** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-Q**
| x      | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934                                                                                                                                                                                                                                                                                                       |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
|   | For the quarterly period ended September 2, 2006                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 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)

#### **North Carolina**

(State or otherjurisdiction of incorporation or organization)

**56-0945643**

(I.R.S. EmployerIdentification No.)

**9990 Princeton Road**

**Cincinnati, Ohio  45246**

(Address ofprincipal executive offices) (zip code)

Registrant’stelephone number, including area code: (513) 874-8741
| (Former name, former address  or former fiscal year if changed since last report) |
|-----------------------------------------------------------------------------------|

 

Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding twelve months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days.  Yes  x    No  o

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

Indicate by check markwhether the registrant is a shell company (as defined in Exchange Act Rule12b-2).  Yes  o    No  x

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

| **Class**             | ** ** | **Outstanding  at October 17, 2006** |
|-----------------------|------------|--------------------------------------|
| Class A Common  Stock |       | 100,000                              |

 

 

----

**PIERRE FOODS, INC.AND SUBSIDIARIES**
|              | ** **                                                                                  | **Page**   |
|--------------|---------------------------------------------------------------------------------------------|------------|
| **INDEX**    | ** **                                                                                  | **Number** |
| ** **   | ** **                                                                                  | ** ** |
| **Part I.**  | **Financial Information:**                                                                  | ** ** | ** ** |
|         |                                                                                        | ** ** | ** ** |
| Item 1.      | Financial Statements                                                                        | ** ** | ** ** |
| ** **   | ** **                                                                                  | ** ** | ** ** |
|         | Condensed Consolidated Balance Sheets — September 2,  2006 and March 4, 2006           | ** ** | 3 |
|         |                                                                                        | ** ** | ** ** |
|         | Condensed  Consolidated Statements of Operations — for the thirteen weeks ended        | ** ** | ** ** |
|         | September 2,  2006 and September 3, 2005                                                    | ** ** | 4 |
|         |                                                                                        | ** ** | ** ** |
|         | Condensed  Consolidated Statements of Operations — for the twenty-six weeks ended      | ** ** | ** ** |
|         | September 2,  2006 and September 3, 2005                                                    | ** ** | 5 |
|         |                                                                                        | ** ** | ** ** |
|         | Condensed  Consolidated Statement of  Shareholder’s Equity — for the twenty-six   | ** ** | ** ** |
|         | weeks ended  September 2, 2006                                                              | ** ** | 6 |
| ** **   | ** **                                                                                  | ** ** | ** ** |
|         | Condensed  Consolidated Statements of Cash  Flows — for the twenty-six weeks ended     | ** ** | ** ** |
|         | September 2,  2006 and September 3, 2005                                                    | ** ** | 7 |
| ** **   | ** **                                                                                  | ** ** | ** ** |
|         | Notes to the Condensed  Consolidated Financial Statements                                   | ** ** | 8 |
|         |                                                                                        | ** ** | ** ** |
|         |                                                                                        | ** ** | ** ** |
| Item 2.      | Management’s Discussion and Analysis of Financial  Condition and Results of Operations | ** ** | 16 |
|         |                                                                                        | ** ** |   |
| ** **   | ** **                                                                                  | ** ** | ** ** |
| Item 3.      | Quantitative  and Qualitative Disclosures About Market Risk                                 | ** ** | 23 |
| ** **   | ** **                                                                                  | ** ** | ** ** |
| ** **   | ** **                                                                                  | ** ** | ** ** |
| Item 4.      | Controls and  Procedures                                                                    | ** ** | 23 |
| ** **   | ** **                                                                                  | ** ** | ** ** |
| ** **   | ** **                                                                                  | ** ** | ** ** |
| **Part II.** | **Other Information:**                                                                      | ** ** | ** ** |
|         |                                                                                        | ** ** | ** ** |
| Item 1.      | Legal Proceedings                                                                           | ** ** | 24 |
|         |                                                                                        | ** ** | ** ** |
| Item 1A.     | Risk Factors                                                                                | ** ** | 25 |
|         |                                                                                        | ** ** | ** ** |
| Item 6.      | Exhibits                                                                                    | ** ** | 26 |
| ** **   | ** **                                                                                  | ** ** |
| ** **   | ** **                                                                                  | ** ** |
| ** **   | ** **                                                                                  | ** ** |
| Signatures   | ** **                                                                                  | 27         |
| Exhibit 31.1 | ** **                                                                                  | 28         |
| Exhibit 31.2 | ** **                                                                                  | 29         |
| Exhibit 32   | ** **                                                                                  | 30         |

 

 

2

----

**PART I.  FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTSPIERRE FOODS, INC. AND SUBSIDIARIES**

**CondensedConsolidated Balance Sheets**
| ** **                                                                                                               | ** ** | **September 2, 2006** | ** **  | **March 4, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                               | ** ** | **(Unaudited)**                 | ** **  | ** **                  | ** ** |
| ASSETS                                                                                                                   |       |                            |        |                        |       |
|                                                                                                                     |       |                            |        |                        |       |
| CURRENT ASSETS:                                                                                                          |       |                            |        |                        |       |
| Cash and cash  equivalents                                                                                               |       | $                               | 235,550     |                        | $          | 2,540,722 |   |
| Accounts  receivable, net                                                                                                |       | 32,092,520                      |        | 29,590,488                  |       |
| Inventories                                                                                                              |       | 57,888,718                      |        | 45,686,342                  |       |
| Refundable  income taxes                                                                                                 |       | —                          |        | 1,650,812                   |       |
| Deferred income  taxes                                                                                                   |       | 3,658,358                       |        | 3,976,012                   |       |
| Prepaid expenses  and other current assets                                                                               |       | 3,006,327                       |        | 3,165,310                   |       |
|                                                                                                                     |       |                            |        |                        |       |
| Total current  assets                                                                                                    |       | 96,881,473                      |        | 86,609,686                  |       |
|                                                                                                                     |       |                            |        |                        |       |
| PROPERTY, PLANT, AND  EQUIPMENT, NET                                                                                     |       | 69,509,107                      |        | 56,206,497                  |       |
|                                                                                                                     |       |                            |        |                        |       |
| OTHER ASSETS:                                                                                                            |       |                            |        |                        |       |
| Other  intangibles, net                                                                                                  |       | 127,467,520                     |        | 134,844,032                 |       |
| Goodwill                                                                                                                 |       | 194,739,492                     |        | 186,535,050                 |       |
| Deferred loan  origination fees, net                                                                                     |       | 7,256,509                       |        | 7,331,561                   |       |
| Other                                                                                                                    |       | 853,780                         |        | 897,845                     |       |
|                                                                                                                     |       |                            |        |                        |       |
| Total other  assets                                                                                                      |       | 330,317,301                     |        | 329,608,488                 |       |
|                                                                                                                     |       |                            |        |                        |       |
| Total Assets                                                                                                             |       | $                               | 496,707,881 |                        | $          | 472,424,671 |   |
|                                                                                                                     |       |                            |        |                        |       |
| LIABILITIES AND  SHAREHOLDER’S EQUITY                                                                               |       |                            |        |                        |       |
|                                                                                                                     |       |                            |        |                        |       |
| CURRENT LIABILITIES:                                                                                                     |       |                            |        |                        |       |
| Current  installments of long-term debt                                                                                  |       | $                               | 211,849     |                        | $          | 229,172 |   |
| Trade accounts  payable                                                                                                  |       | 13,918,380                      |        | 11,897,576                  |       |
| Accrued interest                                                                                                         |       | 1,848,108                       |        | 1,780,618                   |       |
| Accrued payroll  and payroll taxes                                                                                       |       | 5,746,030                       |        | 5,014,821                   |       |
| Accrued  promotions                                                                                                      |       | 3,209,637                       |        | 3,258,650                   |       |
| Accrued taxes  (other than income and payroll)                                                                           |       | 1,262,487                       |        | 796,531                     |       |
| Other accrued  liabilities                                                                                               |       | 2,700,096                       |        | 1,635,052                   |       |
|                                                                                                                     |       |                            |        |                        |       |
| Total current  liabilities                                                                                               |       | 28,896,587                      |        | 24,612,420                  |       |
|                                                                                                                     |       |                            |        |                        |       |
| LONG-TERM DEBT, less  current installments                                                                               |       | 267,492,504                     |        | 244,764,487                 |       |
|                                                                                                                     |       |                            |        |                        |       |
| DEFERRED INCOME TAXES                                                                                                    |       | 44,943,431                      |        | 48,821,259                  |       |
|                                                                                                                     |       |                            |        |                        |       |
| OTHER LONG-TERM  LIABILITIES                                                                                             |       | 6,523,160                       |        | 6,168,649                   |       |
|                                                                                                                     |       |                            |        |                        |       |
| Total  Liabilities                                                                                                       |       | 347,855,682                     |        | 324,366,815                 |       |
|                                                                                                                     |       |                            |        |                        |       |
| SHAREHOLDER’S EQUITY:                                                                                               |       |                            |        |                        |       |
| Common stock —  Class A, 100,000 shares authorized, issued, and outstanding at September 2,  2006 and March 4, 2006 |       | 150,209,836                     |        | 150,225,541                 |       |
| Retained deficit                                                                                                         |       | (1,357,637                      | )           | (2,167,685                  | )          |
|                                                                                                                     |       |                            |        |                        |       |
| Total  shareholder’s equity                                                                                         |       | 148,852,199                     |        | 148,057,856                 |       |
|                                                                                                                     |       |                            |        |                        |       |
| Total Liabilities and  Shareholder’s Equity                                                                         |       | $                               | 496,707,881 |                        | $          | 472,424,671 |   |

 

See accompanying notes to unaudited CondensedConsolidated Financial Statements.

3

----

**PIERREFOODS, INC. AND SUBSIDIARIES**

**CondensedConsolidated Statements of Operations(Unaudited)**
| ** **                                                                                                                                                                                            | ** ** | **For the**                | ** ** | **For the**                | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                            | ** ** | **Thirteen Weeks**         | ** ** | **Thirteen Weeks**         | ** ** |
| ** **                                                                                                                                                                                            | ** ** | **Ended**                       | ** ** | **Ended**                       | ** ** |
| ** **                                                                                                                                                                                            | ** ** | **September 2, 2006** | ** ** | **September 3, 2005** | ** ** |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
| REVENUES, NET                                                                                                                                                                                         |       | $                               | 98,912,576 |                            | $          | 99,180,153 |   |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
| COSTS AND  EXPENSES:                                                                                                                                                                                  |       |                            |       |                            |       |
| Cost of goods sold                                                                                                                                                                                    |       | 68,640,997                      |       | 73,790,865                      |       |
| Selling, general, and administrative expenses  (includes related party transactions totaling $61,353 and $37,690 for the  thirteen weeks ended September 2, 2006 and September 3, 2005, respectively) |       | 17,570,417                      |       | 16,164,970                      |       |
| Depreciation and amortization                                                                                                                                                                         |       | 6,878,458                       |       | 7,585,945                       |       |
| Loss on disposition of property, plant, and  equipment, net                                                                                                                                           |       | 5,301                           |       | —                          |       |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
| Total costs and expenses                                                                                                                                                                              |       | 93,095,173                      |       | 97,541,780                      |       |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
|  OPERATING INCOME                                                                                                                                                                                |       | 5,817,403                       |       | 1,638,373                       |       |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
| INTEREST EXPENSE  AND OTHER INCOME:                                                                                                                                                                   |       |                            |       |                            |       |
| Interest expense                                                                                                                                                                                      |       | (5,582,665                      | )          | (5,479,488                      | )          |
| Other income                                                                                                                                                                                          |       | 3,670                           |       | 8,152                           |       |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
| Interest expense and other income, net                                                                                                                                                                |       | (5,578,995                      | )          | (5,471,336                      | )          |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
| INCOME (LOSS)  BEFORE INCOME TAX (PROVISION) BENEFIT                                                                                                                                                  |       | 238,408                         |       | (3,832,963                      | )          |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
| INCOME TAX  (PROVISION) BENEFIT                                                                                                                                                                       |       | (108,534                        | )          | 2,278,407                       |       |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
| NET INCOME  (LOSS)                                                                                                                                                                                    |       | $                               | 129,874    |                            | $          | (1,554,556 | ) |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
| NET INCOME  (LOSS) PER COMMON SHARE — BASIC AND DILUTED                                                                                                                                          |       | $                               | 1.30       |                            | $          | (15.55 | ) |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
|                                                                                                                                                                                                  |       |                            |       |                            |       |
| WEIGHTED AVERAGE SHARES  OUTSTANDING — BASIC AND DILUTED                                                                                                                                         |       | 100,000                         |       | 100,000                         |       |

 

See accompanying notes to unaudited CondensedConsolidated Financial Statements.

4

----

**PIERREFOODS, INC. AND SUBSIDIARIES**

**CondensedConsolidated Statements of Operations(Unaudited)**
| ** **                                                                                                                                                                                               | ** ** | **For the**                | ** **  | **For the**                | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **Twenty-Six Weeks**       | ** **  | **Twenty-Six Weeks**       | ** ** |
| ** **                                                                                                                                                                                               | ** ** | **Ended**                       | ** **  | **Ended**                       | ** ** |
| ** **                                                                                                                                                                                               | ** ** | **September 2, 2006** | ** **  | **September 3, 2005** | ** ** |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
| REVENUES, NET                                                                                                                                                                                            |       | $                               | 204,668,094 |                            | $          | 206,914,851 |   |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
| COSTS AND  EXPENSES:                                                                                                                                                                                     |       |                            |        |                            |       |
| Cost of goods sold                                                                                                                                                                                       |       | 142,738,505                     |        | 152,131,692                     |       |
| Selling, general, and administrative expenses  (includes related party transactions totaling $110,704 and $67,934 for the  twenty-six weeks ended September 2, 2006 and September 3, 2005, respectively) |       | 35,919,394                      |        | 33,203,304                      |       |
| Depreciation and amortization                                                                                                                                                                            |       | 13,673,863                      |        | 15,486,608                      |       |
| Loss on disposition of property, plant, and  equipment, net                                                                                                                                              |       | 5,301                           |        |                            |       |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
| Total costs and expenses                                                                                                                                                                                 |       | 192,337,063                     |        | 200,821,604                     |       |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
| OPERATING INCOME                                                                                                                                                                                         |       | 12,331,031                      |        | 6,093,247                       |       |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
| INTEREST EXPENSE  AND OTHER INCOME:                                                                                                                                                                      |       |                            |        |                            |       |
| Interest expense                                                                                                                                                                                         |       | (11,104,568                     | )           | (10,951,120                     | )          |
| Other income                                                                                                                                                                                             |       | 35,958                          |        | 34,675                          |       |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
| Interest expense and other income, net                                                                                                                                                                   |       | (11,068,610                     | )           | (10,916,445                     | )          |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
| INCOME (LOSS)  BEFORE INCOME TAX (PROVISION) BENEFIT                                                                                                                                                     |       | 1,262,421                       |        | (4,823,198                      | )          |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
| INCOME TAX  (PROVISION) BENEFIT                                                                                                                                                                          |       | (452,373                        | )           | 2,656,379                       |       |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
| NET INCOME  (LOSS)                                                                                                                                                                                       |       | $                               | 810,048     |                            | $          | (2,166,819 | ) |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
| NET INCOME  (LOSS) PER COMMON SHARE — BASIC AND DILUTED                                                                                                                                             |       | $                               | 8.10        |                            | $          | (21.67 | ) |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
|                                                                                                                                                                                                     |       |                            |        |                            |       |
| WEIGHTED AVERAGE SHARES  OUTSTANDING — BASIC AND DILUTED                                                                                                                                            |       | 100,000                         |        | 100,000                         |       |

 

Seeaccompanying notes to unaudited Condensed Consolidated Financial Statements.

5

----

**PIERREFOODS, INC. AND SUBSIDIARIES**

**CondensedConsolidated Statement of Shareholder’s EquityFor the Twenty-Six Weeks Ended September 2, 2006(Unaudited)**

 
| ** **                         | ** ** | **Common**       | ** **  | ** **   | ** ** | **Total**              | ** ** |
|------------------------------------|------------|------------------|-------------|--------------|------------|------------------------|------------|
| ** **                         | ** ** | **Stock**        | ** **  | **Retained** | ** ** | **Shareholder’s** | ** ** |
| ** **                         | ** ** | **Class A** | ** **  | **Deficit**  | ** ** | **Equity**             | ** ** |
|                               |       |             |        |         |       |                   |       |
| BALANCE AT MARCH  4, 2006          |       | $                | 150,225,541 |         | $          | (2,167,685             | )          | $ | 148,057,856 |   |
|                               |       |             |        |         |       |                   |       |
| Net income                         |       | —           |        | 810,048      |       | 810,048                |       |
| Expenses paid on  behalf of parent |       | (15,705          | )           | —       |       | (15,705                | )          |
|                               |       |             |        |         |       |                   |       |
| BALANCE AT SEPTEMBER 2,  2006      |       | $                | 150,209,836 |         | $          | (1,357,637             | )          | $ | 148,852,199 |   |

 

See accompanying notes to unaudited CondensedConsolidated Financial Statements.

6

----

**PIERREFOODS, INC. AND SUBSIDIARIES**

**CondensedConsolidated Statements of Cash Flows**(Unaudited)
| ** **                                                                                | ** ** | **For the**                | ** ** | **For the**                | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **Twenty-Six Weeks**       | ** ** | **Twenty-Six Weeks**       | ** ** |
| ** **                                                                                | ** ** | **Ended**                       | ** ** | **Ended**                       | ** ** |
| ** **                                                                                | ** ** | **September 2,**

**2006** | ** ** | **September 3,**

**2005** | ** ** |
|                                                                                      |       |                            |       |                            |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                                     |       |                            |       |                            |       |
| Net income (loss)                                                                         |       | $                               | 810,048    |                            | $          | (2,166,819 | ) |
|                                                                                      |       |                            |       |                            |       |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                            |       |                            |       |
| Depreciation and amortization                                                             |       | 13,673,863                      |       | 15,486,608                      |       |
| Amortization of deferred loan origination fees                                            |       | 754,282                         |       | 745,544                         |       |
| Change in deferred taxes                                                                  |       | (6,878,409                      | )          | (791,670                        | )          |
| Loss on disposition of plant, property, and  equipment                                    |       | 5,301                           |       | —                          |       |
| Changes in operating assets and liabilities-net of  acquired assets and liabilities:      |       |                            |       |                            |       |
| Receivables                                                                               |       | (373,628                        | )          | (918,193                        | )          |
| Inventories                                                                               |       | (8,848,651                      | )          | (4,346,948                      | )          |
| Refundable income taxes, prepaid expenses, and other  current assets                      |       | 1,916,070                       |       | (438,750                        | )          |
| Trade accounts payable and other accrued liabilities                                      |       | 1,625,329                       |       | 454,686                         |       |
|  Other  long-term liabilities                                                        |       | 354,511                         |       | (1,041,632                      | )          |
|  Other assets                                                                        |       | 61,690                          |       | —                          |       |
| Total adjustments                                                                         |       | 2,290,358                       |       | 9,149,645                       |       |
| Net cash provided by operating activities                                                 |       | 3,100,406                       |       | 6,982,826                       |       |
|                                                                                      |       |                            |       |                            |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                     |       |                            |       |                            |       |
| Net cash used in the Acquisition of Clovervale                                            |       | (21,810,436                     | )          | —                          |       |
| Capital expenditures                                                                      |       | (3,998,536                      | )          | (3,984,650                      | )          |
| Net cash used in investing activities                                                     |       | (25,808,972                     | )          | (3,984,650                      | )          |
|                                                                                      |       |                            |       |                            |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                     |       |                            |       |                            |       |
| Net borrowings of revolving credit agreement                                              |       | 10,957,000                      |       | 4,752,000                       |       |
| Additional borrowings under term loan                                                     |       | 24,000,000                      |       | —                          |       |
| Repayment of debt acquired in the Acquisition of  Clovervale                              |       | (1,612,378                      | )          | —                          |       |
| Principal payments on long-term debt                                                      |       | (12,246,306                     | )          | (7,616,053                      | )          |
| Loan origination fees                                                                     |       | (679,217                        | )          | (49,673                         | )          |
| Return of capital to parent                                                               |       | (15,705                         | )          | (84,450                         | )          |
| Net cash provided by (used in) financing activities                                       |       | 20,403,394                      |       | (2,998,176                      | )          |
|                                                                                      |       |                            |       |                            |       |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                                |       | (2,305,172                      | )          | —                          |       |
|                                                                                      |       |                            |       |                            |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                           |       | 2,540,722                       |       | —                          |       |
|                                                                                      |       |                            |       |                            |       |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                 |       | $                               | 235,550    |                            | $          | — |   |

 

See accompanying notes to unaudited CondensedConsolidated Financial Statements.

7

----

**PIERRE FOODS, INC.AND SUBSIDIARIES**

**Notes to CondensedConsolidated Financial Statements(Unaudited)**

**1. Basis ofPresentation and Acquisitions**

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

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

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

Included in this report are interim unauditedCondensed Consolidated Financial Statements that contain all adjustmentsnecessary to present fairly the financial position as of September 2, 2006, theresults of operations for the thirteen and twenty-six week periods endedSeptember 2, 2006 and September 3, 2005, the cash flows of the Company for thetwenty-six weeks ended September 2, 2006 and September 3, 2005, and thestatement of shareholder’s equity for the twenty-six week period endedSeptember 2, 2006.  The thirteen weekperiods ended September 2, 2006 and September 3, 2005 are referred to as “secondquarter fiscal 2007” and “second quarter fiscal 2006”, respectively.  The twenty-six week periods ended September2, 2006 and September 3, 2005 are referred to as “fiscal 2007” and “fiscal 2006”,respectively.

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

***Acquisition ofPierre.***   On June 30, 2004, theshareholders of PF Management, Inc. (“PFMI”), the sole shareholder of thePierre, sold their shares of stock in PFMI (the “Acquisition of Pierre”) toPierre Holding Corp. (“Holding”), an affiliate of Madison Dearborn Partners,LLC (“MDP”).  The fair value adjustmentsrelated to the Acquisition of Pierre, were pushed down to the Company fromHolding, which primarily included adjustments in property, plant, andequipment, inventories, goodwill, other intangible assets and related deferredtaxes.

**2.  Acquisition of Clovervale**

On August 21, 2006, the Company acquired all of theoutstanding shares of stock of Clovervale Farms, Inc., two of its subsidiaries,and certain of the real property used in its business (“Clovervale”).  The preliminary aggregate purchase price was$22.8 million, which was paid in cash at the closing. After repayment ofindebtedness and other post-closing adjustments, the net purchase price was$21.8 million and is subject to a post-closing working capital adjustment.  Pierre funded the Acquisition of Clovervalethrough an amendment to its Credit Agreement (“Amendment No. 2”).   See Note 5, “Long-Term Debt” for furtherdiscussion.

Clovervale was a privately held company and employsapproximately 96 employees.  Clovervalehas operations in Amherst, Ohio and Easley, South Carolina and manufactures andsells a variety of food items including individually proportioned entrees,vegetables, sandwiches, fruits, cobblers, peanut butter and jelly bars,sandwiches and cups, sherbets, apple sauce, and other similar products throughvarious customer channels including schools, military, hospitals, and seniorcitizen meal programs.

Operating results for Clovervale are included in theCompany’s Condensed Consolidated Statement of Operations from the date of theAcquisition of Clovervale.  Pierre’sinvestment in Clovervale was based on the rationale that such an investmentwould increase its presence with targeted customer channels and add capacityand production capabilities in order to increase product offerings.

8

----

In conjunction with the Acquisition of Clovervale,management of the Company, with the assistance of an independent valuationfirm, performed valuations on the Clovervale goodwill and other intangibles forfinancial reporting purposes.  Assets identifiedthrough this valuation process included goodwill, customer relationships,non-compete agreements, and certain tradenames and trademarks.    The increases in the carrying amounts ofgoodwill and other intangible assets presented in Note 6, “Goodwill and OtherIntangible Assets” to the Condensed Consolidated Financial Statements representthe preliminary valuations performed in conjunction with the Acquisition ofClovervale.  In addition, other fairvalue adjustments were made in conjunction with the Acquisition of Clovervale,which primarily include adjustments in property, plant, and equipment,inventory, and related deferred taxes.

The following tables present unaudited pro formainformation for the second quarter fiscal 2007, the second quarter fiscal 2006,fiscal 2007, and fiscal 2006, as if the Acquisiton of Clovervale had beencompleted at the beginning of the respective periods.
| ** **         | ** ** | **Second Quarter** | ** ** | **Second Quarter** | ** ** |
|--------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **         | ** ** | **Fiscal 2007**    | ** ** | **Fiscal 2006**    | ** ** |
| ** **         | ** ** | **Actual**              | ** ** | **Pro Forma**      | ** ** | **Actual** | ** ** | **Pro Forma** | ** ** |
|               |       |                    |       |                    |       |   |   |   |   |
| Revenues           |       | $                       | 98,912,576 |                    | $          | 104,472,225 |   | $ | 99,180,153 |   | $ | 107,029,318 |   |
|               |       |                    |       |                    |       |   |   |   |   |
| Net income  (loss) |       | $                       | 129,874    |                    | $          | (390,538 | ) | $ | (1,554,556 | ) | $ | (1,586,629 | ) |
|               |       |                    |       |                    |       |   |   |   |   |

 
| ** **         | ** ** | **Fiscal 2007** | ** **  | **Fiscal 2006** | ** ** |
|--------------------|------------|----------------------|-------------|----------------------|------------|
| ** **         | ** ** | **Actual**           | ** **  | **Pro Forma**   | ** ** | **Actual** | ** ** | **Pro Forma** | ** ** |
|               |       |                 |        |                 |       |   |   |   |   |
| Revenues           |       | $                    | 204,668,094 |                 | $          | 212,998,592 |   | $ | 206,914,851 |   | $ | 221,582,683 |   |
|               |       |                 |        |                 |       |   |   |   |   |
| Net income  (loss) |       | $                    | 810,048     |                 | $          | (349,485 | ) | $ | (2,166,819 | ) | $ | (2,603,515 | ) |

 

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 acquired Clovervale at thebeginning of the respective periods. Purchase related adjustments to the results of operations include theeffects on depreciation and amortization, interest expense, cost of goods sold,and income taxes.

In addition to the purchase related adjustments,included in these pro forma results are certain reclassifications ofClovervale’s expenses, which are consistent with the classifications ofPierre.  These reclassifications includethe presentation of various sales discounts previously reported by Clovervaleas selling expenses, but more appropriately classified as a reduction ofrevenues. 

Also included in these pro forma results is theelimination of miscellaneous income previously reported by Clovervale and theelimination of interest expense related to Clovervale’s debt, which waspartially paid off in conjunction with the Acquisition of Clovervale, and willno longer be present in the Company’s results of operations.

The Acquisition of Clovervale was recorded under thepurchase method of accounting.  The netpurchase price has been allocated to assets acquired and liabilities assumedbased on the estimated fair market value at the date of the Acquisition ofClovervale.  The preliminary allocationof the net purchase price is as follows:
| Current assets                      |   | $          | 5,588,554  |   |
|-------------------------------------|--------|------------|------------|--------|
| Plant, property,  and equipment     |   | 12,876,729 |       |
| Non-current  assets                 |   | 17,625     |       |
| Goodwill                            |   | 8,204,442  |       |
| Other  intangibles                  |   | 2,730,000  |       |
| Debt and other  liabilities assumed |   | (4,288,539 | )          |
| Deferred tax  liabilities           |   | (3,318,235 | )          |
| Net assets acquired                 |   | $          | 21,810,576 |   |

 

Of the $2,730,000 of acquired other intangible assets, $2,400,000 wasassigned to customer relationships with a weighted-average estimated usefullife of 10 years.  The remaining acquiredother intangible assets include tradenames and trademarks of $280,000 with aweighted-average useful life of 3 years and a non-compete agreement of $50,000with a useful life of 2 years.  Thegoodwill related to the Acquisition of Clovervale is not expected to bedeductible for tax purposes.

The allocation of the preliminary net purchase priceto specific assets and liabilities is based, in part, upon preliminaryappraisals, and is therefore subject to change. The Company expects to finalizethe appraisals of acquired assets and liabilities in fiscal 2008.  Deferred tax liabilities will also befinalized after the final allocation of the purchase price and the final taxbasis of the assets and liabilities has been determined.

**3.  Stock-Based Compensation**

On June 30, 2004, Holding adopted a stock 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.  At both September 2, 2006 andMarch 4, 2006, options to purchase a total of 126,219 shares of common stock ofHolding had been issued to members of management of the Company (the “Options”)and 37,559 were reserved for future issuance. All outstanding Options were granted with an exercise price of $10 pershare and expire ten years from the date of grant.  A portion of each outstanding Option vestsdaily on a pro-rata basis over a five-year period from the date of grant andthe remaining portion of each outstanding Option vests seven years from 

9

----

the date of grant, subject to accelerated vestingbased on the achievement of certain performance measures.  At September 2, 2006 and March 4, 2006,options to purchase 21,088 shares and 16,064 shares, respectively, were vestedand exercisable.

The Company treatsthe Options as stock-based employee compensation for employees of theCompany.  Prior to implementing Statementof Financial Accounting Standards (“SFAS “) No. 123(R), “Accounting forStock-Based Compensation” (revision 2004), (“SFAS 123(R)”), as previouslypermitted under GAAP, the Company accounted for the Options under therecognition and measurement principles of Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and relatedInterpretations using the intrinsic value method.  Accordingly, no compensation expense wasrecognized for the Options in the Company’s Condensed Consolidated Statementsof Operations.  The weighted averageminimum value per share of the options granted was $2.24 based on theBlack-Scholes-Merton option pricing model with the following weighted averageassumptions:

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

 

Effective March 5, 2006, as required for the firstannual reporting period beginning after December 15, 2005 for non-publiccompanies (as defined in SFAS 123(R)), the Company adopted SFAS 123(R) usingthe prospective adoption method.  The newstatement requires compensation expense associated with share-based payments toemployees to be recognized in the financial statements based on their fairvalues**. **Uponthe adoption of SFAS 123(R), because the Company had used the minimum valuemethod prior to the adoption, the Company was required to apply the provisionsof the statement only prospectively for any newly issued, modified or settledawards after the date of initial adoption. No new Options were issued, modified or settled subsequent to adoption,however,  the fair value assigned to anynewly issued, modified or settled awards in the future is expected to besignificantly greater due to the differences in valuation methods.

**4.     Inventories**

A summary ofinventories, by major classifications, follows:

|                 | ** ** | **September 2, 2006** | ** ** | **March 4, 2006** | ** ** |
|-----------------|------------|---------------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                               | 10,267,349 |                        | $          | 7,589,997 |   |
| Finished goods  |       | 47,583,625                      |       | 38,090,709                  |       |
| Work in process |       | 37,744                          |       | 5,636                       |       |
| Total           |       | $                               | 57,888,718 |                        | $          | 45,686,342 |   |

 

**5. Long-Term Debt**

Long-term debt iscomprised of the following:
| ** **                                                                                                 | ** ** | **September 2, 2006** | ** **  | **March 4, 2006** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|-----------------------------|------------|
| 9.875% senior  notes, interest payable on January 15 and July 15 of each year,  maturing on July 15, 2012  |       | $                               | 125,000,000 |                        | $          | 125,000,000 |   |
| $150 million  term loan, with floating interest rates maturing 2010                                        |       | 131,000,000                     |        | 119,125,000                 |       |
| Revolving line of  credit, maximum borrowings of $40 million with floating   interest rates, maturing 2009 |       | 10,957,000                      |        |                        |       |
| 0.0% to 7.55%  capitalized lease obligations maturing through 2011                                         |       | 747,353                         |        | 868,659                     |       |
| Total long-term  debt                                                                                      |       | 267,704,353                     |        | 244,993,659                 |       |
| Less current installments                                                                                  |       | 211,849                         |        | 229,172                     |       |
| Long-term debt less  current installments                                                                  |       | $                               | 267,492,504 |                        | $          | 244,764,487 |   |

 

Effective June 30, 2004, the Company obtained a$190 million credit facility, which includes a six-year variable-rate$150 million term loan, a five-year variable-rate $40 million revolvingcredit facility and a $10 million letter of credit subfacility.  Funds available under this facility areavailable for working capital requirements, permitted investments and generalcorporate purposes.  Borrowings under thefacility bear interest at floating rates based upon the interest rate optionselected from time to time by the Company and are secured by a first-prioritysecurity interest in substantially all of the Company’s assets.  The interest rates for base rate borrowingsunder the revolving credit facility and the term loan at September 2, 2006 were9.75% (prime of 8.25% plus 1.50%) and 9.25% (prime of 8.25% plus 1.00%),respectively.  Actual interest rates arelowered by the use of LIBOR tranches as appropriate.  Repayment of borrowings under the term loanwas initially $375,000 per quarter, which began on September 4, 2004, with aballoon payment of $141.4 million due on June 5, 2010.  The Company has made all scheduled quarterlypayments totaling $8.6 million for the term of the loan and prepayments on theterm loan totaling $34.4 million.  Aspreviously discussed in Note 2, “Acquisition of Clovervale” to the CondensedConsolidated Financial Statements, in conjunction with the Acquisition ofClovervale, the Company increased borrowings with respect to the term loan by$24.0 million in order to finance the Acquisition of Clovervale.  The outstanding balance of $131.0 million asof September 2, 2006 is due on June 5, 2010.

10

----

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

On August 21, 2006, the Company entered into AmendmentNo. 2 to its credit facility (“Amendment No. 2”). Amendment No. 2 provided for,among other things, an increase in borrowings with respect to the Company’sterm loan totaling $24.0 million.  A copyof Amendment No. 2 is included as Exhibit 10.1 to the Company’s Current Reporton Form 8-K filed with the SEC on August 22, 2006.

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

As of September 2, 2006, the Company had cash and cashequivalents on hand of $0.2 million, outstanding borrowings under its revolvingcredit facility of $11.0 million, outstanding letters of credit ofapproximately $2.3 million, and borrowing availability of approximately$26.7 million.  Also as of September 2,2006, the Company had borrowings under its term loan of $131.0 million and$125.0 million of Notes outstanding.  Asof March 4, 2006, the Company had cash and cash equivalents on hand of $2.5million, no outstanding borrowings under its revolving credit facility,outstanding letters of credit of approximately $5.6 million, and borrowingavailability of approximately $34.4 million under its revolving creditfacility.  Also as of March 4, 2006,the Company had borrowings under its term loan of $119.1 million and $125.0million of Notes outstanding.  Thematurity date of the $40 million revolving credit facility isJune 30, 2009.  In addition, theCompany is required to satisfy certain financial covenants regarding cash flowand capital expenditures.  As ofSeptember 2, 2006, the Company is in compliance with all financial covenants.

**6.  Goodwill and Other Intangible Assets**

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

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

In accordance with SFAS No. 142, “Goodwill and OtherIntangible Assets,” (“SFAS 142”), the Company tests recorded goodwill and otherintangible assets with indefinite lives for impairment at least annually.  All other intangible assets with finite livesare amortized over their estimated economic or estimated useful lives.  In addition, all other intangible assets arereviewed for impairment in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” (“SFAS 144”).  Based on the Company’s review and the reviewperformed by third parties, no impairment existed at September 2, 2006 or March4, 2006.

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

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

11

----

 
| ** **                               | ** ** | **As of September 2, 2006** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **Useful**                                      | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **                               | ** ** | **Life (yrs)**                             | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| **Amortizable  intangible assets:**      |       |                                            |       |   |   |   |   |   |   |
| Formulas                                 |       | 15                                              |       | $ | 95,000,000 |   | $ | 31,015,963 |   | $ | 63,984,037 |   |
| Tradename and trademarks                 |       | 3-20                                            |       | 20,380,000 |   | 4,396,827 |   | 15,983,173 |   |
| Customer relationships                   |       | 10-12                                           |       | 30,900,000 |   | 12,250,326 |   | 18,649,674 |   |
| Licensing agreements                     |       | 10                                              |       | 12,100,000 |   | 3,498,402 |   | 8,601,598 |   |
| Non-Compete agreement                    |       | 2                                               |       | 50,000 |   | 962 |   | 49,038 |   |
| **Total  amortizable intangible assets** |       |                                            |       | $ | 158,430,000 |   | $ | 51,162,480 |   | $ | 107,267,520 |   |
|                                     |       |                                            |       |   |   |   |   |   |   |
| **Indefinite-lived  intangible assets:** |       |                                            |       |   |   |   |   |   |   |
| Tradename                                |       | Indefinite                                      |       | $ | 20,200,000 |   | $ | — |   | $ | 20,200,000 |   |
| **Total  other intangible assets**       |       |                                            |       | $ | 178,630,000 |   | $ | 51,162,480 |   | $ | 127,467,520 |   |
|                                     |       |                                            |       |   |   |   |   |   |   |
| Goodwill                                 |       | N/A                                             |       | $ | 194,739,492 |   | $ | — |   | $ | 194,739,492 |   |
| **Total intangible assets**              |       |                                            |       | $ | 373,369,492 |   | $ | 51,162,480 |   | $ | 322,207,012 |   |

 

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

 

The followingtable represents activity related to goodwill and amortizable intangible assetsduring Fiscal 2007:
| **Goodwill:**                       |   |        |        |
|-------------------------------------|--------|-------------|-------------|
| Balance as of  March 4, 2006        |   | $           | 186,535,050 |   |
| Acquisition of  Clovervale          |   | 8,204,442   |        |
| Balance as of  September 2, 2006    |   | $           | 194,739,492 |   |
| ** **                          |   |        |        |
| **Amortizable  intangible assets:** |   |        |        |
| Balance as of  March 4, 2006        |   | $           | 114,644,032 |   |
| Acquisition of  Clovervale          |   | 2,730,000   |        |
| Amortization                        |   | (10,106,512 | )           |
| Balance as of September  2, 2006    |   | $           | 107,267,520 |   |

 

12

----

The future amortization of other intangible assets(dollars in thousands) for the next five fiscal years is estimated to be asfollows:
| ** **                | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |     |       |     |       |     |       |
| Formulas                  |       | $        | 11,165     |     | $          | 9,761    |       | $        | 8,468      |     | $          | 7,030 |   | $ | 5,733 |   |
| Tradename and  trademarks |       | $        | 1,914      |     | $          | 1,825    |       | $        | 1,689      |     | $          | 1,539 |   | $ | 1,412 |   |
| Customer  relationships   |       | $        | 3,771      |     | $          | 3,243    |       | $        | 2,717      |     | $          | 2,151 |   | $ | 1,650 |   |
| Licensing  agreements     |       | $        | 1,495      |     | $          | 1,426    |       | $        | 1,361      |     | $          | 1,239 |   | $ | 1,097 |   |
| Non-compete agreement     |       | $        | 25         |     | $          | 12       |       | $        | —     |     | $          | — |   | $ | — |   |

 

**7. Commitments andContingencies**

The Company provided a letter of credit totaling $2.2million and $5.5 million as of September 2, 2006 and March 4, 2006,respectively, to its insurance carrier for the underwriting of certainperformance bonds.  This current letterof credit expires in fiscal 2008.  TheCompany also provides a secured letter of credit to its insurance carrier foroutstanding and potential workers’ compensation and general liabilityclaims.  The letter of credit for theseclaims totaled $110,000 as of September 2, 2006 and March 4, 2006.  In addition, if required by a supplier, theCompany provides secured letters of credit to such suppliers.  The Company had no letters of credit forsuppliers as of September 2, 2006 or March 4, 2006.

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

In conjunction with the Acquisition of Pierre, theCompany and the selling shareholders****entered into atax sharing and indemnification agreement containing certain representationsand warranties of the selling shareholders with respect to taxes.  The agreement provides that any net operatingloss carryforwards attributable to expenses relating to the sale of the Company(“Deal Related NOLs”) and certain other deal related expenses, will be for thebenefit of the selling shareholders.  Asof the date of the Acquisition of Pierre, these Deal Related NOLs and otherdeal related expenses totaled approximately $24.2 million and $6.6 million,respectively.  Accordingly, the Companyis required to pay to the selling shareholders the amount of any tax benefitattributable to such Deal Related NOLs and other deal related expenses, exceptthat the first $4.0 million of such tax benefits shall be paid into an escrowaccount that will secure the selling shareholders indemnification obligationsunder the tax sharing and indemnification agreement.  The Company is required to make payments tothe selling shareholders or the escrow account for tax benefits derived fromsuch utilization 20 days after the filing of the tax return that utilizes suchDeal Related NOLs or other deal related expenses.

Initially, the Company recorded a net long-termliability to the selling shareholders totaling $10.3 million for the estimatedobligations under the tax sharing and indemnification agreement.  As of September 2, 2006, based on the federalincome tax return filed November 15, 2005 (for the tax year ended February 26,2005), the Company has utilized $8.6 million of the Deal Related NOLs and $1.7million in other deal related expenses. During the fiscal year ended March 4, 2006, the Company submittedpayments based on the tax benefits received, net of other tax assessments dueto the Company from the selling shareholders, to an escrow account for a totalof $3.6 million and directly to the selling shareholders for a total of $1.4million.  As of September 2, 2006, theCompany has a net long-term liability to the selling shareholders totaling $5.3million.  The Company expects to utilizethe remaining Deal Related NOLs and make payment to the selling shareholderspursuant to the tax sharing and indemnification agreement subsequent to thefiling of its tax return in November 2006.

**8.    Comprehensive Income**

Total comprehensive income/(loss) is comprised solelyof net income/(loss) in second quarter fiscal 2007, second quarter fiscal 2006,fiscal 2007, and fiscal 2006.

**9.     Supplemental Cash Flow Disclosures —CashPaid During the Period**
| ** **                        | ** ** | **Twenty-Six Weeks**       | ** ** | **Twenty-Six Weeks**       | ** ** |
|-----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Ended**                       | ** ** | **Ended**                       | ** ** |
| ** **                        | ** ** | **September 2, 2006** | ** ** | **September 3, 2005** | ** ** |
|                              |       |                            |       |                            |       |
| Cash paid during  the period for: |       |                            |       |                            |       |
| Interest                          |       | $                               | 10,255,075 |                            | $          | 10,148,868 |   |
| Income taxes, net                 |       | $                               | 5,679,971  |                            | $          | 2,542,473 |   |

 

13

----

**10.  Recently IssuedAccounting Guidance**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN48”).  FIN 48 addresses uncertainty in taxpositions recognized in a company’s financial statements and stipulates arecognition threshold and measurement of a tax position taken or expected to betaken in a tax return.  FIN 48 iseffective for the Company’s fiscal year beginning March 4, 2007, with earlieradoption permitted.  The Company iscurrently evaluating the impact of this interpretation on the Company’sconsolidated financial statements.

**11. Transactions with Related Parties**

At September 2, 2006,there were no significant changes in related party transactions from thosedescribed at March 4, 2006 in the Company’s Form 10-K.

**12.  LegalProceedings**

***Environmental.  ***OnAugust 19, 2003, as a result of complaints from neighboring businesses, theCompany received a Notice of Violation (“NOV”) from the Hamilton CountyDepartment of Environmental Services (“HCDOES”) relating to operations at itsCincinnati, Ohio plant facility. The NOV alleged that the Company violated itspermits by exceeding the visual emission (“VE”) specification of 20% opacity. TheCompany received additional NOV’s for opacity violations on October 22, 2003and November 26, 2003, all of which were the result of complaints fromneighboring businesses.

Subsequent to theoriginal NOV received in August of 2003, the Company began investigating andtesting various emission reduction technologies. The Company found a solutionthat enabled operations to continue with less smoke output and completed theupgrade during early 2004. HCDOES inspected the upgrade in April of 2004 anddetermined that the Company had returned to compliance with the opacity limit. Inconnection with the upgrade, the Company was required to submit a revisedPermit to Install (“PTI”) application.

In August, 2005, pursuantto its regulatory authority, HCDOES requested a Method 5 Stack Test beperformed to assess the Company’s compliance with its emissions limits. TheCompany contacted HCDOES, requesting the scheduled stack emission compliancetest be postponed while the Company’s independent consulting firm conducted anemissions audit program consisting of a series of engineering stack tests thatwere performed at both controlled and uncontrolled emission test points inorder to evaluate the magnitude of the emissions based on current productiondata and to estimate new emissions factors by product line. HCDOES agreed tothis approach and granted permission to delay the standard Method 5 Stack Testoriginally requested while the Company conducted its emissions audit program.

The Company contractedwith an independent environmental consulting firm to perform the audit andevaluation. As part of the overall audit, this firm performed preliminarytesting in early September 2005, which indicated that violations of emissionlevels may have occurred, and retested September 28, 2005 through September 30,2005. The firm conducted additional tests during October 27, 2005 throughNovember 8, 2005. The Company received the results of the audit in January,2006. The results allowed the Company to evaluate the facility’s current andhistorical potential and actual emissions. The testing revealed thatassumptions made by the Company’s former outside engineering firm concerningparticulate emissions and throughput were incorrect. This miscalculation causedthe Company to receive permit limits that are lower than actual emissions forcertain cook lines. The Company met with the local air permitting authority inFebruary, 2006, to discuss the results of the emissions audit program.

On March 20, 2006, HCDOESsent a notice of violation to the Company alleging that the company violatedits permit limits for particulate matter ("PM") and reserved theright to pursue an enforcement action and a civil penalty in the future. OnJuly 7, 2006, HCDOES sent another notice of violation to the Company allegingthat the Company was in violation of its permit limits for PM emissions andagain reserved the right to pursue an enforcement action in the future. Dependingon HCDOES' interpretation of the data, HCDOES may allege additional violationsof emission limits and other regulatory requirements. In August 2006, theCompany entered into a commitment to purchase approximately $266,000 in controlequipment, which is expected to be installed in early calendar year 2007. Inaddition, the Company expects to order additional equipment totalingapproximately $1,750,000 before the end of the first quarter of fiscal 2008 tocomply with relevant laws. Furthermore, in August, 2006 HCDOES requested thatthe Company submit a determination as to whether or not it was subject to TitleV or major new source permitting requirements. The Company responded to HCDOES'request in September 2006, concluding that the Company was not subject to TitleV or major new source permitting requirements based on the Company'sinterpretation of such regulations. The Company is cooperating with the authoritiesin all aspects of these matters. In addition, the Company consulted with itsoutside legal counsel to assist them in resolving these matters and estimatethe potential fines and penalties that may be assessed in the future.

***Labor.******  ***In June 2006, the Departmentof Homeland Security (“DHS”) announced that it would regard a large number ofemployee Social Security Number mismatches as a sign of an “egregious violator”of the laws against hiring and employing illegal aliens. The Immigration &Customs Enforcement (“ICE”), which is part of DHS, proposed a safe harbor fordealing with Social Security mismatch letters. An employer that receives amismatch letter has 14 days to check its records for clerical errors and verifythe resolution with the Social Security Administration. If the error was notmade by the employer, the employer must instruct the employee to resolve thediscrepancy in 60 days. If the employee does not correct the mismatch withinsuch 60 days, the employer has 3 days to complete certain requireddocumentation or terminate the employee. Any employer complying with the safeharbor will not be deemed to have “constructive knowledge” of the fact that theemployee is an unauthorized worker, and therefore, such employer will not be inviolation of the laws regulating the hiring and employment of illegal aliens. Aknowing violation of such laws constitutes a felony. The DHS offers a voluntaryBasic Pilot Employment Verification Program (the “Pilot Program”), whichincludes an internet-based system to assist employers in determining theeligibility of new hires and verifying their Social Security numbers.

14

----

The Company’s Claremont,North Carolina facility received 209 mismatch letters from the Social SecurityAdministration****during March of 2006 and iscurrently in the process of resolving each letter. The Company has requiredeach of these employees to provide documentation that they are authorized towork in the United States. If such employees are unable to do so in theallowable time, they will be terminated. The Company believes such action isconsistent with the DHS regulations. Since March 2006, all new employees in theCompany’s Claremont facility have been subject to the Pilot Program and sinceJuly 27, 2006, a total of 345 employees have been hired to work in suchfacility, of which only 200 of such employees remain with the Company followingcompliance with the Pilot Program.****Managementbelieves that with the Company’s use of the Pilot Program in all of itsexisting facilities, the Company is compliant with laws and regulationsregarding Social Security mismatches.

***General***.   TheCompany continuously evaluates contingencies based upon the best availableinformation. The Company believes it has recorded appropriate liabilities tothe extent necessary in cases where the outcome of such liabilities isconsidered probable and reasonably estimable, and that its assessment ofcontingencies is reasonable. To the extent that resolution of contingenciesresults in amounts that vary from management’s estimates, future earnings willbe charged or credited accordingly.

As part of its ongoingoperations in the food manufacturing industry, the Company is subject toextensive federal, state, and local regulations and its food processingfacilities and food products are subject to frequent inspection, audits andinquiries by the United States Department of Agriculture, the Food and DrugAdministration, and various local health and agricultural agencies and byfederal, state, and local agencies responsible for the enforcement ofenvironmental laws and regulations. The Company is also involved in variouslegal actions arising in the normal course of business. These matters arecontinuously being evaluated and, in some cases, are being contested by theCompany and the outcome is not predictable. Consequently, an estimate of thepossible loss or range of loss associated with these actions cannot be made. Althoughoccasional adverse outcomes (or settlements) may occur and could possibly havean adverse effect on the results of operations in any one accounting period,the Company believes that the final disposition of such matters will not have amaterial adverse affect on the Company’s consolidated financial position.

15

----

**ITEM 2.**   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion relates to the financialcondition and results of operations for second quarter fiscal 2007 compared tosecond quarter fiscal 2006 and fiscal 2007 compared to fiscal 2006.  The thirteen week periods ended September 2,2006 and September 3, 2005 are referred to as “second quarter fiscal 2007” and “secondquarter fiscal 2006”, respectively. The twenty-six week periods ended September2, 2006 and September 3, 2005 are referred to as “fiscal 2007” and “fiscal 2006”,respectively.  This section should beread in conjunction with the Company’s Condensed Consolidated FinancialStatements and considered with “Risk Factors” discussed in Item 1A—“Quantitativeand Qualitative Disclosures About Market Risk” discussed in Item 7 of theCompany’s Annual Report on Form 10-K and for the fiscal year ended March 4,2006 filed with the SEC on June 2, 2006 and “Cautionary Statements RegardingForward Looking Information,” which precedes Item 3 of Part I of this Report.

Pierre operates on a 52-week or 53-week fiscal yearending on the first Saturday in March or if the last day of February is aSaturday, the last day of February.  Eachquarter of the fiscal year contains 13 weeks except for the infrequentfiscal years with 53 weeks.

**Results ofOperations**

**Second QuarterFiscal 2007 Compared to Second Quarter Fiscal 2006**

***Revenues, net.******  ***Netrevenues decreased by $0.3 million in second quarter fiscal 2007 compared tosecond quarter fiscal 2006, or 0.3%. This decrease was primarily due to (1) increased net revenues as aresult of increased sales volume and mix (approximately $1.6 million) due toincrease in sales volume in most of the Company’s end-market segments, offsetby decreased sales volume to two large National Accounts restaurant chaincustomers (approximately $7.1 million), primarily the  result of promotional activity that did notinclude Pierre’s products; this net increase is primarily offset by (2)decreased sales prices as a result of declining commodity protein pricingattributable to market-related pricing contracts with two large NationalAccounts restaurant chain customers (approximately $2.1 million).

***Cost of goodssold.****  *Costof goods sold decreased by $5.1 million in second quarter fiscal 2007 comparedto second quarter fiscal 2006, or 7.0%. This decrease was primarily due to (1) decreased raw material proteincosts (approximately $6.3 million); (2) decreased costs as a result ofdecreased sales volumes and a change in mix to lower cost products (approximately$0.6 million); offset by (3) increased overhead costs (approximately $1.8million) primarily related to increased expenses for utilities, insurance,maintenance repairs, and costs associated with labor.

As a percentage of revenues, cost of goods solddecreased from 74.4% to 69.4%, a decrease of 5.0%.  This decrease was primarily due to (1) thenet impact of decreased prices paid for raw material proteins and formulationmix (approximately 5.0%); (2) decreased costs as a result of a change in mix tolower cost products (approximately 1.9%); offset by (3) increased overheadcosts primarily related to increased utilities, insurance and maintenancerepairs (approximately 1.9%).

The primary materials used in the Company’s foodprocessing operations include boneless beef, pork, chicken, flour, yeast,seasonings, cheese, breading, soy proteins, and packaging supplies.  Meat proteins are generally purchased under7-day payment terms.  Historically, theCompany has not hedged in the futures markets, and over time, the Company’s rawmaterial costs have fluctuated with movement in the relevant commoditymarkets.  Additionally, the Company hascontracts with formulaic pricing that require the Company to immediately passalong commodity price variances.  Duringsecond quarter fiscal 2007, net raw material protein prices decreasedapproximately $5.3 million, including a $2.7 million decrease related to theseformulaic contracts and decreases of approximately $2.6 million related toother non-contracted sales.

Approximately 33.3% of total sales for second quarterfiscal 2007 were protected from commodity exposure, of which 28.9% wereattributable to market-related pricing contracts, while the other 4.4% wererelated to the USDA Commodity Reprocessing Program, which also insulates theCompany from raw material price fluctuations. For second quarter fiscal 2006, approximately 40.9% of total sales wereprotected from commodity exposure, of which 36.2% were attributable tomarket-related pricing contracts, while the other 4.7% were related to the USDACommodity Reprocessing Program.

The following table represents the (increases)decreases in the weighted average prices the Company paid for beef, pork,chicken, and cheese during second quarter fiscal 2007 compared to secondquarter fiscal 2006 excluding formulation mix and contracts with formulaicpricing.

|            | ** ** | **% (Increase)/Decrease in**        | ** ** |
|------------|------------|-----------------------------------------------|------------|
| ** ** | ** ** | **Second Quarter Fiscal 2007** | ** ** |
| ** ** | ** ** | **Compared to**                          | ** ** |
| ** ** | ** ** | **Second Quarter Fiscal 2006** | ** ** |
| Beef       |       | 3.5                                           | %          |
| Pork       |       | (4.5                                          | %)         |
| Chicken    |       | 21.0                                          | %          |
| Cheese     |       | 14.7                                          | %          |
| Aggregate  |       | 7.4                                           | %          |

 

16

----

***Selling, general,and administrative.***   Selling, general, andadministrative expenses increased by $1.4 million in second quarter fiscal 2007compared to second quarter fiscal 2006, or 8.7%.  This increase was primarily due to (1)increased storage expense (approximately $0.5 million) as a result of increasedinventories built to maintain customer service levels for customer requirementsand product line expansion, in addition to increased storage rates paid by theCompany; (2) increased freight (approximately $0.7 million) due to higher fuel surchargesand a change in sales mix to delivered customers versus customers who pick upat the Company’s facilities; and (3) increased selling expenses (approximately$0.7 million) incurred primarily as a result of increased demonstrationexpenses related to growth in the Warehouse Club selling channel and a shift insales mix to customers with higher burden rates for sales and marketingexpenses; offset by (4) decreased administrative expense (approximately $0.5million), primarily as a result of an unemployment tax refund received as aresult of an adjustment to the Company’s experience rates.  As a percentage of revenues, selling,general, and administrative expenses increased from 16.3% to 17.8%.

***Depreciation andamortization.****  *Depreciationand amortization expense decreased by $0.7 million in second quarterfiscal 2007 compared to second quarter fiscal 2006.  This is due to decreased amortization expense(approximately $0.8 million), primarily due to the accelerated amortizationmethod used for certain intangible assets, offset by an increase indepreciation expense (approximately $0.1 million).

***Interest expenseand other income, net.***   Interest expense andother income, net consists primarily of interest on fixed and variable-ratelong-term debt and interest on the revolving loan, both of which were enteredinto in connection with the Acquisition of Pierre.  Interest expense and other income, netincreased by $0.1 million, or 2.0%. This increase is primarily due to increased floating interest ratesrelated to the Company’s variable-rate interest and increased borrowings underthe Company’s revolving credit facility, offset by decreased averageoutstanding borrowings under the term loan due to partial repayments throughthe date of the Acquisition of Clovervale.

***Income taxes.****  *The effective tax rate for secondquarter fiscal 2007 was 45.5% compared to 59.4% for second quarter fiscal2006.  The change in the effective taxrate is primarily due to (1) the impact of the Section 199 adjustment (the “DomesticManufacturing Deduction”) in the current year; (2) the phase-out of Ohiofranchise tax and the phase-in of a gross receipts tax referred to as theCommercial Activity Tax (“CAT”); and (3) the Company’s increased profitabilityand expected pre-tax income in the current year relative to the impact ofpermanent differences.

**Results ofOperations**

**Fiscal 2007Compared to Fiscal 2006**

***Revenues, net.******  ***Netrevenues decreased by $2.2 million in fiscal 2007 compared to fiscal 2006, or1.1%.  This decrease was primarily due to(1) increased net revenues as a result of increased sales volume and mix(approximately $2.1 million) due to an increase in sales volume in most of theCompany’s end-market segments, offset by decreased sales volume to two largeNational Accounts restaurant chain customers (approximately $11.5 million),primarily the result of promotional activity that did not include Pierre’sproducts; this net increase is primarily offset by (2) decreased sales pricesas a result of declining commodity protein pricing attributable tomarket-related pricing contracts with two large National Accounts restaurantchain customers (approximately $4.3 million);

***Cost of goodssold.****  *Costof goods sold decreased by $9.4 million in fiscal 2007 compared to fiscal2006, or 6.2%.  This decrease wasprimarily due to (1) decreased raw material protein costs (approximately $10.6million); (2) decreased costs as a result of decreased sales volumes and achange in mix to lower cost products (approximately $2.8 million); offset by(3) increased overhead costs (approximately $4.3 million) primarily related toincreased expenses for utilities, insurance, maintenance repairs, and costsassociated with labor.

As a percentage of revenues, cost of goods solddecreased from 73.5% to 69.7%, a decrease of 3.8%.  This decrease was primarily due to (1) thenet impact of decreased prices paid for raw material proteins and formulation mix(approximately 3.8%); (2) decreased costs as a result of a change in mix tolower cost products (approximately 2.1%); offset by (3) increased overheadcosts primarily related to increased utilities, insurance, maintenance repairsand costs associated with labor (approximately 2.1%).

During fiscal 2007, net raw material protein pricesdecreased approximately $9.7 million, including a $5.3 million decrease relatedto these formulaic contracts and decreases of approximately $4.4 millionrelated to other non-contracted sales.

Approximately 34.9% of total sales for fiscal 2007were protected from commodity exposure, of which 30.4% were attributable tomarket-related pricing contracts, while the other 4.5% were related to the USDACommodity Reprocessing Program, which also insulates the Company from rawmaterial price fluctuations.  For fiscal2006, approximately 42.6% of total sales were protected from commodityexposure, of which 38.2% were attributable to market-related pricing contracts,while the other 4.4% were related to the USDA Commodity Reprocessing Program.

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

17

----

 

|            | ** ** | **% Decrease in** | ** ** |
|------------|------------|-----------------------------|------------|
| ** ** | ** ** | **Fiscal 2007**        | ** ** |
| ** ** | ** ** | **Compared to**        | ** ** |
| ** ** | ** ** | **Fiscal 2006**        | ** ** |
| Beef       |       | 8.1                         | %          |
| Pork       |       | 8.4                         | %          |
| Chicken    |       | 21.3                        | %          |
| Cheese     |       | 15.9                        | %          |
| Aggregate  |       | 12.2                        | %          |

***Selling, general, and administrative*****.**  Selling,general, and administrative expenses increased by $2.7 million in fiscal 2007compared to fiscal 2006, or 8.2%.  Thisincrease was primarily due to (1) increased storage expense (approximately $1.0million) as a result of increased inventories built to maintain customerservice levels for customer requirements and product line expansion, inaddition to increased storage rates paid by the Company; (2) increased freight(approximately $1.2 million) due to higher fuel surcharges and a change insales mix to delivered customers versus customers who pick up at the Company’sfacilities; and (3) increased selling expenses (approximately $1.1 million)incurred primarily as a result of increased demonstration expenses related togrowth in the Warehouse Club selling channel and a shift in sales mix tocustomers with higher burden rates for sales and marketing expenses; offset by(4) decreased administrative expense (approximately $0.6 million), primarily asa result of an unemployment tax refund received as a result of an adjustment tothe Company’s experience rates, and a decrease in incentive compensation,offset by an increase in professional services. As a percentage of revenues, selling, general, and administrativeexpenses increased from 16.0% to 17.6%.

***Depreciation and amortization.**** *Depreciation and amortization expense decreased by $1.8 million infiscal 2007 compared to fiscal 2006. This is due to decreased amortization expense (approximately $1.6million), primarily due to the accelerated amortization method used for certainintangible assets, and a decrease in depreciation expense (approximately $0.2million).

***Interest expense and other income, net*****.** Interest expense and other income, net consists primarily of interest onfixed and variable-rate long-term debt and interest on the revolving loan, bothof which were entered into in connection with the Acquisition of Pierre.  Interest expense and other income, netincreased by $0.2 million, or 1.4%. This increase is primarily due to increased floating interest ratesrelated to the Company’s variable-rate interest and increased borrowings underthe Company’s revolving credit facility, offset by decreased averageoutstanding borrowings under the term loan due to partial repayments throughthe date of the Acquisition of Clovervale.

***Income taxes.******  ***The effective tax ratefor fiscal 2007 was 35.8% compared to 55.1% for fiscal 2006.  The change in the effective tax rate isprimarily due to (1) the impact of the Section 199 adjustment (the “DomesticManufacturing Deduction”) in the current year; (2) the phase-out of Ohiofranchise tax and the phase-in of a gross receipts tax referred to as theCommercial Activity Tax (“CAT”); and (3) the Company’s increased profitabilityand expected pre-tax income in the current year relative to the impact ofpermanent differences.

**Liquidity andCapital Resources**

The following table summarizes the Company’s net cashprovided by (used in) operating, investing, and financing activities for thetwenty-six weeks ended September 2, 2006 and September 3, 2005, respectively.
| ** **                       | ** ** | **Twenty-Six Weeks Ended** | ** **  | **Twenty-Six Weeks Ended** | ** ** |
|----------------------------------|------------|--------------------------------------|-------------|--------------------------------------|------------|
| ** **                       | ** ** | **September 2, 2006**      | ** **  | **September 3, 2005**      | ** ** |
| Net cash  provided by (used in): |       |                                 |        |                                 |       |
| Operating activities             |       | $                                    | 3,100,406   |                                 | $          | 6,982,826 |   |
| Investing activities             |       | $                                    | (25,808,972 | )                                    | $          | (3,984,650 | ) |
| Financing  activities            |       | $                                    | 20,403,394  |                                 | $          | (2,998,176 | ) |

 

Net cash provided by operating activities for fiscal2007 was $3.1 million compared to net cash provided by operatingactivities of $7.0 million for fiscal 2006.  The decrease in net cash provided by operatingactivities was primarily due to (1) an increase in inventories (approximately$8.8 million) in fiscal 2007 compared with less of an increase in the prioryear comparable period (approximately $4.3 million); (2) a change in deferredincome taxes (approximately $6.9 million) in fiscal 2007 compared to a change(approximately $0.8 million) in fiscal 2006; and (3) a decrease in depreciationand amortization expense (approximately $1.8 million) in fiscal 2007 comparedwith fiscal 2006, primarily due to the accelerated amortization methods usedfor certain intangible assets; offset by (4) an increase in accounts payableand other accrued liabilities (approximately $1.6 million) during fiscal 2007compared to less of an increase (approximately $0.5 million) in the prior yearcomparable period; (5) a decrease in refundable income taxes, prepaid expenseand other current assets (approximately $1.9 million) during fiscal 2007compared to an increase in the prior year comparable period (approximately $0.4million); (6) an increase in other long-term liabilities (approximately $0.4million) in fiscal 2007 compared with a decrease  (approximately $1.0 million) in fiscal2006;  and (7) an increase in accountsreceivable (approximately $0.4 million) during fiscal 2007 compared to anincrease in the prior year comparable period (approximately $0.9 million).  The decrease in net cash provided byoperating activities was partially offset by the Company’s increasedprofitability during fiscal 2007 compared to fiscal 2006.

18

----

The primary components ofnet cash provided by operating activities for fiscal 2007 were (1) depreciationand amortization of intangible assets (approximately $13.7 million), of which$3.6 million relates to depreciation of fixed assets and $10.1 million relatesto amortization of intangible assets recorded in conjunction with theAcquisition of Pierre and the Acquisition of Clovervale; (2) an increase intrade accounts payable and other accrued liabilities (approximately $1.6million); (3) a decrease in refundable income taxes, prepaid expenses, andother current assets (approximately $1.9 million) due to the reduction inrefundable income taxes resulting from the tax provision recorded based on theincome in fiscal 2007 and due to the reduction in prepaid expenses, primarily prepaidinsurance premiums; (4) amortization of deferred loan fees (approximately $0.8million); and (5) an increase in other long-term liabilities (approximately$0.4 million) as a result of the deferred compensation plan; offset by (6) anincrease in inventories (approximately $8.8 million) due to an inventory buildto maintain customer service levels for customer requirements and product lineexpansion; (7) a change in deferred income taxes (approximately $6.9 million)as a result of the tax provision recorded due to the income in fiscal 2007; and(8) an increase in receivables (approximately $0.4 million), primarily as aresult of  our summer seasonality withinour School selling channel.

Net cash used ininvesting activities for fiscal 2007 was $25.8 million compared to$4.0 million for fiscal 2006.  Netcash used in investing activities during fiscal 2007 consists of the net cashused in conjunction with the Acquisition of Clovervale (approximately $21.8million), in addition to capital expenditures (approximately $4.0 million),which consisted of various plant improvements and routine capitalexpenditures.  Net cash used in investingactivities during fiscal 2006 consists of capital expenditures for variousplant improvements and routine capital expenditures.

Net cash provided byfinancing activities for fiscal 2007 was $20.4 million compared to net cashused in financing activities for fiscal 2006 of $3.0 million.  Net cash provided by financing activities forfiscal 2007 was due primarily to: (1) increased term loan borrowings providedby Amendment No. 2 (totaling $24.0 million) for the Acquisition of Clovervaleand (2) net borrowings under the Company’s revolving credit facility  (approximately $11.0 million); offset by (3)principal payments on long-term debt (approximately $12.2 million); (4) repayment of debt  (approximately$1.6 million) acquired in conjunction with the Acquisition of Clovervale; and(5) loan origination fees (approximately $0.7 million as a result ofAmendment No. 1 and Amendment No. 2 to the Credit Agreement (as discussed inNote 5, “Long-Term Debt” to the Condensed Consolidated Financial Statements).

Effective June 30,2004, the Company obtained a $190 million credit facility, which includesa six-year variable-rate $150 million term loan, a five-year variable-rate$40 million revolving credit facility and a $10 million letter of creditsubfacility.  Funds available under thisfacility are available for working capital requirements, permitted investmentsand general corporate purposes. Borrowings under the facility bear interest at floating rates based uponthe interest rate option selected from time to time by the Company and aresecured by a first-priority security interest in substantially all of the Company’sassets.  The interest rates for base rateborrowings under the revolving credit facility and the term loan at September2, 2006 were 9.75% (prime of 8.25% plus 1.50%) and 9.25% (prime of 8.25% plus1.00%), respectively.  Actual interestrates are lowered by the use of LIBOR tranches as appropriate.  Repayment of borrowings under the term loanwas initially $375,000 per quarter, which began on September 4, 2004, with aballoon payment of $141.4 million due on June 5, 2010.  The Company has made all scheduled quarterlypayments totaling $8.6 million for the term of the loan and prepayments on theterm loan totaling $34.4 million.  Aspreviously discussed in Note 2, “Acquisition of Clovervale” to the CondensedConsolidated Financial Statements, in conjunction with the Acquisition ofClovervale, the Company increased borrowings with respect to the term loan by$24.0 million in order to finance the Acquisition of Clovervale.  The outstanding balance of $131.0 million asof September 2, 2006 is due on June 5, 2010.

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

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

Also effective June 30,2004, in conjunction with the Acquisition of Pierre, the Company issued 9.875%senior notes, with interest payable on January 15 and July 15 of each year (the“Notes”).  The proceeds of the Notes,together with the equity contributions from MDP and certain members ofmanagement and borrowings under the Company’s senior credit facility, were usedto finance the Acquisition of Pierre and to repay outstanding indebtedness.

As of September 2, 2006,the Company had cash and cash equivalents on hand of $0.2 million, outstandingborrowings under its revolving credit facility of $11.0 million, outstandingletters of credit of approximately $2.3 million, and borrowing availability ofapproximately $26.7 million.  Alsoas of September 2, 2006, the Company had borrowings under its term loan of$131.0 million and $125.0 million of Notes outstanding.  As of March 4, 2006, the Company had cash andcash equivalents on hand of $2.5 million, no outstanding borrowings under itsrevolving credit facility, outstanding letters of credit of approximately $5.6million, and borrowing availability of approximately $34.4 million underits revolving credit facility.  Also asof March 4, 2006, the Company had borrowings under its term loan of $119.1million and $125.0 million of Notes outstanding.  The maturity date of the $40 millionrevolving credit facility is June 30, 2009.  In addition, the Company is required to satisfycertain financial covenants regarding cash flow and capital expenditures.  As of September 2, 2006, the Company is incompliance with all financial covenants.

TheCompany has budgeted approximately $9.4 million for capital expenditures forthe remainder of fiscal 2007.  Theseexpenditures include a provision for capacity expansion, system upgrades, androutine food processing capital improvement projects and other miscellaneousexpenditures within the Company’s existing facilities.  The Company believes that funds fromoperations and funds from its $40 million revolving credit facility, as well asthe Company’s ability to enter into capital or operating leases, will beadequate to finance these capital expenditures. As described in Note 12, “Legal Proceedings,” to the Condensed 

19

----

Consolidated Financial Statements, the Company hasentered into commitments for approximately of $266,000 in control equipment andexpects to commit to approximately $1,750,000 of additional control equipmentprior to the end of the Company’s first quarter fiscal 2008.

If the Company continues its historical annual revenuegrowth trend 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 requirementsfor these plant expansion projects would need to be met through other long-termfinancing sources.  The incurrence ofadditional long-term debt is governed and restricted by the Company’s existingdebt instruments.  Furthermore, there canbe no assurance that additional long-term financing will be available onadvantageous terms (or any terms) when needed by the Company.

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

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

The followingtables summarize our commitments and contractual obligations by fiscal year asof September 2, 2006.
| ** **                                 | ** ** | **Commitments by Fiscal Year** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | **Total**                                     | ** ** | **Less than 1  Year** | ** ** | **1–3  Years** | ** ** | **3–5  Years** | ** ** | **More than  5 Years** | ** ** |
| Letters of  credit                         |       | $                                             | 2,302,100  |   | $ | 2,302,100 |   | $ | — |   | $ | — |   | $ | — |   |
| Purchase  commitments for capital projects |       | 747,353                                       |       | 747,353 |   | — |   | — |   | — |   |
| Purchase commitments for raw materials     |       | 344,690                                       |       | 344,690 |   | — |   | — |   | — |   |
| Purchase commitments for natural gas       |       | 1,657,326                                     |       | 1,626,991 |   | 30,335 |   | — |   | — |   |
| Purchase  commitments for miscellaneous    |       | 296,000                                       |       | 296,000 |   | — |   | — |   | — |   |
| Total                                      |       | $                                             | 5,347,469  |   | $ | 5,317,134 |   | $ | 30,335 |   | $ | — |   | $ | — |   |

 
| ** **                        | ** ** | **Contractual Obligations by Fiscal Year** | ** **  |
|-----------------------------------|------------|----------------------------------------------------------------|-------------|
| ** **                        | ** ** | **Total**                                                      | ** **  | **Less than 1  Year** | ** ** | **1–3  Years** | ** ** | **3–5  Years** | ** ** | **More than  5 Years** | ** ** |
| Long-term debt                    |       | $                                                              | 266,957,000 |   | $ | — |   | $ | 141,957,000 |   | $ | 125,000,000 |   | $ | — |   |
| Capital lease  obligations*       |       | 747,353                                                        |        | 211,850 |   | 340,608 |   | 194,895 |   | — |   |
| Operating lease  obligations      |       | 3,185,935                                                      |        | 2,380,309 |   | 655,220 |   | 150,406 |   | — |   |
| Interest on  fixed-rate debt**    |       | 62,228,557                                                     |        | 12,596,783 |   | 24,944,274 |   | 24,687,500 |   | — |   |
| Interest on  variable-rate debt** |       | 29,802,500                                                     |        | 9,934,167 |   | 19,868,333 |   | — |   | — |   |
| Total                             |       | $                                                              | 362,921,345 |   | $ | 25,123,109 |   | $ | 187,765,435 |   | $ | 150,032,801 |   | $ | — |   |

----

*                    Capitallease obligations include interest component related to leases.

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

In conjunction with the Acquisition of Pierre, theCompany and the selling shareholders****entered into atax sharing and indemnification agreement containing certain representationsand warranties of the selling shareholders with respect to taxes.  The agreement provides that any net operatingloss carryforwards attributable to expenses relating to the sale of the Company(“Deal Related NOLs”) and certain other deal related expenses, will be for thebenefit of the selling shareholders.  Asof the date of the Acquisition of Pierre, these Deal Related NOLs and otherdeal related expenses totaled approximately $24.2 million and $6.6 million,respectively.  Accordingly, the Companyis required pay to the selling shareholders the amount of any tax benefitattributable to such Deal Related NOLs and other deal related expenses, exceptthat the first $4.0 million of such tax benefits shall be paid into an escrowaccount that will secure the selling shareholders indemnification obligationsunder the tax sharing and indemnification agreement.  The Company is required to make payments tothe selling shareholders or the escrow account for tax benefits derived fromsuch utilization 20 days after the filing of the tax return that utilizes suchDeal Related NOLs or other deal related expenses.

The Company initially recorded a net long-termliability to the selling shareholders totaling $10.3 million for the estimated obligationsunder the tax sharing and indemnification agreement.  As of September 2, 2006, based on the federalincome tax return filed November 15, 2005 (for the tax year ended February 26,2005), the Company has utilized $8.6 million of the Deal Related NOLs and $1.7million in other deal related expenses. During the fiscal year ended March 4, 2006, the Company submittedpayments based on the tax benefits received, net of other tax assessments dueto the Company from the selling shareholders, to an escrow account for a totalof $3.6 million and directly to the selling shareholders for a total of $1.4million.  As of September 2,

20

----

2006, the Company has a net long-term liability to theselling shareholders totaling $5.3 million. Although this amount is excluded from the table above, the Companyexpects to utilize the remaining Deal Related NOLs and make payment to theselling shareholders pursuant to the tax sharing and indemnification agreementsubsequent to the filing of its tax return in November 2006.

**CriticalAccounting Policies and Estimates**

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

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.

***Cash and cashequivalents.***   For financial statementpresentation purposes, the Company presents book overdrafts, principallyoutstanding checks in excess of cash on hand with the same financialinstitution, as accounts payable.   As ofSeptember 2, 2006, the Company had cash on hand of $1.2 million, which wasoffset by outstanding checks of $5.6 million, resulting in a netreclassification of $4.6 million to accounts payable and a remaining cashbalance of $0.2 million.  The remainingcash balance represents cash in other financial institutions other than theCompany’s bank primarily responsible for its cash management.  The Company considers all highly liquidinvestments purchased with an original maturity of three months or less to becash equivalents.  As of September 2,2006, the Company had no cash equivalents.

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

***Goodwill and OtherIntangible Assets.***   In conjunction with theAcquisition of Pierre, the Company engaged an independent party to performvaluations for financial reporting purposes of the Company’s goodwill and otherintangible assets.  Assets identifiedthrough this valuation process included goodwill, formulas, customerrelationships, licensing agreements, and certain trade names and trademarks.

In addition, in conjunction with the Acquisition ofClovervale, management of the Company, with the assistance of an independentvaluation firm, performed similar valuations on the Clovervale goodwill andother intangibles for financial reporting purposes.  Assets identified through this valuationprocess included goodwill, customer relationships, non-compete agreements, andcertain tradenames and trademarks.  Theincreases in the carrying amounts of goodwill, amortizable intangible assets,and indefinite-lived intangible assets represent the assets recorded as aresult of the preliminary valuations performed in conjunction with theAcquisition of Clovervale.

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

The Company’s amortizable intangible assets areamortized using both straight-line and 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.***   Promotionalexpenses associated with rebates, marketing promotions, and special pricingarrangements are recorded as a reduction of revenues or as selling expense atthe time the sale is recorded.  Certainof these expenses are estimated based on historical trends, expected futurepayments to be made under these programs, and expected future customerdeductions to be taken under these programs. The Company believes the estimates recorded in the financial statements arereasonable estimates of the Company’s liability under these programs.

***Concentration ofCredit Risk and Significant Customers.***   Financialinstruments that potentially subject the Company to concentrations of creditrisk consist primarily of trade receivables. The Company performs periodic credit evaluations of its customers’financial condition and generally does not require collateral.  The Company encounters a certain amount ofcredit risk as a result of a concentration of receivables among a fewsignificant customers.  Sales to theCompany’s largest customer were approximately 16% and 24% of net revenues forsecond quarter fiscal 2007 and second quarter fiscal 2006, respectively.  Sales to the Company’s largest customer wereapproximately 18% and 24% of net revenues for fiscal 2007 and fiscal 2006,respectively.  Accounts receivable atSeptember 2, 2006 and March 4, 2006 included receivables from the Company’slargest customer totaling $2.8 million and $2.7 million, respectively.

21

----

***Stock-BasedCompensation.***   The Company treats the optionsto purchase shares of common stock of Holding issued to employees of theCompany (“Options”) as stock-based compensation for employees of theCompany.  Prior to fiscal 2007, aspermitted under GAAP, the Company accounted for the Options under therecognition and measurement principles of Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and relatedInterpretations using the intrinsic value method.  Accordingly, no compensation expense wasrecognized for the stock option plan in the Company’s Condensed ConsolidatedStatements of Operations.

Effective March 5, 2006, as required for the firstannual reporting period beginning after December 15, 2005 for non-publiccompanies (as defined in SFAS 123(R)), the Company adopted SFAS 123(R) usingthe prospective adoption method.  The newstatement requires compensation expense associated with share-based payments toemployees to be recognized in the financial statements based on their fairvalues**. **Uponthe adoption of SFAS 123(R) because the Company had used the minimum valuemethod prior to the adoption, the Company was required to apply the provisionsof the statement only prospectively for any newly issued, modified or settledaward after the date of initial adoption. No new Options were issued, modified or settled subsequent to adoption,however,  the fair value assigned to anynewly issued, modified or settled awards in the future is expected to besignificantly greater due to the differences in valuation methods.

***New AccountingPronouncements.***   In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”(FIN 48”). FIN 48 addresses uncertainty in tax positions recognized in acompany’s financial statements and stipulates a recognition threshold andmeasurement of a tax position taken or expected to be taken in a tax return. FIN48 is effective for the Company’s fiscal year beginning March 4, 2007, withearlier adoption permitted. The Company is currently evaluating the impact ofthis interpretation on the Company’s consolidated financial statements.

**Seasonality**

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

**CautionaryStatement As To Forward-Looking Information**

This report includes “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended, includingstatements about the business, operations, financial results, and futureprospects 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,” “should,” “expect,”“plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,”the negative of such terms or other comparable terminology.  These statements may involve risks anduncertainties related to, among other things:

·                  changes in economic andbusiness conditions in the world;

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

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

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

·                  the Company’s level ofindebtedness;

·                  restrictions imposed by theCompany’s debt instruments;

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

·                  integration of theClovervale business;

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

·                  increased competitiveactivity;

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

·                  dependence on significantcustomers;

·                  changes in consumerpreferences and diets;

·                  consolidation of theCompany’s customers;

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

·                  adverse change to, orefficient utilization or successful rationalization of, the Company’sCincinnati, Ohio, Claremont, North Carolina, Easley, South Carolina or Amherst,Ohio facilities;

·                  dependence on keypersonnel; and

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

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

22

----

 

**ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT 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 September 2, 2006 or March 4, 2006.  Certain of the Company’s outstandingnonderivative financial instruments at September 2, 2006 are subject tointerest rate risk, but not subject to foreign currency or commodity pricerisk.  During second quarter fiscal 2007,the average price the Company paid for beef, pork, chicken, and cheese(increased)/decreased approximately 3.5%, (4.5%), 21.0% and 14.7%,respectively, compared to the prices paid during the fourth quarter of thefiscal year ended March 4, 2006. During fiscal 2007, the average price the Company paid for beef, pork,chicken, and cheese decreased approximately 8.1%, 8.4%, 21.3% and 15.9%,respectively, compared to the prices paid during the fourth quarter of thefiscal year ended March 4, 2006. The Company manages commodity price risk through purchase orders,non-cancelable contracts and by passing on such cost increases tocustomers.  There was no significantchange in market risk during fiscal 2007.

The Company’s major market risk exposure is potentialloss arising from changing interest rates and its impact on long-termdebt.  The Company’s policy is to manageinterest rate risk by maintaining a combination of fixed and variable-ratefinancial instruments in amounts and with maturities that management considersappropriate.  The risks associated withlong-term debt at September 2, 2006 have not changed materially sinceMarch 4, 2006.  Of the long-termdebt outstanding at September 2, 2006, the $125.0 million of Notesaccrue interest at a fixed interest rate, while the $131.0 millionoutstanding borrowings under the term loan facility and the $11.0 million ofoutstanding borrowings under the revolving credit facility accrue interest atvariable interest rates.  A rise in prevailinginterest rates could have adverse effects on the Company’s financial conditionand results of operations.  A 25 basispoint increase in the reference rates for the Company’s average variable-ratedebt outstanding during second quarter fiscal 2007 and fiscal 2007 would havedecreased net income for that period by approximately $140,000 and $210,000respectively.

**ITEM 4.   CONTROLSAND PROCEDURES**

***Evaluation ofDisclosure Controls and Procedures.***   As ofthe end of the period covered by this Report, the Company performed anevaluation, under the supervision and with the participation of its managementincluding the President and Chief Executive Officer and Principal FinancialOfficer of the effectiveness of the Company’s disclosure controls andprocedures (as such term is defined in Exchange Act Rules 13a-15(e) and15d-15(e)).  Based upon this evaluation,the Company’s President and Chief Executive Officer and Principal FinancialOfficer have concluded that as of September 2, 2006, the Company’s disclosurecontrols and procedures were effective for the purposes of ensuring thatinformation required to be disclosed in reports that the Company files orsubmits under the 1934 Act has been recorded, processed, summarized andreported in accordance with the rules and forms of the SEC.

***Changes inInternal Controls.***   There have been no changes inthe Company’s internal controls over financial reporting during the quarterended September 2, 2006 that have materially affected, or are reasonably likelyto materially affect, the Company’s internal control over financial reporting.

***Section 404 ofSarbanes-Oxley Act of 2002.*****   OnAugust 9, 2006, the SEC issued a proposed rule (Release No. 33-8731) to grantrelief to non-accelerated filers by further extending the date of compliancewith Section 404 of the Sarbanes-Oxley Act of 2002 (the “Act”).  Pursuant to the proposed rule, the Company willbe required to comply with the Act in two phases.  The first phase is effective for the Company’sfiscal year ending March 1, 2008 and requires the Company to issue a managementreport on internal control over financial reporting.  The second phase requires the Company toprovide an auditor’s attestation report on internal control over financialreporting beginning with the Company’s fiscal year ending February 28, 2009.**

**The Company is currentlyundergoing an effort to comply with the Act. This effort includes documenting,evaluating the design and testing the effectiveness of the Company’s internalcontrols. During this process, Pierre may make improvements to the design andoperation of its internal controls, including but not limited to, furtherformalization of policies and procedures.  Although the Company believesthat its efforts will enable the Company to provide the required managementreport on internal controls and its independent auditors to provide therequired attestation based on the required dates above, Pierre can give noassurance that these efforts will be successfully completed in a timely manner.**

23

----

**PART II. OTHERINFORMATION**

**ITEM 1. LEGALPROCEEDINGS**

***Environmental.  ***OnAugust 19, 2003, as a result of complaints from neighboring businesses, theCompany received a Notice of Violation (“NOV”) from the Hamilton CountyDepartment of Environmental Services (“HCDOES”) relating to operations at itsCincinnati, Ohio plant facility. The NOV alleged that the Company violated itspermits by exceeding the visual emission (“VE”) specification of 20% opacity. TheCompany received additional NOV’s for opacity violations on October 22, 2003and November 26, 2003, all of which were the result of complaints fromneighboring businesses.

Subsequent to theoriginal NOV received in August of 2003, the Company began investigating andtesting various emission reduction technologies. The Company found a solutionthat enabled operations to continue with less smoke output and completed theupgrade during early 2004. HCDOES inspected the upgrade in April of 2004 anddetermined that the Company had returned to compliance with the opacity limit. Inconnection with the upgrade, the Company was required to submit a revisedPermit to Install (“PTI”) application.

In August, 2005, pursuantto its regulatory authority, HCDOES requested a Method 5 Stack Test beperformed to assess the Company’s compliance with its emissions limits. TheCompany contacted HCDOES, requesting the scheduled stack emission compliancetest be postponed while the Company’s independent consulting firm conducted anemissions audit program consisting of a series of engineering stack tests thatwere performed at both controlled and uncontrolled emission test points inorder to evaluate the magnitude of the emissions based on current productiondata and to estimate new emissions factors by product line. HCDOES agreed tothis approach and granted permission to delay the standard Method 5 Stack Testoriginally requested while the Company conducted its emissions audit program.

The Company contractedwith an independent environmental consulting firm to perform the audit and evaluation.As part of the overall audit, this firm performed preliminary testing in earlySeptember 2005, which indicated that violations of emission levels may haveoccurred, and retested September 28, 2005 through September 30, 2005. The firmconducted additional tests during October 27, 2005 through November 8, 2005. TheCompany received the results of the audit in January, 2006. The results allowedthe Company to evaluate the facility’s current and historical potential andactual emissions. The testing revealed that assumptions made by the Company’sformer outside engineering firm concerning particulate emissions and throughputwere incorrect. This miscalculation caused the Company to receive permit limitsthat are lower than actual emissions for certain cook lines. The Company metwith the local air permitting authority in February, 2006, to discuss theresults of the emissions audit program.

On March 20, 2006, HCDOESsent a notice of violation to the Company alleging that the company violatedits permit limits for particulate matter ("PM") and reserved theright to pursue an enforcement action and a civil penalty in the future. OnJuly 7, 2006, HCDOES sent another notice of violation to the Company allegingthat the Company was in violation of its permit limits for PM emissions andagain reserved the right to pursue an enforcement action in the future. Dependingon HCDOES' interpretation of the data, HCDOES may allege additional violationsof emission limits and other regulatory requirements. In August 2006, theCompany entered into a commitment to purchase approximately $266,000 in controlequipment, which is expected to be installed in early calendar year 2007. Inaddition, the Company expects to order additional equipment totalingapproximately $1,750,000 before the end of the first quarter of fiscal 2008 tocomply with relevant laws. Furthermore, in August, 2006 HCDOES requested thatthe Company submit a determination as to whether or not it was subject to TitleV or major new source permitting requirements. The Company responded to HCDOES'request in September 2006, concluding that the Company was not subject to TitleV or major new source permitting requirements based on the Company'sinterpretation of such regulations. The Company is cooperating with theauthorities in all aspects of these matters. In addition, the Company consultedwith its outside legal counsel to assist them in resolving these matters andestimate the potential fines and penalties that may be assessed in the future.

***Labor.******  ***In June 2006, the Departmentof Homeland Security (“DHS”) announced that it would regard a large number ofemployee Social Security Number mismatches as a sign of an “egregious violator”of the laws against hiring and employing illegal aliens. The Immigration &Customs Enforcement (“ICE”), which is part of DHS, proposed a safe harbor fordealing with Social Security mismatch letters. An employer that receives amismatch letter has 14 days to check its records for clerical errors and verifythe resolution with the Social Security Administration. If the error was notmade by the employer, the employer must instruct the employee to resolve thediscrepancy in 60 days. If the employee does not correct the mismatch withinsuch 60 days, the employer has 3 days to complete certain requireddocumentation or terminate the employee. Any employer complying with the safeharbor will not be deemed to have “constructive knowledge” of the fact that theemployee is an unauthorized worker, and therefore, such employer will not be inviolation of the laws regulating the hiring and employment of illegal aliens. Aknowing violation of such laws constitutes a felony. The DHS offers a voluntaryBasic Pilot Employment Verification Program (the “Pilot Program”), whichincludes an internet-based system to assist employers in determining theeligibility of new hires and verifying their Social Security numbers.

The Company’s Claremont,North Carolina facility received 209 mismatch letters from the Social SecurityAdministration****during March of 2006 and iscurrently in the process of resolving each letter. The Company has requiredeach of these employees to provide documentation that they are authorized towork in the United States. If such employees are unable to do so in theallowable time, they will be terminated. The Company believes such action isconsistent with the DHS regulations. Since March 2006, all new employees in theCompany’s Claremont facility have been subject to the Pilot Program and sinceJuly 27, 2006, a total of 345 employees have been hired to work in suchfacility, of which only 200 of such employees remain with the Company followingcompliance with the Pilot Program.****Managementbelieves that with the Company’s use of the Pilot Program in all of itsexisting facilities, the Company is compliant with laws and regulationsregarding Social Security mismatches.

24

----

***General***.   TheCompany continuously evaluates contingencies based upon the best availableinformation. The Company believes it has recorded appropriate liabilities tothe extent necessary in cases where the outcome of such liabilities isconsidered probable and reasonably estimable, and that its assessment ofcontingencies is reasonable. To the extent that resolution of contingenciesresults in amounts that vary from management’s estimates, future earnings willbe charged or credited accordingly.

As part of its ongoingoperations in the food manufacturing industry, the Company is subject toextensive federal, state, and local regulations and its food processingfacilities and food products are subject to frequent inspection, audits andinquiries by the United States Department of Agriculture, the Food and DrugAdministration, and various local health and agricultural agencies and byfederal, state, and local agencies responsible for the enforcement ofenvironmental laws and regulations. The Company is also involved in variouslegal actions arising in the normal course of business. These matters arecontinuously being evaluated and, in some cases, are being contested by theCompany and the outcome is not predictable. Consequently, an estimate of thepossible loss or range of loss associated with these actions cannot be made. Althoughoccasional adverse outcomes (or settlements) may occur and could possibly havean adverse effect on the results of operations in any one accounting period,the Company believes that the final disposition of such matters will not have amaterial adverse affect on the Company’s consolidated financial position.

**ITEM 1A.  RISK FACTORS**

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

25

----

**ITEM 6.  EXHIBITS**

(a)            Exhibits

31.1         Rule 13a-14(a)/15d-14(a) Certification of the Chief ExecutiveOfficer

31.2         Rule 13a-14(a)/15d-14(a) Certification of the PrincipalFinancial Officer

32                                    Section 1350 Certifications of the ChiefExecutive Officer and the Principal Financial Officer

26

----

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|   | PIERRE FOODS, INC.                     |
|--------|----------------------------------------|
|   |                                   |
|   | /s/ Norbert E.  Woodhams               |
|   | By: Norbert E.  Woodhams               |
|   | President and  Chief Executive Officer |
|   | Dated: October  17, 2006               |
|   |                                   |
|   | /s/ Joseph W.  Meyers                  |
|   | By: Joseph W.  Meyers                  |
|   | Vice President,  Finance               |
|   | Dated: October  17, 2006               |

 

27

----