** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

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

#### ** **

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

** **

**For thequarterly period ended September 1, 2007**

** **

**OR**

** **

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

** **

**For thetransition period from                     to                           **

 

#### **CommissionFile Number:  0-7277**

#### ** **

 

**PIERRE FOODS, INC.**

(Exact name ofregistrant as specified in its charter)

 

#### **NorthCarolina**

(State or otherjurisdiction of incorporation or organization)

 

**56-0945643**

(I.R.S. EmployerIdentification No.)

 

**9990Princeton Road**

**Cincinnati,Ohio  45246**

(Address ofprincipal executive offices) (zip code)

 

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

 

 

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

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer (see definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act). Large accelerated filer o    Accelerated filer o    Non-accelerated filer x

 

Indicateby check mark whether the registrant is a shell company (as defined in ExchangeAct Rule 12b-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 16, 2007** |
|----------------------|------------|---------------------------------------------------------|
| Class A Common Stock |       | 100,000                                                 |

 

 

----

 

**PIERRE FOODS, INC. AND SUBSIDIARIES**

 
| ** **                                                                                                                      | ** ** | **Page**   |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **INDEX**                                                                                                                       | ** ** | **Number** |
| ** **                                                                                                                      | ** ** | ** ** |
| **Part I.  Financial Information:**                                                                                        | ** ** | 3          |
|                                                                                                                            |       |       |
| Item 1.  Financial Statements                                                                                              |       | 3          |
|                                                                                                                            |       |       |
| Condensed Consolidated  Balance Sheets — September 1, 2007 and March 3, 2007                                               | ** ** | 3          |
|                                                                                                                            |       |       |
| Condensed  Consolidated Statements of Operations — for the thirteen weeks ended September 1, 2007 and September  2, 2006   |       | 4          |
|                                                                                                                            |       |       |
| Condensed Consolidated Statements of  Operations — for the twenty-six weeks ended September 1, 2007 and  September 2, 2006 |       | 5          |
|                                                                                                                            |       |       |
| Condensed Consolidated Statement of Shareholder’s  Equity — for the twenty-six  weeks ended September 1, 2007         | ** ** | 6          |
| ** **                                                                                                                      | ** ** |       |
| Condensed Consolidated Statements of Cash Flows –  for the twenty-six weeks ended  September 1, 2007 and September 2, 2006 |       | 7          |
| ** **                                                                                                                      | ** ** |       |
| Notes to the Condensed Consolidated Financial  Statements                                                                       | ** ** | 8          |
|                                                                                                                            |       |       |
| Item  2.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations                      |       | 22         |
| ** **                                                                                                                      | ** ** |       |
| Item  3.  Quantitative and Qualitative  Disclosures About Market Risk                                                      | ** ** | 31         |
| ** **                                                                                                                      | ** ** |       |
| Item 4.  Controls and Procedures                                                                                           | ** ** | 31         |
| ** **                                                                                                                      | ** ** |       |
| **Part II.  Other Information:**                                                                                           | ** ** | 32         |
|                                                                                                                            |       |       |
| Item 1.  Legal Proceedings                                                                                                 |       | 32         |
|                                                                                                                            |       |       |
| Item 1A.  Risk Factors                                                                                                     | ** ** | 33         |
|                                                                                                                            |       |       |
| Item 6.  Exhibits                                                                                                          | ** ** | 33         |
| ** **                                                                                                                      | ** ** |       |
| Signatures                                                                                                                      | ** ** | 34         |
|                                                                                                                            |       |       |
| Exhibit Index                                                                                                                   |       | 35         |
|                                                                                                                            |       |       |
| Exhibits                                                                                                                        |       |       |
| Exhibit 31.1                                                                                                                    | ** ** | 36         |
| Exhibit 31.2                                                                                                                    | ** ** | 37         |
| Exhibit 32                                                                                                                      | ** ** | 38         |

 

2

----

 

**PART I.  FINANCIAL INFORMATION**

** **

**ITEM1.  FINANCIAL STATEMENTS**

** **

**PIERREFOODS, INC. AND SUBSIDIARIES**

 

**Condensed ConsolidatedBalance Sheets**

**(Unaudited)**

 
| ** **                                                                                                               | ** ** | **September 1, 2007** | ** **  | **March 3, 2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|-----------------------------|------------|
| ASSETS                                                                                                                   |       |                            |        |                        |       |
|                                                                                                                     |       |                            |        |                        |       |
| CURRENT ASSETS:                                                                                                          |       |                            |        |                        |       |
| Cash and cash  equivalents                                                                                               |       | $                               | 7,961,536   |                        | $          | 88,631 |   |
| Accounts  receivable, net                                                                                                |       | 48,238,453                      |        | 46,138,649                  |       |
| Inventories                                                                                                              |       | 78,342,984                      |        | 68,496,266                  |       |
| Refundable  income taxes                                                                                                 |       | 6,536,740                       |        | 4,612,613                   |       |
| Deferred income  taxes                                                                                                   |       | 5,012,411                       |        | 5,159,359                   |       |
| Prepaid expenses  and other current assets                                                                               |       | 5,843,685                       |        | 5,553,263                   |       |
|                                                                                                                     |       |                            |        |                        |       |
| Total current assets                                                                                                     |       | 151,935,809                     |        | 130,048,781                 |       |
|                                                                                                                     |       |                            |        |                        |       |
| PROPERTY, PLANT,  AND EQUIPMENT, NET                                                                                     |       | 95,506,089                      |        | 98,559,861                  |       |
|                                                                                                                     |       |                            |        |                        |       |
| OTHER ASSETS:                                                                                                            |       |                            |        |                        |       |
| Other  intangibles, net                                                                                                  |       | 126,218,480                     |        | 139,550,756                 |       |
| Goodwill                                                                                                                 |       | 217,146,471                     |        | 218,221,866                 |       |
| Deferred loan  origination fees                                                                                          |       | 7,178,027                       |        | 8,266,710                   |       |
| Other                                                                                                                    |       | 7,062,940                       |        | 5,181,501                   |       |
|                                                                                                                     |       |                            |        |                        |       |
| Total other  assets                                                                                                      |       | 357,605,918                     |        | 371,220,833                 |       |
|                                                                                                                     |       |                            |        |                        |       |
| Total Assets                                                                                                             |       | $                               | 605,047,816 |                        | $          | 599,829,475 |   |
|                                                                                                                     |       |                            |        |                        |       |
| LIABILITIES AND  SHAREHOLDER’S EQUITY                                                                               |       |                            |        |                        |       |
|                                                                                                                     |       |                            |        |                        |       |
| CURRENT LIABILITIES:                                                                                                     |       |                            |        |                        |       |
| Current  installments of long-term debt                                                                                  |       | $                               | 1,557,397   |                        | $          | 1,557,594 |   |
| Trade accounts  payable                                                                                                  |       | 21,827,861                      |        | 20,567,325                  |       |
| Accrued interest                                                                                                         |       | 2,452,401                       |        | 5,568,643                   |       |
| Accrued payroll  and payroll taxes                                                                                       |       | 6,837,388                       |        | 7,116,045                   |       |
| Accrued  promotions                                                                                                      |       | 4,427,525                       |        | 3,278,430                   |       |
| Accrued taxes  (other than income and payroll)                                                                           |       | 1,413,649                       |        | 1,095,511                   |       |
| Other accrued  liabilities                                                                                               |       | 5,067,685                       |        | 3,110,606                   |       |
|                                                                                                                     |       |                            |        |                        |       |
| Total current  liabilities                                                                                               |       | 43,583,906                      |        | 42,294,154                  |       |
|                                                                                                                     |       |                            |        |                        |       |
| LONG-TERM DEBT,  less current installments                                                                               |       | 378,570,991                     |        | 357,286,462                 |       |
|                                                                                                                     |       |                            |        |                        |       |
| DEFERRED INCOME  TAXES                                                                                                   |       | 40,642,611                      |        | 45,662,017                  |       |
|                                                                                                                     |       |                            |        |                        |       |
| OTHER LONG-TERM  LIABILITIES                                                                                             |       | 4,974,073                       |        | 4,766,732                   |       |
|                                                                                                                     |       |                            |        |                        |       |
| Total  Liabilities                                                                                                       |       | 467,771,581                     |        | 450,009,365                 |       |
|                                                                                                                     |       |                            |        |                        |       |
| SHAREHOLDER’S  EQUITY:                                                                                              |       |                            |        |                        |       |
| Common stock –  Class A, 100,000 shares authorized, issued, and outstanding at September 1,  2007 and March 3, 2007 |       | 150,176,136                     |        | 150,187,941                 |       |
| Retained deficit                                                                                                         |       | (12,899,901                     | )           | (367,831                    | )          |
|                                                                                                                     |       |                            |        |                        |       |
| Total  shareholder’s equity                                                                                         |       | 137,276,235                     |        | 149,820,110                 |       |
|                                                                                                                     |       |                            |        |                        |       |
| Total  Liabilities and Shareholder’s Equity                                                                         |       | $                               | 605,047,816 |                        | $          | 599,829,475 |   |

 

Seeaccompanying notes to unaudited Condensed Consolidated Financial Statements.

 

3

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**PIERRE FOODS, INC. ANDSUBSIDIARIES**

** **

**Condensed Consolidated Statements of Operations**

(Unaudited)

 
| ** **                                                    | ** ** | **For the**                | ** **  | **For the**                | ** ** |
|---------------------------------------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|
| ** **                                                    | ** ** | **Thirteen Weeks**         | ** **  | **Thirteen Weeks**         | ** ** |
| ** **                                                    | ** ** | **Ended**                       | ** **  | **Ended**                       | ** ** |
| ** **                                                    | ** ** | **September 1, 2007** | ** **  | **September 2, 2006** | ** ** |
|                                                          |       |                            |        |                            |       |
| REVENUES, NET                                                 |       | $                               | 151,497,688 |                            | $          | 98,912,576 |   |
|                                                          |       |                            |        |                            |       |
| COSTS AND  EXPENSES:                                          |       |                            |        |                            |       |
| Cost of goods  sold                                           |       | 116,713,558                     |        | 68,640,997                      |       |
| Selling,  general, and administrative expenses                |       | 29,371,157                      |        | 17,570,417                      |       |
| Depreciation and  amortization                                |       | 9,216,252                       |        | 6,878,458                       |       |
| Loss on  disposition of property, plant, and equipment, net   |       | 238                             |        | 5,301                           |       |
|                                                          |       |                            |        |                            |       |
| Total costs and  expenses                                     |       | 155,301,205                     |        | 93,095,173                      |       |
|                                                          |       |                            |        |                            |       |
| OPERATING INCOME  (LOSS)                                      |       | (3,803,517                      | )           | 5,817,403                       |       |
|                                                          |       |                            |        |                            |       |
| INTEREST EXPENSE  AND OTHER INCOME:                           |       |                            |        |                            |       |
| Interest expense                                              |       | (9,023,491                      | )           | (5,582,665                      | )          |
| Other income                                                  |       | 80,422                          |        | 3,670                           |       |
|                                                          |       |                            |        |                            |       |
| Interest expense  and other income, net                       |       | (8,943,069                      | )           | (5,578,995                      | )          |
|                                                          |       |                            |        |                            |       |
| INCOME (LOSS)  BEFORE INCOME TAX BENEFIT (PROVISION)          |       | (12,746,586                     | )           | 238,408                         |       |
|                                                          |       |                            |        |                            |       |
| INCOME TAX  BENEFIT (PROVISION)                               |       | 4,591,415                       |        | (108,534                        | )          |
|                                                          |       |                            |        |                            |       |
| NET INCOME (LOSS)                                             |       | $                               | (8,155,171  | )                               | $          | 129,874 |   |
|                                                          |       |                            |        |                            |       |
| NET INCOME  (LOSS) PER COMMON SHARE — BASIC AND DILUTED  |       | $                               | (81.55      | )                               | $          | 1.30 |   |
|                                                          |       |                            |        |                            |       |
| WEIGHTED AVERAGE  SHARES OUTSTANDING — BASIC AND DILUTED |       | 100,000                         |        | 100,000                         |       |

 

Seeaccompanying notes to unaudited Condensed Consolidated Financial Statements.

 

4

----

 

**PIERRE FOODS, INC. ANDSUBSIDIARIES**

** **

**CondensedConsolidated Statements of Operations**

(Unaudited)

 
| ** **                                                    | ** ** | **For the**                | ** **  | **For the**                | ** ** |
|---------------------------------------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|
| ** **                                                    | ** ** | **Twenty-Six Weeks**       | ** **  | **Twenty-Six Weeks**       | ** ** |
| ** **                                                    | ** ** | **Ended**                       | ** **  | **Ended**                       | ** ** |
| ** **                                                    | ** ** | **September 1, 2007** | ** **  | **September 2, 2006** | ** ** |
|                                                          |       |                            |        |                            |       |
| REVENUES, NET                                                 |       | $                               | 308,999,002 |                            | $          | 204,668,094 |   |
|                                                          |       |                            |        |                            |       |
| COSTS AND  EXPENSES:                                          |       |                            |        |                            |       |
| Cost of goods  sold                                           |       | 234,678,080                     |        | 142,738,505                     |       |
| Selling,  general, and administrative expenses                |       | 57,918,599                      |        | 35,919,394                      |       |
| Depreciation and  amortization                                |       | 18,488,303                      |        | 13,673,863                      |       |
| Loss on  disposition of property, plant, and equipment, net   |       | 38                              |        | 5,301                           |       |
|                                                          |       |                            |        |                            |       |
| Total costs and  expenses                                     |       | 311,085,020                     |        | 192,337,063                     |       |
|                                                          |       |                            |        |                            |       |
| OPERATING INCOME  (LOSS)                                      |       | (2,086,018                      | )           | 12,331,031                      |       |
|                                                          |       |                            |        |                            |       |
| INTEREST EXPENSE  AND OTHER INCOME:                           |       |                            |        |                            |       |
| Interest expense                                              |       | (17,212,963                     | )           | (11,104,568                     | )          |
| Other income                                                  |       | 102,589                         |        | 35,958                          |       |
|                                                          |       |                            |        |                            |       |
| Interest expense  and other income, net                       |       | (17,110,374                     | )           | (11,068,610                     | )          |
|                                                          |       |                            |        |                            |       |
| INCOME (LOSS)  BEFORE INCOME TAX BENEFIT (PROVISION)          |       | (19,196,392                     | )           | 1,262,421                       |       |
|                                                          |       |                            |        |                            |       |
| INCOME TAX  BENEFIT (PROVISION)                               |       | 6,721,449                       |        | (452,373                        | )          |
|                                                          |       |                            |        |                            |       |
| NET INCOME  (LOSS)                                            |       | $                               | (12,474,943 | )                               | $          | 810,048 |   |
|                                                          |       |                            |        |                            |       |
| NET INCOME  (LOSS) PER COMMON SHARE — BASIC AND DILUTED  |       | $                               | (124.75     | )                               | $          | 8.10 |   |
|                                                          |       |                            |        |                            |       |
| WEIGHTED AVERAGE  SHARES OUTSTANDING — BASIC AND DILUTED |       | 100,000                         |        | 100,000                         |       |

 

Seeaccompanying notes to unaudited Condensed Consolidated Financial Statements.

 

5

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**PIERRE FOODS, INC. AND SUBSIDIARIES**

** **

**Condensed Consolidated Statement of Shareholder’sEquity**

** **

**For theTwenty-Six Weeks Ended September 1, 2007**

(Unaudited)

 
| ** **                               | ** ** | **Common**       | ** **  | ** **   | ** ** | **Total**              | ** ** |
|------------------------------------------|------------|------------------|-------------|--------------|------------|------------------------|------------|
| ** **                               | ** ** | **Stock**        | ** **  | **Retained** | ** ** | **Shareholder’s** | ** ** |
| ** **                               | ** ** | **Class A** | ** **  | **Deficit**  | ** ** | **Equity**             | ** ** |
|                                     |       |             |        |         |       |                   |       |
| BALANCE AT MARCH 3, 2007                 |       | $                | 150,187,941 |         | $          | (367,831               | )          | $ | 149,820,110 |   |
|                                     |       |             |        |         |       |                   |       |
| Net loss                                 |       | —           |        | (12,474,943  | )          | (12,474,943            | )          |
|                                     |       |             |        |         |       |                   |       |
| Cumulative effect — FIN 48 adoption |       | —           |        | (57,127      | )          | (57,127                | )          |
|                                     |       |             |        |         |       |                   |       |
| Expenses paid on behalf of parent        |       | (11,805          | )           | —       |       | (11,805                | )          |
|                                     |       |             |        |         |       |                   |       |
| BALANCE AT SEPTEMBER 1, 2007             |       | $                | 150,176,136 |         | $          | (12,899,901            | )          | $ | 137,276,235 |   |

 

Seeaccompanying notes to unaudited Condensed Consolidated Financial Statements.

 

6

----

 

**PIERRE FOODS, INC. ANDSUBSIDIARIES**

** **

**Condensed Consolidated Statements of Cash Flows**

(Unaudited)

** **
| ** **                                                                            | ** ** | **For the**                | ** **  | **For the**                | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|
| ** **                                                                            | ** ** | **Twenty-Six Weeks**       | ** **  | **Twenty-Six Weeks**       | ** ** |
| ** **                                                                            | ** ** | **Ended**                       | ** **  | **Ended**                       | ** ** |
| ** **                                                                            | ** ** | **September 1, 2007** | ** **  | **September 2, 2006** | ** ** |
|                                                                                  |       |                            |        |                            |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                                 |       |                            |        |                            |       |
| Net income  (loss)                                                                    |       | $                               | (12,474,943 | )                               | $          | 810,048 |   |
|                                                                                  |       |                            |        |                            |       |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |       |                            |        |                            |       |
| Depreciation and  amortization                                                        |       | 18,488,303                      |        | 13,673,863                      |       |
| Amortization of  deferred loan origination fees                                       |       | 1,088,683                       |        | 754,282                         |       |
| Change in deferred  taxes                                                             |       | (4,929,585                      | )           | (6,878,409                      | )          |
| Loss on  disposition of plant, property, and equipment                                |       | 38                              |        | 5,301                           |       |
| Changes in  operating assets and liabilities, net of acquired assets and liabilities: |       |                            |        |                            |       |
| Receivables                                                                           |       | (2,171,965                      | )           | (373,628                        | )          |
| Inventories                                                                           |       | (8,466,478                      | )           | (8,848,651                      | )          |
| Refundable  income taxes, prepaid expenses, and other current assets                  |       | (1,416,566                      | )           | 1,916,070                       |       |
| Trade accounts  payable and other accrued liabilities                                 |       | 492,376                         |        | 1,625,329                       |       |
| Other long-term  liabilities                                                          |       | 369,023                         |        | 354,511                         |       |
| Other assets                                                                          |       | (12,433                         | )           | 61,690                          |       |
| Total  adjustments                                                                    |       | 3,441,396                       |        | 2,290,358                       |       |
| Net cash  provided by (used in) operating activities                                  |       | (9,033,547                      | )           | 3,100,406                       |       |
|                                                                                  |       |                            |        |                            |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                 |       |                            |        |                            |       |
| Net cash  provided by (used in) the Acquisition of Clovervale                         |       | 711,002                         |        | (21,810,436                     | )          |
| Net cash used in  the Acquisition of Zartic                                           |       | (155,753                        | )           | —                          |       |
| Capital  expenditures                                                                 |       | (4,921,324                      | )           | (3,998,536                      | )          |
| Net cash used in  investing activities                                                |       | (4,366,075                      | )           | (25,808,972                     | )          |
|                                                                                  |       |                            |        |                            |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                 |       |                            |        |                            |       |
| Net borrowings  of revolving credit agreement                                         |       | 24,050,000                      |        | 10,957,000                      |       |
| 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                                                 |       | (2,765,668                      | )           | (12,246,306                     | )          |
| Loan origination  fees                                                                |       | —                          |        | (679,217                        | )          |
| Return of  capital to parent                                                          |       | (11,805                         | )           | (15,705                         | )          |
|                                                                                  |       |                            |        |                            |       |
| Net cash  provided by financing activities                                            |       | 21,272,527                      |        | 20,403,394                      |       |
|                                                                                  |       |                            |        |                            |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                 |       | 7,872,905                       |        | (2,305,172                      | )          |
|                                                                                  |       |                            |        |                            |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                       |       | 88,631                          |        | 2,540,722                       |       |
|                                                                                  |       |                            |        |                            |       |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                             |       | $                               | 7,961,536   |                            | $          | 235,550 |   |

 

Seeaccompanying notes to unaudited Condensed Consolidated Financial Statements.

 

7

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**PIERRE FOODS, INC. ANDSUBSIDIARIES**

** **

**Notes to CondensedConsolidated Financial Statements**

(Unaudited)

 

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

** **

Pierre Foods, Inc. and itssubsidiaries (the “Company” or “Pierre”) manufactures, markets, and distributeshigh-quality, differentiated processed food solutions, focusing on formed,pre-cooked and ready-to-cook protein products, compartmentalized meals, andhand-held convenience sandwiches.   The Company’s products include, butare not limited to, beef, pork, poultry, bakery items, vegetables, fruits,cobblers, and peanut butter and jelly bars, sandwiches and cups.  Pierreoffers comprehensive food solutions to its customers, including proprietaryproduct development, special ingredients and recipes, as well as custompackaging and marketing programs.   Pierre’s pre-cooked andready-to-cook proteins include flamebroiled burger patties, homestyle meatloaf,chicken strips, and boneless, barbecued pork rib products.   Pierremarkets its pre-cooked and ready-to-cook protein products to a broad array ofcustomers that include restaurant chains, schools, military, and otherfoodservice providers.

 

The Company’s unauditedCondensed Consolidated Financial Statements have been prepared in accordancewith accounting principles generally accepted in the United States of America (“GAAP”),as well as the instructions to Form 10-Q and Article 10 of RegulationS-X.  These statements should be read in conjunction with the ConsolidatedFinancial Statements and the notes thereto included in the Company’s AnnualReport on Form 10-K filed with the SEC on June 15, 2007 (“Form 10-K”).

 

The financial information asof March 3, 2007 included in these financial statements has been derivedfrom the Company’s audited Consolidated Financial Statements.  In theopinion of the Company, the accompanying unaudited Condensed ConsolidatedFinancial Statements contain all adjustments necessary to present fairly thefinancial position, the results of operations, and the cash flows of theCompany for the interim periods.  The results of interim operations arenot necessarily indicative of the results to be expected for the full fiscalyear, and as noted above, should be read in conjunction with the Consolidated FinancialStatements and the notes thereto included in the Company’s Form 10-K.  TheCompany’s current accounting policies are consistent with those described inthe notes to the Company’s March 3, 2007 audited Consolidated FinancialStatements except for the adoption of Financial Accounting Standards Board (“FASB”)Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes —an Interpretation of FASB Statement No. 109, Accounting for Income Taxes”,which was adopted effective March 4, 2007.

 

Included in this report areinterim unaudited Condensed Consolidated Financial Statements that contain alladjustments necessary to present fairly the financial position as of September1, 2007, the results of operations for the thirteen and twenty-six week periodsended September 1, 2007 and September 2, 2006, the cash flows of the Companyfor the twenty-six week periods ended September 1, 2007 and September 2, 2006,and the statement of shareholder’s equity for the twenty-six week period endedSeptember 1, 2007.  The thirteen week periods ended September 1, 2007 andSeptember 2, 2006 are referred to as “second quarter fiscal 2008” and “secondquarter fiscal 2007”, respectively.  Thetwenty-six week periods ended September 1, 2007 and September 2, 2006 are referredto as “fiscal 2008” and “fiscal 2007”, respectively.

 

The Company reports theresults of its operations using a 52-53 week basis.  In line with this, each quarter of the fiscalyear will contain 13 weeks except for the infrequent fiscal years with 53 weeks.  The fiscal year ended March 3, 2007 and thefiscal year ending March 1, 2008 both contain 52 weeks.

 

2.                 **Acquisitions**

*** ***

***Acquisition of Clovervale.***   On August 21, 2006, the Company acquired all of the outstandingshares of stock of Clovervale Farms, Inc., two of its subsidiaries, and certainof the real property used in its business (“Clovervale”).  The acquisitionof Clovervale is referred to herein as the “Acquisition of Clovervale”. The preliminary aggregate purchase price was $22.8 million, which was paid incash at the closing.  After repayment of indebtedness and otherpost-closing adjustments, the preliminary net purchase price was $21.8 millionand was subject to a post-closing working capital adjustment.  Subsequentto finalizing such adjustment, the net purchase price was $21.1 million.  Pierre funded the Acquisition of Clovervalethrough an amendment to its Credit Agreement (“Amendment No. 2”).  SeeNote 6, “Long-Term Debt” to the Company’s Condensed Consolidated FinancialStatements for further discussion.  Pierre’s investment in Clovervale wasbased on the expectation that such an investment would increase the Company’spresence with targeted customer channels and add capacity and productioncapabilities in order to increase product offerings.

 

Clovervale was a privatelyheld company and currently employs approximately 130 employees. Clovervale has operations in Amherst, Ohio and Easley, South Carolina andmanufactures and sells a variety of food items including individuallyproportioned entrees, vegetables, sandwiches, fruits, cobblers, peanut butterand jelly bars, sandwiches and cups, sherbets, apple sauce, and other similarproducts through various customer channels including schools, military,hospitals, and senior citizen meal programs.  The operating results forClovervale are included in the Company’s Condensed Consolidated Statement ofOperations from the date of the Acquisition of Clovervale.

 

In conjunction with theAcquisition of Clovervale, management of the Company, with the assistance of anindependent valuation firm, performed valuations on the Clovervale otherintangible assets for financial reporting purposes.  Assets identifiedthrough these valuations included customer relationships, non-competeagreements, and certain tradenames and trademarks.  Other fair valueadjustments were made in conjunction with the Acquisition of Clovervale, whichprimarily include adjustments to property, plant, and equipment, inventory, andthe related deferred taxes.

 

8

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The Acquisition of Clovervalewas recorded under the purchase method of accounting.  The net purchaseprice has been allocated to assets acquired and liabilities assumed based onthe estimated fair market value at the date of the Acquisition ofClovervale.  The allocation of the net purchase price is as follows:

 
| Current assets                      |   | $          | 5,131,478  |   |
|-------------------------------------|--------|------------|------------|--------|
| Property, plant,  and equipment     |   | 12,876,729 |       |
| Non-current  assets                 |   | 17,625     |       |
| Goodwill                            |   | 6,031,892  |       |
| Other  intangibles                  |   | 2,730,000  |       |
| Debt and other  liabilities assumed |   | (4,409,124 | )          |
| Deferred tax  liabilities           |   | (1,244,174 | )          |
| Net assets  acquired                |   | $          | 21,134,426 |   |

 

Of the $2.7 million ofacquired other intangible assets, $2.4 million was assigned to customerrelationships with a weighted-average estimated useful life of 10 years. The remaining acquired other intangible assets included tradenames andtrademarks of $280,000 with a weighted-average useful life of 3 years and anon-compete agreement of $50,000 with a useful life of 2 years.  Thegoodwill related to the Acquisition of Clovervale is not deductible for taxpurposes.

 

The initial allocation of thepreliminary net purchase price to specific assets and liabilities was based, inpart, upon preliminary appraisals, and was therefore subject to change. Net assets acquired totaling $21.9 million were previously reported in theCompany’s Form 10-Q for the quarter ended June 2, 2007.  The decrease innet assets acquired is due to the final working capital adjustment and othermiscellaneous adjustments.  The Company has finalized the allocation ofthe purchase price to acquired assets and liabilities.  Additionally, the Company has finalized thedeferred tax liabilities.

 

***Acquisition of Zartic.***  On December 11, 2006, theCompany acquired substantially all of the assets of Zartic, Inc. and itsaffiliated distribution company, Zar Tran, Inc., and certain real property andother assets used in the businesses (collectively, “Zartic”).  Theacquisition of Zartic is referred to herein as the “Acquisition of Zartic”. The preliminary aggregate purchase price was $94.0 million, plus the assumptionof certain liabilities, which was paid in cash at the closing and is subject tocertain post-closing adjustments.  After repayment of indebtedness andother post-closing adjustments, the preliminary net purchase price was $91.8million and is subject to additional post-closing adjustments, includingadjustments for working capital.  Pierre funded the Acquisition of Zarticthrough an amendment to its Credit Agreement (“Amendment No. 3”)--see Note 6, “Long-TermDebt” to the Company’s Condensed Consolidated Financial Statements for furtherdiscussion.  Pierre’s investment inZartic was based on the expectation that such an investment would increase theCompany’s presence with targeted customer channels and add capacity andproduction capabilities in order to increase product offerings.

 

Zartic was a privately heldcompany and currently employs approximately 869 employees.  Zarticcurrently has operations in Rome, Georgia and Cedartown, Georgia.  As of the date of the acquisition, Zartic hadoperations in Hamilton, Alabama, which was subsequently destroyed by a fire onJuly 14, 2007.  Zartic manufactures,sells, delivers, and distributes a variety of food items including packagedbeef, poultry, pork, and veal products and other similar products throughvarious customer channels including restaurant chains, schools, military, andother foodservice providers.  Operating results for Zartic are included inthe Company’s Condensed Consolidated Statement of Operations from the date ofthe Acquisition of Zartic.

 

In conjunction with theAcquisition of Zartic, management of the Company, with the assistance of anindependent valuation firm, performed valuations on the Zartic other intangibleassets for financial reporting purposes.  Assets identified through thisvaluation process included customer relationships, non-compete agreements, andcertain tradenames and trademarks.  Other fair value adjustments were madein conjunction with the Acquisition of Zartic, which primarily includeadjustments to property, plant, and equipment, and inventory.

 

The Acquisition of Zartic wasrecorded under the purchase method of accounting.  The preliminary netpurchase price has been allocated to assets acquired and liabilities assumedbased on the estimated fair market value at the date of the Acquisition ofZartic.  The preliminary allocation of the net purchase price is asfollows:

 
| Current assets                      |   | $           | 26,431,047 |   |
|-------------------------------------|--------|-------------|------------|--------|
| Property, plant,  and equipment     |   | 29,809,308  |       |
| Non-current  assets                 |   | 319,691     |       |
| Goodwill                            |   | 23,250,440  |       |
| Other  intangibles                  |   | 27,700,000  |       |
| Debt and other  liabilities assumed |   | (15,750,359 | )          |
| Net assets  acquired                |   | $           | 91,760,127 |   |

 

Of the $27.7 million ofacquired other intangible assets, $15.1 million was assigned to customerrelationships with a weighted-average estimated useful life of 14 years. The remaining acquired other intangible assets included formula and recipes of$9.9 million with a weighted-average useful life of 15 years, tradenames and trademarksof $2.4 million with a weighted-average useful life of 2 years, and anon-compete agreement of $0.3 million with a useful life of 3 years.  Thegoodwill related to the Acquisition of Zartic is deductible for tax purposes.

 

The initial allocation of thepreliminary net purchase price to specific assets and liabilities was based, inpart, upon preliminary appraisals, and is therefore subject to change. Net assets acquired totaling $91.7 million were previously reported in theCompany’s Form 10-Q for the quarter ended June 2, 2007.  The increase innet assets acquired is due to miscellaneous adjustments.  The Companyexpects to further adjust and finalize the appraisals of acquired assets andliabilities by the end of its current fiscal year that ends March 1, 2008.

 

9

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***Unaudited Pro Forma Results. *** The following tables present unaudited proforma information for second quarter fiscal 2007 and fiscal 2007, as if theAcquisition of Clovervale and the Acquisition of Zartic had been completed atthe beginning of the periods.

 
| ** **         | ** ** | **Fiscal 2007** | ** **  | **Second Quarter Fiscal 2007** | ** ** |
|--------------------|------------|----------------------|-------------|-----------------------------------------------|------------|
| ** **         | ** ** | **Actual**           | ** **  | **Pro Forma**                            | ** ** | **Actual** | ** ** | **Pro Forma** | ** ** |
|               |       |                 |        |                                          |       |   |   |   |   |
| Revenues           |       | $                    | 204,668,094 |                                          | $          | 292,651,887 |   | $ | 98,912,576 |   | $ | 143,319,656 |   |
|               |       |                 |        |                                          |       |   |   |   |   |
| Net income  (loss) |       | $                    | 810,048     |                                          | $          | (3,062,565 | ) | $ | 129,874 |   | $ | (317,235 | ) |

 

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

 

In addition to the purchaserelated adjustments, included in these pro forma results are certainreclassifications of Clovervale’s and Zartic’s expenses, to be consistent withthe classifications of Pierre.  These reclassifications include thepresentation of various sales discounts previously reported by Clovervale asselling expenses, but more appropriately classified as a reduction ofrevenues.  In addition, these reclassifications include the presentationof depreciation and amortization previously reported by Zartic within operatingexpenses.

 

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

 

**3.****               ****Income Taxes**

** **

EffectiveMarch 4, 2007, the Company adopted FIN 48, which requires that thefinancial statement effects of a tax position taken or expected to be taken ina tax return be recognized in the financial statements when it is more likelythan not, based on the technical merits, that the position will be sustainedupon examination.

** **

The recognition andmeasurement guidelines of FIN 48 were applied to all of the Company’s materialtax positions as of March 4, 2007, resulting in an increase in non-current taxliabilities of $809,267, including accrued interest.  Of this amount,$57,127 was treated as a decrease to beginning retained earnings for thecumulative effect of change in accounting principle.  The total amount ofunrecognized income tax benefits as of March 4, 2007 was $809,267, of which$57,127 would affect the Company’s effective income tax rate ifrecognized.  The difference between the total amount of unrecognized taxbenefits and the amount that impacts the effective income tax rate relatesprimarily to deferred tax benefits for temporary differences between book andtax return items.

 

The Company files income taxreturns in the U.S. federal jurisdiction and various state jurisdictions. The Company has substantially concluded all U.S. federal income tax matters forthe tax year ended June 30, 2004.  No federal income tax returns arecurrently under examination.  With few exceptions, the Company is nolonger subject to state or local income tax examinations by tax authorities forits fiscal 2003 tax year.

 

The Company’s continuingpolicy is to recognize interest and penalties related to income tax matters astax expense.  The amount of interest and penalty expense recorded for thethirteen and twenty-six week periods ended September 1, 2007 was not material.

 

There was no material changein the net amount of unrecognized tax benefits in second quarter fiscal 2008 orfiscal 2008.  Management has concluded that there will not be a materialreduction in the unrecognized tax benefit during the next 12 months based onanticipated tax positions taken in the next 12 months, expected settlements orpayments of uncertain tax positions, and lapses of the applicable statutes oflimitations of unrecognized tax benefits.

 

The effective tax rate forsecond quarter fiscal 2008 was 36.0% compared to 45.5% for second quarterfiscal 2007.  The effective tax rate for fiscal 2008 was 35.0% compared to35.8% for fiscal 2007.  The change in the effective tax rate for bothperiods is primarily due to a change in the expected Section 199 deduction (the“Domestic Manufacturing Deduction”) based on current year profitability, theelimination of the Extra-Territorial Income deduction (“ETI”) in the currentyear; changes in the Company’s expected pre-tax income relative to the impactof permanent differences, and a reduction in the Company’s estimated stateeffective tax rate due to the Acquisition of Clovervale and the Acquisition ofZartic.

 

**4.     Stock-Based Compensation**

 

On June 30, 2004, PierreHolding Corp. (“Holding”), an affiliate of Madison Dearborn Partners, LLC (“MDP”),adopted a stock option plan, pursuant to which the Board of Directors ofHolding may grant options to purchase an aggregate of 163,778 shares of commonstock of Holding.  Such options may be granted to directors, employees,and consultants of Holding and its subsidiaries, including the Company. At September 1, 2007 and March 3, 2007, outstanding options to purchase commonstock of Holding issued to members of management of the Company (the “Options”)were 124,384 and 126,219, respectively, and 37,559

 

10

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shares were reserved forfuture issuance.  All outstanding Options were granted at $10 per shareand expire ten years from the date of grant.  A portion of eachoutstanding Option vests daily on a pro-rata basis over a five-year period fromthe date of grant and the remaining portion of each outstanding Option vestsseven years from the date of grant, subject to accelerated vesting based on theachievement of certain performance measures.  At September 1, 2007 andMarch 3, 2007, options to purchase 30,712 shares and 26,115 shares,respectively, were vested and exercisable.

 

The Company treats theOptions issued to employees of the Company as stock-based compensation. Prior to fiscal 2007, as permitted under GAAP, the Company accounted for theOptions under the recognition and measurement principles of Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”),and related Interpretations using the intrinsic value method. Accordingly, no compensation expense was recognized for the stock option planin the Company’s Condensed Consolidated Statements of Operations.

 

Effective March 5, 2006, asrequired for the first annual reporting period beginning after December 15,2005 for non-public companies (as defined in Statement of Financial AccountingStandards (“SFAS”) No. 123(R)), the Company adopted SFAS 123(R) using theprospective adoption method.  SFAS 123(R) requires compensation expenseassociated with share-based payments to employees to be recognized in thefinancial statements based on their fair values.  Upon the adoption ofSFAS 123(R), because the Company had used the minimum value method prior to theadoption, the Company was required to apply the provisions of the statementonly prospectively for any newly issued, modified or settled award after thedate of initial adoption.  No Options have been issued, modified orsettled subsequent to adoption.  Upon theadoption of SFAS 123(R), the pro forma effect of fair value accounting forprior periods presented is no longer presented as the Company used the minimumvalue method.

 

**5.     Inventories**

** **

A summary of inventories, by major classifications, follows:

 
| ** **      | ** ** | **September 1, 2007** | ** ** | **March 3, 2007** | ** ** |
|-----------------|------------|---------------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                               | 13,929,829 |                        | $          | 14,122,205 |   |
| Finished goods  |       | 64,157,760                      |       | 54,090,234                  |       |
| Work in process |       | 255,395                         |       | 283,827                     |       |
| Total           |       | $                               | 78,342,984 |                        | $          | 68,496,266 |   |

** **

**6.    Long-Term Debt**

** **

Long-termdebt is comprised of the following:

 
| ** **                                                                                                         | ** ** | **September 1, 2007** | ** **  | **March 3, 2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|-----------------------------|------------|
| 9.875% senior  notes, interest payable on January 15 and July 15 of each year, maturing on  July 15, 2012          |       | $                               | 125,000,000 |                        | $          | 125,000,000 |   |
| $150 million term loan, with floating interest  rates, maturing June 30, 2010                                      |       | 227,000,000                     |        | 229,000,000                 |       |
| Revolving line  of credit, maximum borrowings of $40 million with floating interest rates,  maturing June 30, 2009 |       | 24,850,000                      |        | 800,000                     |       |
| 4.6% to 10.7%  capitalized lease obligations maturing through 2011                                                 |       | 3,278,388                       |        | 4,044,056                   |       |
| Total long-term  debt                                                                                              |       | 380,128,388                     |        | 358,844,056                 |       |
| Less current  installments                                                                                         |       | (1,557,397                      | )           | (1,557,594                  | )          |
| Long-term debt  less current installments                                                                          |       | $                               | 378,570,991 |                        | $          | 357,286,462 |   |

 

Effective June 30, 2004, theCompany obtained a $190 million credit facility, which included a six-yearvariable-rate $150 million term loan, a five-year variable-rate $40 millionrevolving credit facility and a $10 million letter of credit subfacility. Funds available under this facility are available for working capitalrequirements, permitted investments and general corporate purposes.  Allof the Company’s indebtedness under the credit facility is secured by afirst-priority security interest in substantially all of the Company’sassets.  At September 1, 2007, base rate borrowings under the term loanportion of the facility bear interest at prime rate plus 1.25% and base rateborrowings under the revolving credit portion of the facility bear interest atprime rate plus based on prime plus pricing levels ranging from 1.0% to 1.75%determined by the consolidated leverage ratio of the Company.  AtSeptember 1, 2007, the interest rates for base rate borrowings under therevolving credit facility and the term loans were 10.00% (prime of 8.25% plus1.75%) and 9.50% (prime of 8.25% plus 1.25%), respectively.  However, theCompany lowered such rates through the use of LIBOR tranches.  Thefollowing table summarizes the Company’s outstanding LIBOR tranches as ofSeptember 1, 2007, including the amount, the respective rate of interest, andthe date of expiration.

 
| ** **                                | ** ** | **Amount** | ** **  | **Interest Rate** | ** ** | **Expiration Date** | ** ** |
|-------------------------------------------|------------|------------|-------------|------------------------|------------|--------------------------|------------|
| Term loan LIBOR  tranche:                 |       | $          | 227,000,000 |                   | 7.78       | %                        | 11/16/07   |   |
| Revolving credit  facility LIBOR tranche: |       | $          | 6,000,000   |                   | 8.18       | %                        | 02/29/08   |   |
| Revolving credit  facility LIBOR tranche: |       | $          | 14,000,000  |                   | 8.17       | %                        | 02/29/08   |   |

 

Effective August16, 2007, the Company entered into an interest swap agreement (the “Swap”)to reduce its exposure to interest rate fluctuations on a portion of its termloan with the objective of minimizing the impact of interest rate fluctuationsand stabilizing cash flows.  The Swap hasa notional amount of $175.0 million with a fixed rate of 5.14%, therebyeffectively converting a portion of the floating rate term debt to a fixed rateobligation of 7.39% (5.14% plus applicable margin).  A portion of the Swap with

 

11

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a notional amount of $25.0million will expire on August 16, 2008, with the remaining $150.0 millionexpiring on August 16, 2009.  Thedifference between the three-month LIBOR rate and Swap rate will be settled incash on the interest payment dates.  Inaccordance with SFAS 133,**theSwap does not qualify for “Cash Flow Hedge Accounting” treatment.  The change in the fair value of the Swaptotaling $427,677 is reflected as an increase in interest expense in secondquarter fiscal 2008.  As of September 1,2007, the Company has recorded a liability totaling $427,677 to recognize theSwap at its fair value.

 

Repayment of borrowings underthe $150.0 million term loan was initially $375,000 per quarter, which began onSeptember 4, 2004, with a balloon payment of $141.4 million due onJune 30, 2010.  The Company made all such scheduled quarterlypayments totaling $8.6 million for the term of the loan and prepayments on theterm loan totaling $34.4 million.  As previously discussed in Note 2 “Acquisitions”,in conjunction with the Acquisition of Clovervale, the Company increasedborrowings with respect to its term loan by $24.0 million in order to financethe Acquisition of Clovervale.  In addition, also discussed in Note 2 “Acquisitions”,in conjunction with the Acquisition of Zartic, the Company increased borrowingswith respect to its term loan by $100.0 million in order to finance theAcquisition of Zartic.  As a result ofAmendment No. 3, scheduled quarterly repayments were $250,000 per quarter.  During first quarter fiscal 2008, the Companymade prepayments of $2.0 million, and as such, is not required to resumescheduled quarterly payments until February 28, 2009.  The remainingoutstanding balance as of September 1, 2007 of $225.8 million (excludingscheduled quarterly payments) is due on June 30, 2010.

 

On April 3, 2006, the Companyentered into Amendment No. 1 to its credit facility (“Amendment No. 1”). Amendment No. 1 provided for, among other things, a reduction of 0.5% in theper annum interest rate with respect to borrowings under the Company’s termloan.  The applicable interest rate for base rate borrowings under theterm loan was decreased from the base rate (which is the greater of theapplicable prime rate and 1⁄2 of 1% above the Federal Funds Rate) plus 1.50% tosuch base rate plus 1.00%.  On August 21, 2006, the Company entered intoAmendment No. 2 to its credit facility.  Amendment No. 2 provided for,among other things, an increase in borrowings with respect to the Company’sterm loan totaling $24.0 million.  On December 11, 2006, the Companyentered into Amendment No. 3 to its credit facility.  Amendment No. 3provided for, among other things, an increase in borrowings with respect to theCompany’s term loan totaling $100.0 million and an increase in the per annuminterest rate with respect to borrowing under the Company’s term loan to thebase rate plus 1.25%.

 

Asof September 1, 2007, the Company was in default under the consolidatedleverage ratio covenant in its Credit Agreement.  Effective October 10, 2007, the Companyobtained a waiver of such default from the required lenders and entered intoAmendment No. 4 to the Credit Agreement, which amended, among other things, thefinancial covenants in the Credit Agreement and increased the applicableinterest rates for term loans and the revolving credit facility.  The applicable interest rate for term loanborrowings was increased as follows (i) for base rate borrowings, the interestrate was increased to the base rate (which is the greater of the applicableprime rate and 1⁄2 of 1% above the Federal Funds Rate) plus 2.75% if the Companyhas a corporate family rating and a corporate rating greater than or equal toB2 and B from Moody’s and S&P, respectively, or if the Company does nothave such ratings, to the base rate plus 3.00%, and (ii) for LIBOR borrowings,the interest rate was increased to the LIBOR rate plus 3.75% if the Company hasa corporate group family rating and a corporate group rating greater than orequal to B2 and B from Moody’s and S&P, respectively, or if the Companydoes not have such ratings, to the LIBOR rate plus 4.00%.  For revolving credit borrowings, theapplicable interest rate is based upon the Company’s consolidated leverageratio and was increased as follows:  (i)for base rate borrowings, to a range of the base rate plus 2.50% to such baserate plus 3.00%, and (ii) for LIBOR borrowings, to a range of the LIBOR rateplus 3.50% to such LIBOR rate plus 4.00%. In conjunction with the closing of Amendment No. 4, the Company paidfees of approximately $1.2 million, which included an arrangement fee, in additionto payment to each consenting lender. The corresponding long-term debt was not reclassified as a currentliability due to the Company’s default, as the Company believes it will meet its amended debt covenants for the next 12months.

 

On June 30, 2004, the shareholders of PF Management,Inc., the sole shareholder of the Company (“PFMI”), sold their shares of stockin PFMI (the “Acquisition of Pierre”) to Holding.  In conjunction with theAcquisition of Pierre, the Company issued new notes, which are 9.875% seniornotes (the “New Notes”), with interest payable on January 15 and July 15 ofeach year.  The proceeds of the New Notes, together with the equitycontributions from MDP and certain members of management and borrowings underthe Company’s senior credit facility, were used to finance the Acquisition ofPierre and to repay outstanding indebtedness.

 

As of September 1, 2007, theCompany had cash and cash equivalents on hand of $8.0 million, outstandingborrowings under its revolving credit facility of $24.9 million, outstandingletters of credit of approximately $6.3 million, and borrowing availability ofapproximately $8.8 million.  Also as of September 1, 2007, the Company hadborrowings under its term loan of $227.0 million and $125.0 million of NewNotes outstanding.  As of March 3, 2007, the Company had cash and cashequivalents on hand of $0.1 million, outstanding borrowings under its revolvingcredit facility of $0.8 million, outstanding letters of credit of approximately$3.5 million, and borrowing availability of approximately $35.7 million. Also as of March 3, 2007, the Company had borrowings under its term loan of$229.0 million and $125.0 million of New Notes outstanding.  The Companyis required to satisfy certain financial covenants regarding cash flow andcapital expenditures.  As discussed above, as of September 1, 2007, theCompany was not in compliance with all financial covenants; however, a waiverof such default was obtained and the financial covenants have been amended pursuantto Amendment No. 4.

 

**7.     Goodwill andOther Intangible Assets**

** **

In conjunction with theAcquisition of Pierre, the Company engaged an independent party, with theassistance of Pierre’s management, to perform valuations for financialreporting purposes of the Company’s other intangible assets.  Assetsidentified through these valuations included formulas, customer relationships,licensing agreements, and certain tradenames and trademarks.

 

In conjunction with each ofthe Acquisition of Clovervale and the Acquisition of Zartic, management of theCompany, with the assistance of an independent valuation firm, performedvaluations on the Clovervale and Zartic other intangible assets for financialreporting purposes.  Assets identified through these valuations includedcustomer relationships, non-compete agreements, and certain tradenames andtrademarks.

 

12

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In accordance with SFAS No.142 (“SFAS 142”)—”Goodwill and Other Intangible Assets,” the Company testsrecorded goodwill and intangibles with indefinite lives for impairment at leastannually.  Intangible assets with finite lives are amortized over their estimatedeconomic or estimated useful lives.  In addition, all other intangibleassets are reviewed for impairment in accordance with SFAS 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets.”  As of March 3, 2007,the Company performed the annual impairment review of goodwill andindefinite-lived intangible assets and also assessed whether theindefinite-lived intangible assets continue to have indefinite lives.  TheCompany engaged an independent party to perform valuations to assist in theimpairment review.  There were no impairment charges as a result of thisreview.

 

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

 

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

 

The gross carrying amount ofgoodwill and the gross carrying amount and accumulated amortization of otherintangible assets as of September 1, 2007 are as follows:

 
| ** **                               | ** ** | **As of September 1, 2007** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **Useful**                                      | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **                               | ** ** | **Life (yrs)**                             | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| **Amortizable  intangible assets:**      |       |                                            |       |   |   |   |   |   |   |
| Formulas                                 |       | 5-15                                            |       | $ | 93,690,000 |   | $ | 38,793,239 |   | $ | 54,896,761 |   |
| Tradename and  trademarks                |       | 2-20                                            |       | 22,780,000 |   | 7,206,793 |   | 15,573,207 |   |
| Customer  relationships                  |       | 10-14                                           |       | 46,000,000 |   | 17,766,863 |   | 28,233,137 |   |
| Licensing  agreements                    |       | 10                                              |       | 12,100,000 |   | 5,037,509 |   | 7,062,491 |   |
| Non-compete  agreement                   |       | 2-3                                             |       | 350,000 |   | 97,116 |   | 252,884 |   |
| **Total  amortizable intangible assets** |       |                                            |       | 174,920,000 |   | 68,901,520 |   | 106,018,480 |   |
|                                     |       |                                            |       |   |   |   |   |   |   |
| **Indefinite-lived  intangible assets:** |       |                                            |       |   |   |   |   |   |   |
| Tradename                                |       | Indefinite                                      |       | 20,200,000 |   | — |   | 20,200,000 |   |
| **Total  other intangible assets**       |       |                                            |       | 195,120,000 |   | 68,901,520 |   | 126,218,480 |   |
|                                     |       |                                            |       |   |   |   |   |   |   |
| Goodwill                                 |       | N/A                                             |       | 217,146,471 |   | — |   | 217,146,471 |   |
| **Total  intangible assets**             |       |                                            |       | $ | 412,266,471 |   | $ | 68,901,520 |   | $ | 343,364,951 |   |

 

Thegross carrying amount of goodwill and the gross carrying amount and accumulatedamortization of other intangible assets as of March 3, 2007 are as follows:

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

 

13

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Thefollowing table represents activity related to goodwill and amortizableintangible assets during fiscal 2008:

 
| **Goodwill:**                                                     |   |        |        |
|-------------------------------------------------------------------|--------|-------------|-------------|
| ** **                                                        |   |        |        |
| Balance as of  March 3, 2007                                      |   | $           | 218,221,866 |   |
| Acquisition of  Clovervale                                        |   | (591,377    | )           |
| Acquisition of  Zartic                                            |   | (484,018    | )           |
| Balance as of  September 1, 2007                                  |   | $           | 217,146,471 |   |
|                                                              |   |        |        |
| **Amortizable  intangible assets:**                               |   |        |        |
| ** **                                                        |   |        |        |
| Balance as of  March 3, 2007                                      |   | $           | 119,350,756 |   |
| Net carrying  amount reclassified to other non-current assets (1) |   | (2,358,000  | )           |
| Amortization                                                      |   | (10,974,276 | )           |
| Balance as of September  1, 2007                                  |   | $           | 106,018,480 |   |

 

----

(1) Represents a reclassification of the net carrying amount of intangibleassets associated with formulas developed for a National Accounts restaurantchain customer.

 

Thefuture amortization of other intangible assets for the next five fiscal yearsis estimated to be as follows:

** **
| ** **                | ** ** | **(in thousands)** | ** ** |
|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **2009**                | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** |
| Formulas                  |       | $                       | 9,745      |   | $ | 8,523 |   | $ | 7,172 |   | $ | 5,946 |   | $ | 4,864 |   |
| Tradename and  trademarks |       | $                       | 2,771      |   | $ | 1,689 |   | $ | 1,539 |   | $ | 1,412 |   | $ | 1,294 |   |
| Customer  relationships   |       | $                       | 5,083      |   | $ | 4,412 |   | $ | 3,703 |   | $ | 3,058 |   | $ | 2,480 |   |
| Licensing  agreements     |       | $                       | 1,426      |   | $ | 1,361 |   | $ | 1,239 |   | $ | 1,097 |   | $ | 728 |   |
| Non-compete  agreement    |       | $                       | 112        |   | $ | 78 |   | $ | –– |   | $ | –– |   | $ | –– |   |

** **

**8.     Commitments andContingencies**

** **

***Letters of Credit***.  The Company provided a letterof credit in the amount of $5.7 million and $2.8 million as ofSeptember 1, 2007 and March 3, 2007, respectively, to its insurancecarrier for the underwriting of certain performance bonds. The current letterof credit expires during the Company’s fiscal year ending March 1, 2008.  The Company also provides secured letters ofcredit to its insurance carriers for outstanding and potential workers’compensation and general liability claims. Letters of credit for these claims totaled $675,000 as of September 1,2007 and March 3, 2007.

 

***Legal Proceedings***.  The Company is involved invarious legal proceedings.  Management believes, based on the advice oflegal counsel, that the outcome of such proceedings will not have a materialadverse effect on the Company’s financial position or future results ofoperations or cash flows.  See Item 3 — “Legal Proceedings” of the Company’sForm 10-K and Note 14 — “Legal Proceedings,” herein for furtherdiscussion.

 

***Liability to Selling Shareholders***.  Inconjunction with the Acquisition of Pierre, the Company and the sellingshareholders entered into a tax sharing and indemnification agreementcontaining certain representations and warranties of the selling shareholderswith respect to taxes.  The agreement provides that any net operating losscarryforwards attributable to expenses relating to the sale of the Company (“DealRelated NOLs”) and certain other deal related expenses will be for the benefitof the selling shareholders.  As of the date of the Acquisition of Pierre,these Deal Related NOLs and other deal related expenses totaled approximately$24.2 million and $6.6 million, respectively.  Accordingly, theCompany was required to pay and has paid to the selling shareholders the amountof any tax benefits attributable to such Deal Related NOLs and other dealrelated expenses, except that the first $4.0 million of such tax benefits waspaid into an escrow account that secures the selling shareholdersindemnification obligations under the tax sharing and indemnificationagreement. The Company is required to make payments to the selling shareholdersor the escrow account for tax benefits derived from such utilization 20 daysafter the filing of the tax return that utilizes such Deal Related NOLs orother deal related expenses.

 

Initially, the Companyrecorded a net long-term liability to the selling shareholders totaling $10.3million for the estimated obligations under the tax sharing and indemnificationagreement.  During the prior fiscal yearperiod, the Company increased the estimated obligation under the tax sharingand indemnification agreement by approximately $1.3 million based on thedifferences in the tax rate initially used to estimate the liability, theactual payments to the selling shareholders, and the estimated remainingobligation to the selling shareholders.  The adjustment to the liabilityto the selling shareholders resulted in a corresponding increase in goodwillrelated to the Acquisition of Pierre.

 

As of September 1, 2007, theCompany has utilized $24.2 million of the Deal Related NOLs and $1.7 million inother deal related expenses.  Also as of September 1, 2007, the Companyhas submitted payments based on the tax benefits received, net of other taxassessments due to the Company from the selling shareholders, to an escrowaccount (approximately $4.0 million) and directly to the selling shareholders(approximately $5.4 million).  As of September 1, 2007, the Company has aremaining liability to the selling shareholders totaling $2.2 million (whichreflects the aforementioned $1.3 million adjustment during the prior fiscalyear).

 

14

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No payments were made to theselling shareholders during fiscal 2008; however, the Company expects to makeadditional payments in conjunction with the filing of its prior fiscal yearstate returns on or about December 5, 2007. An estimate of the expected payment is classified by the Company as acurrent liability (approximately $0.3 million).  The remaining portion ofthe liability (approximately $1.9 million) is classified as long-term based onthe expected timing of the remaining payments to the sellingshareholders.  The Company expects to fully utilize the Deal Related NOLsand other deal related expenses; however, the timing of the future payments ofthe long-term portion is unknown.

 

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

** **

Totalcomprehensive income (loss) is comprised solely of net income (loss) in secondquarter fiscal 2008, second quarter fiscal 2007, fiscal 2008 and fiscal 2007.

 

**10.**** ****Supplemental Cash FlowDisclosures –Cash Paid During the Period and Non-Cash Transactions**

** **
| ** **                                                                                          | ** ** | **Twenty-Six Weeks**       | ** ** | **Twenty-Six Weeks**       | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                                                          | ** ** | **Ended**                       | ** ** | **Ended**                       | ** ** |
| ** **                                                                                          | ** ** | **September 1, 2007** | ** ** | **September 2, 2006** | ** ** |
| Cash paid during  the period for:                                                                   |       |                            |       |                            |       |
| Interest                                                                                            |       | $                               | 18,673,930 |                            | $          | 10,255,075 |   |
| Income taxes,  net                                                                                  |       | $                               | 132,260    |                            | $          | 5,679,971 |   |
|                                                                                                |       |                            |       |                            |       |
| Acquisition of  Zartic adjustment:                                                                  |       |                            |       |                            |       |
| Adjustment of  inventory to fair value                                                              |       | $                               | 1,359,133  |                            | $          | — |   |
| Adjustment of other accrued liabilities                                                             |       | $                               | 880,027    |                            | $          | — |   |
|                                                                                                |       |                            |       |                            |       |
| Other adjustment:                                                                                   |       |                            |       |                            |       |
| Reclassification  of property, plant , and equipment to other assets as a result of plant fire  (1) |       | $                               | 814,785    |                            | $          | — |   |

 

----

(1)** **See discussion below in Item 2, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”.

** **

**11.**** ****Recently Issued AccountingGuidance**

 

In September 2006, the FASBissued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  Theobjective SFAS 157 is to define fair value, establish a framework for measuringfair value and expand disclosures about fair value measurement.  SFAS 157is effective for interim and annual reporting periods beginning after November15, 2007.  The Company has not yet assessed the impact of SFAS 157 on theCompany’s consolidated financial statements.

 

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

 

Effective March 4, 2007, theCompany adopted FIN 48, which requires that the financial statementeffects of a tax position taken or expected to be taken in a tax return berecognized in the financial statements when it is more likely than not, basedon the technical merits, that the position will be sustained upon examination.The details of the adoption of FIN 48 are described in Note 3, “Income Taxes”,to the Company’s Condensed Consolidated Financial Statements.

 

**12****. ****Transactions with Related Parties**

** **

AtSeptember 1, 2007, there were no significant changes in related partytransactions from those described at March 3, 2007 in the Company’s Form 10-K.

 

**13.**** ****Interest Rate Swap**

** **

The Company’s major market risk exposure ispotential loss 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 maturities that management considersappropriate.  To further mitigate itsrisk associated with variable-rate debt, the Company utilizes derivativeinstruments to hedge its exposure to changing rates.

 

TheCompany accounts for derivative financial instruments in accordance with SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities,” asamended (SFAS 133).  SFAS 133 requiresthat all derivatives be recorded in the balance sheet as either assets orliabilities at fair value.  Accountingfor changes in the fair value of a derivative depends on whether it qualifiesand has been designated as part of a hedging relationship.  For derivatives that qualify and have beendesignated as hedges for accounting purposes, changes in fair value have no netimpact on earnings, to the extent the derivative is considered perfectlyeffective in achieving an offsetting change in fair value or cash flowsattributable to the risk being hedged, until the hedged item is recognized inearnings (commonly referred to as the “hedge accounting” method).  For derivatives that do not qualify as

 

15

----

 

hedgesfor accounting purposes, the change in fair value is recorded as interestexpense.  As of September 1, 2007, theCompany’s derivative financial instruments did not qualify for hedgeaccounting.

 

Effective August16, 2007, the Company entered into an interest swap agreement (the “Swap”)to reduce its exposure to interest rate fluctuations on a portion of its termloan with the objective of minimizing the impact of interest rate fluctuationsand stabilizing cash flows.  The Swap hasa notional amount of $175.0 million with a fixed rate of 5.14%, therebyeffectively converting a portion of the floating rate term debt to a fixed rateobligation of 7.39% (5.14% plus applicable margin).  A portion of the Swap with a notional amountof $25.0 million will expire on August 16, 2008, with the remaining $150.0million expiring on August 16, 2009.  Thedifference between the three-month LIBOR rate and Swap rate will be settled incash on the interest payment dates.  Inaccordance with SFAS 133,**theSwap does not qualify for “Cash Flow Hedge Accounting” treatment.  The change in the fair value of the Swaptotaling $427,677 is reflected as an increase in interest expense in secondquarter fiscal 2008.  As of September 1,2007, the Company has recorded a liability totaling $427,677 to recognize theSwap at its fair value.

 

**14.****   ****LegalProceedings**

** **

**Environmental.**   On March 20,2006, the Hamilton County Department of Environmental Services (“HCDOES”) senta Notice of Violation (“NOV”) to the Company’s West Chester, Ohio facilityalleging that the Company violated its permit limits for particulate matter (“PM”)from certain cooking operations and reserved the right to pursue an enforcementaction and a civil penalty in the future. On July 7, 2006, HCDOES sent another NOV to the Company alleging thatthe Company was in violation of its permit limits for PM emissions and againreserved the right to pursue an enforcement action in the future.

 

The Company is cooperating with the authorities in allaspects of these matters.  The Companyapplied for modified permits to install on August 14, 2007 for the emissionsources at the plant and also submitted a permit to install application onSeptember 20, 2007 for process water heaters at the plant to come intocompliance with regulatory requirements. These permits are currently being reviewed and processed byHCDOES.  On May 21, 2007, the Director of the Ohio EPA invited the Companyto enter into consent finding and orders with the Ohio EPA, in lieu of referralto the Ohio Attorney General’s Office and the filing of an enforcement actionin court.  On August 31, 2007, theCompany finalized a $125,000 settlement with the Ohio EPA to resolve the allegednon-compliance with air pollution laws without any admission of liability.  In response to the NOV’s, the Company alsohas installed and spent approximately $1.8 million for emissions controlequipment to comply with relevant laws.

 

The Company has conducted additional stack testing of certainof its cook lines, which use the new control equipment installed for four ofits largest cook lines.  The preliminary results indicate that the newequipment is not as effective as originally expected.  Nevertheless, thecontrolled emissions are expected to meet applicable regulatory requirements.

 

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

 

As part of its ongoing operations in the food processingindustry, the Company is subject to extensive federal, state, and localregulations and its food processing facilities and food products are subject tofrequent inspection, audits and inquiries by the USDA, the FDA, and variouslocal health and agricultural agencies and by federal, state, and localagencies responsible for the enforcement of environmental, labor, and other lawsand regulations.  The Company is also involved in various legal actionsarising in the normal course of business.  These matters are continuouslybeing evaluated and, in some cases, are being contested by the Company and theoutcome is not predictable. Consequently, an estimate of the possible loss orrange of loss associated with these actions cannot be made.  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 effect on the Company’s consolidated financial position.

 

**15.****   ****SubsidiaryGuarantors**

** **

Each of the subsidiaries of Pierre Foods, Inc. fully andunconditionally guarantees the New Notes on a joint and several basis.  The subsidiaries resulting from theAcquisition of Clovervale and the Acquisition of Zartic became guarantors fromthe date of their respective acquisitions in fiscal 2007.  Fresh FoodsProperties, LLC, which was the only subsidiary of Pierre Foods, Inc. priorto fiscal 2007, is inactive and holds two trademarks that are not currently inuse by the Company.  The following presents financial information aboutPierre Foods, Inc., as the issuer of the New Notes, and each of the guarantorsubsidiaries.  Pierre has no non-guarantor subsidiaries. Intercompany transactions are eliminated.

 

The following supplemental condensed statements of operationsfor the thirteen and twenty-six week periods ended September 1, 2007,condensed balance sheets as of September 1, 2007 and March 3, 2007, and thesupplemental cash flows for the twenty-six week period ended September 1, 2007,depict in separate columns, the issuer (Pierre Foods, Inc.), the subsidiaries,all of which are guarantors, elimination adjustments, and the consolidatedtotal.  The financial information followsthe legal structure of the Company and therefore, may not necessarily beindicative of the results of operations or financial position of the Company,including the subsidiaries, had they been operated as independent entities.

 

16

----

 

**Pierre Foods, Inc.**

**Condensed Statements of Operations**

**For the Thirteen Weeks Ended September 1, 2007**

(Unaudited)

 
| ** **                                                  | ** ** | **Pierre Foods, Inc.** | ** **  | **Guarantor**    | ** ** | ** **       | ** ** | ** **  | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|-------------|------------------|------------|------------------|------------|-------------|------------|
| ** **                                                  | ** ** | **(Issuer)**                     | ** **  | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**   | ** ** |
|                                                        |       |                             |        |             |       |             |       |        |       |
| REVENUES, NET:                                              |       |                             |        |             |       |             |       |        |       |
| Customers                                                   |       | $                                | 148,684,602 |             | $          | 2,813,086        |       | $           | —     |   | $ | 151,497,688 |   |
| Intercompany                                                |       | —                           |        | 36,269,095       |       | (36,269,095      | )          | —      |       |
| Total revenues,  net                                        |       | 148,684,602                      |        | 39,082,181       |       | (36,269,095      | )          | 151,497,688 |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| COSTS AND  EXPENSES:                                        |       |                             |        |             |       |             |       |        |       |
| Cost of goods sold                                          |       | 116,713,558                      |        | 35,265,812       |       | (35,265,812      | )          | 116,713,558 |       |
| Selling, general, and  administrative expenses              |       | 26,615,015                       |        | 3,452,019        |       | (695,877         | )          | 29,371,157  |       |
| Depreciation and  amortization                              |       | 6,641,314                        |        | 2,882,344        |       | (307,406         | )          | 9,216,252   |       |
| Loss on disposition of  property, plant, and equipment, net |       | 238                              |        | —           |       | —           |       | 238         |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| Total costs and  expenses                                   |       | 149,970,125                      |        | 41,600,175       |       | (36,269,095      | )          | 155,301,205 |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| OPERATING LOSS                                              |       | (1,285,523                       | )           | (2,517,994       | )          | —           |       | (3,803,517  | )          |
|                                                        |       |                             |        |             |       |             |       |        |       |
| INTEREST EXPENSE  AND OTHER INCOME:                         |       |                             |        |             |       |             |       |        |       |
| Interest expense                                            |       | (8,959,585                       | )           | (63,906          | )          | —           |       | (9,023,491  | )          |
| Other income                                                |       | 80,422                           |        | —           |       | —           |       | 80,422      |       |
| Interest expense  and other income, net                     |       | (8,879,163                       | )           | (63,906          | )          | —           |       | (8,943,069  | )          |
|                                                        |       |                             |        |             |       |             |       |        |       |
| LOSS BEFORE  INCOME TAX BENEFIT                             |       | (10,164,686                      | )           | (2,581,900       | )          | —           |       | (12,746,586 | )          |
|                                                        |       |                             |        |             |       |             |       |        |       |
| INCOME TAX  BENEFIT                                         |       | 3,829,915                        |        | 761,500          |       | —           |       | 4,591,415   |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| EQUITY IN NET  LOSS OF SUBSIDIARIES                         |       | (1,820,400                       | )           | —           |       | 1,820,400        |       | —      |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| NET LOSS                                                    |       | $                                | (8,155,171  | )                | $          | (1,820,400       | )          | $           | 1,820,400  |   | $ | (8,155,171 | ) |

 

17

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**Pierre Foods, Inc.**

**Condensed Statements of Operations**

**For the Twenty-Six Weeks Ended September 1, 2007**

(Unaudited)

 
| ** **                                                  | ** ** | **Pierre Foods, Inc.** | ** **  | **Guarantor**    | ** ** | ** **       | ** ** | ** **  | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|-------------|------------------|------------|------------------|------------|-------------|------------|
| ** **                                                  | ** ** | **(Issuer)**                     | ** **  | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**   | ** ** |
|                                                        |       |                             |        |             |       |             |       |        |       |
| REVENUES, NET:                                              |       |                             |        |             |       |             |       |        |       |
| Customers                                                   |       | $                                | 304,017,757 |             | $          | 4,981,245        |       | $           |       |   | $ | 308,999,002 |   |
| Intercompany                                                |       | —                           |        | 94,456,951       |       | (94,456,951      | )          | —      |       |
| Total revenues,  net                                        |       | 304,017,757                      |        | 99,438,196       |       | (94,456,951      | )          | 308,999,002 |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| COSTS AND  EXPENSES:                                        |       |                             |        |             |       |             |       |        |       |
| Cost of goods sold                                          |       | 234,678,080                      |        | 91,196,823       |       | (91,196,823      | )          | 234,678,080 |       |
| Selling, general, and  administrative expenses              |       | 53,361,507                       |        | 6,919,241        |       | (2,362,149       | )          | 57,918,599  |       |
| Depreciation and  amortization                              |       | 15,080,978                       |        | 4,305,304        |       | (897,979         | )          | 18,488,303  |       |
| Loss on disposition of  property, plant, and equipment, net |       | 38                               |        | —           |       | —           |       | 38          |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| Total costs and  expenses                                   |       | 303,120,603                      |        | 102,421,368      |       | (94,456,951      | )          | 311,085,020 |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| OPERATING INCOME  (LOSS)                                    |       | 897,154                          |        | (2,983,172       | )          | —           |       | (2,086,018  | )          |
|                                                        |       |                             |        |             |       |             |       |        |       |
| INTEREST EXPENSE  AND OTHER INCOME:                         |       |                             |        |             |       |             |       |        |       |
| Interest expense                                            |       | (16,887,016                      | )           | (325,947         | )          | —           |       | (17,212,963 | )          |
| Other income                                                |       | 102,589                          |        | —           |       | —           |       | 102,589     |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| Interest expense  and other income, net                     |       | (16,784,427                      | )           | (325,947         | )          | —           |       | (17,110,374 | )          |
|                                                        |       |                             |        |             |       |             |       |        |       |
| LOSS BEFORE INCOME  TAX BENEFIT                             |       | (15,887,273                      | )           | (3,309,119       | )          | —           |       | (19,196,392 | )          |
|                                                        |       |                             |        |             |       |             |       |        |       |
| INCOME TAX  BENEFIT                                         |       | 5,769,414                        |        | 952,035          |       | —           |       | 6,721,449   |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| EQUITY IN NET  LOSS OF SUBSIDIARIES                         |       | (2,357,084                       | )           | —           |       | 2,357,084        |       | —      |       |
|                                                        |       |                             |        |             |       |             |       |        |       |
| NET LOSS                                                    |       | $                                | (12,474,943 | )                | $          | (2,357,084       | )          | $           | 2,357,084  |   | $ | (12,474,943 | ) |

 

18

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**Pierre Foods, Inc.**

**Condensed Balance Sheets**

**September 1, 2007**

(Unaudited)

 
| ** **                                                                                             | ** ** | **Pierre Foods, Inc.** | ** **  | **Guarantor**    | ** ** | ** **       | ** ** | ** **  | ** **   |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|------------------|------------|------------------|------------|-------------|--------------|
| ** **                                                                                             | ** ** | **(Issuer)**                     | ** **  | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**   | ** **   |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| ASSETS                                                                                                 |       |                             |        |             |       |             |       |        |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| CURRENT ASSETS:                                                                                        |       |                             |        |             |       |             |       |        |         |
| Cash and cash  equivalents                                                                             |       | $                                | 7,938,975   |             | $          | 22,561           |       | $           | —       |   | $ | 7,961,536 |   |
| Accounts  receivable, net                                                                              |       | 46,560,311                       |        | 1,678,142        |       | —           |       | 48,238,453  |         |
| Inventories                                                                                            |       | 67,636,605                       |        | 10,706,379       |       | —           |       | 78,342,984  |         |
| Refundable  income taxes                                                                               |       | 3,117,998                        |        | 3,418,742        |       | —           |       | 6,536,740   |         |
| Deferred income  taxes                                                                                 |       | 4,399,379                        |        | 613,032          |       | —           |       | 5,012,411   |         |
| Prepaid expenses  and other current assets                                                             |       | 3,371,869                        |        | 2,471,816        |       | —           |       | 5,843,685   |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| Total current  assets                                                                                  |       | 133,025,137                      |        | 18,910,672       |       | —           |       | 151,935,809 |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| PROPERTY, PLANT,  AND EQUIPMENT, NET                                                                   |       | 55,034,118                       |        | 40,471,971       |       | —           |       | 95,506,089  |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| OTHER ASSETS:                                                                                          |       |                             |        |             |       |             |       |        |         |
| Other  intangibles, net                                                                                |       | 99,569,158                       |        | 26,649,322       |       | —           |       | 126,218,480 |         |
| Goodwill                                                                                               |       | 187,864,138                      |        | 29,282,333       |       | —           |       | 217,146,471 |         |
| Deferred loan  origination fees                                                                        |       | 7,178,027                        |        | —           |       | —           |       | 7,178,027   |         |
| Investment in  subsidiaries                                                                            |       | 108,754,685                      |        | —           |       | (108,754,685     | )          | —      |         |
| Intercompany  accounts                                                                                 |       | —                           |        | 14,092,790       |       | (14,092,790      | )          | —      |         |
| Other                                                                                                  |       | 6,769,121                        |        | 293,819          |       | —           |       | 7,062,940   |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| Total other  assets                                                                                    |       | 410,135,129                      |        | 70,318,264       |       | (122,847,475     | )          | 357,605,918 |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| Total Assets                                                                                           |       | $                                | 598,194,384 |             | $          | 129,700,907      |       | $           | (122,847,475 | ) | $ | 605,047,816 |   |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| LIABILITIES AND  SHAREHOLDER’S EQUITY                                                             |       |                             |        |             |       |             |       |        |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| CURRENT  LIABILITIES:                                                                                  |       |                             |        |             |       |             |       |        |         |
| Current  installments of long-term debt                                                                |       | $                                | 169,144     |             | $          | 1,388,253        |       | $           | —       |   | $ | 1,557,397 |   |
| Trade accounts  payable                                                                                |       | 10,626,460                       |        | 11,201,401       |       | —           |       | 21,827,861  |         |
| Accrued interest                                                                                       |       | 2,452,401                        |        | —           |       | —           |       | 2,452,401   |         |
| Accrued payroll  and payroll taxes                                                                     |       | 5,107,608                        |        | 1,729,780        |       | —           |       | 6,837,388   |         |
| Accrued  promotions                                                                                    |       | 4,427,525                        |        | —           |       | —           |       | 4,427,525   |         |
| Accrued taxes  (other than income and payroll)                                                         |       | 995,910                          |        | 417,739          |       | —           |       | 1,413,649   |         |
| Other accrued  liabilities                                                                             |       | 2,573,368                        |        | 2,494,317        |       | —           |       | 5,067,685   |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| Total current  liabilities                                                                             |       | 26,352,416                       |        | 17,231,490       |       | —           |       | 43,583,906  |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| LONG-TERM DEBT,  less current installments                                                             |       | 377,216,364                      |        | 1,354,627        |       | —           |       | 378,570,991 |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| DEFERRED INCOME  TAXES                                                                                 |       | 39,016,791                       |        | 1,625,820        |       | —           |       | 40,642,611  |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| INTERCOMPANY  ACCOUNTS                                                                                 |       | 14,092,790                       |        | —           |       | (14,092,790      | )          | —      |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| OTHER LONG-TERM  LIABILITIES                                                                           |       | 4,239,788                        |        | 734,285          |       | —           |       | 4,974,073   |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| Total  Liabilities                                                                                     |       | 460,918,149                      |        | 20,946,222       |       | (14,092,790      | )          | 467,771,582 |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| SHAREHOLDER’S  EQUITY:                                                                            |       |                             |        |             |       |             |       |        |         |
| Common stock –  Class A, 100,000 shares authorized, issued, and outstanding at September 1,  2007 |       | 150,176,136                      |        | 112,894,552      |       | (112,894,552     | )          | 150,176,136 |         |
| Retained deficit                                                                                       |       | (12,899,901                      | )           | (4,139,867       | )          | 4,139,867        |       | (12,899,901 | )            |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| Total  shareholder’s equity                                                                       |       | 137,276,235                      |        | 108,754,685      |       | (108,754,685     | )          | 137,276,235 |         |
|                                                                                                   |       |                             |        |             |       |             |       |        |         |
| Total  Liabilities and Shareholder’s Equity                                                       |       | $                                | 598,194,385 |             | $          | 129,700,907      |       | $           | (122,847,475 | ) | $ | 605,047,817 |   |

 

19

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**Pierre Foods, Inc.**

**Condensed Balance Sheets**

**March 3, 2007**

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

 

20

----

 

**Pierre Foods, Inc.**

**Condensed Statements of Cash Flows**

**For the Twenty-Six Weeks Ended September 1, 2007**

(Unaudited)

 
| ** **                                           | ** ** | **Pierre Foods, Inc.** | ** **  | **Guarantor**    | ** ** | ** **       | ** ** | ** **  | ** ** |
|------------------------------------------------------|------------|------------------------|-------------|------------------|------------|------------------|------------|-------------|------------|
| ** **                                           | ** ** | **(Issuer)**           | ** **  | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**   | ** ** |
|                                                 |       |                   |        |             |       |             |       |        |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES                |       | $                      | (29,071,542 | )                | $          | 20,037,995       |       | $           | —     |   | $ | (9,033,547 | ) |
|                                                 |       |                   |        |             |       |             |       |        |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:               |       |                   |        |             |       |             |       |        |       |
| Net cash used in  the Acquisition of Zartic          |       | (155,753               | )           | —           |       | —           |       | (155,753    | )          |
| Net cash  provided by the Acquisition of Clovervale  |       | 711,002                |        | —           |       | —           |       | 711,002     |       |
| Intercompany  accounts                               |       | 16,318,697             |        | —           |       | (16,318,697      | )          | —      |       |
| Capital  expenditures                                |       | (1,847,006             | )           | (3,074,318       | )          | —           |       | (4,921,324  | )          |
| Net cash used in  investing activities               |       | $                      | 15,026,940  |             | $          | (3,074,318       | )          | (16,318,697 | )          | $ | (4,366,075 | ) |
|                                                 |       |                   |        |             |       |             |       |        |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:               |       |                   |        |             |       |             |       |        |       |
| Borrowings of  revolving credit agreement            |       | 24,050,000             |        | —           |       | —           |       | 24,050,000  |       |
| Principal  payments on long-term debt                |       | (2,103,975             | )           | (661,496         | )          | —           |       | (2,765,668  | )          |
| Intercompany  accounts                               |       | —                 |        | (16,318,697      | )          | 16,318,697       |       | —      |       |
| Return of  capital to parent                         |       | (11,805                | )           | —           |       | —           |       | (11,805     | )          |
| Net cash  provided by (used in) financing activities |       | $                      | 21,934,220  |             | $          | (16,980,390      | )          | 16,318,697  |       | $ | 21,272,527 |   |
|                                                 |       |                   |        |             |       |             |       |        |       |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS    |       | 7,889,618              |        | (16,713          | )          | —           |       | 7,872,905   |       |
|                                                 |       |                   |        |             |       |             |       |        |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF YEAR        |       | 49,357                 |        | 39,274           |       | —           |       | 88,631      |       |
|                                                 |       |                   |        |             |       |             |       |        |       |
| CASH AND CASH  EQUIVALENTS, END OF YEAR              |       | $                      | 7,938,975   |             | $          | 22,561           |       | $           | —     |   | $ | 7,961,536 |   |
|                                                      |            |                        |             |                  |            |                  |            |             |            |  |  |  |  |  |  |  |  |

 

 

21

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

** **

The following discussionrelates to the financial condition and results of operations for second quarterfiscal 2008 compared to second quarter fiscal 2007 and for fiscal 2008 comparedto fiscal 2007.  The thirteen weekperiods ended September 1, 2007 and September 2, 2006 are referred to as “secondquarter fiscal 2008” and “second quarter fiscal 2007”, respectively.  The twenty-six week periods ended September1, 2007 and September 2, 2006 are referred to as “fiscal 2008” and “fiscal 2007”,respectively.  This section should beread in conjunction with the Company’s Condensed Consolidated FinancialStatements included in this Quarterly Report on Form 10-Q, and considered with “RiskFactors”  and “Quantitative and Qualitative Disclosures About Market Risk”discussed in Item 1A and Item 7, respectively, of the Company’s Annual Reporton Form 10-K for the fiscal year ended March 3, 2007 filed with the SEC on June15, 2007 (“Form 10-K”) and Item 3 of Part I and “Cautionary StatementsRegarding Forward Looking Information,” which precedes Item 3 of Part I of thisReport.

 

Pierre operates on a 52-weekor 53-week fiscal year ending on the first Saturday in March or if the last dayof February is a Saturday, the last day of February.  Each quarter of thefiscal year contains 13 weeks except for the infrequent fiscal years with53 weeks.  The fiscal year endedMarch 3, 2007 and the fiscal year ending March 1, 2008 both contain 52 weeks.

 

**Results of Operations**

** **

**SecondQuarter Fiscal 2008 Compared to Second Quarter Fiscal 2007**

*** ***

***Revenues, net.**** *Net revenues increased by $52.6 million in second quarter fiscal 2008 comparedto second quarter fiscal 2007, or 53.2%.  This increase was primarily dueto (1) an increase in sales volume due to the Acquisition of Zartic (approximately$39.4 million); (2) an increase in sales volume due to the Acquisition ofClovervale (approximately $8.8 million); (3) increased sales volume, driven byincreases in the Company’s Military, Warehouse Club, and National Accountsend-market segments (approximately $1.7 million); and (4) net price increasesto customers (approximately $3.0 million); partially offset by other items.

 

***Cost of goods sold.**** * Cost of goods soldincreased by $48.1 million in second quarter fiscal 2008 compared to secondquarter fiscal 2007, or 70.0%.  This increase was primarily due to (1) anincrease in sales volume due to the Acquisition of Zartic (approximately $27.5million); (2) an increase in sales volume due to the Acquisition of Clovervale(approximately $7.0 million);(3) an increase in expense as a result of increased net revenues due to volumegrowth and a change in mix (approximately $3.3 million); (4) an increase in rawmaterial costs (approximately $9.4 million); (5) an increase due to excessiveequipment downtime on three of the larger fry lines in the Company’s Rome,Georgia facility (approximately $1.0 million); and (6) an increase in laborcosts (approximately $0.2 million); partially offset by other items.

 

As a percentage of revenues,cost of goods sold increased from 69.4% to 77.0%, an increase of 7.6%. This increase was primarily due to (1) the net impact of increases in pricespaid for raw material proteins and favorable formulation mix (approximately9.5%); (2) increased volume growth and a change in sales mix (approximately2.2%); (3) an increase due to the excessive equipment downtime on three of thelarger fry lines in the Company’s Rome, Georgia facility (approximately 1.0%);(4) sales of higher-cost products due to the Acquisition of Clovervale(approximately 0.2%); and (5) higher costs as a result of increased costsassociated with labor (approximately 0.2%); partially offset by (6) salesof net lower-cost products as a result of the Acquisition of Zartic(approximately 2.7%); (7) the impact of net price increases to customers(approximately 2.4%) and (8) decreases in overhead costs (approximately 0.4%).

*** ***

The primary materials used inthe Company’s food processing operations include boneless beef, chicken, pork,flour, yeast, seasonings, cheese, breading, soy proteins, peanut butter, andpackaging supplies.  Meat proteins are generally purchased under 7-daypayment terms.  Historically, the Company has not hedged in the futuresmarkets, and over time, the Company’s raw material costs have fluctuated with movementin the relevant commodity markets.  Additionally, the Company hasmarket-related pricing contracts that require the Company to immediately passalong commodity price variances.  During second quarter fiscal 2008, netprices paid for raw material proteins increased approximately $9.4 million; ofwhich approximately $5.0 million was attributable to the Acquisition of Zartic.

 

Approximately 29.0% of totalsales for second quarter fiscal 2008 were protected from commodity exposure, ofwhich 24.2% were attributable to market-related pricing contracts, while theother 4.8% were related to the USDA Commodity Reprocessing Program, which alsoinsulates the Company from raw material price fluctuations.  For secondquarter fiscal 2007, approximately 33.3% of total sales were protected fromcommodity exposure, of which 28.9% were attributable to market-related pricingcontracts, while the other 4.4% were related to the USDA Commodity ReprocessingProgram.

 

The following tablerepresents the increases (decreases) in the weighted average prices the Companypaid for beef, chicken, pork, and cheese during second quarter fiscal 2008compared to second quarter fiscal 2007 excluding formulation mix andmarket-related pricing contracts.  The second quarter fiscal 2008 reflectsthe weighted average prices paid for raw materials as a result of theAcquisition of Zartic and the Acquisition of Clovervale.

 

22

----

 
| ** ** | ** ** | **% (Increase)/Decrease in Prices** | ** ** |
|------------|------------|----------------------------------------------------|------------|
| ** ** | ** ** | **Paid for Raw Materials**          | ** ** |
| ** ** | ** ** | **Second Quarter Fiscal 2008**      | ** ** |
| ** ** | ** ** | **Compared to**                               | ** ** |
| ** ** | ** ** | **Second Quarter Fiscal 2007**      | ** ** |
| Beef       |       | (2.7                                               | )%         |
| Chicken    |       | (40.0                                              | )%         |
| Pork       |       | 4.0                                                | %          |
| Cheese     |       | (41.4                                              | )%         |
| Aggregate  |       | (10.2                                              | )%         |

 

While historically the Companyhas managed fluctuations in raw material costs through purchase orders,market-related pricing contracts, and by passing on such cost increases tocustomers, the Company may be unable to protect itself from future increases inthe prices of raw materials on a timely basis, or at all.   Inaddition, some of the Company’s customers purchase products based on bidcontracts with set prices, which would prevent the Company from recovering anyraw materials price increases from these customers during the life of thosecontracts.  If prices for beef, chicken, pork, and cheese were to increasesignificantly without a commensurate increase in the price for processedprotein food products, the Company’s financial condition and operating resultscould be adversely affected.

 

***Selling, general, and administrative***. Selling, general, and administrativeexpenses increased by $11.8 million in second quarter fiscal 2008 compared tosecond quarter fiscal 2007, or 67.2%.  This increase was primarily due to(1) increased volume as a result of the Acquisition of Zartic (approximately$8.1 million); (2) increased volume as a result of the Acquisition ofClovervale (approximately $2.5 million); (3) increased storage expense(approximately $0.5 million) due to increased replenishment costs and build ofinventories associated with the Acquisition of Zartic; (4) increasedintegration expenses, primarily as a result of the Acquisition of Zartic(approximately $0.5 million); and (5) increased administrative expenses,primarily due to bad debt associated with the bankruptcy of a customer(approximately $0.3 million) and increased management consulting fees(approximately $0.2 million); partially offset by other items. As a percentageof revenues, selling, general, and administrative expenses increased from 17.8%to 19.4%.

 

***Depreciation and amortization***. Depreciation and amortization expenseincreased by $2.3 million primarily due to increased amortization ($0.7million) and increased depreciation expense ($1.6 million).  The increasein amortization expense was primarily due to additional amortization expense asa result of additional amortizable intangible assets recorded in conjunctionwith the Acquisition of Zartic and the Acquisition of Clovervale; offset by thedecrease as a result of the accelerated methods of amortization used for theamortizable intangible assets recorded in conjunction with the Acquisition ofPierre.  The increased depreciation expense was primarily due to theallocation of the purchase prices in conjunction with the Acquisition of Zarticand the Acquisition of Clovervale and the valuations of property, plant, andequipment as a result of purchase accounting for such acquisitions.

 

***Interest expense and other income, net*****.**   Interest expense and other income, netconsists primarily of interest on fixed and variable-rate long-term debt. Interest expense and other income, net increased by $3.4 million, or60.3%.  This increase is primarily due to increased average outstandingborrowings under the term loan as a result of Amendment No. 2 to the Company’scredit facility in order to finance the Acquisition of Clovervale and AmendmentNo. 3 to the Company’s credit facility in order to finance the Acquisition ofZartic and increased average borrowings under the Company’s revolving creditfacility.  The Company’s average outstanding long-term debt during secondquarter fiscal 2008 was $369.3 million versus $249.5 million during secondquarter fiscal 2007.  The weighted average interest rates for secondquarter fiscal 2008 and second quarter fiscal 2007 were 8.4% and 8.5%,respectively.

 

***Income taxes*****.*** * The effective tax rate for secondquarter fiscal 2008 was 36.0% compared to 45.5% for second quarter fiscal2007.  The change in the effective tax rate is primarily due to a changein the expected Section 199 deduction (the “Domestic Manufacturing Deduction”)due to current year profitability, the elimination of the Extra-TerritorialIncome deduction (“ETI”) in the current year, changes in the Company’s expectedpre-tax income relative to the impact of permanent differences, and a reductionin the Company’s estimated state effective tax rate due to the Acquisition ofClovervale and the Acquisition of Zartic.

 

The Company files income taxreturns in the U.S. federal jurisdiction and various state jurisdictions. The Company has substantially concluded all U.S. federal income taxmatters through the tax year ended June 30, 2004.  No federal income taxreturns are currently under examination.  With few exceptions, the Companyis no longer subject to state or local income tax examinations by taxauthorities through the fiscal 2003 tax year.

 

The Company’s policy is torecognize interest and penalties related to income tax matters as tax expense. The amount of interest and penalty expense recorded for the thirteen weekperiod ended September 1, 2007 was not material.

 

**Fiscal2008 Compared to Fiscal 2007**

 

***Revenues, net.**** * Net revenuesincreased by $104.3 million in fiscal 2008 compared to fiscal 2007, or51.0%.  This increase was primarily due to (1) an increase in sales volumedue to the Acquisition of Zartic (approximately $80.7 million); (2) an increasein sales volume due to the Acquisition of Clovervale (approximately $18.3million); (3) an increase in volume, due to an increase in the Company’sMilitary, Warehouse Club, National Accounts and Convenience Store end-marketsand changes in sales mix (approximately $2.9 million); and (4) net priceincreases to customers (approximately $2.4 million).

 

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***Cost of goods sold.**** * Cost of goods soldincreased by $91.9 million in fiscal 2008 compared to fiscal 2007, or64.4%.  This increase was primarily due to (1) an increase in sales volumedue to the Acquisition of Zartic (approximately $61.9 million); (2) an increasein sales volume due to the Acquisition of Clovervale (approximately $14.1million); (3) an increase in expense as a result of increased net revenues dueto volume and mix growth (approximately $6.4 million); (4) an increase raw materialcosts (approximately $13.6 million), primarily due to increased prices paid forchicken (approximately $8.1 million); (5) an increase due to excessiveequipment downtime on three of the larger fry lines in the Company’s Rome,Georgia facility (approximately $1.0 million); and (6) an increase in laborcosts (approximately $0.5 million); partially offset by (7) a decrease in salesvolume to two National Accounts restaurant chains (approximately $2.7 million);(8) a decrease in overhead costs (approximately $1.6 million); and (9)favorable formulation mix and manufacturing yields (approximately $1.3  million).

 

As a percentage of revenues,cost of goods sold increased from 69.7% to 75.9%, an increase of 6.2%. This increase was primarily due to (1) the net impact of increases in pricespaid for raw material proteins and favorable formulation mix (approximately6.0%); (2) increased volume growth and a change in sales mix (approximately0.8%); (3) an increase due to the excessive equipment downtime on three of thelarger fry lines in the Company’s Rome, Georgia facility (approximately 0.5%);(4) sales of higher-cost products as a result of the Acquisition of Zartic(approximately 0.3%); (5) higher costs as a result of increased costsassociated with labor (approximately 0.2%); and (6) sales of higher-costproducts due to the Acquisition of Clovervale (approximately 0.1%); partiallyoffset by  (7) the impact of net price increases to customers(approximately 0.9%) and (8) decreases in overhead costs (approximately 0.8%).

 

As previously noted, theCompany has market-related pricing contracts that require the Company toimmediately pass along commodity price variances.  During fiscal 2008, netprices paid for raw material proteins increased approximately $13.6 million; ofwhich approximately $9.1 million was attributable to the Acquisition of Zartic.

 

Approximately 29.9% of totalsales for fiscal 2008 were protected from commodity exposure, of which 24.6%were attributable to market-related pricing contracts, while the other 5.3%were related to the USDA Commodity Reprocessing Program, which also insulatesthe Company from raw material price fluctuations.  For fiscal 2007,approximately 34.9% of total sales were protected from commodity exposure, ofwhich 30.4% were attributable to market-related pricing contracts, while theother 4.5% were related to the USDA Commodity Reprocessing Program.

 

The following tablerepresents the increases in the weighted average prices the Company paid forbeef, chicken, pork, and cheese during fiscal 2008 compared to fiscal 2007excluding formulation mix and market-related pricing contracts.  Fiscal2008 reflects the weighted average prices paid for raw materials as a result ofthe Acquisition of Zartic and the Acquisition of Clovervale.

 
| ** ** | ** ** | **% (Increase) in Prices** | ** ** |
|------------|------------|-------------------------------------------|------------|
| ** ** | ** ** | **Paid for Raw Materials** | ** ** |
| ** ** | ** ** | **Fiscal 2008**                      | ** ** |
| ** ** | ** ** | **Compared to**                      | ** ** |
| ** ** | ** ** | **Fiscal 2007**                      | ** ** |
| Beef       |       | (3.8                                      | )%         |
| Chicken    |       | (55.2                                     | )%         |
| Pork       |       | (5.6                                      | )%         |
| Cheese     |       | (25.5                                     | )%         |
| Aggregate  |       | (14.5                                     | )%         |

 

While historically theCompany has managed fluctuations in raw material costs through purchase orders,market-related pricing contracts, and by passing on such cost increases tocustomers, the Company may be unable to protect itself from future increases inthe prices of raw materials on a timely basis, or at all.   Inaddition, some of the Company’s customers purchase products based on bidcontracts with set prices, which would prevent the Company from recovering anyraw materials price increases from these customers during the life of thosecontracts.  If prices for beef, chicken, pork, and cheese were to increasesignificantly without a commensurate increase in the price for processedprotein food products, the Company’s financial condition and operating resultscould be adversely affected.

 

***Selling, general, and administrative*****.**Selling, general, and administrative expensesincreased by $22.0 million in fiscal 2008 compared to fiscal 2007, or61.2%.  This increase was primarily due to (1) increased volume as aresult of the Acquisition of Zartic (approximately $13.1 million); (2)increased volume as a result of the Acquisition of Clovervale (approximately$4.5 million); (3) increased selling expense primarily due to increasedpromotional activity (approximately $1.4 million); (4) increased expensesrelated to increased sales volume and mix shift across most of the Company’send-markets (approximately $1.0 million); (5) increased storage expense(approximately $0.8 million) due to increased replenishment costs and build ofinventories associated with the Acquisition of Zartic; (6) increasedintegration expenses, primarily as a result of the Acquisition of Zartic(approximately $0.7 million); (7) increased administrative expenses, primarilydue to bad debt associated with the bankruptcy of a customer (approximately $0.3million) and increased management consulting fees (approximately $0.3 million);and (8) increased freight costs (approximately $0.2 million).  These werepartially offset by a decrease in compensation expense (approximately $1.0million). As a percentage of revenues, selling, general, and administrativeexpenses increased from 17.6% to 18.7%.

 

***Depreciation and amortization****. * Depreciation and amortization expenseincreased by $4.8 million primarily due to increased amortization(approximately $1.3 million) and increased depreciation expense (approximately$3.5 million).  The increase in amortization expense was primarily due toadditional amortization expense as a result of additional amortizableintangible assets recorded in conjunction with the Acquisition of Zartic andthe Acquisition of Clovervale; offset by the decrease as a result of the 

 

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accelerated methods ofamortization used for the amortizable intangible assets recorded in conjunctionwith the Acquisition of Pierre.  The increased depreciation expense wasprimarily due to the allocation of the purchase prices in conjunction with theAcquisition of Zartic and the Acquisition of Clovervale and the valuations ofproperty, plant, and equipment as a result of purchase accounting for suchacquisitions.

 

***Interest expense and other income, net*****.**  Interest expense and other income, netconsists primarily of interest on fixed and variable-rate long-term debt. Interest expense and other income, net increased by $6.0 million, or54.6%.  This increase is primarily due to increased average outstandingborrowings under the term loan as a result of Amendment No. 2 to the Company’scredit facility in order to finance the Acquisition of Clovervale and AmendmentNo. 3 to the Company’s credit facility in order to finance the Acquisition ofZartic, increased floating interest rates related to the Company’svariable-rate interest, and increased average borrowings under the Company’srevolving credit facility.  The Company’s average outstanding long-termdebt during fiscal 2008 was $364.7 million versus $255.5 million during fiscal2007.  The weighted average interest rates for fiscal 2008 and fiscal 2007were 8.3% and 8.0%, respectively.

 

***Income taxes*****.**Theeffective tax rate for fiscal 2008 was 35.0% compared to 35.8% for fiscal2007.  The change in the effective tax rate is primarily due to a changein the expected Section 199 deduction (the “Domestic Manufacturing Deduction”)due to current year profitability, the elimination of the Extra-TerritorialIncome deduction (“ETI”) in the current year, changes in the Company’s expectedpre-tax income relative to the impact of permanent differences, and a reductionin the Company’s estimated state effective tax rate due to the Acquisition ofClovervale and the Acquisition of Zartic.

 

The Company adopted theprovisions of Financial Accounting Standards Board (FASB) InterpretationNo. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement No. 109, Accounting for Income Taxes” onMarch 4, 2007.  As a result, the Company recorded a liability of $809,267for unrecognized tax benefits, including accrued interest.  Of thisamount, $57,127 represented accrued interest and was accounted for as a reductionto the beginning balance of retained earnings.  The remaining $752,140 wasrecorded as a reduction to a non-current deferred tax liability account. The$57,127 represents unrecognized tax benefits that, if recognized, wouldfavorably affect the effective income tax rate in any future periods.

 

The Company files income taxreturns in the U.S. federal jurisdiction and various state jurisdictions. The Company has substantially concluded all U.S. federal income taxmatters through the tax year ended June 30, 2004.  No federal income taxreturns are currently under examination.  With few exceptions, the Companyis no longer subject to state or local income tax examinations by taxauthorities through the fiscal 2003 tax year.

 

As previously noted, theCompany’s policy is to recognize interest and penalties related to income taxmatters as tax expense.  The amount of interest and penalty expenserecorded for the twenty-six week period ended September 1, 2007 was notmaterial.

 

**Liquidity and Capital Resources**

 

Thefollowing table summarizes the Company’s net cash provided by (used in)operating, investing, and financing activities for the twenty-six weeks endedSeptember 1, 2007 and September 2, 2006, respectively.

 
| ** **                       | ** ** | **Twenty-Six**                  | ** ** | **Twenty-Six**                  | ** ** |
|----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Weeks Ended**            | ** ** | **Weeks Ended**            | ** ** |
| ** **                       | ** ** | **September 1, 2007** | ** ** | **September 2, 2006** | ** ** |
| Net cash  provided by (used in): |       |                            |       |                            |       |
| Operating  activities            |       | $                               | (9,033,547 | )                               | $          | 3,100,406 |   |
| Investing  activities            |       | $                               | (4,366,075 | )                               | $          | (25,808,972 | ) |
| Financing  activities            |       | $                               | 21,272,527 |                            | $          | 20,403,394 |   |

 

Net cash used in operatingactivities during fiscal 2008 was $9.0 million compared to net cashprovided by operating activities of $3.1 million during fiscal 2007. The decrease in net cash provided by operating activities was primarily due to(1) a net loss of $12.5 million during fiscal 2008 compared to net income of$0.8 million in fiscal 2007; (2) a change in deferred taxes in fiscal 2008(approximately $4.9 million) compared to a change in fiscal 2007 (approximately$6.9 million); (3) an increase in accounts receivable (approximately $2.2million) during fiscal 2008 compared to less of an increase in the prior yearcomparable period (approximately $0.4 million); (4) an increase in refundableincome taxes, prepaid expense, and other current assets (approximately $1.4million) in fiscal 2008 compared with a decrease in fiscal 2007 (approximately$1.9 million); and (5) an increase in accounts payable and other accruedliabilities (approximately $0.5 million) during fiscal 2008 compared to agreater increase (approximately $1.6 million) in the prior year comparableperiod; offset by (6) depreciation and amortization expense (approximately$18.5 million) in fiscal 2008 compared with fiscal 2007 (approximately $13.7million); (7) an increase in inventories (approximately $8.5 million) in fiscal2008 compared with a greater increase in the prior year comparable period(approximately $8.8 million); and (8) amortization of deferred loan fees infiscal 2008 (approximately $1.1 million) compared to less amortization in fiscal2007 (approximately $0.8 million).

 

The primary components of netcash used in operating activities for fiscal 2008 were (1) a net loss of $12.5million during fiscal 2008; (2) an increase in inventories (approximately $8.5million) due to a pipeline fill in conjunction with the Acquisition of Zartic,an increase in raw material costs used in the production of inventory,production of newly developed products to meet customer needs, an inventorybuild in conjunction with the seasonality of the Company’s school business andto meet contractual obligations with one of the Company’s largest customers,and a focused effort to increase safety stock due to anticipated transitions tonew suppliers; (3) an increase in refundable income taxes, prepaid expenses,and other current assets (approximately $1.4 million); (4) a change in deferredincome taxes (approximately $4.9 million); and (5) an increase in receivables(approximately

 

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$2.2 million); offset by (6) depreciationand amortization of intangible assets (approximately $18.5 million), of which$7.0 million relates to depreciation of fixed assets and $11.5 million relatesto amortization of intangible assets recorded in conjunction with theAcquisition of Pierre, the Acquisition of Clovervale, and the Acquisition ofZartic; (7) amortization of deferred loan fees (approximately $1.1 million);(8) an increase in trade accounts payable and other accrued liabilities(approximately $0.5 million); and (9) an increase in other long-termliabilities (approximately $0.4 million).

 

Net cash used in investingactivities for fiscal 2008 was $4.4 million compared to $25.8 millionfor fiscal 2007.  Net cash used in investing activities during fiscal 2008consists of capital expenditures (approximately $4.9 million), which consistedof various plant improvements, including the expenditures on the controlequipment (See further discussion in Note 14, “Legal Proceedings” to theCompany’s Condensed Consolidated Financial Statements), and routine capitalexpenditures, in addition to net cash used in conjunction with the Acquisitionof Zartic (approximately $0.2 million).  Net cash used in investingactivities during fiscal 2007 consists primarily of net cash used in conjunctionwith the Acquisition of Clovervale (approximately $21.1 million), in additionto capital expenditures for various plant improvements and routine capitalexpenditures.

 

Net cash provided byfinancing activities for fiscal 2008 was $21.3 million compared to net cashprovided by financing activities for fiscal 2007 of $20.4 million.  Netcash provided by financing activities for fiscal 2008 was due primarily to (1)increased borrowings under the Company’s revolving credit facility(approximately $24.1 million); offset by principal payments on long-term debt(approximately $2.8 million), which includes $2.0 million of prepayments onCompany’s term loan and $0.8 million of principal payments for capital leases.

 

Effective June 30, 2004, theCompany obtained a $190 million credit facility, which included a six-yearvariable-rate $150 million term loan, a five-year variable-rate $40 millionrevolving credit facility and a $10 million letter of credit subfacility. Funds available under this facility are available for working capitalrequirements, permitted investments and general corporate purposes.  Allof the Company’s indebtedness under the credit facility is secured by afirst-priority security interest in substantially all of the Company’sassets.  At September 1, 2007, base rate borrowings under the term loanportion of the facility bear interest at prime rate plus 1.25% and base rateborrowings under the revolving credit portion of the facility bear interest atprime rate plus based on prime plus pricing levels ranging from 1.0% to 1.75%determined by the consolidated leverage ratio of the Company.  AtSeptember 1, 2007, the interest rates for base rate borrowings under therevolving credit facility and the term loans were 10.00% (prime of 8.25% plus1.75%) and 9.50% (prime of 8.25% plus 1.25%), respectively.  However, theCompany lowered such rates through the use of LIBOR tranches.  Thefollowing table summarizes the Company’s outstanding LIBOR tranches as ofSeptember 1, 2007, including the amount, the respective rate of interest, andthe date of expiration.

 
| ** **                                | ** ** | **Amount** | ** **  | **Interest Rate** | ** ** | **Expiration Date** | ** ** |
|-------------------------------------------|------------|------------|-------------|------------------------|------------|--------------------------|------------|
| Term loan LIBOR  tranche:                 |       | $          | 227,000,000 |                   | 7.78       | %                        | 11/16/07   |   |
| Revolving credit  facility LIBOR tranche: |       | $          | 6,000,000   |                   | 8.18       | %                        | 02/29/08   |   |
| Revolving credit  facility LIBOR tranche: |       | $          | 14,000,000  |                   | 8.17       | %                        | 02/29/08   |   |

 

Effective August16, 2007, the Company entered into an interest swap agreement (the “Swap”)to reduce its exposure to interest rate fluctuations on a portion of its termloan with the objective of minimizing the impact of interest rate fluctuationsand stabilizing cash flows. The Swap has a notional amount of$175.0 million with a fixed rate of 5.14%, thereby effectively convertinga portion of the floating rate term debt to a fixed rate obligation of 7.39% (5.14%plus applicable margin). A portion of the Swap with a notional amount of $25.0million will expire on August 16, 2008, with the remaining $150.0 millionexpiring on August 16, 2009. The difference between the three-month LIBOR rateand Swap rate will be settled in cash on the interest payment dates. Inaccordance with SFAS 133,**theSwap does not qualify for “Cash Flow Hedge Accounting” treatment. The change inthe fair value of the Swap totaling $427,677 is reflected as an increase ininterest expense in second quarter fiscal 2008. As of September 1, 2007, theCompany has recorded a liability totaling $427,677 to recognize the Swap at itsfair value.

 

Repayment of borrowings underthe $150.0 million term loan was initially $375,000 per quarter, which began onSeptember 4, 2004, with a balloon payment of $141.4 million due onJune 30, 2010.  The Company made all such scheduled quarterlypayments totaling $8.6 million for the term of the loan and prepayments on theterm loan totaling $34.4 million.  As previously discussed in Note 2 “Acquisitions”,in conjunction with the Acquisition of Clovervale, the Company increasedborrowings with respect to its term loan by $24.0 million in order to financethe Acquisition of Clovervale.  In addition, also discussed in Note 2 “Acquisitions”,in conjunction with the Acquisition of Zartic, the Company increased borrowingswith respect to its term loan by $100.0 million in order to finance theAcquisition of Zartic. As a result of Amendment No. 3, scheduled quarterly repaymentswere $250,000 per quarter. During first quarter fiscal 2008, the Company madeprepayments of $2.0 million, and as such, will not resume scheduled quarterlypayments until February 28, 2009.  The remaining outstanding balance of$225.8 million (excluding scheduled quarterly payments) as of September 1, 2007is due on June 30, 2010.

 

**Acquisition of Clovervale.**   In conjunction with theAcquisition of Clovervale, on August 21, 2006, the Company entered intoAmendment No. 2 to its credit facility.  Amendment No. 2provided for, among other things, an increase in borrowings with respect to theCompany’s term loan totaling $24.0 million.  A copy of AmendmentNo. 2 is included as Exhibit 10.1 to the Company’s Current Report onForm 8-K filed with the SEC on August 22, 2006.

 

**Acquisition of Zartic.**   In conjunction with theAcquisition of Zartic, on December 11, 2006, the Company entered into AmendmentNo. 3 to its credit facility.  Amendment No. 3 provided for, amongother things, an increase in borrowings with respect to the Company’s term loantotaling $100.0 million.  A copy of Amendment No. 3 is includedas Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filedwith the SEC on January 16, 2007.

 

Subsequent to the Acquisitionof Zartic, as previously disclosed in the Company’s Report on Form 10-Q for thequarter ended June 2, 2007, on July 14, 2007, one of the acquired meatprocessing plants, which is located in Hamilton, Alabama, was destroyed by afire. The Hamilton plant was primarily used for processing sausage products andemployed approximately 45 people prior to the fire. An investigation wasconducted in order to determine the cause of the fire and to determine theextent of the damages. The Company is working with its insurance carrier todetermine coverage, but believes that the damages, including

 

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business interruption, willbe covered by insurance without any material financial loss to the Company. TheCompany is executing a Disaster Recovery Plan designed to continue the supplyof affected products to the Company’s customers.

 

OnAugust 2, 2007, the Company retained an outside consultant to manage and assistthe Company’s management with the preparation of the property and business interruptionclaims. During second quarter fiscal 2008, the Company determined that $133,140of inventory and property, plant and equipment with a net book value of$814,785 at the location were irreparably damaged. The Company believes thatits insurance carrier will indemnify the Company for the entire amount of theloss. The Company recorded insurance receivables of approximately $1.0 millionduring second quarter fiscal 2008 for insurance reimbursements related to thedamaged assets.

*** ***

***SubsequentEvent - Credit Agreement.  ***As of September 1, 2007, the Company was indefault under the consolidated leverage ratio covenant in its Credit Agreement.Effective October 10, 2007, the Company obtained a waiver of such default fromthe required lenders and entered into Amendment No. 4 to the Credit Agreement,which amended, among other things, the financial covenants in the CreditAgreement and increased the applicable interest rates for term loans and therevolving credit facility. The applicable interest rate for term loanborrowings was increased as follows (i) for base rate borrowings, the interestrate was increased to the base rate (which is the greater of the applicableprime rate and 1⁄2 of 1% above the Federal Funds Rate) plus 2.75% if the Companyhas a corporate family rating and a corporate rating greater than or equal toB2 and B from Moody’s and S&P, respectively, or if the Company does nothave such ratings, to the base rate plus 3.00%, and (ii) for LIBOR borrowings,the interest rate was increased to the LIBOR rate plus 3.75% if the Company hasa corporate group family rating and a corporate group rating greater than orequal to B2 and B from Moody’s and S&P, respectively, or if the Companydoes not have such ratings, to the LIBOR rate plus 4.00%. For revolving creditborrowings, the applicable interest rate is based upon the Company’sconsolidated leverage ratio and was increased as follows:  (i) for base rate borrowings, to a range ofthe base rate plus 2.50% to such base rate plus 3.00%, and (ii) for LIBORborrowings, to a range of the LIBOR rate plus 3.50% to such LIBOR rate plus4.00%. In conjunction with the closing of Amendment No. 4, the Company paidfees of approximately $1.2 million, which included an arrangement fee, inaddition to payment to each consenting lender . The corresponding long-termdebt was not reclassified as a current liability due to the Company’s default,as the Company believes it will meet its amended debtcovenants for the next 12 months.

 

***Cash and Cash Equivalents; Borrowing Availability.  *** As of September 1, 2007, the Company had netcash and cash equivalents on hand of $8.0 million (See Critical AccountingPolicies below for further discussion on the Company’s treatment of cash andcash equivalents) outstanding borrowings under its revolving credit facility of$24.9 million and borrowing availability of approximately $8.8 million. Also as of September 1, 2007, the Company had borrowings under its term loan of$227.0 million and $125.0 million of the 9.875% senior notes outstanding thatwere issued in conjunction with the Acquisition of Pierre (“New Notes”). As of March 3, 2007, the Company had cash and cash equivalents on hand of$0.1 million, outstanding borrowings under its revolving credit facility of$0.8 million, and borrowing availability of approximately $35.7 million. Also as of March 3, 2007, the Company had borrowings under its term loanof $229.0 million and $125.0 million of the New Notesoutstanding.  The maturity date of the $40 million revolving creditfacility is June 30, 2009.  The Company is required to satisfycertain financial covenants regarding cash flow and capital expenditures. Asstated above, as of September 1, 2007, the Company was not in compliance withall of its financial covenants; however, a waiver of such default was obtainedand the financial covenants have been amended pursuant to Amendment No. 4.

 

***Income Taxes***.The Company adopted the provisions of FIN 48 on March 4, 2007.  As aresult, the Company recorded a liability of $809,267 for unrecognized taxbenefits, including accrued interest.  Of this amount, $57,127 wasaccounted for as a reduction to the beginning balance of retainedearnings.  The remaining $752,140 was recorded as a reduction to anon-current deferred tax liability account.  The $57,127 representsunrecognized tax benefits that, if recognized, would favorably affect theeffective income tax rate in any future periods.

 

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

 

The Company’s continuingpolicy is to recognize interest and penalties related to income tax matters astax expense. The amount of interest and penalty expense recorded for thethirteen and twenty-six week periods ended September 1, 2007 was not material.

 

***Tax Sharing Agreement with Selling Shareholders. ***   In conjunction with the Acquisition ofPierre, the Company and the selling shareholders entered into a tax sharing andindemnification agreement containing certain representations and warranties ofthe selling shareholders with respect to taxes.  The agreement providesthat any net operating loss carryforwards attributable to expenses relating tothe sale of the Company (“Deal Related NOLs”) and certain other deal relatedexpenses, will be for the benefit of the selling shareholders.  As of thedate of the Acquisition of Pierre, these Deal Related NOLs and other dealrelated expenses totaled approximately $24.2 million and $6.6 million, respectively. Accordingly, the Company was required to pay and has paid to the sellingshareholders the amount of any tax benefit attributable to such Deal RelatedNOLs and other deal related expenses, except that the first $4.0 million ofsuch tax benefits was paid into an escrow account that secures the sellingshareholders indemnification obligations under the tax sharing andindemnification agreement.   The Company is required to make paymentsto the 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 Companyrecorded a net long-term liability to the selling shareholders totaling $10.3million for the estimated obligations under the tax sharing and indemnificationagreement.  During the Company’s fiscal year ended March 2, 2007, theCompany increased the estimated obligation under the tax sharing andindemnification agreement by approximately $1.3 million based on thedifferences in the tax rate initially used to estimate the liability, theactual payments to the selling shareholders, and the estimated remainingobligation to the selling shareholders.  The adjustment to the liabilityto the selling shareholders resulted in a corresponding increase in goodwillrelated to the Acquisition of Pierre.

 

As of September 1, 2007, theCompany has utilized $24.2 million of the Deal Related NOLs and $1.7 million inother deal related expenses.  Also as of September 1, 2007, the Companyhas submitted payments based on the tax benefits received, net of other taxassessments due to the Company from the selling shareholders, to an escrowaccount (approximately $4.0 million) and directly to the selling shareholders(approximately $5.4 million).  As of September 1, 2007, the Company has aremaining liability to the selling shareholders totaling $2.2 million (whichreflects the aforementioned $1.3 million adjustment during fiscal 2007). No payments were made to the selling shareholders during fiscal 2008, however,the Company expects to make an additional payment on or about December 5, 2007in conjunction with the filing of its fiscal 2007 state returns.  Anestimate of such payments is classified by the Company as a current liability(approximately $0.3 million).  The remaining portion of the liability(approximately $1.9 million) is classified as long-term based on the expectedtiming of the remaining payments to the selling shareholders.  The Companyexpects to fully utilize the Deal Related NOLs and other deal related expenses,however the timing of the future payments of the long-term portion is unknown.

 

***Capital Expenditures. *** The Company has budgeted approximately $5.5million for capital expenditures for the remainder of its fiscal year endingMarch 1, 2008. These expenditures include a provision for capacity expansion,system upgrades, and routine food processing capital improvement projects andother miscellaneous expenditures within the Company’s existing

 

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facilities.  The Companybelieves that funds from operations and funds from its $40 million revolvingcredit facility, as well as the Company’s ability to enter into capital leases,will be adequate to finance these capital expenditures.

 

If the Company continues itshistorical annual revenue growth trend as expected, the Company will berequired to raise and invest additional capital for additional plant expansionprojects to provide operating capacity to satisfy increased demand and specificcustomer requirements.  In addition, management believes that future cashrequirements for these plant expansion projects would need to be met throughother long-term financing sources.  The incurrence of additional long-termdebt is governed and restricted by the Company’s existing debtinstruments.  Furthermore, there can be no assurance that additionallong-term financing will be available on advantageous terms (or any terms) whenneeded by the Company.

 

***General.***Significantassumptions underlie the belief that the Company anticipates that its cashrequirements for working capital and debt service for the remainder of thefiscal year ending March 1, 2008 will be met through a combination of fundsprovided by operations and borrowings under its $40 million revolving creditfacility, including, among other things, that there will be no material adversedevelopments in the business, liquidity or significant unbudgeted capitalrequirements of the Company.  In addition, if Pierre is unable toimplement appropriate pricing to its customers (required due to rising rawmaterial costs), or if the Company is unable to successfully integrate therecently acquired companies, which includes consolidating the financialfunctions and obtaining planned synergies, integrating key personnel, and themaintenance and growth of the existing businesses, the Company may be unable tocontinue to generate sufficient cash flow.  Such inability to generatesufficient cash flow may require the Company to refinance all or a portion ofits debt, including the New Notes and its credit facility, obtain additionalfinancing, which as a result, might not be available for its operations orother purposes, sell some of its assets or operations, reduce or delay capitalexpenditures, or revise or delay its operations or strategic plans.  Ifthe Company is required to take any of these actions, it could have a materialadverse effect on its business and financial condition.  In addition,the Company cannot guarantee it would be able to take any of these actions,that these actions would enable it to continue to satisfy its capitalrequirements, or that these actions would be permitted under the terms of itsNew Notes or credit facility.

 

**CommercialCommitments, Contingencies, and Contractual Obligations**

 

The Company provided a letterof credit in the amount of $5.7 million and $2.8 million as of September 1,2007 and March 3, 2007, respectively, to its insurance carrier for theunderwriting of certain performance bonds.  The current letter of creditoutstanding expires during the Company’s fiscal year ending March 1,2008.  The Company also provides secured letters of credit to itsinsurance carrier for outstanding and potential workers’ compensation andgeneral liability claims.  The letters of credit for these claims totaled$675,000 as of September 1, 2007 and March 3, 2007.

 

The Company is involved invarious legal proceedings.  Management believes, based on the advice oflegal counsel, that the outcome of such proceedings will not have a materialadverse effect on the Company’s financial position or future results ofoperations and cash flows.  See Note 14 — “Legal Proceedings,” to theCompany’s Condensed Consolidated Financial Statements for further discussion ofproceedings as of September 1, 2007.

 

The following tablessummarize our commitments and contractual obligations by fiscal year as ofSeptember 1, 2007.

 
| ** **                                 | ** ** | **Commitments by Fiscal Year** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | **Total**                                     | ** ** | **Less than 1  Year** | ** ** | **1 – 3  Years** | ** ** | **3-5  Years** | ** ** | **More than 5  Years** | ** ** |
| Letters of  credit                         |       | $                                             | 6,369,500  |   | $ | 6,369,500 |   | $ | — |   | $ | — |   | $ | — |   |
| Purchase  commitments for capital projects |       | 848,750                                       |       | 848,750 |   | — |   | — |   | — |   |
| Purchase commitments for raw materials     |       | 616,888                                       |       | 616,888 |   | — |   | — |   | — |   |
| Purchase commitments for natural gas       |       | 791,440                                       |       | 791,440 |   | — |   | — |   | — |   |
| Purchase  commitments for miscellaneous    |       | 8,061                                         |       | 8,061 |   | — |   | — |   | — |   |
| Total                                      |       | $                                             | 8,634,639  |   | 8,634,639 |   | $ | — |   | $ | — |   | $ | — |   |
|                                            |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                        | ** ** | **Contractual Obligations by Fiscal Year** | ** **  |
|-----------------------------------|------------|----------------------------------------------------------------|-------------|
| ** **                        | ** ** | **Total**                                                      | ** **  | **Less than 1  Year** | ** ** | **1 – 3  Years** | ** ** | **3-5  Years** | ** ** | **More than 5  Years** | ** ** |
| ** **                        | ** ** | ** **                                                     | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term debt                    |       | $                                                              | 376,850,000 |   | $ | — |   | $ | 251,850,000 |   | $ | 125,000,000 |   | $ | — |   |
| Capital lease  obligations*       |       | 3,570,273                                                      |        | 1,740,722 |   | 1,764,069 |   | 65,482 |   | — |   |
| Operating lease  obligations      |       | 3,658,121                                                      |        | 2,770,212 |   | 830,722 |   | 57,187 |   |   |   |
| Interest on  fixed-rate debt**    |       | 61,964,399                                                     |        | 12,589,399 |   | 24,687,500 |   | 24,687,500 |   | — |   |
| Interest on  variable-rate debt** |       | 37,214,147                                                     |        | 19,678,649 |   | 17,535,498 |   | — |   | — |   |
| Total                             |       | $                                                              | 483,256,940 |   | $ | 36,778,982 |   | $ | 296,667,789 |   | $ | 149,810,169 |   | $ | — |   |

 

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*Capitallease obligations include interest component related to leases.

**Estimatedpayments for interest are based on actual interest rates for fixed andvariable-rate debt outstanding as of September 1, 2007 assuming that theoutstanding balances remain unchanged until maturity.

 

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**CriticalAccounting Policies and Estimates**

 

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

 

The Company believes itsapplication of accounting policies, and the estimates inherently requiredtherein, are reasonable.  These accounting policies and estimates areconstantly reevaluated, and adjustments are made when facts and circumstancesdictate a change.  Historically, the Company’s application of accountingpolicies has been appropriate, and actual results have not differed materiallyfrom those determined using necessary estimates.

 

The following criticalaccounting policies affect the Company’s more significant judgments andestimates used in the preparation of its financial statements.

 

***Cash and cash equivalents.***   For financial statement presentation purposes, the Companypresents book overdrafts, principally outstanding checks in excess of cash onhand with the same financial institution, as accounts payable.  As ofSeptember 1, 2007, the Company had actual cash of $17.2 million (of which $17.1million was held in accounts with the Company’s bank that is primarilyresponsible for its cash management), which was offset by outstanding checks of$10.1 million, resulting in a net reclassification of $9.2 million to accountspayable and a remaining net cash on hand balance of $8.0 million.  Theremaining cash balance represents cash on hand in excess of outstanding checks.The Company considers all highly liquid investments purchased with an originalmaturity of three months or less to be cash equivalents.  As of September1, 2007, the Company had no cash equivalents.

 

***Revenue Recognition.**** * The Companyrecords revenues from its sales of food processing products at the time titletransfers.  Standard shipping terms are FOB destination.  Based onthese terms, title passes at the time the product is delivered to thecustomer.  Revenue is recognized as the net amount to be received by theCompany after deductions for estimated discounts, product returns, and otherallowances.  These estimates are based on historical trends and expectedfuture payments (see also *Promotions*below).

 

***Goodwill and Other Intangible Assets*****.**   In conjunction with the Acquisition ofPierre, the Acquisition of Clovervale, and the Acquisition of Zartic, themanagement of the Company, with the assistance of an independent valuationfirm, performed valuations of the Company’s other intangible assets forfinancial reporting purposes.  Assets identified through these valuationsincluded formulas, customer relationships, licensing agreements, non-competeagreements, and certain tradenames and trademarks.

 

In accordance with FinancialAccounting Standard (“SFAS”) No. 142 (“SFAS 142”) —”Goodwill and OtherIntangible Assets,” the Company tests recorded goodwill and intangibles withindefinite lives for impairment at least annually.  Intangible assets withfinite lives are amortized over their estimated economic or estimated usefullives.  In addition, all other intangible assets are reviewed for impairmentin accordance with SFAS 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.”  Included in the review for impairment are certainassumptions and estimates which include financial forecasts of income and cashflow that are attributable to the Company’s reporting units andindefinite-lived intangible assets (which are discounted to present value atrates reflective of the Company’s cost of capital).  As of March 3, 2007,the Company performed the annual impairment review of goodwill andindefinite-lived intangible assets and also assessed whether theindefinite-lived intangible assets continue to have indefinite lives.  TheCompany engaged an independent party to perform valuations to assist in theimpairment review. There were no impairment charges as a result of this review.

 

As noted above, theimpairment analyses relied on financial forecasts of income and cash flow thatare attributable to the Company’s reporting units and indefinite-livedintangible assets and then discounted to present value at rates reflective ofthe Company’s cost of capital.  Future changes in the Company’s financialforecasts or cost of capital might adversely affect the value of the Company’sreporting units or indefinite-lived intangible assets.  The Company willcontinue to perform impairment tests on an annual basis and on an interimbasis, if certain conditions exist.

 

The Company’s amortizableintangible assets are amortized using primarily accelerated amortizationmethods, in addition to the straight-line amortization method, in order toallocate expected benefit derived from the assets over the estimated usefullife of such assets.

 

***Promotions*****.** Promotional expenses associated with customer rebates, marketingpromotions, and special pricing arrangements are recorded as a reduction ofrevenues or as selling expense at the 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 customer deductionsto be taken under these programs.  The Company believes the estimatesrecorded in the financial statements are reasonable estimates of the Company’sliability under these programs.

 

***Stock-Based Compensation*****.**   The Company treats the options topurchase shares of common stock of Holding issued to employees of the Company (“Options”)as stock-based compensation for employees of the Company.  Prior to theCompany’s fiscal year ended March 3, 2007, as permitted under GAAP, the Companyaccounted for the Options under the recognition and measurement principles ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (“APB 25”), and related Interpretations using the intrinsic valuemethod.  Accordingly, no compensation expense was recognized for the stockoption plan in the Company’s Condensed Consolidated Statements of Operations.

 

Effective March 5, 2006, asrequired for the first annual reporting period beginning after December 15,2005 for non-public companies (as defined in SFAS 123(R)), the Company adoptedSFAS 123(R) using the prospective adoption method.  The new statementrequires compensation expense associated with share-based payments to employeesto be recognized in the

 

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financial statements based ontheir fair values.  Upon the adoption of SFAS 123(R), because the Companyhad used the minimum value method prior to the adoption, the Company wasrequired to apply the provisions of the statement only prospectively for anynewly issued, modified or settled award after the date of initialadoption.  No new Options were issued, modified or settled subsequent toadoption, however, the fair value assigned to any newly issued, modified orsettled award in the future is expected to be significantly greater due to thedifferences in valuation methods.  Upon the adoption of SFAS 123(R) thepro forma effect of fair value accounting for prior periods presented are nolonger presented as the Company used the minimum value method.

 

***New Accounting Pronouncements.***   In September 2006, the FASB issuedSFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  The objective SFAS157 is to define fair value, establish a framework for measuring fair value andexpand disclosures about fair value measurement.  SFAS 157 is effectivefor interim and annual reporting periods beginning after November 15,2007.  The Company is currently assessing the impact of SFAS 157 on theCompany’s consolidated financial statements.

 

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

 

Effective March 4, 2007, theCompany adopted FIN 48 which requires that the financial statement effectsof a tax position taken or expected to be taken in a tax return be recognizedin the financial statements when it is more likely than not, based on thetechnical merits, that the position will be sustained upon examination. The cumulative effect of applying FIN 48 was $809,267 forunrecognized tax benefits, including accrued interest.  Of such amount,$57,127 was recorded as an adjustment to the March 4, 2007 balance of retainedearnings and the remaining balance was recorded as a reduction in non-currentdeferred taxes.

 

**Seasonality**

 

Except for sales to schooldistricts, which represent approximately 20% of the Company’s total salesannually and which decline significantly during summer, late November andDecember, there is no significant seasonal variation in the Company’s sales.

 

**CautionaryStatement As To Forward-Looking Information**

 

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

 

•                  adverse changes in food costs and availabilityof supplies or costs of distribution, and the ability pass on such coststhrough increased prices to customers;

•                  the Company’s level of indebtedness;

•                  the Company’s ability to generate sufficientcash flows in order to satisfy cash requirements for working capital and debtservice;

•                  restrictions imposed by the Company’s debtinstruments;

•                  acquisitions, if any, including identificationof appropriate targets and successful integration of any acquired businesses,including the integration of the Clovervale and Zartic businesses;

•                  dependence on co-packers, some of whom may becompetitors or sole-source suppliers;

•                  increased competitive activity;

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

•                  dependence on significant customers;

•                  changes in consumer preferences and diets;

•                  consolidation of the Company’s customers;

•                  general risks of the food industry, includingrisk of contamination, mislabeling of food products, a decline in meatconsumption, and outbreak of disease among cattle, chicken or pigs, or anychange in consumer perception of certain protein products;

•                  adverse change to, or efficient utilization orsuccessful rationalization of, the Company’s facilities;

•                  dependence on key personnel;

•                  changes in the availability and relative costsof labor and potential labor disruptions or union organization activities;

•                  changes in federal government procurement lawsor failure to retain contracts in re-bidding processes;

•                  changes in economic and business conditions inthe world;

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

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

 

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

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

As discussed in the Company’sAnnual Report on Form 10-K for the fiscal year ended March 3, 2007, the Companyis exposed to market risk stemming from changes in interest rates, commodityprices, and foreign exchange rates.   Changes in these factors could causefluctuations in the Company’s financial condition, results of operations andcash flows.  The Company owned no derivative financial instruments ornonderivative financial instruments held for trading purposes at September 1,2007 or March 3, 2007.  Certain of the Company’s outstanding nonderivativefinancial instruments at September 1, 2007 and March 3, 2007 are subject tointerest rate risk, but not subject to foreign currency or commodity pricerisk.

 

***Interest Rate Risk***.  The Company’s major market risk exposure is potential lossarising from changing interest rates and its impact on long-term debt. The Company’s policy is to manage interest rate risk by maintaining acombination of fixed and variable-rate financial instruments in amounts andwith maturities that management considers appropriate.  The risksassociated with long-term debt at September 1, 2007 have not changedmaterially since March 3, 2007.  Of the long-term debt outstanding atSeptember 1, 2007, the $125.0 million of New Notes accrue interest ata fixed interest rate, while the $227.0 million outstanding borrowings underthe term loan facility and the $24.9 million of outstanding borrowings underthe revolving credit facility accrue interest at variable interest rates. A rise in prevailing interest rates could have adverse effects on the Company’sfinancial condition and results of operations.  A 25 basis point increasein the reference rates for the Company’s average variable-rate debt outstandingduring second quarter fiscal 2008 and fiscal 2008 would have decreased netincome for these periods by approximately $0.1 million and $0.2 million,respectively.

 

Effective August16, 2007, the Company entered into an interest swap agreement (the “Swap”)to reduce its exposure to interest rate fluctuations on a portion of its termloan with the objective of minimizing the impact of interest rate fluctuationsand stabilizing cash flows. The Swap has a notional amount of$175.0 million with a fixed rate of 5.14%, thereby effectively convertinga portion of the floating rate term debt to a fixed rate obligation of 7.39%(5.14% plus applicable margin). A portion of the Swap with a notional amount of$25.0 million will expire on August 16, 2008, with the remaining $150.0million expiring on August 16, 2009. The difference between the three-monthLIBOR rate and Swap rate will be settled in cash on the interest payment dates.In accordance with SFAS 133,**theSwap does not qualify for “Cash Flow Hedge Accounting” treatment. The change inthe fair market of the Swap totaling $427,677 is reflected as an increase ininterest expense in second quarter fiscal 2008. As of September 1, 2007, theCompany has recorded a liability totaling $427,677 to recognize the Swap at itsfair value.

 

**Commodity Price Risk.**  Certain raw materials used in foodprocessing operations are susceptible to commodity price changes. Increases inthe prices of certain commodity products could result in higher overallproduction costs.  The primary raw materials used in the Company’s foodprocessing operations are boneless beef, chicken and pork, flour, yeast,seasonings, cheese, breading, soy proteins, peanut butter, and packagingsupplies.  During second quarter fiscal 2008, the weighted average pricesthe Company paid for beef, chicken, pork, and cheese increased by approximately7.4%, 13.8%, 33.9%, and 28.6%, respectively, over the weighted average pricesthe Company paid for these raw materials during the fourth quarter of fiscal2007.  During fiscal 2008, the weighted average prices the Company paidfor beef, chicken, pork, and cheese increased by approximately 9.0%, 15.8%,17.0%, and 14.2%, respectively, over the weighted average prices the Companypaid for these raw materials during the fourth quarter of fiscal 2007.   The Company attempts to manage suchfluctuations through purchase orders, market-related pricing contracts and bypassing on such cost increases to customers.

 

**Foreign Exchange Rate Risk.**  The Company bills customers in foreigncountries in US dollars, with the exception of sales to Canada.  TheCompany does not believe the foreign exchange rate risk on Canadian sales ismaterial.  However, a significant decline in the value of currencies usedin certain regions of the world as compared to the US dollar could adverselyaffect product sales in those regions because the Company’s products may bemore expensive for those customers to pay for in their local currency.  AtSeptember 1, 2007 and March 3, 2007, all trade receivables were denominated inUS dollars.

 

**Fair Value of FinancialInstruments.**  TheCompany’s non-derivative financial instruments consist primarily of cash andcash equivalents, trade receivables, trade payables and long-term debt.  The estimated fair values of the financial instruments have been determined bythe Company using available market information and appropriate valuationtechniques.  Considerable judgment is required, however, to interpretmarket data to develop the estimates of fair value.  Accordingly, theestimates presented are not necessarily indicative of the amounts that theCompany could realize in a current market exchange.  The use of differentmarket assumptions and/or estimation methodologies may have a material effecton the estimated fair value amounts.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls and Procedures*****.**   As of the end of the period covered bythis report, the Company performed an evaluation, under the supervision andwith the participation of its management including the President and Chief ExecutiveOfficer and Chief Financial Officer of the effectiveness of the Company’sdisclosure controls and procedures (as such term is defined in Exchange ActRules 13a-15(e) and 15d-15(e)).  Based upon this evaluation, the Company’sPresident and Chief Executive Officer and Chief Financial Officer haveconcluded that as of September 1, 2007, the Company’s disclosure controls andprocedures were effective for the purposes of ensuring that informationrequired to be disclosed in reports that the Company files or submits under theSecurities Exchange Act of 1934 (“Exchange Act”) has been (1) recorded,processed, summarized and reported in accordance with the rules and forms ofthe SEC and (2) accumulated and communicated to the Company’s management,including the President and Chief Executive Officer and the Chief FinancialOfficer, to allow timely decisions regarding disclosure..

 

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***Changes in Internal Controls*****.***** *** There have been no changes in theCompany’s internal controls over financial reporting during the quarter endedSeptember 1, 2007 that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

***Section 404 of Sarbanes-Oxley Act of 2002.***   On December 15, 2006, the SEC issued arule (Release No. 33-8760; 34-54942) to grant relief to non-accelerated filersby further extending the date of compliance with Section 404 of theSarbanes-Oxley Act of 2002 (the “Act”).  Pursuant to the rule, the Companyis required to comply with the Act in two phases.  The first phase iseffective for the Company’s fiscal year ending March 1, 2008 and requires theCompany to issue a management report on internal control over financialreporting.  The second phase requires the Company to provide an auditor’sattestation report on internal control over financial reporting beginning withthe Company’s fiscal year ending February 28, 2009.

 

The Company is currentlyundergoing an effort to comply with the Act.  This effort includesdocumenting, evaluating the design and testing the effectiveness of the Company’sinternal controls.  During this process, Pierre may make improvements tothe design and operation of its internal controls, including but not limitedto, further formalization of policies and procedures.  Although theCompany believes that its efforts will enable the Company to provide therequired management report on internal controls and its independent auditors toprovide the required attestation based on the required dates above, Pierre cangive no assurance that these efforts will be successfully completed in a timelymanner.

 

**PART II.  OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

**Environmental.**   On March 20,2006, the Hamilton County Department of Environmental Services (“HCDOES”) sentan Notice of Violation (“NOV”) to the Company’s West Chester, Ohio facilityalleging that the Company violated its permit limits for particulate matter (“PM”)from certain cooking operations and reserved the right to pursue an enforcementaction and a civil penalty in the future.  On July 7, 2006, HCDOES sentanother NOV to the Company alleging that the Company was in violation of itspermit limits for PM emissions and again reserved the right to pursue anenforcement action in the future.

 

The Company is cooperating with the authorities in allaspects of these matters. The Company applied for modified permits to installon August 14, 2007 for the emission sources at the plant and also submitted apermit to install application on September 20, 2007 for process water heatersat the plant to come into compliance with regulatory requirements. Thesepermits are currently being reviewed and processed by HCDOES.  On May 21,2007, the Director of the Ohio EPA invited the Company to enter into consentfinding and orders with the Ohio EPA, in lieu of referral to the Ohio AttorneyGeneral’s Office and the filing of an enforcement action in court. On August31, 2007, the Company finalized a $125,000 settlement with the Ohio EPA toresolve the alleged non-compliance with air pollution laws without anyadmission of liability. In response to the NOV’s, the Company also hasinstalled and spent approximately $1.8 million for emissions control equipmentto comply with relevant laws.

 

The Company has conducted additional stack testing of certainof its cook lines, which use the new control equipment installed for four ofits largest cook lines.  The preliminary results indicate that the newequipment is not as effective as originally expected.  Nevertheless, thecontrolled emissions are expected to meet applicable regulatory requirements.

 

***General.  *** TheCompany continuously evaluates contingencies based upon the best availableinformation.  The Company believes it has recorded appropriate liabilitiesto the 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 ofcontingencies results in amounts that vary from management’s estimates, futureearnings will be charged or credited accordingly.

 

As part of its ongoing operations in the food processingindustry, the Company is subject to extensive federal, state, and localregulations and its food processing facilities and food products are subject tofrequent inspection, audits and inquiries by the USDA, the FDA, and variouslocal health and agricultural agencies and by federal, state, and localagencies responsible for the enforcement of environmental, labor, and otherlaws and regulations.  The Company is also involved in various legalactions arising

 

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in thenormal course of business.  These matters are continuously being evaluatedand, in some cases, are being contested by the Company and the outcome is notpredictable. Consequently, an estimate of the possible loss or range of lossassociated with these actions cannot be made.  Although occasional adverseoutcomes (or settlements) may occur and could possibly have an adverse effecton the results of operations in any one accounting period, the Company believesthat the final disposition of such matters will not have a material adverseeffect on the Company’s consolidated financial position.

 

**ITEM1A.  RISK FACTORS**

 

At September 1, 2007, therewere no material changes in risk factors from those described at March 3, 2007in the Company’s Annual Report on Form 10-K.

 

**ITEM6.  EXHIBITS**

 

See Exhibit Index.

 

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**SIGNATURES**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   | PIERRE  FOODS, INC.                    |
|--------|----------------------------------------|
|   |                                   |
|   |                                   |
|   | /S/  NORBERT E. WOODHAMS          |   |
|   | By:  Norbert E. Woodhams               |
|   | President  and Chief Executive Officer |
|   | Dated:  October 16, 2007               |
|   |                                   |
|   |                                   |
|   | /S/  JOSEPH W. MEYERS             |   |
|   | By:  Joseph W. Meyers                  |
|   | Chief  Financial Officer               |
|   | Dated:  October 16, 2007               |

 

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| **EXHIBIT INDEX**             |
|-------------------------------|
|                          |   |   |
| Exhibit  No. and Description: |   |   |
|                          |
|                          | (31) | Rule  13a - 14(a) / 15d - 14(a) Certifications |   |
|                          |
|                          | 31.1 | Rule  13a - 14(a) / 15d - 14(a) Certification of Chief Executive Officer (1) |
|                          |   |   |
|                          | 31.2 | Rule  13a - 14(a) / 15d - 14(a) Certification of Chief Financial Officer (1) |
|                          |
|                          | (32) | Section  1350 Certifications |   |
|                          |
|                          | 32 | Section  1350 Certifications of the Chief Executive Officer and the Chief Financial  Officer (1) |
|                               |  |  |  |  |  |  |

 

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|   | (1) | Filed  herewith. |
|--------|-----|------------------|

 

35

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