receivable                   |       | $                    | —     |       |                   | $          | 993,247 |   |
| Cancellation of accrual  to PF Purchasing          |       | $                    | —     |       |                   | $          | 3,479,007 |   |
| Cancellation of  accrual to PF Distribution        |       | $                    | —     |       |                   | $          | 535,251 |   |
| Assumption of  deferred tax liability for aircraft |       | $                    | —     |       |                   | $          | 1,576,000 |   |
| Other                                              |       | $                    | —     |       |                   | $          | 174,874 |   |

 

**8.****              RecentlyIssued Accounting Guidance**

 

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

 

In May 2005, FASB issuedSFAS 154, “Accounting Changes andError Corrections”.  The Statementrequires retroactive application of a voluntary change in accounting principleto prior period financial statements unless it is impracticable. SFAS 154 alsorequires that a change in method of depreciation, amortization, or depletionfor long-lived, non-financial assets be accounted for as a change in accountingestimate that is affected by a change in accounting principle.  SFAS 154 replaces APB Opinion 20, “Accounting Changes”, and SFAS 3, “Reporting Accounting Changes in InterimFinancial Statements”.  TheCompany will adopt the provisions of SFAS 154, effective March 5, 2006 for itsfiscal 2007 condensed consolidated financial statements.  Management currently believes that adoptionof the provisions of SFAS 154 will not have a material impact on the Company’s condensedconsolidated financial statements.

 

**9.****              RelatedParty Transactions**

 

**SuccessorPierre**

 

At June 4, 2005, there wereno significant changes in related party transactions from those described atMarch 5, 2005 in the Company’s Form 10-K.

 

15

----

 

**PredecessorPierre**

 

As described in Note 4, “Long-TermDebt” to the Condensed Consolidated Financial Statements, on March 8,2004, following a consent solicitation in which a majority of the holders ofthe Company’s outstanding Old Notes consented to a Fourth SupplementalIndenture between the Company and the Trustee, the Company entered into theFourth Supplemental Indenture with the Trustee. Among other things, the FourthSupplemental Indenture limited future related party transactions and requiredthe termination of all related party transactions, except for certainspecifically-permitted transactions.

 

The following relatedparty transactions were specifically permitted under the terms of the FourthSupplemental Indenture:

 

•                  ColumbiaHill Land Company, LLC, owned 50% by each of James C. Richardson and David R. Clark,the Company’s then Chairman and Vice-Chairman, respectively, leased officespace to the Company in Hickory, North Carolina, pursuant to a ten-year leasethat commenced in September 1998. Rents paid under the lease were approximately$29,000 during predecessor first quarter 2005.

 

•                  OnMarch 8, 2004 the Company took title to an aircraft that was transferred fromCHA, owned 100% by PFMI, subject to existing purchase money debt. The aircraftwas originally leased by the Company from CHA beginning in the fourth quarterof fiscal 2002. Effective March 1, 2002, the original lease was cancelled andreplaced with a non-exclusive lease agreement. Pursuant to this new lease, theCompany was obligated to make 16 quarterly lease payments of $471,500 each forthe right to use the aircraft for up to 115 flight hours per quarter, based onavailability. Under this lease agreement, CHA was responsible for all expensesincurred in the operation of the use of the aircraft, except that the Companyprovided its own flight crew.

 

All other related partytransactions that were in effect at March 6, 2004 were terminated as of March8, 2004 pursuant to the terms of the Fourth Supplemental Indenture. As a resultof the termination of these related party transactions, subsequent to March 8,2004, the Company has performed its purchasing and distribution servicesinternally.

 

The followingtransactions were entered into on March 8, 2004 as permitted by the FourthSupplemental Indenture:

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

 

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

 

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

 

16

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

 

**Results of Operations**

 

**Successor First Quarter 2006Compared to Predecessor First Quarter 2005**

 

As a result of theAcquisition as described in Note 1, “Basis of Presentation and Acquisition,” tothe Condensed Consolidated Financial Statements and elsewhere in this report,the following results of operations comparisons demonstrate a significantdifference between compared periods.  TheAcquisition on June 30, 2004 was accounted for under the purchase method ofaccounting resulting in an increase in the basis of the Company’s assets.  Due to the change in basis, the Company’s resultsof operations and those of the Company’s predecessor are not consideredcomparable.  The Company’s results ofoperations include amortization related to the identifiable intangible assetsand interest expense related to the borrowings incurred in connection with theAcquisition.

 

*Revenues,net. *Net revenues increasedby $15.7 million in successor first quarter 2006 compared to predecessor firstquarter 2005, or 17.1%. The increase in net revenues for successor firstquarter 2006 versus the prior year comparable period is primarily due toincreased sales volume in most of the Company’s end-market segments,particularly in the National Accounts and Schools business divisions.  Price increases implemented during the secondand third quarters of the prior year, in response to higher raw materialprices, further drove net revenue growth.

 

*Costof goods sold.*Cost of goods sold increased by $11.3 millionin successor first quarter 2006 compared to predecessor first quarter 2005, or 16.8%. This increase was primarily due to (1)increased costs as a result of increased net revenues due to substantial volumegrowth; (2) increased raw material prices; and (3) increased incentivecompensation expense of $0.4 million; offset by (4) a decrease of start-upcosts of $1.4 million associated with a prior year National Accounts restaurantchain customer and (5) a favorable variance in product mix as a result ofincreased sales of lower cost products.  Asa percentage of revenues, cost of goods sold decreased from 72.9% to 72.7%.

 

*Selling,general and administrative*. Selling, general andadministrative expenses decreased by $1.8 million in successor firstquarter 2006 compared to predecessor first quarter 2005, or 9.6%. As apercentage of revenues, selling, general and administrative expenses decreasedfrom 20.5% to 15.8%. This decrease was primarily due to (1) the elimination ofexpenses related to the previous shareholders as a result of the Acquisition of$4.9 million; offset by (2) an increase in incentive compensation; (3) anincrease in freight charges due to increased sales volume, higher costs for thestorage of increased inventory and higher fuel surcharges impacted by the priceof crude oil; (4) an increase in selling expense due to increased sales volume and(5) a non-cash deferred compensation charge related to the management team’sinvestment in the Acquisition.  Expensesassociated with the previous shareholders in predecessor first quarter 2005that were not present in successor first quarter 2006 and are not expected tobe incurred in the future include the following:

 
| ** **                                      | ** ** | **Predecessor**   | ** ** |
|-------------------------------------------------|------------|-------------------|------------|
| ** **                                      | ** ** | **First Quarter** | ** ** |
| **(in millions)**                               | ** ** | **2005**          | ** ** |
|                                            |       |              |       |
| Compensation  expense (a)                       |       | $                 | 0.9        |   |
|                                            |       |              |       |   |
| Travel and  entertainment (b)                   |       | 0.7               |       |
|                                            |       |              |       |
| Office  expense(c)                              |       | 0.1               |       |
|                                            |       |              |       |
| Aircraft expense  (d)                           |       | 0.3               |       |
|                                            |       |              |       |
| Compass  Outfitters (e)                         |       | 0.1               |       |
|                                            |       |              |       |
| Professional  fees (f)                          |       | 2.3               |       |
|                                            |       |              |       |
| Previous  shareholders’ other expenses (g) |       | 0.5               |       |
|                                            |       |              |       |
| Total                                           |       | $                 | 4.9        |   |

 

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Compensation expense (a) relatesto personnel who were terminated in connection with the sale of the Company andwill not be replaced. Travel and entertainment (b) relates to expensesincurred by personnel who were terminated and will not be replaced as a resultof the sale of the Company. Office Expense (c) relates to rent expense,maintenance and other occupancy costs associated with the lease of an officebuilding from a related party that was terminated in connection with the Acquisition.Aircraft expense (d) relates to the leasing of an aircraft owned by CHAwhich was formerly a subsidiary of PFMI, which was retained by the sellingshareholders. Compass Outfitters (e) relates to expense incurred inconnection with an asset that was retained by the selling shareholders. Theprofessional fees (f) primarily related to the Restructuring and to theAcquisition. The previous shareholders’ other expenses (g) relate tooutside board of director fees, community relations, and contributions made tothe former owner’s alma mater.

 

*Depreciationand Amortization.*Depreciation and amortization expenseincreased in successor first quarter 2006 compared to predecessor first quarter2005 by $6.7 million. This is primarily due to the amortization related tothe allocation of the Acquisition purchase price to other intangible assets insuccessor first quarter 2006, amounting to $5.8 million.  In addition, depreciation expense increasedas a result of the allocation of the Acquisition purchase price andre-valuation of property, plant and equipment as a result of purchase accountingdue to the Acquisition.

 

*OtherExpense*. Other expense consists primarily of interest onfixed and variable rate long-term debt and interest on a revolving loan, bothof which were entered into in connection with the Acquisition. Interest expenseincreased in successor first quarter 2006 compared with predecessor firstquarter 2005 by $0.7 million, or 13.8%. This is due to the additional debtincurred as a result of the Acquisition.

 

* Income taxes*. The effective taxrate for successor first quarter 2006 was 38.17% compared to 32.8% forpredecessor first quarter 2005.

 

**Liquidityand Capital Resources**

 

Net cash provided by operating activities forsuccessor first quarter 2006 was $10.9 million compared to net cash usedin operating activities of $0.2 million for predecessor first quarter 2005.The primary components of the net cash provided by operating activities forsuccessor first quarter 2006 were: (1) depreciation and amortization of$7.9 million; (2) an increase in trade accounts payable and other accruedliabilities of $4.0 million and (3) a decrease in accounts receivable of $3.6million; offset by (4) an increase in inventory of $4.6 million.

 

Net cash used in investing activities for successorfirst quarter 2006 was $2.4 million compared to $1.5 million forpredecessor first quarter 2005.  Net cashused in investing activities consists of capital expenditures for bothsuccessor first quarter 2006 and predecessor first quarter 2005, whichconsisted of various plant improvements and routine capital expenditures.

 

Net cash used in financing activities for successorfirst quarter 2006 was $8.4 million compared to net cash provided byfinancing activities of $1.6 million for predecessor first quarter 2005.Net cash used in financing activities for successor first quarter 2006 was dueprimarily to: (1) net repayments under the revolving credit agreement of$0.8 million and (2) principal payments on long-term debt of $7.5 million.

 

As of June 4, 2005, theCompany had no cash and cash equivalents on hand, no outstanding borrowingsunder its revolving credit facility and borrowing availability of approximately$35.4 million.  Also as ofJune 4, 2005, the Company had borrowings under its term loan of $129.1million and $125.0 million of the New Notes outstanding.

 

The Company has budgeted approximately $10.1 millionfor capital expenditures for the remainder of fiscal 2006.  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 

 

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believes that funds from operations and funds from its new $40 millionrevolving credit facility, as well as the Company’s ability to enter intocapital or operating leases, will be adequate to finance these capitalexpenditures.

 

If the Company continues its historical revenue growthtrend as expected, then the Company will be required to raise and investadditional capital for additional plant expansion projects to provide operatingcapacity to satisfy increased demand. Management believes that future cash requirements for these plantexpansion projects would need to be met through other long-term financing sources.  The incurrence of additional long-term debtis governed and restricted by the Company’s existing debt instruments.  Furthermore, there can be no assurance thatadditional long-term financing will be available on advantageous terms (or anyterms) when needed by the Company.

 

On March 8, 2004,following a consent solicitation in which consents of holders of$112.4 million in aggregate principal amount of the Company’s Old Notes,representing 97.74% of the outstanding Old Notes, consented to a Fourth SupplementalIndenture between the Company and U.S. Bank National Association, as trustee(the “Trustee”), the Company entered into the Fourth Supplemental Indenturewith the Trustee. See Note 1, “Basis of Presentation and Acquisition,” to theCondensed Consolidated Financial Statements. Concurrently with the execution ofthe Fourth Supplemental Indenture, the Company took title to an aircrafttransferred from a related party subject to $5.6 million of existingpurchase money debt; cancelled the $1.0 million related party notereceivable from its former principal shareholders; cancelled the balances owedby the Company to certain related parties, as follows: $0.5 million owed toCHA; $3.5 million owed to PF Purchasing and $0.5 million owed to PFDistribution; and assumed the operating leases of PF Distribution in connectionwith the Fourth Supplemental Indenture. The Company assumed $15.3 millionof subordinated debt of PFMI in connection with the execution of the FourthSupplemental Indenture and cancelled the $1.0 million related party notereceivable against the debt assumed from PFMI.

 

On June 30, 2004,the shareholders of PFMI closed the Acquisition (see Note 1, “Basis ofPresentation and Acquisition,” to the Condensed Consolidated FinancialStatements).  Effective June 30,2004, the Company terminated its three-year variable-rate $40 millionrevolving credit facility.  Existing debtissuance costs related to the Company’s former $40 million facility in theamount of $0.5 million and a prepayment penalty paid to the former lenderin the amount of $0.4 million were charged to interest expense.  Also effective June 30, 2004, theCompany obtained a $190 million credit facility from a new lender whichincludes a six-year variable-rate $150 million term loan, a five-yearvariable rate $40 million revolving credit facility and a $10 millionletter of credit subfacility.  Fundsavailable under this new facility are available for working capitalrequirements, permitted investments and general corporate purposes.  Borrowings under the new facility bearinterest at floating rates based upon the interest rate option selected fromtime to time by the Company and are secured by a first-priority securityinterest in substantially all of the Company’s assets.  The interest rate for borrowings under thenew revolving credit facility at March 5, 2005 was 7.5% (prime plus1.75%).  Repayment of borrowings underthe term loan is $375,000 per quarter, which began on September 4, 2004, with aballoon payment of $141.4 million due on June 5, 2010.  In addition to the scheduled quarterlypayment, prepayments on the term loan totaling $12.4 million were made duringsuccessor fiscal 2005.  The maturity dateof the $40 million revolving credit facility is June 30, 2009.  In addition, the Company is required tosatisfy certain financial covenants regarding cash flow and capitalexpenditures.

 

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

 

**CriticalAccounting Policies and Estimates**

 

Thepreparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America (“GAAP”) requires the appropriate application of certainaccounting policies, many of which require the Company to make estimates andassumptions about future events and their impact on amounts reported in thefinancial statements and related notes. Since future events and the impact of those events cannot be determinedwith certainty, the actual results will inevitably differ from the Company’sestimates.  Such differences could bematerial to the financial statements.

 

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The Company believes its application of accountingpolicies, and the estimates inherently required therein, are reasonable.  These accounting policies and estimates areconstantly reevaluated, and adjustments are made when facts and circumstancesdictate a change.  Historically, theCompany’s application of accounting policies has been appropriate, and actualresults have not differed materially from those determined using necessaryestimates.

 

The following critical accounting policies affect theCompany’s more significant judgments and estimates used in the preparation ofits financial statements.

 

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

 

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

 

In accordance with SFAS142—“Goodwill and Other Intangible Assets”, the Company tests recorded goodwilland intangibles with indefinite lives for impairment at least annually.  All other intangible assets with finite livesare amortized over their estimated economic or estimated useful lives.  In addition, all other intangible assets arereviewed for impairment in accordance with SFAS 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” As of March 5, 2005, the Companyperformed the annual impairment review of goodwill and indefinite-livedintangible assets and also assessed whether the indefinite-lived intangibleassets continue to have indefinite lives. The Company engaged an independent party to perform valuations to assistin the impairment review.  There were notany impairment charges as a result of this review.

 

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

 

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

 

*Concentrationof Credit Risk and Significant Customers*.  Financial instruments that potentiallysubject the Company to concentrations of credit risk consist primarily of tradereceivables.  The Company performsperiodic credit evaluations of its customers’ financial condition and generallydoes not require collateral.  The Companyencounters a certain amount of credit risk as a result of a concentration ofreceivables among a few significant customers. Sales to the Company’s largest customer were approximately 25% and 28%of revenues for successor first quarter 2006 and predecessor first quarter 2005,respectively.  Accounts receivable atJune 4, 2005 and March 5, 2005 included receivables from the Company’slargest customer totaling $3.8 million and $3.7 million, respectively.

 

*Stock-Based Compensation*.  The Company treats the options to purchaseshares of common stock of Holding issued to employees of the Company (“Options”)as stock-based compensation for employees of the Company.  As permitted under GAAP, the Company accountsfor the Options under the recognition and measurement principles of AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB25”), and related Interpretations using the intrinsic value method.  Accordingly, no compensation expense has beenrecognized for the stock option plan in the Company’s condensed consolidatedstatements of operations.

 

*New Accounting Pronouncements*.  In November 2004, the FinancialAccounting Standards Board (the “FASB”) issued SFAS  151, “InventoryCosts—an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151amends ARB 43, Chapter 4, to clarify that abnormal amounts of idlefacility expense, freight, handling costs and wasted materials 

 

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(spoilage) should berecognized as current-period charges. In addition, SFAS 151 requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. The Company will adopt theprovisions of SFAS 151, effective March 5, 2006 for its fiscal 2007 condensedconsolidated financial statements. Management is currently evaluating theimpact the adoption of the provisions of SFAS 151 will have on the Company’scondensed consolidated financial statements.

 

In May 2005, FASB issuedSFAS 154, “Accounting Changes andError Corrections”.  The Statementrequires retroactive application of a voluntary change in accounting principleto prior period financial statements unless it is impracticable. The Statementalso requires that a change in method of depreciation, amortization, ordepletion for long-lived, non-financial assets be accounted for as a change inaccounting estimate that is affected by a change in accounting principle.  The Statement replaces APB Opinion 20, “Accounting Changes”, and SFAS 3, “Reporting Accounting Changes in InterimFinancial Statements”.  TheCompany will adopt the provisions of SFAS 154, effective March 5, 2006 for itsfiscal 2007 condensed consolidated financial statements.  Management currently believes that adoptionof the provisions of SFAS 154 will not have a material impact on the Company’scondensed consolidated financial statements.

 

**Seasonality**

 

Except for sales to school districts, which representapproximately 18% of the Company’s total sales annually and which declinesignificantly during summer, late November and December, there is no othersignificant seasonal variation in the Company’s sales.

 

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

 

As discussed in the Company’s Annual Report on Form10-K, the Company is exposed to market risk stemming from changes in interestrates, foreign exchange rates and commodity prices.  Changes in these factors could causefluctuations in the Company’s financial condition, results of operations andcash flows.  The Company owned noderivative financial instruments or nonderivative financial instruments heldfor trading purposes at June 4, 2005 or March 5, 2005.  Certain of the Company’s outstandingnonderivative financial instruments at June 4, 2005 are subject to interest raterisk, but not subject to foreign currency or commodity price risk.  In successor first quarter 2006, beef, pork,chicken and cheese prices (increased)/decreased approximately (4%), 20%, (3%)and 5%, respectively, compared to the prices at the fiscal year endedMarch 5, 2005. The Company manages commodity price risk through purchaseorders, non-cancelable contracts and by passing on such cost increases tocustomers. There was no significant change in market risk during first quarter2006.

 

The Company’s major market risk exposure is potentialloss arising from changing interest rates and its impact on long-term debt. TheCompany’s policy is to manage interest rate risk by maintaining a combinationof fixed and variable rate financial instruments in amounts and with maturitiesthat management considers appropriate. The risks associated with long-term debtat June 4, 2005 have not changed materially since March 5, 2005. Ofthe long-term debt outstanding at June 4, 2005, the $125.0 million ofNew Notes accrue interest at a fixed interest rate, while the $129.1 millionoutstanding borrowings under the term loan facility and the revolving creditfacility accrue interest at a variable interest rate. At June 4, 2005, therewas no outstanding balance under the revolving credit facility.  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 outstanding duringsuccessor first quarter 2006 would have increased net loss for that period byapproximately $85,045.

 

**CautionaryStatement As To Forward Looking Information**

 

This report includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended,including statements about the business, operations, financial results andfuture prospects of the Company. Forward-looking statements relate to future events or future financialperformance.  In some cases, you canidentify forward-looking statements by terminology such as “may,” “will,” “should,”“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential”or “continue,” the negative of such terms or other comparable terminology.  These statements may involve risks anduncertainties related to, among other things:

 

•                  changesin economic and business conditions in the world;

•                  adversechanges in food costs and availability of supplies or costs of distribution;

•                  theCompany’s level of indebtedness;

•                  restrictionsimposed by the Company’s debt instruments;

•                  increasedcompetitive activity;

•                  governmentregulation;

•                  dependenceon significant customers;

•                  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;

•                  adversechange in the Company’s Cincinnati, Ohio or Claremont, North Carolina facility;

•                  dependenceon key personnel; and

•                  potentiallabor disruptions.

 

This list of risks anduncertainties is not exhaustive.  Also,new risk factors emerge over time.  It isnot possible for the Company to predict all risks and uncertainties, nor canthe Company assess the extent to which any factor, or combination of factors,may cause actual results to differ from those contained in forward-lookingstatements.  Any forward-lookingstatements in this report are based on certain assumptions and analyses made bythe Company in light of its experience and perception of historical trends,current conditions, expected future developments and other factors it believesare appropriate in the circumstances. Such statements are not a guarantee of future performance and actualresults or developments may differ materially from those projected.

 

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

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

As of the end of the period covered by this report,the Company performed an evaluation, under the supervision and with theparticipation of its management including the chief executive officer and theprincipal accounting officer, of the effectiveness of its disclosure controlsand procedures. Based on that evaluation, the Company’s management, includingthe chief executive officer and principal accounting officer, concluded thatthe Company’s disclosure controls and procedures were effective.  Also as of the end of the period covered bythis report, the Company transitioned its financial system to a new softwarepackage.  Implementation of the newsoftware package involved changes to the Company’s procedures for control overfinancial reporting.  The new softwarepackage was subjected to testing prior to and subsequent to June 5, 2005 and isfunctioning to ensure that information required to be disclosed by the Companyin its reports filed under the Exchange Act are recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.  TheCompany has not experienced any significant difficulties to date in connectionwith the implementation or operation of the new software package.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 5. OTHER INFORMATION**

** **

**None.**

 

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**ITEM 6.  EXHIBITS**

 

(a)  Exhibits

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

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

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

 

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