** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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

#### ** **

| x      | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|--------|---------------------------------------------------------------------------------------------------------|
|   | ** **                                                                                              |
|   | **For the quarterly period ended  December 1, 2007**                                               |
|   | ** **                                                                                              |
|   | **OR**                                                                                                  |
|   | ** **                                                                                              |
| o      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition periodfrom                  to                  **

** **

#### **Commission FileNumber:  0-7277**

#### ** **

 

**PIERREFOODS, INC.**

(Exact name ofregistrant as specified in its charter)

 

#### **North Carolina**

(State or otherjurisdiction of incorporation or organization)

 

**56-0945643**

(I.R.S. EmployerIdentification No.)

 

**9990Princeton Road**

**Cincinnati,Ohio  45246**

(Address ofprincipal executive offices) (zip code)

 

 Registrant’s telephone number, including areacode:  **(513)874-8741**

----

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

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding twelve months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.    Yesx  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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Exchange Act Rule 12b-2). Yes oNo x

 

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

 

| **Class**                  | ** ** | **Outstanding at January 15, 2008** |
|----------------------------|------------|------------------------------------------|
| Class A Common  Stock |       | 100,000                                  |

 

 

 

----

 
| **PIERRE FOODS, INC. AND SUBSIDIARIES**                                                                                                  | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                                               | ** ** | ** ** |
| ** **                                                                                                                               | ** ** | **Page**   |
| **INDEX**                                                                                                                                | ** ** | **Number** |
| ** **                                                                                                                               | ** ** | ** ** |
| **Part I. Financial  Information:**                                                                                                 | ** ** |       |
|                                                                                                                                     |       |       |
| Item 1. Financial  Statements                                                                                                            |       |       |
| ** **                                                                                                                               | ** ** |       |
| Condensed  Consolidated Balance Sheets — December 1, 2007 and March 3, 2007                                               | ** ** | 3          |
|                                                                                                                                     |       |       |
| Condensed  Consolidated Statements of Operations — for the thirteen weeks ended December 1, 2007 and  December 2, 2006    |       | 4          |
|                                                                                                                                     |       |       |
| Condensed  Consolidated Statements of Operations — for the thirty-nine weeks ended December 1, 2007 and  December 2, 2006 |       | 5          |
|                                                                                                                                     |       |       |
| Condensed Consolidated Statement of Shareholder’s  Equity — for the thirty-nine weeks  ended December 1, 2007             |       | 6          |
| ** **                                                                                                                               | ** ** |       |
| Condensed Consolidated Statements of Cash Flows —  for the thirty-nine weeks ended December 1, 2007 and December 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                                     |       | 23         |
| ** **                                                                                                                               | ** ** |       |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                                      | ** ** | 31         |
| ** **                                                                                                                               | ** ** |       |
| Item 4T. Controls  and Procedures                                                                                                        | ** ** | 32         |
| ** **                                                                                                                               | ** ** |       |
| ** **                                                                                                                               | ** ** |       |
| **Part II.  Other Information:**                                                                                                    | ** ** |       |
|                                                                                                                                     |       |       |
| 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**

** **

**ITEM 1.  FINANCIAL STATEMENTS**

 

**PIERREFOODS, INC. AND SUBSIDIARIES**

 

**CondensedConsolidated Balance Sheets**

**(Unaudited)**

 
| ** **                                                                                                                             | ** ** | **December 1, 2007** | ** **  | **March 3, 2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|-------------|------------------------|------------|
| ASSETS                                                                                                                                 |       |                      |        |                   |       |
|                                                                                                                                   |       |                      |        |                   |       |
| CURRENT ASSETS:                                                                                                                        |       |                      |        |                   |       |
| Cash and cash  equivalents                                                                                                             |       | $                         | 119,078     |                   | $          | 88,631 |   |
| Accounts  receivable, net                                                                                                              |       | 49,151,768                |        | 46,138,649             |       |
| Inventories                                                                                                                            |       | 80,994,071                |        | 68,496,266             |       |
| Refundable  income taxes                                                                                                               |       | 11,832,471                |        | 4,612,613              |       |
| Deferred income  taxes                                                                                                                 |       | 3,540,645                 |        | 5,159,359              |       |
| Prepaid expenses  and other current assets                                                                                             |       | 5,255,889                 |        | 5,553,263              |       |
|                                                                                                                                   |       |                      |        |                   |       |
| Total current  assets                                                                                                                  |       | 150,893,922               |        | 130,048,781            |       |
|                                                                                                                                   |       |                      |        |                   |       |
| PROPERTY, PLANT, AND EQUIPMENT, NET                                                                                                    |       | 93,538,789                |        | 98,559,861             |       |
|                                                                                                                                   |       |                      |        |                   |       |
| OTHER ASSETS:                                                                                                                          |       |                      |        |                   |       |
| Other  intangibles, net                                                                                                                |       | 120,825,956               |        | 139,550,756            |       |
| Goodwill                                                                                                                               |       | 216,718,289               |        | 218,221,866            |       |
| Deferred loan  origination fees                                                                                                        |       | 7,758,223                 |        | 8,266,710              |       |
| Other                                                                                                                                  |       | 6,695,008                 |        | 5,181,501              |       |
|                                                                                                                                   |       |                      |        |                   |       |
| Total other  assets                                                                                                                    |       | 351,997,476               |        | 371,220,833            |       |
|                                                                                                                                   |       |                      |        |                   |       |
| Total Assets                                                                                                                           |       | $                         | 596,430,187 |                   | $          | 599,829,475 |   |
|                                                                                                                                   |       |                      |        |                   |       |
| LIABILITIES AND SHAREHOLDER’S EQUITY                                                                                              |       |                      |        |                   |       |
|                                                                                                                                   |       |                      |        |                   |       |
| CURRENT LIABILITIES:                                                                                                                   |       |                      |        |                   |       |
| Current  installments of long-term debt                                                                                                |       | $                         | 1,558,549   |                   | $          | 1,557,594 |   |
| Trade accounts  payable                                                                                                                |       | 25,808,328                |        | 20,567,325             |       |
| Accrued interest                                                                                                                       |       | 5,668,577                 |        | 5,568,643              |       |
| Accrued payroll  and payroll taxes                                                                                                     |       | 7,374,734                 |        | 7,116,045              |       |
| Accrued  promotions                                                                                                                    |       | 4,832,588                 |        | 3,278,430              |       |
| Accrued taxes  (other than income and payroll)                                                                                         |       | 867,161                   |        | 1,095,511              |       |
| Other accrued  liabilities                                                                                                             |       | 5,681,541                 |        | 3,110,606              |       |
|                                                                                                                                   |       |                      |        |                   |       |
| Total current  liabilities                                                                                                             |       | 51,791,478                |        | 42,294,154             |       |
|                                                                                                                                   |       |                      |        |                   |       |
| LONG-TERM DEBT, less current installments                                                                                              |       | 367,335,479               |        | 357,286,462            |       |
|                                                                                                                                   |       |                      |        |                   |       |
| DEFERRED INCOME TAXES                                                                                                                  |       | 40,041,287                |        | 45,662,017             |       |
|                                                                                                                                   |       |                      |        |                   |       |
| OTHER LONG-TERM LIABILITIES                                                                                                            |       | 7,482,044                 |        | 4,766,732              |       |
|                                                                                                                                   |       |                      |        |                   |       |
| Total  Liabilities                                                                                                                     |       | 466,650,288               |        | 450,009,365            |       |
|                                                                                                                                   |       |                      |        |                   |       |
| SHAREHOLDER’S EQUITY:                                                                                                             |       |                      |        |                   |       |
| Common stock —  Class A, 100,000 shares authorized, issued, and outstanding at  December 1, 2007 and March 3, 2007 |       | 150,194,270               |        | 150,187,941            |       |
| Retained deficit                                                                                                                       |       | (20,414,371               | )           | (367,831               | )          |
|                                                                                                                                   |       |                      |        |                   |       |
| Total  shareholder’s equity                                                                                                       |       | 129,779,899               |        | 149,820,110            |       |
|                                                                                                                                   |       |                      |        |                   |       |
| Total  Liabilities and Shareholder’s Equity                                                                                       |       | $                         | 596,430,187 |                   | $          | 599,829,475 |   |

 

See accompanying notes to unaudited Condensed Consolidated FinancialStatements.

 

3

----

 

**Condensed Consolidated Statementsof Operations**

(Unaudited)

 
| ** **                                                    | ** ** | **For the**               | ** **  | **For the**               | ** ** |
|---------------------------------------------------------------|------------|---------------------------|-------------|---------------------------|------------|
| ** **                                                    | ** ** | **Thirteen Weeks**        | ** **  | **Thirteen Weeks**        | ** ** |
| ** **                                                    | ** ** | **Ended**                 | ** **  | **Ended**                 | ** ** |
| ** **                                                    | ** ** | **December 1, 2007** | ** **  | **December 2, 2006** | ** ** |
|                                                          |       |                      |        |                      |       |
| REVENUES, NET                                                 |       | $                         | 177,123,916 |                      | $          | 127,137,507 |   |
|                                                          |       |                      |        |                      |       |
| COSTS AND EXPENSES:                                           |       |                      |        |                      |       |
| Cost of goods  sold                                           |       | 132,494,273               |        | 87,874,486                |       |
| Selling,  general, and administrative expenses                |       | 35,612,442                |        | 21,820,429                |       |
| Depreciation and  amortization                                |       | 9,165,839                 |        | 7,281,289                 |       |
| Loss on  disposition of property, plant, and equipment, net   |       | 118,258                   |        | —                    |       |
|                                                          |       |                      |        |                      |       |
| Total costs and  expenses                                     |       | 177,390,812               |        | 116,976,204               |       |
|                                                          |       |                      |        |                      |       |
| OPERATING INCOME (LOSS)                                       |       | (266,896                  | )           | 10,161,303                |       |
|                                                          |       |                      |        |                      |       |
| INTEREST EXPENSE AND OTHER INCOME:                            |       |                      |        |                      |       |
| Interest expense                                              |       | (11,768,154               | )           | (6,189,779                | )          |
| Other income                                                  |       | 114,120                   |        | 1,186                     |       |
|                                                          |       |                      |        |                      |       |
| Interest expense  and other income, net                       |       | (11,654,034               | )           | (6,188,593                | )          |
|                                                          |       |                      |        |                      |       |
| INCOME (LOSS) BEFORE INCOME TAX BENEFIT (PROVISION)           |       | (11,920,930               | )           | 3,972,710                 |       |
|                                                          |       |                      |        |                      |       |
| INCOME TAX BENEFIT (PROVISION)                                |       | 4,406,460                 |        | (1,211,167                | )          |
|                                                          |       |                      |        |                      |       |
| NET INCOME (LOSS)                                             |       | $                         | (7,514,470  | )                         | $          | 2,761,543 |   |
|                                                          |       |                      |        |                      |       |
| NET INCOME (LOSS) PER COMMON SHARE — BASIC AND  DILUTED  |       | $                         | (75.14      | )                         | $          | 27.62 |   |
|                                                          |       |                      |        |                      |       |
| WEIGHTED AVERAGE SHARES OUTSTANDING — BASIC AND  DILUTED |       | 100,000                   |        | 100,000                   |       |

 

Seeaccompanying notes to unaudited Condensed Consolidated Financial Statements.

 

4

----

 

**Condensed Consolidated Statementsof Operations**

(Unaudited)

 
| ** **                                                    | ** ** | **For the**               | ** **  | **For the**               | ** ** |
|---------------------------------------------------------------|------------|---------------------------|-------------|---------------------------|------------|
| ** **                                                    | ** ** | **Thirty-Nine Weeks**     | ** **  | **Thirty-Nine Weeks**     | ** ** |
| ** **                                                    | ** ** | **Ended**                 | ** **  | **Ended**                 | ** ** |
| ** **                                                    | ** ** | **December 1, 2007** | ** **  | **December 2, 2006** | ** ** |
|                                                          |       |                      |        |                      |       |
| REVENUES, NET                                                 |       | $                         | 486,122,918 |                      | $          | 331,805,601 |   |
|                                                          |       |                      |        |                      |       |
| COSTS AND EXPENSES:                                           |       |                      |        |                      |       |
| Cost of goods  sold                                           |       | 367,172,353               |        | 230,612,991               |       |
| Selling,  general, and administrative expenses                |       | 93,531,041                |        | 57,739,823                |       |
| Depreciation and  amortization                                |       | 27,654,142                |        | 20,955,152                |       |
| Loss on  disposition of property, plant, and equipment, net   |       | 118,296                   |        | 5,301                     |       |
|                                                          |       |                      |        |                      |       |
| Total costs and  expenses                                     |       | 488,475,832               |        | 309,313,267               |       |
|                                                          |       |                      |        |                      |       |
| OPERATING INCOME (LOSS)                                       |       | (2,352,914                | )           | 22,492,334                |       |
|                                                          |       |                      |        |                      |       |
| INTEREST EXPENSE AND OTHER INCOME:                            |       |                      |        |                      |       |
| Interest expense                                              |       | (28,981,117               | )           | (17,294,347               | )          |
| Other income                                                  |       | 216,709                   |        | 37,144                    |       |
|                                                          |       |                      |        |                      |       |
| Interest expense  and other income, net                       |       | (28,764,408               | )           | (17,257,203               | )          |
|                                                          |       |                      |        |                      |       |
| INCOME (LOSS) BEFORE INCOME TAX BENEFIT (PROVISION)           |       | (31,117,322               | )           | 5,235,131                 |       |
|                                                          |       |                      |        |                      |       |
| INCOME TAX BENEFIT (PROVISION)                                |       | 11,127,909                |        | (1,663,540                | )          |
|                                                          |       |                      |        |                      |       |
| NET INCOME (LOSS)                                             |       | $                         | (19,989,413 | )                         | $          | 3,571,591 |   |
|                                                          |       |                      |        |                      |       |
| NET INCOME (LOSS) PER COMMON SHARE — BASIC AND  DILUTED  |       | $                         | (199.89     | )                         | $          | 35.72 |   |
|                                                          |       |                      |        |                      |       |
| WEIGHTED AVERAGE SHARES OUTSTANDING — BASIC AND  DILUTED |       | 100,000                   |        | 100,000                   |       |

 

Seeaccompanying notes to unaudited Condensed Consolidated Financial Statements.

 

5

----

 

**Condensed Consolidated Statementof Shareholder’s Equity**

 

**For the Thirty-Nine Weeks Ended December 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                                                        |       | —           |        | (19,989,413  | )          | (19,989,413            | )          |
|                                                            |       |             |        |         |       |                   |       |
| Cumulative  effect — FIN 48 adoption                       |       | —           |        | (57,127      | )          | (57,127                | )          |
|                                                            |       |             |        |         |       |                   |       |
| Capital  contributed (net of expenses paid on behalf of parent) |       | 6,329            |        | —       |       | 6,329                  |       |
|                                                            |       |             |        |         |       |                   |       |
| BALANCE AT  DECEMBER 1, 2007                                    |       | $                | 150,194,270 |         | $          | (20,414,371            | )          | $ | 129,779,899 |   |

 

See accompanying notes to unaudited Condensed Consolidated FinancialStatements.

 

6

----

 

**Condensed Consolidated Statementsof Cash Flows**

(Unaudited)

 

 
| ** **                                                                                           | ** ** | **For the**               | ** **  | **For the**               | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------|-------------|---------------------------|------------|
| ** **                                                                                           | ** ** | **Thirty-Nine Weeks**     | ** **  | **Thirty-Nine Weeks**     | ** ** |
| ** **                                                                                           | ** ** | **Ended**                 | ** **  | **Ended**                 | ** ** |
| ** **                                                                                           | ** ** | **December 1, 2007** | ** **  | **December 2, 2006** | ** ** |
|                                                                                                 |       |                      |        |                      |       |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                                 |       |                      |        |                      |       |
| Net income  (loss)                                                                                   |       | $                         | (19,989,413 | )                         | $          | 3,571,591 |   |
|                                                                                                 |       |                      |        |                      |       |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                      |        |                      |       |
| Depreciation and  amortization                                                                       |       | 27,654,142                |        | 20,955,152                |       |
| Amortization of  deferred loan origination fees                                                      |       | 1,703,698                 |        | 1,158,973                 |       |
| Change in deferred  taxes                                                                            |       | (4,059,143                | )           | (5,681,742                | )          |
| Change in fair  value of interest rate swaps                                                         |       | 3,077,080                 |        | —                    |       |
| Loss on  disposition of plant, property, and equipment                                               |       | 118,296                   |        | 5,301                     |       |
| Changes in  operating assets and liabilities, net of acquired assets and liabilities:                |       |                      |        |                      |       |
| Receivables                                                                                          |       | (3,085,280                | )           | (2,266,529                | )          |
| Inventories                                                                                          |       | (10,699,260               | )           | (9,728,630                | )          |
| Refundable  income taxes, prepaid expenses, and other current assets                                 |       | (7,126,489                | )           | 1,179,229                 |       |
| Trade accounts  payable and other accrued liabilities                                                |       | 8,330,249                 |        | 8,477,091                 |       |
| Other long-term  liabilities                                                                         |       | 196,500                   |        | (3,955,495                | )          |
| Other assets                                                                                         |       | 13,039                    |        | (650,995                  | )          |
| Total  adjustments                                                                                   |       | 16,122,832                |        | 9,492,355                 |       |
| Net cash  provided by (used in) operating activities                                                 |       | (3,866,581                | )           | 13,063,946                |       |
|                                                                                                 |       |                      |        |                      |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                                 |       |                      |        |                      |       |
| Net cash  provided by (used in) the Acquisition of Clovervale                                        |       | 711,002                   |        | (21,815,835               | )          |
| Net cash used in  the Acquisition of Zartic                                                          |       | (171,837                  | )           | —                    |       |
| Capital  expenditures                                                                                |       | (6,537,927                | )           | (6,221,810                | )          |
| Casualty  insurance proceeds                                                                         |       | 1,000,000                 |        | —                    |       |
| Proceeds from sale  of plant, property and equipment                                                 |       | 34,700                    |        | —                    |       |
| Net cash used in  investing activities                                                               |       | (4,964,062                | )           | (28,037,645               | )          |
|                                                                                                 |       |                      |        |                      |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                                 |       |                      |        |                      |       |
| Net borrowings  on revolving credit agreement                                                        |       | 13,200,000                |        | 3,169,000                 |       |
| Additional  borrowings term loan                                                                     |       | —                    |        | 24,000,000                |       |
| Repayment of  debt acquired in the Acquisition of Clovervale                                         |       | —                    |        | (1,612,378                | )          |
| Principal  payments on long-term debt                                                                |       | (3,150,028                | )           | (12,299,911               | )          |
| Loan origination  fees                                                                               |       | (1,195,211                | )           | (708,601                  | )          |
| Capital  contributions (return of capital to parent), net                                            |       | 6,329                     |        | (29,890                   | )          |
|                                                                                                 |       |                      |        |                      |       |
| Net cash  provided by financing activities                                                           |       | 8,861,090                 |        | 12,518,220                |       |
|                                                                                                 |       |                      |        |                      |       |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                 |       | 30,447                    |        | (2,455,479                | )          |
|                                                                                                 |       |                      |        |                      |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                       |       | 88,631                    |        | 2,540,722                 |       |
|                                                                                                 |       |                      |        |                      |       |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                             |       | $                         | 119,078     |                      | $          | 85,243 |   |

 

See accompanying notes to unaudited Condensed Consolidated FinancialStatements.

 

7

----

**PIERRE FOODS, INC. AND SUBSIDIARIES**

 

**Notesto Condensed Consolidated Financial Statements**

(Unaudited)

 

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

 

Pierre Foods, Inc. andits subsidiaries (the “Company” or “Pierre”) manufactures, markets, anddistributes high-quality, differentiated processed food solutions, focusing onformed, pre-cooked and ready-to-cook protein products, compartmentalized meals,and hand-held convenience sandwiches.   The Company’s productsinclude, but are not limited to, beef, pork, poultry, bakery items, vegetables,fruits, cobblers, and peanut butter and jelly bars, sandwiches and cups. Pierre offers comprehensive food solutions to its customers, includingproprietary product development, special ingredients and recipes, as well ascustom packaging and marketing programs. Pierre’s pre-cooked and ready-to-cookproteins include flamebroiled burger patties, homestyle meatloaf, chickenstrips, and boneless, barbecued pork rib products. Pierre markets itspre-cooked and ready-to-cook protein products to a broad array of customersthat include restaurant chains, schools, military, and other foodserviceproviders.

 

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 ofRegulation S-X.  These statements should be read in conjunction with theConsolidated Financial Statements and the notes thereto included in theCompany’s Annual Report on Form 10-K for the fiscal year ended March 3,2007 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 ConsolidatedFinancial Statements and the notes thereto included in the Company’s Form 10-K. The Company’s current accounting policies are consistent with those describedin the 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 inIncome Taxes — an Interpretation of FASB Statement No. 109, Accounting forIncome 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 December 1,2007, the results of operations for the thirteen and thirty-nine week periodsended December 1, 2007 and December 2, 2006, the cash flows of theCompany for the thirty-nine week periods ended December 1, 2007 and December 2,2006, and the statement of shareholder’s equity for the thirty-nine week periodended December 1, 2007.  The thirteen week periods ended December 1,2007 and December 2, 2006 are referred to as “third quarter fiscal 2008”and “third quarter fiscal 2007”, respectively. The thirty-nine week periodsended December 1, 2007 and December 2, 2006 are referred to 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 fiscal year will contain 13 weeks except for the infrequentfiscal years with 53 weeks. The fiscal year ended March 3, 2007 andthe fiscal year ending March 1, 2008 both contain 52 weeks.

 

**2.**        **Acquisitions**

 

***Acquisition of Clovervale.***   On August 21,2006, the Company acquired all of the outstanding shares of stock of ClovervaleFarms, Inc., two of its subsidiaries, and certain of the real propertyused in its business (“Clovervale”).  The acquisition of Clovervale isreferred to herein as the “Acquisition of Clovervale”.  The preliminaryaggregate purchase price was $22.8 million, which was paid in cash at the closing. After repayment of indebtedness and other post-closing adjustments, thepreliminary net purchase price was $21.8 million and was subject to apost-closing working capital adjustment.  Subsequent to finalizing suchadjustment, the net purchase price was $21.1 million. Pierre funded theAcquisition of Clovervale through an amendment to its Credit Agreement(“Amendment No. 2”).  See Note 6, “Long-Term Debt” herein for furtherdiscussion. Pierre’s investment in Clovervale was based on the expectation thatsuch an investment would increase the Company’s presence with targeted customerchannels and add capacity and production capabilities in order to increaseproduct offerings.

 

Prior to the Acquisition of Clovervale, Clovervale wasa privately held company with operations in Amherst, Ohio and Easley, SouthCarolina. Clovervale manufactured and sold a variety of food items includingindividually proportioned entrees, vegetables, fruit, cobblers, peanut butterand jelly bars, sandwiches and cups, sherberts, apple sauce and other similarproducts through various customer channels including schools, military,hospitals, and senior citizen meal programs. Since the Acquisition of Clovervale, the Company has been working to integratethe operations of Clovervale with those of Pierre.  Clovervale currently employsapproximately 127 people and continues to have manufacturingfacilities in Amherst, Ohio and Easley, South Carolina.  Clovervale primarily manufactures productsfor sale and distribution by Pierre.

 

In conjunction with theAcquisition of Clovervale, management of the Company performed valuations onthe Clovervale other intangible assets for financial reporting purposes. Assets identified through these valuations included customer relationships,non-compete agreements, and certain tradenames and trademarks.  Other fairvalue adjustments were made in conjunction with the Acquisition of Clovervale,which primarily include adjustments to property, plant, and equipment,inventory, and the related deferred taxes.

 

8

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TheAcquisition of Clovervale was recorded under the purchase method ofaccounting.  The net purchase price has been allocated to assets acquiredand liabilities assumed based on the estimated fair market value at the date ofthe Acquisition of Clovervale.  The allocation of the net purchase priceis 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 |   |

 

Ofthe $2.7 million of acquired other intangible assets, $2.4 million was assignedto customer relationships with a weighted-average estimated useful life of 10years.  The remaining acquired other intangible assets included tradenamesand trademarks 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. During the quarter ended September 1, 2007 the Company finalized itsallocation of the purchase price.

 

***Acquisition of Zartic.***   On December 11,2006, the Company acquired substantially all of the assets of Zartic, Inc.and its affiliated distribution company, Zar Tran, Inc., and certain realproperty and other assets used in the businesses (collectively, “Zartic”).  The acquisition of Zartic is referred to herein as the“Acquisition of Zartic”.  The preliminary aggregate purchase price was$94.0 million, plus the assumption of certain liabilities, which was paid incash at the closing and is subject to certain post-closing adjustments. After repayment of indebtedness and other post-closing adjustments, thepreliminary net purchase price was $91.8 million and is subject to additionalpost-closing adjustments.  Pierre funded the Acquisition of Zartic throughan amendment to its Credit Agreement (“Amendment No. 3”) — see Note 6,“Long-Term Debt” herein for further discussion. Pierre’s investment in Zarticwas 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.

 

Prior to the Acquisition of Zartic, Zartic was aprivately held company that manufactured, sold, delivered and distributed avariety of food items including packaged beef, chicken/poultry, pork and vealproducts through its operations in Rome, Georgia, Cedartown, Georgia, and Hamilton,Alabama.  Subsequent to the Acquisitionof Zartic, the Company has been working to integrate the operations of Zarticwith those of Pierre.  Zartic currentlyemploys approximately 854 people and has manufacturing facilities in Rome,Georgia and Cedartown, Georgia.  TheHamilton, Alabama facility was destroyed in a fire on July 14, 2007.  Zartic primarily manufactures products forsale and distribution by Pierre.

 

In conjunction with theAcquisition of Zartic, management of the Company performed valuations on theZartic other intangible assets for financial reporting purposes.  Assetsidentified through this valuation process included customer relationships,non-compete agreements, and certain tradenames and trademarks.  Other fairvalue adjustments were made in conjunction with the Acquisition of Zartic,which primarily include adjustments to property, plant, and equipment, andinventory.

 

TheAcquisition of Zartic was recorded under the purchase method ofaccounting.  The preliminary net purchase price has been allocated toassets acquired and liabilities assumed based on the estimated fair marketvalue at the date of the Acquisition of Zartic.  The preliminaryallocation of the net purchase price is as follows:

 
| Current assets                     |   | $           | 26,843,826 |   |
|------------------------------------|--------|-------------|------------|--------|
| Property, plant, and equipment     |   | 29,809,308  |       |
| Non-current assets                 |   | 319,691     |       |
| Goodwill                           |   | 22,822,260  |       |
| Other intangibles                  |   | 27,700,000  |       |
| Debt and other liabilities assumed |   | (15,720,674 | )          |
| Net assets acquired                |   | $           | 91,774,411 |   |

 

Ofthe $27.7 million of acquired other intangible assets, $15.1 million wasassigned to customer relationships with a weighted-average estimated usefullife of 14 years.  The remaining acquired other intangible assets includedformula and recipes of $9.9 million with a weighted-average useful life of 15years, tradenames and trademarks of $2.4 million with a weighted-average usefullife of 2 years, and a non-compete agreement of $0.3 million with a useful lifeof 3 years.  The goodwill related to the Acquisition of Zartic isdeductible 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 $91.8 million were previously reported in theCompany’s Form 10-Q for the quarter ended September 1, 2007. The changes in the allocation of net assets acquired is due to miscellaneousadjustments.  The Company expects to further adjust and finalize theappraisals of acquired assets and liabilities, including the assessment of thesalability of acquired inventory, in the fourth quarter of its current fiscalyear that ends March 1, 2008.

 

9

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

 
| ** **        | ** ** | **Fiscal 2007** | ** **  | **Third Quarter Fiscal 2007** | ** ** |
|-------------------|------------|-----------------|-------------|-------------------------------|------------|
| ** **        | ** ** | **Actual**      | ** **  | **Pro Forma**                 | ** ** | **Actual** | ** ** | **Pro Forma** | ** ** |
|              |       |            |        |                          |       |   |   |   |   |
| Revenues          |       | $               | 331,805,601 |                          | $          | 467,428,834 |   | $ | 127,137,507 |   | $ | 174,776,948 |   |
|              |       |            |        |                          |       |   |   |   |   |
| Net income (loss) |       | $               | 3,571,591   |                          | $          | (2,457,516 | ) | $ | 2,761,543 |   | $ | 1,032,692 |   |

 

Theseunaudited pro forma results are estimates based on assumptions deemedappropriate by the Company’s management, and have been prepared forinformational purposes only and are not necessarily indicative of the amountsthat would have resulted if the Company had acquired Clovervale and Zartic atthe beginning of the respective periods. Purchase-related adjustments to theresults of operations include the effects on depreciation and amortization,interest expense, cost of goods sold, and income taxes.

 

In addition to the purchase-relatedadjustments, included in these pro forma results are certain reclassificationsof Clovervale’s and Zartic’s expenses, to be consistent with theclassifications of Pierre.  These reclassifications include thepresentation of various sales discounts previously reported by Clovervale asselling expenses, but more appropriately classified as a reduction of revenues.

 

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**

 

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

 

The recognition andmeasurement guidelines of FIN 48 were applied to all of the Company’s materialtax positions as of March 4, 2007, resulting in an increase in non-currenttax liabilities of $809,267, including accrued interest.  Of this amount,$57,127 was treated as an increase to beginning retained deficit for thecumulative effect of change in accounting principle.  The total amount ofunrecognized income tax benefits as of March 4, 2007 was $809,267, ofwhich $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 thirty-nine week periods ended December 1, 2007 was notmaterial.

 

There was no material changein the net amount of unrecognized tax benefits in third 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 forthird quarter fiscal 2008 was 37.0% compared to 30.5% for third quarter fiscal2007.  The effective tax rate for fiscal 2008 was 35.8% compared to 31.8%for fiscal 2007.  The change in the effective tax rate for both periods isprimarily 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 Directorsof Holding may grant options to purchase an aggregate of 163,778 shares ofcommon stock of Holding.  Such options may be granted to directors,employees, and consultants of Holding and its subsidiaries, including theCompany.  At December 1, 2007 and March 3, 2007, outstandingoptions to purchase  common stock of Holding issued to members ofmanagement of the Company (the “Options”) were 125,668 and 126,219,respectively, and 38,110

 

10

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and 37,559, respectively,shares were reserved for future issuance.  All outstanding Options weregranted with an exercise price of $10 per share and expire ten years from thedate of grant.  A portion of each outstanding Option vests daily on apro-rata basis over a five-year period from the date of grant and the remainingportion of each outstanding Option vests seven years from the date of grant,subject to accelerated vesting based on the achievement of certain performancemeasures.  At December 1, 2007 and March 3, 2007, options topurchase 34,496 shares and 26,115 shares, respectively, were vested andexercisable.

 

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 AccountingPrinciples 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,as required 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) usingthe prospective adoption method.  SFAS 123(R) requires compensationexpense associated with share-based payments to employees to be recognized inthe financial 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 of SFAS 123(R). Upon the adoption of SFAS123(R), the pro forma effect of fair value accounting for prior periodspresented is no longer presented as the Company used the minimum value method.

 

**5.****       ****Inventories**

 

A summary of inventories, by major classifications, follows:

 
| ** **      | ** ** | **December 1,  2007** | ** ** | **March 3,  2007** | ** ** |
|-----------------|------------|----------------------------|------------|-------------------------|------------|
| Raw materials   |       | $                          | 17,644,557 |                    | $          | 14,122,205 |   |
| Finished goods  |       | 63,113,925                 |       | 54,090,234              |       |
| Work in process |       | 235,589                    |       | 283,827                 |       |
| Total           |       | $                          | 80,994,071 |                    | $          | 68,496,266 |   |

 

**6.****       ****Long****-****Term Debt**

 

Long-termdebt is comprised of the following:

 
| ** **                                                                                                               | ** ** | **December 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 |   |
| 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  |       | 14,000,000                 |        | 800,000                 |       |
| 4.6% to 10.7%  capitalized lease obligations maturing through 2011                                                       |       | 2,894,028                  |        | 4,044,056               |       |
| Total long-term debt                                                                                                     |       | 368,894,028                |        | 358,844,056             |       |
| Less current  installments                                                                                               |       | (1,558,549                 | )           | (1,557,594              | )          |
| Long-term debt less  current installments                                                                                |       | $                          | 367,335,479 |                    | $          | 357,286,462 |   |

 

EffectiveJune 30, 2004, the Company obtained a $190 million credit facility, whichincluded a six-year variable-rate $150 million term loan, a five-yearvariable-rate $40 million revolving credit facility and a $10 million letter ofcredit subfacility.  Funds available under this facility are available forworking capital requirements, permitted investments and general corporatepurposes.  All of the Company’s indebtedness under the credit facility issecured by a first-priority security interest in substantially all of theCompany’s assets.  At December 1, 2007, base rate borrowings underthe term loan portion of the facility bear interest at prime rate plus 2.75% to3.0% determined by the Company’s corporate credit rating and base rateborrowings under the revolving credit portion of the facility bear interest atprime rate plus pricing levels ranging from 2.5% to 3.0% determined by theconsolidated leverage ratio of the Company.  At December 1, 2007, theinterest rates for base rate borrowings under both the revolving creditfacility and the term loans were 10.50% (prime of 7.5% plus 3.0%). However, the Company lowered such rates through the use of LIBOR tranches andinterest rate swaps.  The following table summarizes the Company’s outstandingborrowings as of December 1, 2007, including the amount, the respectiverate of interest, and the date of expiration. The interest rates listed belowinclude the impact of interest rate swap agreements in place as of December 1,2007.

 
| ** **                               | ** ** | **Amount** | ** **  | **Interest Rate** | ** ** | **Swap/LIBOR**

**Maturity Date** | ** ** |
|------------------------------------------|------------|------------|-------------|------------------------|------------|----------------------------------------|------------|
| Term loan LIBOR tranche:                 |       | $          | 27,000,000  |                   | 8.88       | %                                      | 02/19/08   |   |
| Term loan Swap tranche:                  |       | $          | 25,000,000  |                   | 9.14       | %                                      | 08/16/08   |   |
| Term loan Swap tranche:                  |       | $          | 150,000,000 |                   | 9.14       | %                                      | 08/16/09   |   |
| Term loan Swap tranche:                  |       | $          | 25,000,000  |                   | 8.52       | %                                      | 05/18/09   |   |
| Revolving credit facility LIBOR tranche: |       | $          | 14,000,000  |                   | 8.84       | %                                      | 04/30/08   |   |

 

11

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On April 3, 2006, theCompany entered into Amendment No. 1 to its credit facility (“Amendment No. 1”). Amendment No. 1 provided for, among other things, a reduction of 0.5% inthe per 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 enteredinto Amendment 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.  On December 11, 2006 theCompany entered into Amendment No. 3 to its credit facility. Amendment No. 3 provided for, among other things, an increase inborrowings with respect to the Company’s term loan totaling $100.0 million andan increase in the per annum interest rate with respect to borrowing under thecompany’s term loan to the base rate plus 1.25%.

 

As of September 1, 2007, the Company wasin default under the consolidated leverage ratio covenant in its CreditAgreement. Effective October 10, 2007, the Company obtained a waiver ofsuch default from the required lenders and entered into Amendment No. 4 tothe Credit Agreement, which amended, among other things, the financialcovenants in the Credit Agreement and increased the applicable interest ratesfor term loans and the revolving credit facility. The applicable interest ratefor term loan borrowings was increased for base rate borrowings to the primerate plus 2.75% to 3.0% and for LIBOR borrowings to the applicable LIBOR rateplus 3.75% to 4.0%, each determined based on the Company’s corporate creditrating. The applicable interest rate for revolving credit borrowings wasincreased for base rate borrowings to the prime rate plus 2.5% to 3.0% and forLIBOR borrowings to the applicable LIBOR rate plus 3.5% to 4.0%, eachdetermined based upon the Company’s consolidated leverage ratio.

 

Repaymentof borrowings under the $150.0 million term loan was initially $375,000 perquarter, which began on September 4, 2004, with a balloon payment of$141.4 million due on June 30, 2010.  The Company made all suchscheduled quarterly payments totaling $8.6 million for the term of the loan andprepayments on the term loan totaling $34.4 million.  As a result ofAmendment No. 3, scheduled quarterly repayments were $250,000 per quarter.During first quarter of fiscal 2008, the Company made prepayments of $2.0million, and as such, is not required to resume scheduled quarterly paymentsuntil February 28, 2009.  The remaining outstanding balance of $225.8million (after considering scheduled quarterly payments of $1.2 million) is dueon June 30, 2010.

 

EffectiveOctober 29, 2007 and August 16, 2007, the Company entered intointerest rate swap agreements (the “Swaps”) to reduce its exposure to interestrate fluctuations on portions of its term loan. See Note 13, “Interest RateSwaps,” herein for futher discussion.

 

Significantassumptions underlie the belief that the Company will meet its amended debtcovenants for the next 12 months, including, among other things, that therewill be no material adverse developments in the business, liquidity orsignificant unbudgeted capital requirements of the Company, and that there willnot be any material goodwill impairment charges. In addition, if Pierre isunable to successfully integrate the recently acquired companies, whichincludes consolidating the financial functions and obtaining planned synergies,integrating key personnel, and the maintenance and growth of the existingbusiness, the Company may be unable to continue to generate sufficient cashflow. Such inability to generate sufficient cash flow may result in covenantviolations.  Any covenant violationscould require the Company to refinance all or a portion of its debt, includingthe its senior notes and its credit facility, obtain additional financing,which as a result, might not be available for its operations or other purposes,sell some of its assets or operations, reduce or delay capital expenditures, orrevise or delay its operation or strategic plans. If the Company is required totake any of these actions, it could have a material adverse effect on itsbusiness and financial condition. In addition, the Company cannot guarantee itwould be able to take any of these actions, that these actions would enable itto continue to satisfy its capital requirements, or that these actions would bepermitted under the terms of its senior notes or credit facility.

 

On June 30, 2004, the shareholders of PF Management, Inc.,the sole shareholder of the Company (“PFMI”), sold their shares of stock inPFMI (the “Acquisition of Pierre”) to Holding.  In conjunction with theAcquisition of Pierre, the Company issued new notes, which are 9.875% seniornotes (the “Senior Notes”), with interest payable on January 15 and July 15of each year.  The proceeds of the Senior 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 December 1, 2007,the Company had cash and cash equivalents on hand of $0.1 million, outstandingborrowings under its revolving credit facility of $14.0 million, outstandingletters of credit of approximately $6.4 million, and borrowing availability ofapproximately $19.6 million.  Also as of December 1, 2007, theCompany had borrowings under its term loan of $227.0 million and $125.0 millionof Senior Notes outstanding.  As of March 3, 2007, the Company hadcash and cash equivalents on hand of $0.1 million, outstanding borrowings underits revolving credit facility of $0.8 million, outstanding letters of credit ofapproximately $3.5 million, and borrowing availability of approximately $35.7million.  Also as of March 3, 2007, the Company had borrowings underits term loan of $229.0 million and $125.0 million of Senior Notesoutstanding.  The Company is required to satisfy certain financialcovenants regarding cash flow and capital expenditures.  As of December 1,2007, the Company was in compliance with its financial covenants.

 

**7.****       ****Goodwill****and Other Intangible Assets**

 

In conjunction with theAcquisition of Pierre, management of the Company performed valuations forfinancial reporting purposes of the Company’s other intangible assets. Assets identified through these valuations included formulas, customerrelationships, licensing agreements, and certain tradenames and trademarks.

 

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In conjunction with each ofthe Acquisition of Clovervale and the Acquisition of Zartic, management of theCompany performed valuations on the Clovervale and Zartic other intangibleassets for financial reporting purposes.  Assets identified through these valuationsincluded customer relationships, non-compete agreements, and certain tradenamesand trademarks.

 

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 theirestimated economic or estimated useful lives.  In addition, all otherintangible assets are reviewed for impairment in accordance with SFAS 144, “Accountingfor the 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 theCompany’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 tomatch the expected benefit derived from the assets over the life of the asset.

 

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

 
| ** **                              | ** ** | **As of  December 1, 2007** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **Useful**                       | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **                              | ** ** | **Life (yrs)**                   | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| **Amortizable intangible assets:**      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Formulas                                |       | 5-15                             |       | $ | 93,690,000 |   | $ | 41,563,758 |   | $ | 52,126,242 |   |
| Tradename and  trademarks               |       | 2-20                             |       | 22,780,000 |   | 7,985,379 |   | 14,794,621 |   |
| Customer  relationships                 |       | 10-14                            |       | 46,000,000 |   | 19,205,384 |   | 26,794,616 |   |
| Licensing  agreements                   |       | 10                               |       | 12,100,000 |   | 5,411,157 |   | 6,688,843 |   |
| Non-compete  agreement                  |       | 2-3                              |       | 350,000 |   | 128,366 |   | 221,634 |   |
| **Total amortizable intangible assets** |       |                             |       | 174,920,000 |   | 74,294,044 |   | 100,625,956 |   |
|                                    |       |                             |       |   |   |   |   |   |   |
| **Indefinite-lived intangible assets:** | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Tradename                               |       | Indefinite                       |       | 20,200,000 |   | — |   | 20,200,000 |   |
| **Total other intangible assets**       |       |                             |       | 195,120,000 |   | 74,294,044 |   | 120,825,956 |   |
|                                    |       |                             |       |   |   |   |   |   |   |
| Goodwill                                |       | N/A                              |       | 216,718,289 |   | — |   | 216,718,289 |   |
| **Total intangible assets**             |       |                             |       | $ | 411,838,289 |   | $ | 74,294,044 |   | $ | 337,544,245 |   |

 

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

 

13

----

 
| ** **                              | ** ** | **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 |   |

 

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                                             |       | (912,200    | )           |
| Balance as of December 1, 2007                               |       | $           | 216,718,289 |   |
| ** **                                                        | ** ** | ** **  | ** **  |
| **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                                                      |       | (16,366,800 | )           |
| Balance as of December 1, 2007                               |       | $           | 100,625,956 |   |

----

(1) Represents a reclassification of the netcarrying amount of intangible assets associated with formulas developed for aNational Accounts restaurant chain 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 and Contingencies**

 

***Letters of Credit***.  The Company provided a letter of credit inthe amount of $5.7 million and $2.8 million as of December 1, 2007 and March 3,2007, respectively, to its insurance carrier for the underwriting of certainperformance bonds. The current letter of credit expires during the Company’sfiscal year ending March 1, 2008. The Company also provides secured letters of credit to its insurancecarriers for outstanding and potential workers’ compensation and generalliability claims.  Letters of credit forthese claims totaled $675,000 as of December 1, 2007 and March 3,2007.

 

***Legal Proceedings***.  The Company is involved in various legalproceedings.  Management believes, based on the advice of legal counsel,that the outcome of such proceedings will not have a material adverse effect onthe Company’s financial position or future results of operations or cashflows.  See Note 14 — “Legal Proceedings,” herein for furtherdiscussion.

 

14

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***Liability to 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 paidto the selling shareholders the amount of any tax benefits attributable to suchDeal Related NOLs and other deal related expenses, except that the first $4.0million of such tax benefits was paid into an escrow account that secures theselling shareholders indemnification obligations under the tax sharing andindemnification agreement. The Company is required to make payments to theselling shareholders or the escrow account for tax benefits derived from suchutilization 20 days after the filing of the tax return that utilizes such DealRelated 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 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 December 1, 2007,the Company has utilized $24.2 million of the Deal Related NOLs and $1.7million in other deal related expenses.  Also as of December 1, 2007,the Company has submitted payments based on the tax benefits received, net ofother tax assessments due to the Company from the selling shareholders, to anescrow account (approximately $4.0 million) and directly to the sellingshareholders (approximately $5.4 million).  As of December 1, 2007,the Company has a remaining liability to the selling shareholders totaling $2.2million (which reflects the aforementioned $1.3 million adjustment during theprior fiscal year).  No payments weremade to the selling shareholders during fiscal 2008.  Subsequent to December 1, 2007 theCompany made a $0.3 million payment to the selling shareholders.  Theremaining portion of the liability (approximately $1.9 million) is classifiedas long-term based on the expected timing of the remaining payments to theselling shareholders.  The Company expects to fully utilize the DealRelated NOLs and other deal related expenses; however, the timing of the futurepayments of the long-term portion is unknown.

 

**9.     Comprehensive Income**

 

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

 

**10.  Supplemental Cash Flow Disclosures  — Cash Paid During the Period and Non-CashTransactions**

** **
| ** **                                                                                          | ** ** | **Thirty-Nine  Weeks**     | ** ** | **Thirty-Nine  Weeks**     | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                          | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** |
| ** **                                                                                          | ** ** | **December 1,  2007** | ** ** | **December 2,  2006** | ** ** |
| Cash paid during the period for:                                                                    |       |                       |       |                       |       |
| Interest                                                                                            |       | $                          | 23,613,870 |                       | $          | 12,945,789 |   |
| Income taxes,  net                                                                                  |       | $                          | 151,088    |                       | $          | 5,694,471 |   |
|                                                                                                |       |                       |       |                       |       |
| Non-cash transactions:                                                                              |       |                       |       |                       |       |
| Liability to  selling shareholders                                                                  |       | $                          | —     |                       | $          | 1,329,088 |   |
|                                                                                                |       |                       |       |                       |       |
| Acquisition of Zartic adjustment:                                                                   |       |                       |       |                       |       |
| Adjustment of  accounts receivable to fair value                                                    |       | $                          | (72,161    | )                          | $          | — |   |
| Adjustment of inventory to fair value                                                               |       | $                          | 1,798,545  |                       | $          | — |   |
| Adjustment of other current assets to fair value                                                    |       | $                          | 155,920    |                       | $          | — |   |
| Adjustment of other accrued liabilities to fair  value                                              |       | $                          | 1,166,120  |                       | $          | — |   |
| Adjustment of other long-term liabilities to fair  value                                            |       | $                          | (558,268   | )                          | $          | — |   |
|                                                                                                |       |                       |       |                       |       |
| Other  adjustment:                                                                                  |       |                       |       |                       |       |
| Reclassification  of property, plant , and equipment to other assets as a result of plant fire  (1) |       | $                          | 814,785    |                       | $          | — |   |

----

(1) ****Seediscussion below in Item 2, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”.

 

**11.  Recently Issued Accounting Guidance**

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). The objective of SFAS 157 is to define fair value, establish a framework formeasuring fair value and expand disclosures about fair value measurement. SFAS 157 is effective fiscal years beginning after November 15, 2007 andinterim periods within those fiscal years.  The Company is currentlyassessing the impact of SFAS 157 on the Company’s consolidated financialstatements.

 

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities” (“SFAS 159”).  SFAS 159 permits entities to chooseto measure many financial instruments and certain other items at fair valuethat are not currently required to be measured at fair value.  Theobjective of SFAS 159 is to improve financial reporting by 

 

15

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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 is currentlyassessing the impact of SFAS 159 on the Company’s consolidated financialstatements.

 

Effective March 4, 2007,the Company 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”above.

 

**12.  Transactions with Related Parties**

 

At December 1,2007, there were no significant changes in related party transactions fromthose described at March 3, 2007 in the Company’s Form 10-K.

 

**13.  Interest Rate Swaps**

 

One of the Company’s major market risk exposures ispotential loss arising from changing interest rates on its long-term debt andits impact on cash flows.  The Company’spolicy is to manage interest rate risk by maintaining a combination of fixedand variable-rate financial instruments in amounts and maturities thatmanagement considers appropriate.  Tofurther mitigate its risk associated with variable-rate debt, the Companyutilizes derivative instruments to hedge its exposure to changing rates.

 

The Company accountsfor derivative financial instruments in accordance with SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” as amended(SFAS 133).  SFAS 133 requires that allderivatives be recorded in the balance sheet as either assets or liabilities atfair value.  Accounting for changes inthe fair value of a derivative depends on whether it qualifies and has beendesignated as part of a hedging relationship. For derivatives that qualify and have been designated as hedges foraccounting purposes, changes in fair value have no net impact on earnings, tothe extent the derivative is considered perfectly effective in achieving anoffsetting change in fair value or cash flows attributable to the risk beinghedged, until the hedged item is recognized in earnings (commonly referred toas the “hedge accounting” method).  As ofDecember 1, 2007, the Company’s derivative financial instruments did notqualify for hedge accounting and the change in fair value is recorded asinterest expense.

 

Effective October 29, 2007 and August 16, 2007,the Company entered into interest rate swap agreements (the “Swaps”) to reduceits exposure to interest rate fluctuations on portions of its term loan withthe objective of minimizing the impact of interest rate fluctuations andstabilizing cash flows.  The Swaps havenotional amounts of $25.0 million and $175.0 million with fixed rates of4.52% and 5.14%, respectively, thereby effectively converting portions of thefloating rate term debt to fixed rate obligations of 8.52% and 9.14%,respectively, as of December 1, 2007 (4.52% and 5.14% plus applicablemargin).  The October 29, 2007 swapwill expire on May 18, 2009.  Aportion of the August 16, 2007 swap with a notional amount of $25.0million will expire on August 16, 2008, with the remaining $150.0million expiring on August 16, 2009. The difference between the three-month LIBOR rate and respective swaprates will be settled in cash on the interest payment dates.  In accordance with SFAS 133,**the Swaps do not qualify for ‘‘Cash FlowHedge Accounting’’ treatment.  The changein the fair value of the Swaps totaling $2,649,403 is reflected as an increasein interest expense in third quarter fiscal 2008.  The change in fair value of the Swapsreflected in interest expense totaled $3,077,080 for fiscal 2008.  As of December 1, 2007, the Company hasrecorded a liability totaling $3,077,080 to recognize the Swaps at fair value.

 

**14.  Legal Proceedings**

 

**Environmental.**  On March 20, 2006, the Hamilton County Department of EnvironmentalServices (“HCDOES”) sent a Notice of Violation (“NOV”) to the Company’s WestChester, Ohio facility alleging that the Company violated its permit limits forparticulate matter (“PM”) from certain cooking operations and reserved theright to pursue an enforcement action and a civil penalty in the future.  On July 7, 2006, HCDOES sent another NOVto the Company alleging that the Company was in violation of its permit limitsfor PM emissions and again reserved the right to pursue an enforcement actionin the future.

 

The Company is cooperating with authorities in all aspects ofthese matters.  The Company applied formodified permits to install on August 14, 2007 for the emission sources atthe plant and also submitted a permit to install application on September 20,2007  for process water heaters at theplant to comply with regulatory requirements. These permit applications are currently being reviewed and processed byHCDOES.  In connection with the PTIapplications review, HCDOES requested on October 5, 2007 that the Companyassess fugitive emissions from its cooking operations and provide thatassessment to HCDOES.  Depending on theresults of this assessment, the Company may have to submit modified permit toinstall applications.  On May 21,2007 the Director of the Ohio EPA invited the Company to enter into consentfinding and orders with Ohio EPA in lieu of referral to the Ohio AttorneyGeneral’s Office and the filing of the enforcement action in court.  On August 31, 2007, the Companyfinalized a $125,000 settlement with 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.

 

On July 24, 2007, the Company received a letter from theCity of Amherst Building and Utilities Department concerning problems with thegrease interceptor at the Clovervale facility in Amherst, Ohio, which wasacquired as part of the Purchase of Clovervale. The grease interceptor is part of the wastewater discharge system forthe Amherst facility.  The City ofAmherst’s letter 

 

16

----

 

requestedthat the Company meet with the City and comply with wastewater dischargerequirements.  The Company’senvironmental consultant is assessing compliance with the City of Amherstwastewater discharge requirements and although the extent of noncompliance andpossible costs to comply are unknown at this point, the Company has made aclaim for indemnity with the selling shareholder under the Share and AssetPurchase Agreement pursuant to which the Company purchased Clovervale.

 

***General.  *** The Company continuously evaluates contingencies based uponthe best available information.  TheCompany believes it has recorded appropriate liabilities to the extentnecessary in cases where the outcome of such liabilities is considered probableand reasonably estimable, and that its assessment of contingencies isreasonable.  To the extent that resolutionof contingencies results in amounts that vary from management’s estimates,future earnings 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 in the normal course of business.  These matters arecontinuously being evaluated and, in some cases, are being contested by theCompany and the outcome is not predictable. Consequently, an estimate of thepossible loss or range of loss associated with these actions cannot bemade.  Although occasional adverse outcomes (or settlements) may occur andcould possibly have an adverse effect on the results of operations in any oneaccounting period, the Company believes that the final disposition of suchmatters will not have a material adverse effect on the Company’s consolidatedfinancial position.

 

**15.  Subsidiary Guarantors**

 

Each of the subsidiaries of Pierre Foods, Inc. fully andunconditionally guarantees the Senior 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.prior to fiscal 2007, is inactive and holds two trademarks that are notcurrently in use by the Company.  The following presents financialinformation about Pierre Foods, Inc., as the issuer of the Senior Notes,and each of the guarantor subsidiaries.  Pierre has no non-guarantorsubsidiaries.  Intercompany transactions are eliminated.

 

The following supplemental condensed statements of operationsfor the thirteen and thirty-nine week periods ended December 1, 2007,condensed balance sheets as of December 1, 2007 and March 3, 2007,and the supplemental cash flows for the thirty-nine week period ended December 1,2007, depict in separate columns, the issuer (Pierre Foods, Inc.), thesubsidiaries, all of which are guarantors, elimination adjustments, and theconsolidated total.  The financialinformation follows the legal structure of the Company and therefore, may notnecessarily be indicative of the results of operations or financial position ofthe Company, including the subsidiaries, had they been operated as independententities.

 

17

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**Pierre Foods, Inc.**

**Condensed Statements ofOperations**

**For the Thirteen WeeksEnded December 1, 2007**

(Unaudited)

 
| ** **                                                  | ** ** | **Pierre Foods, Inc.** | ** **  | **Guarantor**    | ** ** | ** **       | ** ** | ** **  | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|-------------|------------------|------------|------------------|------------|-------------|------------|
| ** **                                                  | ** ** | **(Issuer)**                | ** **  | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**   | ** ** |
|                                                        |       |                        |        |             |       |             |       |        |       |
| REVENUES, NET:                                              |       |                        |        |             |       |             |       |        |       |
| Customers                                                   |       | $                           | 174,353,231 |             | $          | 2,770,685        |       | $           | —     |   | $ | 177,123,916 |   |
| Intercompany                                                |       | —                      |        | 46,627,805       |       | (46,627,805      | )          | —      |       |
| Total revenues,  net                                        |       | 174,353,231                 |        | 49,398,490       |       | (46,627,805      | )          | 177,123,916 |       |
|                                                        |       |                        |        |             |       |             |       |        |       |
| COSTS AND EXPENSES:                                         |       |                        |        |             |       |             |       |        |       |
| Cost of goods  sold                                         |       | 132,494,273                 |        | 44,071,970       |       | (44,071,970      | )          | 132,494,273 |       |
| Selling,  general, and administrative expenses              |       | 32,334,576                  |        | 4,695,503        |       | (1,417,637       | )          | 35,612,442  |       |
| Depreciation and  amortization                              |       | 7,467,421                   |        | 2,836,616        |       | (1,138,198       | )          | 9,165,839   |       |
| Loss on  disposition of property, plant, and equipment, net |       | 79,699                      |        | 38,559           |       | —           |       | 118,258     |       |
|                                                        |       |                        |        |             |       |             |       |        |       |
| Total costs and  expenses                                   |       | 172,375,969                 |        | 51,642,648       |       | (46,627,805      | )          | 177,390,812 |       |
|                                                        |       |                        |        |             |       |             |       |        |       |
| OPERATING INCOME (LOSS)                                     |       | 1,977,262                   |        | (2,244,158       | )          | —           |       | (266,896    | )          |
|                                                        |       |                        |        |             |       |             |       |        |       |
| INTEREST EXPENSE AND OTHER INCOME:                          |       |                        |        |             |       |             |       |        |       |
| Interest expense                                            |       | (11,729,237                 | )           | (38,917          | )          | —           |       | (11,768,154 | )          |
| Other income                                                |       | 114,120                     |        | —           |       | —           |       | 114,120     |       |
| Interest expense  and other income, net                     |       | (11,615,117                 | )           | (38,917          | )          | —           |       | (11,654,034 | )          |
|                                                        |       |                        |        |             |       |             |       |        |       |
| LOSS BEFORE INCOME TAX BENEFIT                              |       | (9,637,855                  | )           | (2,283,075       | )          | —           |       | (11,920,930 | )          |
|                                                        |       |                        |        |             |       |             |       |        |       |
| INCOME TAX BENEFIT                                          |       | 3,385,913                   |        | 1,020,547        |       | —           |       | 4,406,460   |       |
|                                                        |       |                        |        |             |       |             |       |        |       |
| EQUITY IN NET LOSS OF SUBSIDIARIES                          |       | (1,262,528                  | )           | —           |       | 1,262,528        |       | —      |       |
|                                                        |       |                        |        |             |       |             |       |        |       |
| NET LOSS                                                    |       | $                           | (7,514,470  | )                | $          | (1,262,528       | )          | $           | 1,262,528  |   | $ | (7,514,470 | ) |
|                                                        |       |                        |        |             |       |             |       |        |       |

 

18

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**Pierre Foods, Inc.**

**Condensed Statements ofOperations**

**For the Thirty-Nine WeeksEnded December 1, 2007**

(Unaudited)

 
| ** **                                                  | ** ** | **Pierre Foods, Inc.** | ** **  | **Guarantor**    | ** ** | ** **       | ** ** | ** **  | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|-------------|------------------|------------|------------------|------------|-------------|------------|
| ** **                                                  | ** ** | **(Issuer)**                | ** **  | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**   | ** ** |
|                                                        |       |                        |        |             |       |             |       |        |       |
| REVENUES, NET:                                              |       |                        |        |             |       |             |       |        |       |
| Customers                                                   |       | $                           | 478,370,988 |             | $          | 7,751,930        |       | $           | —     |   | $ | 486,122,918 |   |
| Intercompany                                                |       | —                      |        | 141,091,760      |       | (141,091,760     | )          | —      |       |
| Total revenues,  net                                        |       | 478,370,988                 |        | 148,843,690      |       | (141,091,760     | )          | 486,122,918 |       |
|                                                        |       |                        |        |             |       |             |       |        |       |
| COSTS AND EXPENSES:                                         |       |                        |        |             |       |             |       |        |       |
| Cost of goods  sold                                         |       | 367,172,353                 |        | 133,736,072      |       | (133,736,072     | )          | 367,172,353 |       |
| Selling,  general, and administrative expenses              |       | 85,696,084                  |        | 11,614,743       |       | (3,779,786       | )          | 93,531,041  |       |
| Depreciation and  amortization                              |       | 22,546,137                  |        | 8,683,907        |       | (3,575,902       | )          | 27,654,142  |       |
| Loss on disposition  of property, plant, and equipment, net |       | 79,737                      |        | 38,559           |       | —           |       | 118,296     |       |
|                                                        |       |                        |        |             |       |             |       |        |       |
| Total costs and  expenses                                   |       | 475,494,311                 |        | 154,073,281      |       | (141,091,760     | )          | 488,475,832 |       |
|                                                        |       |                        |        |             |       |             |       |        |       |
| OPERATING INCOME (LOSS)                                     |       | 2,876,677                   |        | (5,229,591       | )          | —           |       | (2,352,914  | )          |
|                                                        |       |                        |        |             |       |             |       |        |       |
| INTEREST EXPENSE AND OTHER INCOME:                          |       |                        |        |             |       |             |       |        |       |
| Interest expense                                            |       | (28,616,253                 | )           | (364,864         | )          | —           |       | (28,981,117 | )          |
| Other income                                                |       | 216,709                     |        | —           |       | —           |       | 216,709     |       |
|                                                        |       |                        |        |             |       |             |       |        |       |
| Interest expense  and other income, net                     |       | (28,399,544                 | )           | (364,864         | )          | —           |       | (28,764,408 | )          |
|                                                        |       |                        |        |             |       |             |       |        |       |
| LOSS BEFORE INCOME TAX BENEFIT                              |       | (25,522,867                 | )           | (5,594,455       | )          | —           |       | (31,117,322 | )          |
|                                                        |       |                        |        |             |       |             |       |        |       |
| INCOME TAX BENEFIT                                          |       | 9,153,066                   |        | 1,974,843        |       | —           |       | 11,127,909  |       |
|                                                        |       |                        |        |             |       |             |       |        |       |
| EQUITY IN NET LOSS OF SUBSIDIARIES                          |       | (3,619,612                  | )           | —           |       | 3,619,612        |       | —      |       |
|                                                        |       |                        |        |             |       |             |       |        |       |
| NET LOSS                                                    |       | $                           | (19,989,413 | )                | $          | (3,619,612       | )          | $           | 3,619,612  |   | $ | (19,989,413 | ) |
|                                                        |       |                        |        |             |       |             |       |        |       |

 

19

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**Pierre Foods, Inc.**

**Condensed Balance Sheets**

**December 1, 2007**

(Unaudited)

 
| ** **                                                                                                      | ** ** | **Pierre Foods, Inc.** | ** **  | **Guarantor**    | ** ** | ** **       | ** ** | ** **  | ** **   |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|------------------|------------|------------------|------------|-------------|--------------|
| ** **                                                                                                      | ** ** | **(Issuer)**                | ** **  | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**   | ** **   |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| ASSETS                                                                                                          |       |                        |        |             |       |             |       |        |         |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| CURRENT ASSETS:                                                                                                 |       |                        |        |             |       |             |       |        |         |
| Cash and cash  equivalents                                                                                      |       | $                           | 106,845     |             | $          | 12,233           |       | $           | —       |   | $ | 119,078 |   |
| Accounts  receivable, net                                                                                       |       | 47,410,822                  |        | 1,740,946        |       | —           |       | 49,151,768  |         |
| Inventories                                                                                                     |       | 68,186,447                  |        | 12,807,624       |       | —           |       | 80,994,071  |         |
| Refundable  income taxes                                                                                        |       | 4,315,506                   |        | 7,516,965        |       | —           |       | 11,832,471  |         |
| Deferred income  taxes                                                                                          |       | 2,695,719                   |        | 844,926          |       | —           |       | 3,540,645   |         |
| Prepaid expenses  and other current assets                                                                      |       | 4,176,137                   |        | 1,079,752        |       | —           |       | 5,255,889   |         |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| Total current  assets                                                                                           |       | 126,891,476                 |        | 24,002,446       |       | —           |       | 150,893,922 |         |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| PROPERTY, PLANT, AND EQUIPMENT, NET                                                                             |       | 53,862,178                  |        | 39,676,611       |       | —           |       | 93,538,789  |         |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| OTHER ASSETS:                                                                                                   |       |                        |        |             |       |             |       |        |         |
| Other  intangibles, net                                                                                         |       | 95,435,158                  |        | 25,390,798       |       | —           |       | 120,825,956 |         |
| Goodwill                                                                                                        |       | 187,864,137                 |        | 28,854,152       |       | —           |       | 216,718,289 |         |
| Deferred loan  origination fees                                                                                 |       | 7,758,223                   |        | —           |       | —           |       | 7,758,223   |         |
| Investment in  subsidiaries                                                                                     |       | 107,506,442                 |        | —           |       | (107,506,442     | )          | —      |         |
| Intercompany  accounts                                                                                          |       | —                      |        | 9,331,878        |       | (9,331,878       | )          | —      |         |
| Other                                                                                                           |       | 6,336,270                   |        | 358,738          |       | —           |       | 6,695,008   |         |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| Total other assets                                                                                              |       | 404,900,230                 |        | 63,935,566       |       | (116,838,320     | )          | 351,997,476 |         |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| Total Assets                                                                                                    |       | $                           | 585,653,884 |             | $          | 127,614,623      |       | $           | (116,838,320 | ) | $ | 596,430,187 |   |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| LIABILITIES AND SHAREHOLDER’S EQUITY                                                                       | ** ** | ** **                  | ** **  | ** **       | ** ** | ** **       | ** ** | ** **  | ** **   |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| CURRENT LIABILITIES:                                                                                            |       |                        |        |             |       |             |       |        |         |
| Current installments  of long-term debt                                                                         |       | $                           | 165,662     |             | $          | 1,392,887        |       | $           | —       |   | $ | 1,558,549 |   |
| Trade accounts  payable                                                                                         |       | 15,171,218                  |        | 10,637,110       |       | —           |       | 25,808,328  |         |
| Accrued interest                                                                                                |       | 5,668,577                   |        | —           |       | —           |       | 5,668,577   |         |
| Accrued payroll  and payroll taxes                                                                              |       | 5,317,413                   |        | 2,057,321        |       | —           |       | 7,374,734   |         |
| Accrued  promotions                                                                                             |       | 4,832,588                   |        | —           |       | —           |       | 4,832,588   |         |
| Accrued taxes  (other than income and payroll)                                                                  |       | 704,689                     |        | 162,472          |       | —           |       | 867,161     |         |
| Other accrued  liabilities                                                                                      |       | 2,522,153                   |        | 3,159,388        |       | —           |       | 5,681,541   |         |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| Total current  liabilities                                                                                      |       | 34,382,300                  |        | 17,409,178       |       | —           |       | 51,791,478  |         |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| LONG-TERM DEBT, less current installments                                                                       |       | 366,324,233                 |        | 1,011,246        |       | —           |       | 367,335,479 |         |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| DEFERRED INCOME TAXES                                                                                           |       | 38,696,079                  |        | 1,345,208        |       | —           |       | 40,041,287  |         |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| INTERCOMPANY ACCOUNTS                                                                                           |       | 9,331,878                   |        | —           |       | (9,331,878       | )          | —      |         |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| OTHER LONG-TERM LIABILITIES                                                                                     |       | 7,139,495                   |        | 342,549          |       | —           |       | 7,482,044   |         |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| Total  Liabilities                                                                                              |       | 455,873,985                 |        | 20,108,181       |       | (9,331,878       | )          | 466,650,288 |         |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| SHAREHOLDER’S EQUITY:                                                                                      |       |                        |        |             |       |             |       |        |         |
| Common stock —  Class A, 100,000 shares authorized, issued, and outstanding at  December 1, 2007 |       | 150,194,270                 |        | 112,908,837      |       | (112,908,837     | )          | 150,194,270 |         |
| Retained deficit                                                                                                |       | (20,414,371                 | )           | (5,402,395       | )          | 5,402,395        |       | (20,414,371 | )            |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| Total  shareholder’s equity                                                                                |       | 129,779,899                 |        | 107,506,442      |       | (107,506,442     | )          | 129,779,899 |         |
|                                                                                                            |       |                        |        |             |       |             |       |        |         |
| Total  Liabilities and Shareholder’s Equity                                                                |       | $                           | 585,653,884 |             | $          | 127,614,623      |       | $           | (116,838,320 | ) | $ | 596,430,187 |   |

 

20

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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 |   |

 

21

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**Pierre Foods, Inc.**

**Condensed Statements ofCash Flows**

**For the Thirty-Nine WeeksEnded December 1, 2007**

(Unaudited)

 
| ** **                                                | ** ** | **Pierre Foods, Inc.** | ** **  | **Guarantor**    | ** ** | ** **       | ** ** | ** **  | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|-------------|------------------|------------|------------------|------------|-------------|------------|
| ** **                                                | ** ** | **(Issuer)**                | ** **  | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**   | ** ** |
|                                                      |       |                        |        |             |       |             |       |        |       |
| CASH FLOWS FROM OPERATING ACTIVITIES                      |       | $                           | (19,509,581 | )                | $          | 15,643,000       |       | $           | —     |   | $ | (3,866,581 | ) |
|                                                      |       |                        |        |             |       |             |       |        |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                     |       |                        |        |             |       |             |       |        |       |
| Net cash  provided by the Acquisition of Clovervale       |       | 711,002                     |        | —           |       | —           |       | 711,002     |       |
| Net cash used in  the Acquisition of Zartic               |       | (171,837                    | )           | —           |       | —           |       | (171,837    | )          |
| Intercompany  accounts                                    |       | 11,557,785                  |        | —           |       | (11,557,785      | )          | —      |       |
| Capital  expenditures                                     |       | (2,426,111                  | )           | (4,111,816       | )          | —           |       | (6,537,927  | )          |
| Casualty  insurance proceeds                              |       | —                      |        | 1,000,000        |       | —           |       | 1,000,000   |       |
| Proceeds from  sale of plant, property and equipment      |       | 34,700                      |        | —           |       | —           |       | 34,700      |       |
| Net cash  provided by (used in) investing activities      |       | $                           | 9,705,539   |             | $          | (3,111,816       | )          | (11,557,785 | )          | $ | (4,964,062 | ) |
|                                                      |       |                        |        |             |       |             |       |        |       |
| CASH FLOWS ON FINANCING ACTIVITIES:                       |       |                        |        |             |       |             |       |        |       |
| Net borrowings  on revolving credit agreement             |       | 13,200,000                  |        | —           |       | —           |       | 13,200,000  |       |
| Principal  payments on long-term debt                     |       | (2,149,588                  | )           | (1,000,440       | )          | —           |       | (3,150,028  | )          |
| Intercompany  accounts                                    |       | —                      |        | (11,557,785      | )          | 11,557,785       |       | —      |       |
| Loan origination  fees                                    |       | (1,195,211                  | )           | —           |       | —           |       | (1,195,211  | )          |
| Capital  contributions (return of capital to parent), net |       | 6,329                       |        | —           |       | —           |       | 6,329       |       |
| Net cash  provided by (used in) financing activities      |       | $                           | 9,861,530   |             | $          | (12,558,225      | )          | 11,557,785  |       | $ | 8,861,090 |   |
|                                                      |       |                        |        |             |       |             |       |        |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS     |       | 57,488                      |        | (27,041          | )          | —           |       | 30,447      |       |
|                                                      |       |                        |        |             |       |             |       |        |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD            |       | 49,357                      |        | 39,274           |       | —           |       | 88,631      |       |
|                                                      |       |                        |        |             |       |             |       |        |       |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                  |       | $                           | 106,845     |             | $          | 12,233           |       | $           | —     |   | $ | 119,078 |   |

 

22

----

** **

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

 

The following discussion relates to thefinancial condition and results of operations for third quarter fiscal 2008compared to third quarter fiscal 2007 and for fiscal 2008 compared to fiscal2007.  The thirteen week periods ended December 1,2007 and December 2, 2006 are referred to as “third quarter fiscal 2008”and “third quarter fiscal 2007”, respectively. The thirty-nine week periods ended December 1, 2007 and December 2,2006 are referred to as “fiscal 2008” and “fiscal 2007”, respectively.  This section should be read in conjunctionwith the Company’s Condensed Consolidated Financial Statements included in thisQuarterly Report on Form 10-Q, and considered with “Risk Factors” and “Quantitative and Qualitative Disclosures About Market Risk” discussed inItem 1A and Item 7, respectively, of the Company’s Annual Report on Form 10-Kfor the fiscal year ended March 3, 2007 filed with the SEC on June 15,2007 (“Form 10-K”) and “Cautionary Statements Regarding Forward LookingInformation,” which precedes Item 3 of Part I of this Report.

 

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

 

**Results of Operations**

 

**ThirdQuarter Fiscal 2008 Compared to Third Quarter Fiscal 2007**

 

***Revenues, net.**** * Net revenues increased by $50.0million in third quarter fiscal 2008 compared to third quarter fiscal 2007, or39.3%.  This increase was primarily due to (1) an increase in salesvolume due to the Acquisition of Zartic (approximately $45.3 million); (2) increasedsales volume and mix in most of the Company’s end-market segments(approximately $7.5 million); and (3) net price increases to customers(approximately $0.5 million), offset by (4) a decrease in sales to twonational accounts restaurant chains (approximately $3.3 million).

 

***Cost of goods sold.**** * Cost of goods sold increased by $44.6 million inthird quarter fiscal 2008 compared to third quarter fiscal 2007, or50.8%.  This increase was primarily due to (1) an increase in salesvolume due to the Acquisition of Zartic (approximately $35.3 million); (2) anincrease in expense as a result of increased net revenues due to volume growthand a change in mix (approximately $6.2 million); (3) an increase in rawmaterial costs (approximately $6.2 million) primarily due to increased pricespaid for proteins ($3.7 million) and other ingredients including cheese, peanutbutter, cooking oil, and flour-based products ($2.5 million); and (4) anincrease in product costs related to product outsourcing as a result of thedestruction of the Hamilton, Alabama facility ($1.0 million); offset by (5) adecline in cost of goods sold to two national accounts restaurant chains(approximately $2.8 million) and partially offset by other items ($1.3million). In addition to the approximately $1.0 million in increased productioncosts incurred by the Company in third quarter fiscal 2008 attributable tooutsourced manufacturing of products previously produced at the Company’sHamilton, Alabama facility, the Company incurred approximately $3.0 million of costscompared with the prior fiscal quarter resulting from manufacturinginefficiencies previously capalized into inventory.

 

As a percentage of revenues,cost of goods sold increased from 69.1% to 74.7%, an increase of 5.6%. This increase was primarily due to (1) the net impact of increases inprices paid for raw material proteins (approximately 4.9%); (2) sales ofnet lower-margin products as a result of the Acquisition of Zartic(approximately 1.1%); and (3) an increase in product costs related toproduct outsourcing as a result of the destruction of the Hamilton, Alabamafacility (0.8%); offset in part by (4) the impact of net price increasesto customers (approximately 0.3%); and (5) decreases in overhead costs(approximately 0.9%).

 

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 withmovement in the relevant commodity markets.  Additionally, the Company hasmarket-related pricing contracts that require the Company to immediately passalong commodity price variances.  Excluding these market-related pricingcontracts, during third quarter fiscal 2008, net prices paid for raw materialproteins increased approximately $1.4 million versus third quarter fiscal 2007;of which approximately $0.8 million was attributable to the Acquisition ofZartic.

 

Approximately 31.2% of totalsales for third quarter fiscal 2008 were protected from commodity exposure, ofwhich 20.5% were attributable to market-related pricing contracts, while theother 10.7% were related to the USDA Commodity Reprocessing Program, which alsoinsulates the Company from raw material price fluctuations.  For thirdquarter fiscal 2007, approximately 34.1% of total sales were protected fromcommodity exposure, of which 25.7% were attributable to market-related pricingcontracts, while the other 8.4% 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 third quarter fiscal 2008compared to third quarter fiscal 2007 excluding formulation mix andmarket-related pricing contracts.  The third quarter fiscal 2008 reflectsthe weighted average prices paid for raw materials as a result of theAcquisition of Zartic.

 

 

23

----

 

| ** ** | ** ** | **% (Increase)/Decrease in Prices  Paid for Raw Materials   Third Quarter Fiscal 2008  Compared to   Third Quarter Fiscal 2007** | ** ** |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| Beef       |       | 5.4%                                                                                                                             |       |
| Chicken    |       | (33.5%)                                                                                                                          |       |
| Pork       |       | (6.1%)                                                                                                                           |       |
| Cheese     |       | (43.7%)                                                                                                                          |       |
| Aggregate  |       | (3.5%)                                                                                                                           |       |

 

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 $13.8 million in third quarter fiscal 2008 compared to thirdquarter fiscal 2007, or 63.2%.  This increase was primarily due to (1) increasedvolume as a result of the Acquisition of Zartic (approximately $11.0 million); (2) increasedvolume and a change in mix across most of the Company’s end-market segments(approximately $2.4 million); (3) increased demonstration expenses in theCompany’s Warehouse Club division (approximately $0.4 million); (4) increasedseverance expenses, primarily as a result of the Acquisition of Zartic(approximately $0.6 million); and (5) increased management consulting expenses(approximately $0.7 million); partially offset by other miscellaneousitems.  As a percentage of revenues,selling, general, and administrative expenses increased from 17.2% to 20.1%.Approximately $1.8 million of the $13.8 million increase is considered by theCompany to be one-time in nature, including management consulting expense(approximately $0.7 million), severance expense (approximately $0.6 million),excessive selling demonstration charges within the warehouse club sellingchannel (approximately $0.5 million).

 

***Depreciation and amortization***.  Depreciation and amortization expenseincreased by $1.9 million primarily due to increased amortization ($0.6million) and increased depreciation expense ($1.3 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; offset by the decrease as a result of theaccelerated methods of amortization used for the amortizable intangible assetsrecorded in conjunction with the Acquisition of Pierre.  The increaseddepreciation expense was primarily due to the allocation of the purchase pricesin conjunction with the Acquisition of Zartic and the valuation of property,plant, and equipment as a result of purchase accounting for the acquisition.

 

***Interest expense and other income, net*****.**   Interestexpense and other income, net consists primarily of interest on fixed andvariable-rate long-term debt.  Interest expense and other income, netincreased by $5.5 million, or 88.3%.  This increase is primarily due to (1) changein fair value of interest rate swaps; (2) increased average outstandingborrowings under the term loan as a result of Amendment No. 2 to theCompany’s credit facility in order to finance the Acquisition of Clovervale andAmendment No. 3 to the Company’s credit facility in order to finance theAcquisition of Zartic; (3)  increased applicable interest rates for termloan and revolving credit facility borrowings as a result of Amendment No. 4to the Company’s credit facility in order to obtain a waiver of default underthe consolidated leverage ratio covenant in its credit facility and amend suchcovenants; and (4) increased average borrowings under the Company’srevolving credit facility.  The Company’s average outstanding long-termdebt during third quarter fiscal 2008 was $371.6 million versus $262.1 millionduring third quarter fiscal 2007.  The weighted average interest rates forthird quarter fiscal 2008 and third quarter fiscal 2007 were 9.1% and 8.5%,respectively.

 

**Fiscal2008 Compared to Fiscal 2007**

 

***Revenues, net.**** * Net revenues increased by $154.3 million in fiscal2008 compared to fiscal 2007, or 46.5%.  This increase was primarily dueto (1) an increase in sales volume due to the Acquisition of Zartic(approximately $126.0 million); (2) an increase in sales volume due to theAcquisition of Clovervale (approximately $17.6 million); (3) an increasein volume, due to an increase in most of the Company’s end markets and changesin sales mix (approximately $14.1 million); and (4) net price increases tocustomers (approximately $2.4 million); offset, in part, by (5) a decreasein sales to two national accounts restaurant chains (approximately $5.8million).

 

***Cost of goods sold.**** * Cost of goods sold increased by $136.6 million infiscal 2008 compared to fiscal 2007, or 59.2%.  This increase wasprimarily due to (1) an increase in sales volume due to the Acquisition ofZartic (approximately $99.8 million); (2) an increase in sales volume dueto the Acquisition of Clovervale (approximately $13.5 million); (3) anincrease in expense as a result of increased net revenues due to volume and mixgrowth (approximately $11.9 million); (4) an increase in raw materialcosts (approximately $18.0 million), primarily due to increased prices paid forchicken (approximately $9.8 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); (6) an increase in productcosts related to product outsourcing as a result of the destruction of theHamilton, Alabama facility ($1.0 million); and (7) an increase in laborcosts (approximately $0.7 million); partially offset by (8) a decrease insales volume to two national accounts restaurant chains (approximately $5.5million); (9) a decrease in overhead costs (approximately $2.8 million);and (10) favorable formulation mix and manufacturing yields (approximately$1.2  million); and other miscellaneousitems. In addition to the approximately $1.0 million in increased production costsincurred by the Company in third quarter fiscal 2008 attributable to outsourcedmanufacturing of products previously produced at its Hamilton, Alabamafacility, the Company incurred approximately $3.0 million of costs resultingfrom manufacturing inefficiencies previously capitalized into inventory.

 

As a percentage of revenues,cost of goods sold increased from 69.5% to 75.5%, an increase of 6.0%. This increase was primarily due to (1) the net impact of increases inprices paid for raw material proteins and favorable formulation mix(approximately 5.1%); (2) increased volume growth and a change in salesmix (approximately 0.2%); (3) an increase due to the 

 

 

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excessive equipment downtimeon three of the larger fry lines in the Company’s Rome, Georgia facility(approximately 0.3%); (4) an increase in product costs related to productoutsourcing as a result of the destruction of the Hamilton, Alabama facility(0.3%); (5) sales of higher-cost products as a result of the Acquisitionof Zartic (approximately 1.5%); (6) higher costs as a result of increasedcosts associated with labor (approximately 0.2%); and (7) sales ofhigher-cost products due to the Acquisition of Clovervale (approximately 0.2%);partially offset by  (8) the impact of net price increases tocustomers (approximately 0.5%); (9) decreases in overhead costs(approximately 0.9%); and (10) a decrease in sales volume to two nationalaccounts restaurant chains (approximately 0.4%).

 

As previously noted, theCompany has market-related pricing contracts that require the Company toimmediately pass along commodity price variances.  Excluding thesemarket-related pricing contracts, during fiscal 2008, net prices paid for rawmaterial proteins increased approximately $12.2 million as compared to fiscal2007 (of which approximately $7.3 million was attributable to the Acquisitionof Zartic).

 

Approximately 30.3% of totalsales for fiscal 2008 were protected from commodity exposure, of which 23.1%were attributable to market-related pricing contracts, while the other 7.2%were related to the USDA Commodity Reprocessing Program, which also insulatesthe Company from raw material price fluctuations.  For fiscal 2007,approximately 34.6% of total sales were protected from commodity exposure, ofwhich 28.6% were attributable to market-related pricing contracts, while theother 6.0% 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       |       | (0.0%)                                                                                      |       |
| Chicken    |       | (54.4%)                                                                                     |       |
| Pork       |       | (6.0%)                                                                                      |       |
| Cheese     |       | (34.8%)                                                                                     |       |
| Aggregate  |       | (11.0%)                                                                                     |       |

 

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 administrative expensesincreased by $35.8 million in fiscal 2008 compared to fiscal 2007, or62.0%.  This increase was primarily due to (1) increased volume as aresult of the Acquisition of Zartic (approximately $24.8 million); (2) increasedvolume as a result of the Acquisition of Clovervale (approximately $4.1million); (3) increased selling expense primarily due to increasedpromotional activity and demonstration expenses (approximately $1.4 million); (4) increasedexpenses related to increased sales volume and mix shift across most of theCompany’s end-markets (approximately $3.4 million); (5) increased storageexpense (approximately $1.1 million) due to increased replenishment costs andbuild of inventories associated with the Acquisition of Zartic; (6) increasedintegration expenses, primarily as a result of severance associated with  the Acquisition of Zartic (approximately $1.2million); (7) increased administrative expenses, primarily due to bad debtassociated with the bankruptcy of a customer, legal and accounting fees,insurance, wages, and management consulting (approximately $1.0 million); and (8) increasedfreight and storage costs (approximately $0.6 million).  These werepartially offset by a decrease in compensation expense (approximately $1.0million) and other miscellaneous items. As a percentage of revenues, selling, general, and administrativeexpenses increased from 17.4% to 19.2%. Approximately $4.7 million of the $358million increase is considered by the Company to be one-time in nature,including certain administrative and integration costs (approximately $1.1million), a charge relating to the transfer of inventory to a new warehouse(aproximately $1.1 million), management consulting fees (approximately $1.1million), excessive selling demonstration charges within the warehouse club sellingchannel (approximatley $0.8 million), and severance expense (approximately $0.6million).

 

***Depreciation and amortization****. * Depreciationand amortization expense increased by $6.7 million, including increasedamortization (approximately $1.9 million) and increased depreciation expense(approximately $4.8 million).  The increase in amortization expense wasprimarily due to additional amortization expense as a result of additionalamortizable intangible assets recorded in conjunction with the Acquisition ofZartic and the Acquisition of Clovervale; offset by the decrease as a result ofthe accelerated methods of amortization used for the amortizable intangibleassets recorded in conjunction with the Acquisition of Pierre.  Theincreased depreciation expense was primarily due to the allocation of thepurchase prices in conjunction with the Acquisition of Zartic and the Acquisitionof Clovervale and the valuations of property, plant, and equipment as a resultof purchase accounting for such acquisitions.

 

***Interest expense and other income, net*****.**  Interestexpense and other income, net consists primarily of interest on fixed and variable-ratelong-term debt.  Interest expense and other income, net increased by$11.5 million, or 66.7%.  This increase is primarily due to (1) increasedaverage outstanding borrowings under the term loan as a result of Amendment No. 2to the Company’s credit facility in order to finance the Acquisition ofClovervale and Amendment No. 3 to the Company’s credit facility in orderto finance the Acquisition of Zartic; (2) change in fair value of interestrate swaps; and (3) increased average borrowings 

 

 

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under the Company’s revolvingcredit facility.  The Company’s average outstanding long-term debt duringfiscal 2008 was $364.2 million versus $282.5 million during fiscal 2007. The weighted average interest rates were 8.6% for both fiscal 2008 and fiscal2007.

 

**Liquidity and Capital Resources**

 

                The following table summarizesthe Company’s net cash provided by (used in) operating, investing, andfinancing activities for the thirty-nine weeks ended December 1, 2007 and December 2,2006, respectively.

 

| ** **                      | ** ** | **Thirty-Nine  Weeks Ended  December 1, 2007** | ** ** | **Thirty-Nine    Weeks Ended  December 2, 2006** | ** ** |
|---------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------|------------|
| Net cash provided by (used in): |       |                                                |       |                                                  |       |
| Operating  activities           |       | $                                                   | (3,866,581 | )                                                     | $          | 13,063,946 |   |
| Investing  activities           |       | $                                                   | (4,964,062 | )                                                     | $          | (28,037,645 | ) |
| Financing  activities           |       | $                                                   | 8,861,090  |                                                  | $          | 12,518,220 |   |

 

Net cash used in operatingactivities during fiscal 2008 was $3.9 million compared to net cashprovided by operating activities of $13.1 million during fiscal2007.  The decrease in net cash provided by operating activities wasprimarily due to (1) a net loss of $20.0 million during fiscal 2008compared to net income of $3.6 million in fiscal 2007; (2) an increase inrefundable income taxes, prepaid expense, and other current assets (approximately$7.1 million) in fiscal 2008 compared with a decrease in fiscal 2007(approximately $1.2 million); (3) an increase in inventories(approximately $10.7 million) in fiscal 2008 compared to less of an increase inthe prior year comparable period (approximately $9.7 million); (4) anincrease in accounts receivable (approximately $3.1 million) during fiscal 2008compared to less of an increase in the prior year comparable period(approximately $2.3 million); and (5) an increase in accounts payable andother accrued liabilities (approximately $8.3 million) in fiscal 2008 comparedto a greater increase in fiscal 2007; offset by (6) depreciation andamortization expense (approximately $27.7 million) in fiscal 2008 compared withfiscal 2007 (approximately $21.0 million); (7) an increase in otherlong-term liabilities (approximately $0.2 million) in fiscal 2008 compared to adecrease in the prior comparable period (approximately $4.0 million); (8) achange in the fair value of interest rate swaps entered into during fiscal 2008(approximately $3.1 million) in fiscal 2008; (9) a decrease in netdeferred tax liabilities in fiscal 2008 (approximately $4.1 million) comparedto a greater decrease in fiscal 2007 (approximately $5.7 million); (10) nochange in other assets in fiscal 2008 compared to an increase (approximately$0.7 million) in fiscal 2007; (11) amortization of deferred loan fees in fiscal2008 (approximately $1.7 million) compared to less amortization in fiscal 2007(approximately $1.2 million); and (12) loss on disposition of plant, propertyand equipment in fiscal 2008 (approximately $0.1 million).

 

The primary components of netcash used in operating activities for fiscal 2008 were (1) a net loss of$20.0 million during fiscal 2008; (2) an increase in inventories(approximately $10.7 million) due to a pipeline fill in conjunction with theAcquisition of Zartic, an increase in raw material costs used in the productionof inventory, production of newly developed products to meet customer needs, aninventory build in conjunction with the seasonality of the Company’s schoolbusiness and to meet contractual obligations with one of the Company’s largestcustomers, and a focused effort to increase safety stock due to anticipatedtransitions to new suppliers; (3) an increase in refundable income taxes,prepaid expenses, and other current assets (approximately $7.1 million)primarily due to income tax refunds receivable related to fiscal 2008 pre-taxlosses and tax loss carryback potential; (4) a change in deferred incometaxes (approximately $4.1 million); and (5) an increase in receivables(approximately $3.1 million); offset by (6) depreciation and amortizationof intangible assets (approximately $27.7 million), of which $10.5 millionrelates to depreciation of fixed assets and $17.2 million relates toamortization of intangible assets recorded in conjunction with the Acquisitionof Pierre, the Acquisition of Clovervale, and the Acquisition of Zartic; (7) anincrease in trade accounts payable and other accrued liabilities (approximately$8.3 million); (8) change in fair value of interest rate swaps(approximately $3.1 million); and  (9) amortizationof deferred loan fees (approximately $1.7 million).

 

Net cash used in investingactivities for fiscal 2008 was $5.0 million compared to $28.0 millionfor fiscal 2007.  Net cash used in investing activities during fiscal 2008consists of capital expenditures (approximately $6.5 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), offset by casualty insurance proceeds(approximately $1.0 million) and net cash provided by the Acquisition ofClovervale (approximately $0.7 million).  Net cash used in investingactivities during fiscal 2007 consists primarily of net cash used inconjunction with the Acquisition of Clovervale (approximately $21.8 million),in addition to capital expenditures for various plant improvements and routinecapital expenditures.

 

Net cash provided byfinancing activities for fiscal 2008 was $8.9 million compared to net cashprovided by financing activities for fiscal 2007 of $12.5 million.  Netcash provided by financing activities for fiscal 2008 was due primarily to (1) increasedborrowings under the Company’s revolving credit facility (approximately $13.2million); offset by principal payments on long-term debt (approximately $3.2million), which includes $2.0 million of prepayments on Company’s term loan and$1.2 million of principal payments for capital leases; and (3) loanorigination fees of $1.2 million.

 

EffectiveJune 30, 2004, the Company obtained a $190 million credit facility, whichincluded a six-year variable-rate $150 million term loan, a five-yearvariable-rate $40 million revolving credit facility and a $10 million letter ofcredit subfacility.  Funds available under this facility are available forworking capital requirements, permitted investments and general corporatepurposes.  All of the Company’s indebtedness under the credit facility issecured by a first-priority security interest in substantially all of theCompany’s assets.  At December 1, 2007, base rate borrowings underthe term loan portion of the facility bear interest at prime rate plus 2.75% to3.0% determined by the Company’s corporate credit rating and base rate borrowingsunder the revolving credit portion of the facility bear interest at prime rateplus pricing levels ranging from 2.5% to 3.0% determined by the consolidated 

 

 

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leverage ratio of theCompany.  At December 1, 2007, the interest rates for base rateborrowings under both the revolving credit facility and the term loans were10.50% (prime of 7.5% plus 3.0%).  However, the Company lowered such ratesthrough the use of LIBOR tranches and interest rate swaps.  The followingtable summarizes the Company’s outstanding borrowings under its credit facilityas of December 1, 2007, including the amount, the respective rate ofinterest, and the date of expiration. The interest rates listed below include the impact of interest rate swapagreements in place as of December 1, 2007.

 
| ** **                               | ** ** | **Amount** | ** **  | **Interest Rate** | ** ** | **Swap/LIBOR Maturity Date** | ** ** |
|------------------------------------------|------------|------------|-------------|------------------------|------------|-----------------------------------|------------|
| Term loan LIBOR tranche:                 |       | $          | 27,000,000  |                   | 8.88       | %                                 | 02/19/08   |   |
| Term loan Swap tranche:                  |       | $          | 25,000,000  |                   | 9.14       | %                                 | 08/16/08   |   |
| Term loan Swap tranche:                  |       | $          | 150,000,000 |                   | 9.14       | %                                 | 08/16/09   |   |
| Term loan Swap tranche:                  |       | $          | 25,000,000  |                   | 8.52       | %                                 | 05/18/09   |   |
| Revolving credit facility LIBOR tranche: |       | $          | 14,000,000  |                   | 8.84       | %                                 | 04/30/08   |   |

 

Effective October 29, 2007 and August 16, 2007,the Company entered into interest rate swap agreements (the “Swaps”) to reduceits exposure to interest rate fluctuations on portions of its term loan withthe objective of minimizing the impact of interest rate fluctuations andstabilizing cash flows.  The Swaps havenotional amounts of $25.0 million and $175.0 million with fixed rates of4.52% and 5.14%, respectively, thereby effectively converting portions of thefloating rate term debt to fixed rate obligations of 8.52% and 9.14%,respectively, as of December 1, 2007 (4.52% and 5.14% plus applicablemargin).  The October 29, 2007 swapwill expire on May 18, 2009.  Aportion of the August 16, 2007 swap with a notional amount of $25.0million will expire on August 16, 2008, with the remaining $150.0million expiring on August 16, 2009. The difference between the three-month LIBOR rate and respective swaprates will be settled in cash on the interest payment dates.  In accordance with SFAS 133,**the Swaps do not qualify for ‘‘Cash FlowHedge Accounting’’ treatment.  Thechanges in the fair value of the Swaps totaling $2,649,403 is reflected as anincrease in interest expense in third quarter fiscal 2008.  As of December 1, 2007, the Company hasrecorded a liability totaling $3,077,080 to recognize the Swaps at fair value.

 

Repayment of borrowings under the $150.0million term loan was initially $375,000 per quarter, which began on December 4,2004, with a balloon payment of $141.4 million due on June 30,2010.  The Company made all such scheduled quarterly payments totaling$8.6 million for the term of the loan and prepayments on the term loan totaling$34.4 million.  As discussed in Note 2 “Acquisitions”, to the Company’sCondensed Consolidated Financial Statements in conjunction with the Acquisitionof Clovervale, the Company increased borrowings with respect to its term loanby $24.0 million in order to finance the Acquisition of Clovervale.  Inaddition, also discussed in Note 2 “Acquisitions”, in conjunction with theAcquisition of Zartic, the Company increased borrowings with respect to its termloan by $100.0 million in order to finance the Acquisition of Zartic.  As a result of Amendment 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, will not resume scheduledquarterly payments until February 28, 2009.  The remainingoutstanding balance of $225.8 million (excluding scheduled quarterly payments)as of December 1, 2007 is due on June 30, 2010.

 

Subsequent to the Acquisition of Zartic, aspreviously disclosed in the Company’s Report on Form 10-Q for the quarterended 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 primarilyused for processing sausage products and employed approximately 45 people priorto the fire.  An investigation wasconducted in order to determine the cause of the fire and to determine theextent of the damages.  The Company isworking with its insurance carrier to determine coverage, but believes that thedamages, including business interruption, will be covered by insurance withoutany material financial loss to the Company. The Company has executed a DisasterRecovery Plan designed to continue the supply of affected products to theCompany’s customers.

 

OnAugust 2, 2007, the Company retained an outside consultant to manage andassist the Company’s management with the preparation of the property andbusiness interruption claims.  Duringthird quarter fiscal 2008, the Company received insurance proceeds ofapproximately $1.0 million related to the inventory and property losses.  Management and the outside consultant are inthe process of accumulating all necessary data to file additional claims forbusiness interruption and expect to receive additional insurance proceeds infiscal 2009.

 

***Cash and Cash Equivalents; Borrowing Availability.  *** As of December 1,2007, the Company had net cash and cash equivalents on hand of $0.1 million(See “Critical Accounting Policies and Estimates” below for further discussionon the Company’s treatment of cash and cash equivalents) outstanding borrowingsunder its revolving credit facility of $14.0 million and borrowing availabilityof approximately $19.6 million.  Also as of December 1, 2007, theCompany had borrowings under its term loan of $227.0 million and $125.0 millionof the 9.875% senior notes outstanding that were issued in conjunction with theAcquisition of Pierre (“Senior Notes”).  As of March 3, 2007, theCompany had cash and cash equivalents on hand of $0.1 million, outstandingborrowings under its revolving credit facility of $0.8 million, and borrowingavailability 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 the Senior Notes outstanding.  The maturity date ofthe $40 million revolving credit facility is June 30, 2009.  TheCompany is required to satisfy certain financial covenants regarding cash flowand capital expenditures. As of December 1, 2007, the Company was incompliance with all of its financial covenants.

 

***Income Taxes***.  TheCompany 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 retaineddeficit.  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.

 

 

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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 andpenalty expense recorded for the thirteen and thirty-nine week periods ended December 1,2007 was not material.

 

***Tax Sharing Agreement with Selling Shareholders. ***   Inconjunction with the Acquisition of Pierre, the Company and the selling shareholdersentered into a tax sharing and indemnification agreement containing certainrepresentations and warranties of the selling shareholders with respect totaxes.  The agreement provides that any net operating loss carryforwardsattributable to expenses relating to the sale of the Company (“Deal RelatedNOLs”) and certain other deal related expenses, will be for the benefit of theselling shareholders.  As of the date of the Acquisition of Pierre, theseDeal Related NOLs and other deal related expenses totaled approximately $24.2million and $6.6 million, respectively.  Accordingly, the Company wasrequired pay and has paid to the selling shareholders the amount of any taxbenefit attributable to such Deal Related NOLs and other deal related expenses,except that the first $4.0 million of such tax benefits was paid into an escrowaccount that secures the selling shareholders indemnification obligations underthe tax sharing and indemnification agreement.   The Company isrequired to make payments to the selling shareholders or the escrow account fortax benefits derived from such utilization 20 days after the filing of the taxreturn that utilizes such Deal Related NOLs or other deal related expenses.

 

Initially, the Companyrecorded a net long-term liability to the selling shareholders totaling $10.3million for the estimated obligations under the tax sharing and indemnificationagreement.  During 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 December 1, 2007,the Company has utilized $24.2 million of the Deal Related NOLs and $1.7 millionin other deal related expenses.  Also as of December 1, 2007, theCompany has submitted payments based on the tax benefits received, net of othertax assessments 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 December 1, 2007, the Companyhas a remaining liability to the selling shareholders totaling $2.2 million(which reflects the aforementioned $1.3 million adjustment during the priorfiscal year).  No payments were made tothe selling shareholders during fiscal 2008. Subsequent to December 1, 2007 the Company made a $0.3 millionpayment.  The remaining portion of the liability (approximately $1.9million) is classified as long-term based on the expected timing of theremaining payments to the selling shareholders.  The Company expects tofully 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 budgetedapproximately $2.8 million for capital expenditures for the remainder of itsfiscal year ending March 1, 2008. These expenditures include a provision for capacity expansion, systemupgrades, and routine food processing capital improvement projects and othermiscellaneous expenditures within the Company’s existing facilities.  TheCompany believes that funds from operations and funds from its $40 millionrevolving credit facility, as well as the Company’s ability to enter intocapital 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 will meet its amended debtcovenants for the next 12 months, including, among other things, that therewill be no material adverse developments in the business, liquidity orsignificant unbudgeted capital requirements of the Company and that there willnot be any material goodwill impairment charges.  In addition, if Pierreis unable to implement appropriate pricing to its customers to offset to risingraw material costs, or if the Company is unable to successfully integrate itsrecently acquired companies, which includes among other things, consolidatingthe financial functions and obtaining planned synergies, integrating key personnel,and the maintenance and growth of the existing businesses, the Company may beunable to continue to generate sufficient cash flow, which could result in acovenant violation. Any covenant violations could require the Company torefinance all or a portion of its debt, including the Senior Notes and itscredit facility, obtain additional financing, which as a result, might not beavailable for its operations or other purposes, sell some of its assets oroperations, reduce or delay capital expenditures, or revise or delay itsoperations or strategic plans.  If the Company is required to take any ofthese actions, it could have a material adverse effect on its businessand financial condition.  In addition, the Company cannot guaranteeit would be able to take any of these actions, that these actions would enableit to continue to satisfy its capital requirements, or that these actions wouldbe permitted under the terms of its Senior 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 December 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 December 1, 2007 and March 3, 2007.

 

 

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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 December 1, 2007.

 

The following tablessummarize our commitments and contractual obligations by fiscal year as of December 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 |       | 1,644,958                       |       | 1,644,958 |   | — |   | — |   | — |   |
| Purchase commitments  for raw materials   |       | 5,587,521                       |       | 4,667,271 |   | 920,250 |   | — |   | — |   |
| Purchase commitments  for natural gas     |       | 706,423                         |       | 706,423 |   | — |   | — |   | — |   |
| Purchase commitments for miscellaneous    |       | 4,788                           |       | 4,652 |   | 136 |   | — |   | — |   |
| Total                                     |       | $                               | 14,313,190 |   | 13,392,804 |   | $ | 920,386 |   | $ | — |   | $ | — |   |
|                                           |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

 
| ** **                       | ** ** | **Contractual  Obligations by Fiscal Year** | ** **  |
|----------------------------------|------------|---------------------------------------------|-------------|
| ** **                       | ** ** | ** **                                  | ** **  |
| ** **                       | ** ** | **Total**                                   | ** **  | **Less than 1   Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More than 5 Years** | ** ** |
|                             |       |                                        |        |   |   |   |   |   |   |   |   |
| Long-term debt                   |       | $                                           | 366,000,000 |   | $ | — |   | $ | 241,000,000 |   | $ | 125,000,000 |   | $ | — |   |
| Capital lease obligations*       |       | 3,115,216                                   |        | 1,717,500 |   | 1,397,716 |   | — |   | — |   |
| Operating lease obligations      |       | 2,185,224                                   |        | 1,461,682 |   | 655,529 |   | 68,013 |   | — |   |
| Interest on fixed-rate debt**    |       | 62,082,193                                  |        | 12,608,610 |   | 24,786,083 |   | 24,687,500 |   | — |   |
| Interest on variable-rate debt** |       | 38,396,995                                  |        | 21,958,654 |   | 16,438,341 |   | — |   | — |   |
| Total                            |       | $                                           | 471,779,628 |   | $ | 37,746,446 |   | $ | 284,277,669 |   | $ | 149,755,513 |   | $ | — |   |

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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 December 1, 2007 assuming that theoutstanding balances remain unchanged until maturity.

 

**CriticalAccounting Policies and Estimates**

 

The preparation of financialstatements in conformity with GAAP requires the appropriate application ofcertain accounting policies, many of which require the Company to makeestimates and assumptions about future events and their impact on amountsreported in the financial statements and related notes.  Since 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 financialstatement presentation purposes, the Company presents book overdrafts,principally outstanding checks in excess of cash on hand with the samefinancial institution, as accounts payable.  As of December 1, 2007,the Company had actual cash of $4.6 million (of which $4.5 million was held inaccounts with the Company’s bank that is primarily responsible for its cashmanagement), which was offset by outstanding checks of $4.5 million, resultingin no net reclassification and a remaining net cash on hand balance of $0.1million.  The remaining cash balance represents cash on hand in excess ofoutstanding checks.  The Companyconsiders all highly liquid investments purchased with an original maturity ofthree months or less to be cash equivalents.  As of December 1, 2007,the Company had no cash equivalents.

 

***Revenue Recognition.**** * The Company records revenues from its sales of foodprocessing products at the time title transfers.  Standard shipping termsare FOB destination.  Based on these terms, title passes at the time theproduct is delivered to the customer.  Revenue is recognized as the netamount to be received by the Company after deductions for estimated discounts,product returns, and other allowances.  These estimates are based onhistorical trends and expected future payments (see also *Promotions* below).

 

***Goodwill and Other Intangible Assets*****.**   Inconjunction with the Acquisition of Pierre, the Acquisition of Clovervale, andthe Acquisition of Zartic, the management of the Company, with the assistanceof an independent valuation firm, performed 

 

 

 

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valuations of the Company’sother intangible assets for financial reporting purposes.  Assetsidentified through these valuations included formulas, customer relationships,licensing agreements, non-compete agreements, and certain tradenames and trademarks.

 

In accordance with Statementof Financial Accounting Standards (“SFAS”) No. 142 (“SFAS 142”) —“Goodwilland Other Intangible Assets,” the Company tests recorded goodwill andintangibles with indefinite lives for impairment at least annually. Intangible assets with finite lives are amortized over their estimated economicor estimated useful lives.  In addition, all other intangible assets arereviewed for impairment in accordance with SFAS 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.”  Included in the review forimpairment are certain assumptions and estimates which include financialforecasts of income and cash flow that are attributable to the Company’sreporting units and indefinite-lived intangible assets (which are discounted topresent value at rates reflective of the Company’s cost of capital).  Asof March 3, 2007, the Company performed the annual impairment review ofgoodwill and indefinite-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 customerdeductions to be taken under these programs.  The Company believes theestimates recorded in the financial statements are reasonable estimates of theCompany’s liability under these programs.

 

***Stock-Based Compensation*****.**   TheCompany treats the options to purchase shares of common stock of Holding issuedto employees of the Company (“Options”) as stock-based compensation foremployees of the Company.  Prior to the Company’s fiscal year ended March 3,2007, as permitted under GAAP, the Company accounted for the Options under therecognition and measurement principles of Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”), and relatedInterpretations using the intrinsic value method.  Accordingly, nocompensation expense was recognized for the stock option plan in the Company’sCondensed Consolidated Statements of Operations.

 

Effective March 5, 2006,as required 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 financial statements based on their fair values. Upon the adoption of SFAS 123(R), because the Company had used the minimumvalue method prior to the adoption, the Company was required to apply theprovisions of the statement only prospectively for any newly issued, modifiedor settled award after the date of initial adoption.  No new Options wereissued, modified or settled subsequent to adoption, however, the fair valueassigned to any newly issued, modified or settled award in the future isexpected to be significantly greater due to the differences in valuationmethods.  Upon the adoption of SFAS 123(R) the pro forma effect offair value accounting for prior periods presented are no longer presented asthe Company used the minimum value method.

 

***New Accounting Pronouncements.***   In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). The objective SFAS 157 is to define fair value, establish a framework formeasuring fair value and expand disclosures about fair value measurement. SFAS 157 is effective for annual fiscal years beginning after November 15,2007 and interim periods within these fiscal years.  The Company iscurrently assessing the impact of SFAS 157 on the Company’s consolidatedfinancial statements.

 

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities” (“SFAS 159”).  SFAS 159 permits entities to chooseto measure many financial instruments and certain other items at fair valuethat are not currently required to be measured at fair value.  Theobjective of SFAS 159 is to improve financial reporting by providing entitieswith the opportunity to mitigate volatility in reported earnings caused bymeasuring related assets and liabilities differently without having to applycomplex hedge accounting provisions.  SFAS 159 is effective for the firstfiscal year that begins after November 15, 2007.  The Company iscurrently assessing the impact of SFAS 159 on the Company’s consolidatedfinancial statements.

 

Effective March 4, 2007,the Company 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 cumulative effect of applying FIN 48 was $809,267 for unrecognizedtax benefits, including accrued interest.  Of such amount, $57,127 wasrecorded as an adjustment to the March 4, 2007 balance of retained deficitand the remaining balance was recorded as a reduction in non-current deferredtaxes.

 

 

 

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**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-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, including statements about the business,operations, financial results, and future prospects of the Company. Forward-looking statements relate to future events or future financialperformance.  In some cases, you can identify forward-looking statementsby terminology such as “may,” “should,” “expect,” “plan,” “anticipate,”“believe,” “estimate,” “predict,” “potential” or “continue,” the negative ofsuch terms or other comparable terminology.  These statements may involverisks and uncertainties related to, among other things:

 

·                  adverse changesin food costs and availability of supplies or costs of distribution, and theability pass on such costs through increased prices to customers;

·                  the Company’slevel of indebtedness;

·                  the Company’sability to generate sufficient cash flows in order to satisfy cash requirementsfor working capital and debt service;

·                  restrictionsimposed by the Company’s debt instruments;

·                  acquisitions, ifany, including identification of appropriate targets and successful integrationof any acquired businesses, including the integration of the Clovervale andZartic businesses;

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

·                  increasedcompetitive activity;

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

·                  dependence onsignificant customers;

·                  changes inconsumer preferences and diets;

·                  consolidation ofthe Company’s customers;

·                  general risks ofthe food industry, including risk of contamination, mislabeling of foodproducts, a decline in meat consumption, and outbreak of disease among cattle,chicken or pigs, or any change in consumer perception of certain proteinproducts;

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

·                  dependence onkey personnel;

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

·                  changes in federalgovernment procurement laws or failure to retain contracts in re-biddingprocesses;

·                  changes ineconomic and business conditions in the world;

·                  potential impactof hurricanes and other natural disasters on sales, raw material costs, fuelcosts, insurance costs, and bad debt expense resulting from uncollectibleaccounts receivable; and

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

 

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

 

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

 

The Company is exposed tomarket risk stemming from changes in interest rates, commodity prices, and foreignexchange rates.   Changes in these factors could cause fluctuations in theCompany’s financial condition, results of operations and cash flows.  TheCompany owned no derivative financial instruments or non-derivative financialinstruments held for trading purposes at December 1, 2007 or March 3,2007.  Certain of the Company’s outstanding non-derivative financialinstruments at December 1, 2007 and March 3, 2007 are subject tointerest rate risk, but not subject to foreign currency or commodity price risk.

 

***Interest Rate Risk***.  The Company’s majormarket risk exposure is potential loss arising from changing interest rates andits impact on long-term debt.  The Company’s policy is to manage interestrate risk by maintaining a combination of fixed and variable-rate financialinstruments in amounts and with maturities that management considersappropriate.  The risks associated with long-term debt at December 1,2007 have not changed materially since March 3, 2007.  Of thelong-term debt outstanding at December 1, 2007, the $125.0 million ofSenior Notes accrue interest at a fixed interest rate, while the $227.0 millionoutstanding borrowings under the term loan facility and the $24.9 million ofoutstanding borrowings under the revolving credit facility accrue interest atvariable interest rates.  A rise in prevailing interest rates could haveadverse effects on the Company’s financial condition and results ofoperations.  A 25 basis point increase in the reference rates for theCompany’s average variable-rate debt outstanding during third quarter fiscal2008 and fiscal 2008 would have decreased net income for these periods byapproximately $0.1 million and $0.2 million, respectively.

 

Effective October 29, 2007 and August 16, 2007,the Company entered into interest rate swap agreements (the “Swaps”) to reduceits exposure to interest rate fluctuations on portions of its term loan withthe objective of minimizing the impact of interest rate fluctuations andstabilizing cash flows.  The Swaps havenotional amounts of $25.0 million and $175.0 million with fixed rates of4.52% and 5.14%, respectively, thereby effectively converting portions of thefloating rate term debt to fixed rate obligations of 8.52% and 9.14%,respectively, as of December 1, 2007 (4.52% and 5.14% plus applicablemargin).  The October 29, 2007 swapwill expire on May 18, 2009.  Aportion of the August 16, 2007 swap with a notional amount of $25.0million will expire on August 16, 2008, 

 

 

31

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with the remaining $150.0 million expiring on August 16,2009.  The difference between thethree-month LIBOR rate and respective swap rates will be settled in cash on theinterest payment dates.  In accordancewith SFAS 133,**the Swaps donot qualify for ‘‘Cash Flow Hedge Accounting’’ treatment.  The change in the fair value of the Swapstotaling $2,649,403 is reflected as an increase in interest expense in thirdquarter fiscal 2008.  The change in fairvalue of the Swaps reflected in interest expense for fiscal 2008 totaled$3,077,080.  As of December 1, 2007,the Company has recorded a liability totaling $3,077,080 to recognize the Swapsat fair value.

 

***Commodity Price Risk.***  Certainraw materials used in food processing operations are susceptible to commodity pricechanges. Increases in the prices of certain commodity products could result inhigher overall production costs.  The primary raw materials used in theCompany’s food processing operations are boneless beef, chicken and pork,flour, yeast, seasonings, cheese, breading, soy proteins, peanut butter, andpackaging supplies.  During third quarter fiscal 2008, the weightedaverage prices the Company paid for beef, pork, and cheese increased byapproximately 1.1%, 24.8%, and 38.1%, respectively, over the weighted averageprices the Company paid for these raw materials during the fourth quarter offiscal 2007.  During the third quarter offiscal 2008, the weighted average price the Company paid for chicken decreasedby 9.1% as compared to the prices paid during the fourth quarter of fiscal2007.  During fiscal 2008, the weighted average prices the Company paidfor beef, chicken, pork, and cheese increased by approximately 6.3%, 7.1%,19.3%, and 22.7%, respectively, over the weighted average prices the Company paidfor 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.***  TheCompany bills customers in foreign countries in US dollars, with the exceptionof sales to Canada.  The Company does not believe the foreign exchangerate risk on Canadian sales is material.  However, a significant declinein the value of currencies used in certain regions of the world as compared tothe US dollar could adversely affect product sales in those regions because theCompany’s products may be more expensive for those customers to pay for intheir local currency.  At December 1, 2007 and March 3, 2007,all trade receivables were denominated in US dollars.

 

***Fair Value of FinancialInstruments.**** *The Company’s non-derivativefinancial instruments consist primarily of cash and cash equivalents, tradereceivables, trade payables and long-term debt.   The estimated fairvalues of the financial instruments have been determined by the Company usingavailable market information and appropriate valuation techniques. Considerable judgment is required, however, to interpret market data to developthe estimates of fair value.  Accordingly, the estimates presented are notnecessarily indicative of the amounts that the Company could realize in acurrent market exchange.  The use of different market assumptions and/orestimation methodologies may have a material effect on the estimated fair valueamounts.

 

**ITEM 4T.CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls and Procedures*****.**   As ofthe end of the period covered by this report, the Company performed anevaluation, under the supervision and with the participation of its managementincluding the President and Chief Executive Officer and Chief Financial Officerof the effectiveness of the Company’s disclosure controls and procedures (assuch term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon this evaluation, the Company’s President and Chief Executive Officerand Chief Financial Officer have concluded that as of December 1, 2007,the Company’s disclosure controls and procedures were effective for thepurposes of ensuring that information required to be disclosed in reports thatthe Company files or submits under the Securities Exchange Act of 1934(“Exchange Act”) has been (1) recorded, processed, summarized and reportedin accordance with the rules and forms of the SEC and (2) accumulatedand communicated to the Company’s management, including the President and ChiefExecutive Officer and the Chief Financial Officer, to allow timely decisionsregarding disclosure.

 

***Changes in Internal Controls*****.***** *** There havebeen no changes in the Company’s internal controls over financial reportingduring the quarter ended December 1, 2007 that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

***Section 404 of Sarbanes-Oxley Act of 2002.***   On December 15,2006, the SEC issued a rule (Release No. 33-8760; 34-54942) to grantrelief to non-accelerated filers by further extending the date of compliancewith Section 404 of the Sarbanes-Oxley Act of 2002 (the “Act”).  Pursuantto the rule, the Company is required to comply with the Act in twophases.  The first phase is effective for the Company’s fiscal year endingMarch 1, 2008 and requires the Company to issue a management report oninternal control over financial reporting.  The third phase requires theCompany to provide an auditor’s attestation report on internal control overfinancial reporting beginning with the 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 theCompany’s internal controls.  During this process, Pierre may makeimprovements to the design and operation of its internal controls, includingbut not limited to, further formalization of policies and procedures. Although the Company believes that its efforts will enable the Company toprovide the required management report on internal controls and its independentauditors to provide the required attestation based on the required dates above,Pierre can give no assurance that these efforts will be successfully completedin a timely manner.

 

**PART IIOTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

**Environmental.**  On March 20, 2006, the Hamilton County Department of EnvironmentalServices (“HCDOES”) sent an Notice of Violation (“NOV”) to the Company’s WestChester, Ohio facility alleging that the Company violated its permit limits for

 

 

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particulatematter (“PM”) from certain cooking operations and reserved the right to pursuean enforcement action and a civil penalty in the future.  On July 7,2006, HCDOES sent another NOV to the Company alleging that the Company was inviolation of its permit limits for PM emissions and again reserved the right topursue an enforcement action in the future.

 

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 on September 20,2007 for process water heaters at the plant to come into compliance withregulatory requirements.  These permitsare currently being reviewed and processed by HCDOES.  In connection with the PTI applicationsreview, HCDOES requested on October 5, 2007 that the Company assess fugitiveemissions from its cooking operations and provide that assessment to theHCDOES. Depending on the results of this assessment, the Company may have tosubmit modified permit to install applications. On May 21, 2007, theDirector of the Ohio EPA invited the Company to enter into consent finding andorders with the Ohio EPA, in lieu of referral to the Ohio Attorney General’sOffice and the filing of an enforcement action in court.  On August 31, 2007, the Companyfinalized 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.

 

On July 24, 2007, the Company received a letter from the Cityof Amherst Building and Utilities Department concerning problems with thegrease interceptor at the Clovervale facility in Amherst, Ohio, which wasacquired as part of the Purchase of Clovervale. The grease interceptor is part of the wastewater discharge system forthe Amherst facility.  The City ofAmherst’s letter requested that the Company meet with the City and comply withwastewater discharge requirements.  TheCompany’s environmental consultant is assessing compliance with the City ofAmherst wastewater discharge requirements and although the extent ofnoncompliance and possible costs to comply are unknown at this point, theCompany has made a claim for indemnity with the selling shareholder under theShare and Asset Purchase Agreement pursuant to which the Company purchasedClovervale.

 

***General.  *** The Company continuously evaluates contingencies based uponthe 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 thatresolution of contingencies results in amounts that vary from management’sestimates, future earnings will be charged or credited accordingly.

 

As part of its ongoing operations in the 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 in the normal course of business.  These matters arecontinuously being evaluated and, in some cases, are being contested by theCompany and the outcome is not predictable. Consequently, an estimate of thepossible loss or range of loss associated with these actions cannot bemade.  Although occasional adverse outcomes (or settlements) may occur andcould possibly have an adverse effect on the results of operations in any oneaccounting period, the Company believes that the final disposition of suchmatters will not have a material adverse effect on the Company’s consolidatedfinancial position.

 

**ITEM1A.  RISK FACTORS**

 

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

 

**ITEM6.  EXHIBITS**

 

See Exhibit Index.

 

** **

** **

**33**

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** **

**SIGNATURES**

** **

** **

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

 
|   | PIERRE  FOODS, INC.                    |
|--------|----------------------------------------|
|   |                                   |
|   |                                   |
|   | /S/  NORBERT E. WOODHAMS               |
|   | By:  Norbert E. Woodhams               |
|   | President  and Chief Executive Officer |
|   | Dated:  January 15, 2008          |
|   |                                   |
|   |                                   |
|   | /S/  JOSEPH W. MEYERS                  |
|   | By:  Joseph W. Meyers                  |
|   | Chief  Financial Officer               |
|   | Dated:  January 15, 2008          |

 

 

 

 

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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) |
|                                             |  |  |  |  |  |  |  |  |  |  |

----

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

 

 

 

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